Ask HN: Is buying a cryptocurrency a bet that the currency will be “legitimate”?

With everything happening in cryptocurrency right now, I find myself really, really, trying to see the value behind buying these crypto coins. This is simplified but I was hoping someone here could shed some more light on what the actual value of these coins are.

- The coins are bought with dollars (or other gov't backed currencies, for the sake of argument I will just use USD).

- USD yes are fiat, but at the end of the day they represent time, labor, & goods. This system came into place because back in the day it was very hard to bargain with non-comparable goods. For instance if a coffee farmer needs more cows, the only thing they could do before fiat currency is find a cow farmer who also needs coffee and make a trade. With fiat currency they can sell for dollars (which represent their goods).

- I buy 10$USD worth of bitcoin when bitcoin's price is 1$/coin. So I have 10 bitcoins. Then bitcoin's price goes up to 100$/coin and I now have $1000USD in bitcoin.

My real question is - where is this value coming from? Why is the price of the coin going up while the price of dollars is relatively stable? When investing in traditional securities - investors tie the stock price to the actual value of the company in hopes of dividends, or selling at a higher price later because the company's value grew (having more cash, assets, etc).

So right now crypto's price is high. Does this just mean people are willing to pay a higher premium for a coin because they think in the future it will be more powerful than USD (and will become the de facto standard)?

> Where is this value coming from?

People transitioning from one currency (USD) to another (BTC). When countries joined the EU and started using Euros, holders of say Francs, could exchange their Francs for Euros at a set exchange rate. This was a planned transition where Francs would become unusable at some point and Euros would become the new standard. There is much more uncertainty with Bitcoin, people don't know what the utility of Bitcoin or other cryptocurrencies will be in the future yet at the same time there is a massive reward for speculating on it's success because most cryptocurrencies have a fixed supply.

> Why is the price of the coin going up while the price of dollars is relatively stable?

There are many reasons for this, a few are related to the points I touched on in my first answer. Another one is the value of USD as a whole is much larger so it is much less prone to manipulation. Another is the federal reserve regularly diluting the supply of dollars which keeps the value of a dollar from rising as the economy grows.

It's an interesting argument, really.

Nothing actually backs USD currency, except our labor, which is really our time. The gold standard was removed long ago, and gold is actually severely undervalued, as if some unforeseen committee is paying to keep the price of gold not as valuable as it should be. So really, we go to work, we all believe we should get paid, so they pay us in these US Treasury notes that don't actually mean anything, but society accepts it as a whole. The value of $1.00 is based on time.

If I go to work as a programmer and make $24.00 an hour, than 1 hour of my time is worth $24.00. If I go to some fast food restaurant, whose workers are getting paid around $9.00 an hour, their time is given that value. The value goes up with the more education you have, the more knowledge you have, and the more in demand you are. The less skills required to do the job, the less value is assigned to your job. Who sets these standards... is an interesting question just the same: we almost set our own value in some way or another, but you can't walk into a fast food restaurant and demand more than what they are willing to pay.

The one thing that cryptocurrency has going for it is:

- anti-bank people are more likely to switch it, trusting it over a bank

- people in third-world countries with no access to the bank system can use it

- people believe in it as an idea that can be used as currency

The issue with cryptocurrency is:

- at this current time, the only way to "get bitcoin" is to actually trade in the money of your country for it

- at this current time, it is functioning similar to the stock market, but is insanely volatile (once in late/early 2015/2016, the stock market had a hiccup -- LinkedIn's value was $250 per share one day and then dropped to $100 the next, and just a month later, skyrocketed to $190 -- unpredictably and where exactly did the money go? Did everyone pull out their money at the same time?)

- 1 bitcoin is not worth $1.00 USD or the value of $1.00 worth of any currency

- everyone can stop believing in it, take out their money all at the same time, and then it is just useless

There are companies spawning up to make it so that you can actually get paid in Bitcoin via salary.

The only value, just like a US dollar, is the value people are willing to give to it. At the moment, 1 bitcoin is worth upwards of $18.5k.

There are also other cryptocurrencies out there too. So where might they play a role? For most of the world economy: very few companies accept cryptocurrency. Though some may start accepting X coin. If no one accepts X coin, than you can trade all of your other cryptocurrencies for that X coin.

I've watched a few documentaries on the start of Bitcoin and Satoshi... and while I believe Satoshi had a great idea for this, I do believe it has been largely misinterpreted for what it was actually supposed to do. I could be wrong... but there is no guidance on this anymore.

As for the future of cryptocurrencies.. I don't think they are going to largely disappear, but may evolve into something greater. Bitcoin is a great lead, but it also manifests some uncertainties of still just being an idea of decentralizing money from the banks and governments. Now a search of bitcoin pros and cons.. will lead you to two sides:

1. You have people who largely distrust banks and government who will advocate for Bitcoin.

2. You have the government and banks who cannot have people largely distrusting them because without people needing to go through banks or government, there is no reason for these institutions to produce currency, which is what keeps them going, and they will likely denounce and be against all cryptocurrencies.

The Ideal Bitcoin

If you've ever watched Guardians of the Galaxy... they have something called "units" that seem to be valued across the entire spectrum of galaxies. As Marvel is tying in Avengers with Guardians of the Galaxy.. "units" exist in the same universe, thus... the idea of cryptocurrency isn't a bad one. Imagine in the distant future where humans and aliens of all species intermingle: exactly what will the currency be for trading? There probably isn't enough gold to be traded across the galaxy, so "units" would have to likely be measured in some type of labor transaction system.

I've wrote an article in 2014 to answer some of your questions[1]. More specifically, on the value of bitcoin as a currency and where the value comes from:

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3.2 the currency

Bitcoin was introduced to the general public as a cryptocurrency in 2009. Apparently bitcoin was introduced as an alternative to FIAT currency for online payments.

But there is a fundamental design decision that makes, bitcoin as a currency, contradictory: bitcoin is deflationary by design. There can only be produced 21 million bitcoins.

Initially I thought that Satoshi5 made a mistake. But given the genius that takes to create the state-of-art cryptographic protocol that bitcoin is, a mistake from Satoshi was hard to digest.

So my bet is that Satoshi had a deep understanding of macro-economics and consumer’s psyche. He knew that mainstream consumers wouldn’t have any incentive to own a currency that is inflationary with no inherent value, backed up by no one. Since there was no other to way to force someone to own bitcoins - Satoshi was not in a position to force the proliferation of bitcoin - the only way turn bitcoin mainstream was to make it deflationary, to give bitcoin users something to aspire on, a good return on investment.

Hence I believe that this was a kind of forced decision, to make bitcoin acceptable by the masses and it was a successful decision in my opinion, otherwise bitcoin might had never took off.

I can’t tell if my theory is correct of course. But if it is correct, it paid off.

3.3 no currencies, only assets

Bitcoin, in my view, was never meant to be a currency. It was never meant to be used at least directly, for online micro-payments, as the original paper states.

If an average consumer has reason to believe that bitcoin will raise it’s value, the consumer will probably choose to hoard and not spend bitcoins when he can spend USD which is an inflationary currency.

And there is a very good reason to believe that bitcoin will continue to go up in the long run. The reason is bitcoin’s scarcity. Of course prices don’t go up for ever, but no one can tell for sure when prices will go down. So even when in doubt, most consumers will choose to spend an inflationary currency.

So in my opinion, bitcoin is a failed currency. It was meant to fail. It was meant to be used primarily as value storage medium and only in lack of other options as an exchange medium.

Of course for bitcoin to be considered an option for medium to big investors, the price needs to stop fluctuating so much. It is a common pattern for new currencies to fluctuate, but since bitcoin’s characteristics are way more similar to gold than FIAT currency, I think that it’s clear by now that bitcoin should be considered an asset (investment) and not a currency. We will see in a couple of years how this will play out, but I don’t think this will change.

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[1]: https://www.convalesco.org/essays/2014/02/11/on-the-matter-o...

Do you have a source?

I'd believe the 15B is transaction volume (including investors buying/selling) not payments for regular goods?