I've been perusing the sub lately, and I see people debating about how the price of Bitcoin is generated. People are getting into arguments saying that scarcity generates the price, and others saying that the inherent value of Bitcoin determines its price.
This is insane and it needs to be cleared up. If you'd like to learn more, beyond what I write here, check out the millions of free hours of lectures, videos, articles, and books available at Mises.org
What I write will be a rather crude representation of very detailed ideas that you can learn more about at Mises.org.
1) Nothing has inherent value.
Sorry, inherent value doesn't exist.
Humans flush shit down the toilet, while flies swim to it for a buffet (to further prove the point, research "nightsoil");
Drawing modern-day hentai-porn takes just about as much effort as the original painting of Mona Lisa, yet one sells for millions while the other is available for free online;
Up until as late as 150 years ago, one of the most valuable things to our economy today – oil – was seen as a horrific nuisance. Farmers would wake up one day and have black goo ruin their crops and they wouldn't be able to sell their farms because no one wanted it – their lives were ruined. Now, decade-long wars are fought for control over it;
Water is the most important substance on the planet for life, yet giant cities with millions of people are built in deserts and the stuff is handed out for free, and even pumped full of chlorine and used in fountains.
Nothing has inherent value.
2) All value is subjective.
All value is in the eye of the beholder.
This is a loaded statement and has a lot of information packed into it, so let's break it down into a few sub-sections
2.A.) Humans have goals
Humans have goals – they recognize that their lives could be better in the future than it is now, and they can contemplate a way to achieve that better life.
2.A.a) This means time exists and it moves forward
If our lives suck now, and we can imagine – and actually accomplish – a way to make it better, then time must exist.
2.A.b) This means that "things now" are more valuable than "things later"
No one wants to have a shitty life at any point of their life. Thus, ending suffering immediately – or pre-emptively avoiding suffering – is preferred to ending suffering later
(Psst: this is why "loans" and "interest rates" exist)
2.B) Not everyone's goals are the same
Many of our goals are the same, but not all of them. Some people desire to become gods of the universe, some just want to make cartoons for a living, and others would rather be non-stop strung out on drugs.
2.B.b) People can trade! (Provided private property exists)
If we all have different tastes, then I don't mind giving you a peanut butter sandwich in exchange for a turkey one. Children will begin trading after Trick-Or-Treat because Sally likes Twix, while Jimmy likes Kit-Kats.
Trading can only happen when the parties involved both agree to do so. It is, per se, always viewed as profitable before the trade happens. Barring fraud and horrible accidents, everyone always benefits from voluntary trade by definition. This is why socialism ALWAYS fails. Sorry, kids: Socialism IS death.
2.B.b.a) Trading is difficult
If you have a chicken, and want pickles, you're a chicken-having-pickle-wanter. You'll need to find someone with pickles who wants chickens, a pickle-having-chicken-wanter. (Thanks to Walter Block for this fun phrase)
This is difficult and really stifles the development of an economy. How many farmers need A.I. technologies for Google Cloud Services? None, that's how many. Thus, A.I. can't be developed because the programmers would starve (or, at least, there would be a strong incentive to NOT be a programmer).
2.B.b.a.a) A common medium of exchange facilitates trade
Money makes trading easier! People have goals, and so do other people, but their goals might not correlate and so countless professions are unsustainable. People eventually see that they can obtain these other professions if they simply create a local medium of exchange (money). Everyone is better off with money.
2.B.c) People's goals and desires are revealed through action, not speech.
Liars exist. People might say they want to be the world's best Oncologist, but they spend all their time playing League of Legends. It sucks, but, the person reveals that, indeed, they want to vegetate in front of their computer.
Bitcoin's Subjective Value comes from the fact that PEOPLE WITH THE GOAL OF HAVING STABLE MONEY OBSERVE THAT (a) money can be used to ease trade, (b) paper monies are completely controlled by sadistic megalomaniacs, (c) precious metals are too heavy and difficult to hide to travel around the globe easily, (d) and Bitcoin is a money that doesn't have these problems. Thus, the goal of having a stable, free, uncontrolled, worldwide money can be accomplished via Bitcoin. THIS is why Bitcoin has VALUE – people GIVE it value via its ability to help them achieve their goals.
3) Value alone doesn't generate prices – It takes two to tango
Prices are generated via a sort of auction system. If I have a tomato, I can go to a market and start yelling that I want to sell a tomato. The people in the market who view the tomato as a means to achieve their goals will then begin bidding on how much to pay for the tomato.
As they bid, the bidders one by one drop out as the price becomes too high for them.
4) Many products are fungible
When you buy 3 turkey sandwiches from the same store in the same order, they're largely the same. Even though the lettuce on each sandwich might have come from different heads of lettuce, the onion slices might have come from different onions, the tomato slices might have come from different tomatoes, the bottle of oil or mayo might have run out half way through the second sandwich and had to be replaced by another bottle, or the person making one sandwich might have been different from the person making the other sandwiches…
…they're still pretty much the same sandwiches.
4.A) We use products for what we think are our most important goals first.
If you're on a small island alone, and you know you'll be saved in a week, and you have 20 gallons of water, you'll put aside 10 gallons (or so) for drinking, and use the rest for bathing, watering plants, or whatever else.
However, if a storm comes through and destroys 5 of the 10 gallons you set aside for drinking (so now you have 5 for drinking, and 10 for "other"), you don't have to worry about dehydration. You'll just reassign 5 of the "other" water gallons into "drinking" gallons. After all, they're all fungible, and 'watering plants' is a less important goal than 'drinking and living'.
(Thus, disasters are NOT good for the economy)
4.A.a) The more we have of something, the less each individual thing is worth to us
If you only really "need" 5 pencils for the year, and you "want" an emergency 10 pencils just in case… but you have 500 pencils, then you won't even bother to pick up a pencil if you drop it on the floor. Why bother? You'd have to go through 2 every day to actually be worried about running out.
Indeed, after the first 100 pencils, they're largely a nuisance. Thus, pencils #101 through #500 are pretty much worthless to you.
However, your neighbors might need some pencils, so you'd be willing to sell them. Even though the pencils are worthless to you, your neighbors are willing to bid up the price to buy them off you.
This is why "Greater Supply leads to Lower Prices" — If all 30 people in your neighborhood only need/want 20 pencils each, but you have 50,000,000 of them to sell, people don't need to bid very high to convince you to sell one. Hell, you might just give them out for free.
We've literally just used the phrase "people have goals and act to achieve them" to deduce the laws of Supply and Demand.
This is how the price of everything is determined: you have more of something than you feel you need, and you're willing to trade the left-over things for something else; AND someone else wants that thing, and is willing to trade FOR the left-over things with his something else.
*A price is NOTHING more than "What someone is willing to give you for whatever it is that you own". *
There's no "advanced market analysis class" that can predict what the price will be.
Just because there are only 21 million BTC doesn't mean that each coin will be worth billions of dollars.
Just because the miner-reward will drop by half does NOT MEAN that the price HAS to increase.
Just because Bitcoin achieves a goal that people want doesn't mean that everyone will go bankrupt trying to acquire it.
The amount of Bitcoin is the amount of Bitcoin, and people with goals will assign a value to it, and this value will run into other people's valuation of it, which will eventually, on an open, free market, generate a price of it.
Again, if you want to learn how REAL economics works, or just get your teeth whet, hop over to Mises.org where you can learn economics in EASY TO UNDERSTAND terms.
If it weren't for Ron Paul waking me up in 2007 and pointing me to Mises.org and Austrian Economics, I wouldn't have ever thought about Bitcoin as anything serious.
And remember kids: Socialism IS death.