Bitcoin Exists
Bitcoin Exists
The Business Of Bitcoin: Entrepreneurs See Opportunities In Alternative Currencies
Over the past few months, the electronic currency known as Bitcoin has gained a surprising amount of attention. The idea of Bitcoins is to create an anonymous “crypto-currency,” with payments theoretically untrackable and therefore difficult to tax, among other claimed advantages. Currencies such as this are interesting from a networking perspective, lacking the power of a government to enforce their value and therefore with a price relative to real currencies based almost entirely on network effects. Game theory suggests that as long as somebody is willing to exchange Bitcoins for US dollars or a similarly widely-accepted currency, merchants should accept it, assuming that enough of their customers are willing to pay only in bitcoins.
This is actually counterintuitive, since without the IRS or some equivalent to back up the currency by accepting exclusively it bitcoins have no obvious basis for value, and therefore the equlibrium value ought to be 0. Since a bitcoin is currently worth around $3 ($22 million total), this serves as a good example of the circumstances under which game theory fails: ultimately, a good part of this market is irrational. It’s important to remember that, considering how much of network theory relies on rationality, it can easily cease to exist.
[…] a Cornell university blogger who writes about networks, http://blogs.cornell.edu/info2040/2011/11/08/bitcoin-exists/ “Currencies such as this are interesting from a networking perspective, lacking the power of […]
“…since without the IRS or some equivalent to back up the currency by accepting exclusively it bitcoins have no obvious basis for value, and therefore the equlibrium value ought to be 0.”
Only individuals can assess value since value is a subjective measure. Therefore the price of bitcoins relative to each currency cannot be zero unless all individuals in a given currency market decide that bitcoins are worth nothing.