A Gold Ring, a House and a Bitcoin

I put a gold ring on a table. It is a nice fat one. 4 grams of pure gold.

How many hours would you be willing to work in order to get it?

It fits your finger perfectly. It's shiny and impressive looking. Working a day in order to get it doesn't sound all that bad.

A day it is. 4 grams of gold is equal to 1 day of your time.

Across the street, there is a house for sale. It is a beautiful little hose. Just the right size. Neither too big nor too small.

How many days would you be willing to work for it?

Building it from scratch would take about a year with continuous work being done by on average 1 person busy at all times. In addition, there's the materials and the land.

2 years of work in order to get it sounds reasonable. After all, you get to live in it while you work for it, and it is a truly beautiful and comfortable house.

To make things easy for ourselves, we equate a year to 300 days. 2 years are then 600 days.

One day is 4 grams of gold. That makes a house worth 2400 grams of gold.

In all of this, we have to remember that we have other things we have to pay while we work to get these things, so the actual time spent will be longer. It is our savings that we put into the house, not our total earnings. 1 day of work for a ring is therefore likely to take about 1 week, and 2 years will take about 10 years.

The point in all of this is that we can estimate a reasonable relationship between a gold ring and a house.

Today, a typical house costs more like 4000 gram of gold than than 2400. Our subjective valuation tells us then that houses are expensive relative to gold. However, we may be wrong. Other people are clearly of a different opinion.

Nevertheless, there's definitely a relationship between gold and a house. What exactly people are willing to pay for either is constantly varying, but the price relationship will be inside a predictable range. A typical house will never cost 100,000 gram of gold, nor will it ever fall much below 2400 gram.

The reason for this is that both the gold ring and the house can be tied to how we value our time.

Now, let me introduce you to a rare and wonderful number. It is unique, and it can be traded, either in its entirety, or as a fraction. Every transaction is secured by a technology called the block-chain.

How many hours are we willing to work for such a number?

The rational answer to this appears to be zero. After all, a number has no value. It cannot be worn, nor can it be lived in. However, there is value in the block-chain. The transaction mechanism looks promising.

But what is the transaction mechanism worth? It is open source code. Anyone can set up their own block-chain mechanism. That requires some computers and network access. It requires some software that people can download to their PCs. That's it.

The total investment required to put together a block-chain technology is about equal to that of a house. If there are 120,000 tokens in the system. Each has a value of about 1/50 of a gram according to our own measures arrived at for the proper value of a house.

As it happens, there is currently about 16,000,000 Bitcoins currently in circulation. Each one of them are priced at 50 gold rings. People are currently willing to spend 200 gram of gold on something that we would subjectively estimate to have a value of about 1/50,000 gram. That's a mismatch of about 10,000,000 to 1.