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Question

I've done research on bitcoin and I know what it is and how it works, kinda. I've even built a small block chain app.

Here's the question, what I don't understand and I haven't been able to find the answer to, is if I own some bitcoin, how does that help me buy groceries at the market, or gas for my car? The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?

Also how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.

The fact that a single bitcoin was approximately equal to a few cents when it first came out, but now is worth tens of thousands, is very troubling.

Only the future will determine if Bitcoin is another Tulipmania or it's going to become mainstream. FWIW, here's an interesting read:investopedia.com/terms/b/â€¦ — 5 hours ago
Almost every currency in active use is also traded as a commodity. — 5 hours ago
@CharlesE.Grant I understand that all current currencies are traded as commodities, I just think that the volatility of the bitcoin value will eventually destroy it. — 4 hours ago
@KingWilder The volatility of bitcoin won't destroy it. It's already a failure as a currency, but it can exist indefinitely as a commodity alone. Current currencies can be traded as commodities, but they also function as currencies-- bitcoin only does the one. The fact that you're tracking bitcoin's value solely as a function of its volatility in price in other currencies is evidence of this. — 2 hours ago
@Upper_Case A commodity must have some form of inherent value. If Bitcoin has no value as a currency, then how can it have any value as a commodity? What use does it provide? — 2 hours ago

score 12 · Answer 1 · 2018-10-16 17:13:24Z

Here's the question, what I don't understand and I haven't been able to find the answer to, is if I own some bitcoin, how does that help me buy groceries at the market, or gas for my car? The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?

The market you go to probably doesn't accept Swiss francs either, but that doesn't mean Swiss francs aren't worth anything. It just means that it's not the preferred currency for those particular exchanges. Bitcoin is probably more comparable to gold than a national currency with potential uses involving storing value rather than transferring it.

Also how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.

Likely by acquiring bitcoin when the prices were lower than they are today or were in the past. It's much the same way people get rich with stocks -- they buy them when they are cheap and sell them when they are more expensive.

The value of bitcoin today comes largely from speculation. Regardless of what you could do with a commodity today, if you had good reason to think it would be more valuable in the future, you wouldn't sell it cheap today. Most of bitcoin's present value probably comes from this expectation of future value.

To give an analogy, imagine if silicon were a rare element rather than a common one. In the early days of digital electronics, even though you couldn't actually do much with digital electronics, it might make sense to invest in silicon. The idea would be that if digital electronics catches on and becomes a major industry, everyone in that industry will need lots of silicon. If you think you can sell silicon for lots of money in a few years, you won't sell it cheaply now.

So even though you couldn't yet do anything particularly exciting with silicon, its price would go up immediately. As digital electronics became more popular, the price of silicon would go up higher. Anything that suggested that maybe digital electronics were not going to be as big as expected would cause the price of silicon to drop drastically since its present value was based almost entirely on that expectation.

Much the same thing is happening with bitcoin. People expect that digital assets like bitcoin will become much more popular in the future and so they aren't going to be willing to sell them cheaply now. However, this makes the prices very volatile.

I'm not saying that I think bitcoin isn't worth something, so your Swiss francs example is only partially valid here. Swiss francs are not a global currency, where supposedly bitcoin is. I just think that in my daily life, if I need to exchange some bitcoin into cash so I can but material things from vendors who don't take bitcoin, it seems a little counter intuitive to me. I do think that if bitcoin was the only global currency, then there is real value to it. But until then, I'm not so sure. — 4 hours ago
I don't know what you mean by "supposedly bitcoin is". Either it is or it isn't. If it isn't and someone says it is, they're just wrong. It's more helpful to focus on what's actually true than on what some people who are wrong might say, so that's what I did. — 4 hours ago
@KingWilder there are (some) places where you can spend bitcoins. Some web/computer hosts will accept them, some "hipster" business, some people will trade you for them, along with a whole lost of other, less legal, markets. While I personally don't see the appeal, if I lived in places with either extremely restrictive governments (e.g. China) or an unstable local currency (Zimbabwe?), I feel like trading bitcoins between my friends, or with the guy at the market, might be a pretty appealing proposition. — 2 hours ago
"It's much the same way people get rich with stocks" I think I know where you are going with this but I think it's a bad idea to compare bitcoin and stocks. The value of stocks are based on the dividends they pay or the dividends they are expected to pay in the future. They represent ownership in a real-world entity and entitle the owner to a portion of the value of that entity. Owning one bitcoin entitles you sell one bitcoin. — 1 hour ago
@DavidSchwartz You can buy a stock and collect dividends and then sell the stock for same or even less than you bought it and still make money. Maybe that's not how people get rich quick but it's a major distinction between something that has value purely because of people's beliefs and something that has value because it's entitles you to the ownership of an actual, real-life business operation. — 58 mins ago

Grade 'Eh' Bacon 18.1k74868 · Answer 2 · 2018-10-16 17:28:49Z

Apologies for the brevity and avoidance of in-depth discussion in this answer, for simplicity's sake.

To understand Bitcoin and its failures, we must understand what a 'currency' is, and why it is important.

Prior to currency, people bartered for goods - I give you 4 chickens, you give me a goat. What if you don't want my chickens? How do I get my goat? Well I could trade my chickens for your neighbors calf, and trade you the calf for the goat, etc. But there are a few problems with this system:

(1) It takes time for me to 'shop' my chickens around to trade; [They are a poor 'medium of exchange']

(2) Chickens, goats, and calves only hold value while they are live / edible. [They are all poor 'stores of value']

(3) How much each person values a chicken, calf, or goat will differ based on even what they want to eat that week [it is a poor 'unit of account'].

Coincidentally, those bolded items there represent the 3 qualities of money. From a practical standpoint, you can see some of these having been met by a quasi-bartering currency, such as cocoa beans (South America) or pounds of salt (Rome), where the 'money' itself had a definable practical use. You can also see these principals with rare metals such as gold, which were the first minted coins. Now in any of these cases, the 'value' of the currency truly is in the eye of the beholder. If someone in prison is going to accept a pack of ramen noodles as money, it is because either they will use its inherent value, or simply they believe in the market's general valuation of that ramen, and have faith that they will be able to trade it to someone else down the road.

Metal coins technically had inherent value in their ability to be melted down for jewelry, but there are problems with this form of currency - metal content can be faked, new mine sites adjust inflation in non-controllable ways, and ultimately modern economies are unrelated to the handful of gold mines still in existence.

Modern economies have historically printed currency 'backed by' gold, to get around some of the physical problems of a metal-based currency [meaning for every dollar bill printed in the US, there was a speck of gold that was held by the US government, theoretically redeemable].

But what is that 'true' value of a dollar 'backed by' a speck of gold? For an inherently valuable money like salt, this 'market valuation' is not as much in question. Someone will always need salt, and therefore if salt is rare / hard to produce [which it no longer is], then owning salt will give you future market bargaining power. But what if your money is a minted coin, with a value above the raw ability for jewelry? Well you're in luck if that money is distributed by your government, because they will accept it for something tremendously important - to pay your taxes.

Proponents of gold [and, amusingly to me, bitcoin] dislike the fact that gold no longer backs the US reserve, but frankly, its true modern value is as settlement of your tax debt with the government. And that usage today is the same whether the government backs it with gold, or by proclamation (value by 'fiat').

Watch out, the below contains a lot of opinionated comments.

So why does no one accept bitcoin as a currency? Because it has no inherent value, and it cannot be used to settle a tax debt. And because it is insecure [no authority to assist with payment issues]. And because it does not 'play well' with a modern electronic economy [try explaining to a mom and pop shop how to set up a bitcoin wallet securely, and confirm their payment receipts on the blockchain, vs just paying Visa 3% and forgetting about it]. And because it is deflationary by nature [who wants to pay someone 10 BTC for a pizza worth $20 today, when it could be worth $200k in 5 years?]. And because it is volatile [who wants to accept 1 BTC today for $20k, when it could be worth $6k in 3 months?]

So why does BTC have a value at all? Because it avoids 'know your client' banking requirements allowing money laundering or black market activity. And because people love to gamble. And because it lends itself an air of superiority to its users. And because it makes some hopeful claims about the future (allowing the 'banking of the unbanked').

For the interest of the reader, note that today, BTC was valued at between $6500 and $7000 USD [difference due to various bitcoin markets with massive price spreads due to technical issues (look up 'Tether October 16 2018' for an example) not worth getting into here, but more than anything else, being a signal of the volatility and manipulation of the market].

To your bullet points, this goes to my comment above that if bitcoin was a globally accepted currency with all vendors, then I see a real value to it. If there was a globally accepted currency, then you could just buy my goat and keep your chickens, as long as I knew that I could buy anything I wanted from someone else with the proceeds from our transaction. Which at the moment, I can't. (Sigh) — 4 hours ago
Great answer! It might be worth pointing out that while people (generally, cryptocurrency fans) like to talk about cryptocurrencies as currencies they really operate as commodities. No one rich in bitcoins is rich from those bitcoins, but if they sold the coins for actual currency they might become rich as a result. — 2 hours ago
@Upper_Case Saying that bitcoin 'operates as a commodity' is not a meaningful statement, because the 'commodity' of bitcoin is purely on the speculation of its future adoption as a currency. If one believes it cannot be a currency in the future (as I do), then it cannot be a commodity now. Instead of talking about the minority of bitcoin gamblers who 'become rich', why not talk about the majority who 'became poor' after the many, many price drops over the years? — 2 hours ago
@Grade'Eh'Bacon I don't disagree that Bitcoin is a terrible investment. People desiring to own them is where their assessed value lies (always, necessarily, denominated in actual currencies). It's the same as Dutch tulips. And you can absolutely talk about the majority of people that 'became poor' due to Bitcoin speculation. But they were poorer when the held the Bitcoins-- at least after the sale, they had something they could spend. — 2 hours ago

T. Thomas 111 · Answer 3 · 2018-10-16 18:02:43Z

Here's the question, what I don't understand and I haven't been able to find the answer to, is if I own some bitcoin, how does that help me buy groceries at the market, or gas for my car? The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?

The idea is that with more adoption, then this will be able to be accomplished. The issue currently is that the mining fees and verification time are too high/long. Bitcoin will likely grow in use online and less so in the real world. Outside of the internet, it makes more sense to use Bitcoin for large purchases or to quickly and cheaply transfer large quantities of money (as opposed to wire transfers).

If you exclude the possibility of global financial collapse, then fiat currency will likely not go away. It's very likely that crypto and fiat will exist simultaneously (like the telephone and the internet).

Also how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.

There are markets that exist with all currencies. You can trade foreign exchange and take advantage of the exchange rates to make a profit. Bitcoin is a deflationary currency, which means that the supply is fixed. Since the supply is fixed, that makes it have an inverse relationship with dollar value. People are capitalizing on this characteristic of Bitcoin to make money. Similar to how gold was originally a currency, but now is a financial asset (because there is a fixed supply of gold), Bitcoin is a currency, and simultaneously a financial asset to to its fixed supply (21 million).

The fact that a single bitcoin was approximately equal to a few cents when it first came out but now is worth tens of thousands, is very troubling.

This is a product of supply and demand. When there are fewer items, the value increases. When you have a full bag of potato chips, you are willing to let people have some. The closer you get to having none left, the more hesitant you become to give them away. This is because each of them has a higher value now.

If you want a slightly more elaborate answer, you can read this book for a easy-to-understand explanation: https://www.amazon.com/dp/B07GNRXM9P (shameless self-plug)

It's only about 100 pages, and it covers all of the things you seem to have questions on.

score 12 · Answer 4 · 2018-10-16 17:13:24Z

Here's the question, what I don't understand and I haven't been able to find the answer to, is if I own some bitcoin, how does that help me buy groceries at the market, or gas for my car? The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?

The market you go to probably doesn't accept Swiss francs either, but that doesn't mean Swiss francs aren't worth anything. It just means that it's not the preferred currency for those particular exchanges. Bitcoin is probably more comparable to gold than a national currency with potential uses involving storing value rather than transferring it.

Also how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.

Likely by acquiring bitcoin when the prices were lower than they are today or were in the past. It's much the same way people get rich with stocks -- they buy them when they are cheap and sell them when they are more expensive.

The value of bitcoin today comes largely from speculation. Regardless of what you could do with a commodity today, if you had good reason to think it would be more valuable in the future, you wouldn't sell it cheap today. Most of bitcoin's present value probably comes from this expectation of future value.

To give an analogy, imagine if silicon were a rare element rather than a common one. In the early days of digital electronics, even though you couldn't actually do much with digital electronics, it might make sense to invest in silicon. The idea would be that if digital electronics catches on and becomes a major industry, everyone in that industry will need lots of silicon. If you think you can sell silicon for lots of money in a few years, you won't sell it cheaply now.

So even though you couldn't yet do anything particularly exciting with silicon, its price would go up immediately. As digital electronics became more popular, the price of silicon would go up higher. Anything that suggested that maybe digital electronics were not going to be as big as expected would cause the price of silicon to drop drastically since its present value was based almost entirely on that expectation.

Much the same thing is happening with bitcoin. People expect that digital assets like bitcoin will become much more popular in the future and so they aren't going to be willing to sell them cheaply now. However, this makes the prices very volatile.

I'm not saying that I think bitcoin isn't worth something, so your Swiss francs example is only partially valid here. Swiss francs are not a global currency, where supposedly bitcoin is. I just think that in my daily life, if I need to exchange some bitcoin into cash so I can but material things from vendors who don't take bitcoin, it seems a little counter intuitive to me. I do think that if bitcoin was the only global currency, then there is real value to it. But until then, I'm not so sure. — 4 hours ago
I don't know what you mean by "supposedly bitcoin is". Either it is or it isn't. If it isn't and someone says it is, they're just wrong. It's more helpful to focus on what's actually true than on what some people who are wrong might say, so that's what I did. — 4 hours ago
@KingWilder there are (some) places where you can spend bitcoins. Some web/computer hosts will accept them, some "hipster" business, some people will trade you for them, along with a whole lost of other, less legal, markets. While I personally don't see the appeal, if I lived in places with either extremely restrictive governments (e.g. China) or an unstable local currency (Zimbabwe?), I feel like trading bitcoins between my friends, or with the guy at the market, might be a pretty appealing proposition. — 2 hours ago
"It's much the same way people get rich with stocks" I think I know where you are going with this but I think it's a bad idea to compare bitcoin and stocks. The value of stocks are based on the dividends they pay or the dividends they are expected to pay in the future. They represent ownership in a real-world entity and entitle the owner to a portion of the value of that entity. Owning one bitcoin entitles you sell one bitcoin. — 1 hour ago
@DavidSchwartz You can buy a stock and collect dividends and then sell the stock for same or even less than you bought it and still make money. Maybe that's not how people get rich quick but it's a major distinction between something that has value purely because of people's beliefs and something that has value because it's entitles you to the ownership of an actual, real-life business operation. — 58 mins ago

Grade 'Eh' Bacon 18.1k74868 · Answer 5 · 2018-10-16 17:28:49Z