Currencies are supposed to be used as a medium of exchange where, they
facilitate transactions thus the multiplier effect kicks in and increases
the economies wealth. An example of this, is fiscal stimulus used by the
Obama Administration with the American Recovery and Reinvestment Act of
2009[15] however, this is not happening with Bitcoin.
So Bitcoin doesn't have fiscal stimuli like regular currencies, and therefore
it will experience depressions and recessions, unlike regular currencies? OH
WAIT.
> So Bitcoin doesn't have fiscal stimuli like regular currencies, and therefore it will experience depressions and recessions, unlike regular currencies?
You missed the big problem; while one could make an argument that the lack of the capacity for monetary stimulus with Bitcoin is an issue, fiscal stimulus is quite possible with Bitcoin (there isn't any now, because no government uses Bitcoin as the currency in which its budget works), and the multiplier effect resulting from the velocity of money would conceptually work the same way as with any other currency (the inherently deflationary construction of Bitcoin makes the likely velocity lower, which might reduce the effectiveness of fiscal stimulus, but its still possible; and different forms of fiscal stimulus could address the velocity of money.)
You're confusing two points just like the author. First you're saying that controlling your currency doesn't help (hurts?). Look at how many recessions the US had when it was pegged to gold vs now, then get back to me on that one.
But, that doesn't really matter because Bitcoin is _not_ a national currency. It really is more like gold in that it's not really a currency in itself, but a way to store/transfer other currencies. No one buys something with gold without first doing the conversion to their local currency and I don't see that ever changing with Bitcoin either. And, it doesn't have to.
I don't see the problem of buying thins with bitcoins directly, as long as the merchants are willing to accept it. And it will happen when/if the market stabilizes.
Gold has a lot of disadvantages (fractionating, checking for purity) that bitcoins doesn't.
I don't think that's true, that the economy was less stable a century ago than it is now. People used to give out 50 or even 100 year bonds, and recessions usually were not as bad and didn't last as long.
But even if I'm wrong, the currency not being based on gold is only one of a billion other things that has changed in the economy since then. It's a completely different world.
And while bitcoin is not a national currency it has the potential to become a universal currency online. People could work for bitcoins and use them to buy what they need online from other people that accept bitcoins. The currency could circulate through many hands without ever once being converted to another currency.
And since it's online any conversion could be done quickly and automatically so the effective difference between holding two different currencies wouldn't really matter. The only thing you would have to take into account is how likely they were to increase or decrease in value in the time that you aren't spending them, and bitcoin has a clear advantage in that regard.
Comments like this show a complete lack of understanding about economics and the positive impact government spending and lending can have on the economy. Just because recent monetary policy hasn't improved the economy as much as we would like is no excuse to give up all control over the monetary policy.
Unlike other currencies, Bitcoin is limited in supply and produces a set amount every 10 minutes - as a result there is the potential for a liquidity trap because these new injections into the market may fail to stimulate economic growth. Whereas, fiat currencies are backed by Governments etc (something which Bitcoin isn't) and these currencies can theoretically have an unlimited amount supplied into the economy - and as I highlighted with the American Recovery and Reinvestment Act of 2009[1] government spending and lending can have a positive impact on the economy in particular through kick-starting the multiplier effect.
But my point is that the possibility of fiscal stimulus is not critical for a functioning economy, and in many cases simply does not work. I disagree with the monetarist principle that economic growth is stimulated by money injections—it's just people getting up and going to work in the morning, and inventing new things and discovering new processes. All this money mechanics stuff is distracting fluff.
This is the classic argument you hear a lot, particuarly from Keynsian economists is: bitcoin is bad because it's deflationary like gold.
In the past when we were using gold, like during the Civil War, we couldn't pay soldiers so we went to greenbacks (paper money like today). That allowed the soldiers to get paid so we could continue to fight the war. Gold obviously has a physical practical limit that can be traded and transfered. When a gram becomes worth so much it buys a house that makes other purchases of food and bills become impractical and people stop buying, and when building a billion dollar construction project moving it and protecting it has another set of problems and overhead. Bitcoin does not have the division problem--a single coin can be divided into pieces 10^8 pieces as the code currently works. That can also be changed in future versions to be divided even smaller. Ie, when one bitcoin can buy a house, you can just pay 0.0000001 for your stick of gum. So, we are then left with the argument, "Oh My God people won't buy because of the psychology that 0.01 coin today that currently buys a pack of gum being able to buy a car in the future." But, that's almost true now with savings and stocks and people still spend their money today and go into debt. Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc.
Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. Venture Capital also would have issues, but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time.
Inflation is built into the current model to encourage investment and prevent concentration of capital. Clearly, given the wealth divide that isn't working (blame exploitation of 3rd world or robots).
> Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in.
From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borrowing, but it exacerbates the problem it creates for lending. Specifically, if the the BTC I have in my pocket today is going to be worth 10 times as much tomorrow, what's my incentive to lend it at all? I've got a strong return without default risk if I just hold on to it. If you propose something that reduces the lenders BTC-denominated payments over the life of the loan to account to mitigate the effect deflation has on the value they are paying back, it makes it even less attractive for me to lend the money.
> Inflation is built into the current model to encourage investment and prevent concentration of capital.
Inflation doesn't prevent concentration of capital (it prevents hoarding cash, but by doing so encourages concentration of capital.) Things like progressive taxation of income are intended to prevent concentration of wealth (but this is undercut by things like favorable tax treatment of income derived from capital compared to income derived from labor.)
> Not to say bitcoin is the solution, but it's something different.
That's a bit like pointing to imperfections in representative democracy caused things like gerrymandering, and then saying "I'm not saying that hereditary monarchy is the solution, but it's something different."
While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for.
If John's $45,000 house and Jane's $4.5M mansion are built in the same year and equally subjected to wear/tear, 20 years the value of John's house is probably less than 1 percent of Jane's mansion.
> While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for.
I'm not looking for risk. I'm pointing out that a currency that appreciates in value when you stuff it in your mattress makes you far less likely to lend it out to someone and assume the risk of default, especially at interest rates that will be attractive to someone who is going to be uncomfortable paying it off even without interest, since just paying of the original loan value (denominated in the appreciating currency) without interest will mean paying over time many times the value (in purchasing power) of the original loan over its life.
Actually, given the wealth divide, it's working extremely well. We sometimes underestimate the progress the world has made in the last 100 years.
We tend to overlook that we live in the most peaceful times in the history of mankind, and that poverty and hunger in the world is declining steeply.
We don't know what a bitcoin economy will look like. Stimulus packages over the decades have been known to work and not to work. We don't know how a bitcoin economy reacts to depressions and risk. We do know that the current bitcoin economy and any financial engineering (or even just opening a bitcoin-accepting webshop) is extremely more complicated and risky than the traditional money systems.
I think he meant that the wealth divide is worse in relative terms. Everyone is richer than a century ago, but the top x% are richer than before, than the poor are richer than before.
> Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc.
How are you expecting to get a ton more after 20 years? Even with a ridiculous constant real interest rate of 5%, you'll get only 2.6x your original investment after 20 years.
"but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time."
Well, for last couple weeks, bitcoin is the best investment, just saying ....
Well, why don't you put your money where your mouth is and throw all your savings into it today? I mean, if it keeps growing like it has for the past couple weeks, you stand to be a gajillionaire even though you didn't buy when it was low, right?
> I would think, even more than that, loans would have issues in an anonymous system.
Not really; the fact that the currency is anonymous doesn't make the loans anonymous. The lender cares that someone is on the hook for the payment being made, they don't care if that person is the person to whom the cash loaned is actually transferred or the person from whom the payments will, in fact, be transferred.
Of course, to establish credit worthiness and get attractive loan terms when the currency itself is anonymous -- whether its paper dollars or Bitcoins -- people are probably going to have to engage in transactions that are recorded and verifiable by the people who they want to trust them (either directly or through trusted third parties), mitigating the benefit of any anonymity inherent in the underlying currency system.
And, loan terms aside, if you want to take out loans whose enforcement relies on the compulsory powers of the states rather than the compulsory powers of lenders who act outside of the rules imposed by the state, you probably need to adopt some kind of protocol that allows you to prove in court that a loan agreement was made with particular terms by a particular lender and borrower and that repayments of specific amounts were made on that loan, which, again, will require sacrificing some of the anonymity inherent in the underlying monetary system.
Mike Hearn has talked some on how you could use existing functionality in the bitcoin protocol to issue loans. Around 25:50 he talks about ripple + bitcoin which is a practical autonomous lending system. A little bit simpler than the smart property way which is pretty deep down in the protocol.
Actually inflation causes the wealth divide, since the printed money goes to the top first, making them better off, then trickling to the bottom only after prices have gone up and people are poorer.
The reason I said that is because, there are two reasons to own Bitcoin - either to derive indirect utility through purchasing goods with Bitcoin in the future (therefore Bitcoins are being treated as if it’s a currency) OR the expectation that Bitcoin will rise in monetary value which means that, Bitcoin is a speculative digital asset – however, it’s not tied to anything in the way a stock or bond is for example. Currently, Bitcoin can be considered elastic (to some extent) although it’s subject to future diminishing elasticity meaning that, in the long run there will be a finite supply of Bitcoins and an inelastic supply.
However, a long-run inelastic and fixed supply currency is not useful for a real world economy which is why, Bitcoin is useful as a speculative digital asset rather than a currency.
Third use - transfer money easily across borders, for example a migrant worker sending money to family. No red tape, no forex hassles, no worry about future value (unless the value tanks while you're transferring, of course.)
> Third use - transfer money easily across borders, for example a migrant worker sending money to family. No red tape, no forex hassles, no worry about future value (unless the value tanks while you're transferring, of course.)
The "no red tape, no forex hassles" are largely because of immaturity in the regulation of "virtual currencies" that exist largely because most states haven't gotten around to addressing them because of scale issues compared to traditional soveriegn currencies.
The regulations will surely come. However, the ability to hold a private wallet outside of a bank and transfer money to a point anywhere in the world, makes regulations harder to police. Some wallets might be declared and known, others might exist anywhere in the world and be held by anybody. For a law-abiding citizen who trusts their government (the people you don't need to police), all will be (probably) declared. I expect different behaviour from a Russian holding money in a Cypriot bank or someone who pays taxes to a corrupt regime.
Still, if someone is looking to preserve wealth, it would seem smarter to wait and see if and where the price stabilises. Or if governments slam the door shut on the currency.
I was worried that they would expose a fundamental flaw in the encryption algorithm, however the post goes on with irrelevant FUD. It s a lot less flawed than even paper currency, and the fact that there haven't been any forgeries is a testament to its success. The argument about identifying transactions is a bit disconcerting, but how much of a real concern is it? After all, even paper money has a trail of DNAs from the hands that touched it.
As for the comparisons with other currencies and commodities, it has been exhausted as a subject; money is a matter of trust after all.
The question is what are the actual security threats to bitcoin's p2p infrastructure/integrity?
There is a fix that will go live in the future at a predetermined date. All users are being encouraged to update their clients or patch their clients' config files before the impending deadline.
I'm not sure what will happen to clients that don't patch or update.
Not really. The possibility of a short lived double spend is a valid state for the system to be in. What is vanishingly unlikely is a long lived double spend. There are currently no long lived double spends in the block chain, and that means no double spend has ever been successful.
"However, they are wrong because converting $100 into 10 x $10 bills or even 100 x $1 bills does not make you feel richer."
This was also quoted in a Forbes article but I don't get it. Can someone explain what this means? What does lack liquidity or limited supply have to do with feeling richer by funging your bills?
I'm not joking I seriously have no idea what this has to do with anything...
I agree that this argument is purely stupid. How does the 'feeling richer' psychological factor somehow play into the success or downfall of a currency as a 'flaw' in the mechanics of it?
Some people feel 'richer' with 1 OZ of gold then $1700 in bills, some feel 'richer' with 100x $1 then a check for $100. But why does that matter as a success factor of a currency?
It's stupid. If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces. Bitcoins can be divided up, but then uninformed people forget why this is important and then make nonsensical arguments about splitting a $100 bill into 10 $10 bills.
> If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces.
Its actually pretty trivial to issue new paper currency in smaller denominations and exchange existing currency for it; the problem with deflation is that it creates a disincentive to spend or invest, not that there is a logistical difficulty in subdividing currency.
Has there been a currency (assuming bitcoin is a currency) that's deflated by 2000x in a few years? Not saying it can't be done with paper money, but it's less convenient than it is with bitcoin.
> Has there been a currency (assuming bitcoin is a currency) that's deflated by 2000x in a few years?
Not a major one recently, because considerable effort is expended to avoid that for reasons which have nothing to do with the logistical difficulties of subdivision.
> Not saying it can't be done with paper money, but it's less convenient than it is with bitcoin.
It could be done with paper money, but nobody involved in managing currency wants it to be done. People managing currencies for use as exchange media don't want the currency to be an attractive investment. But the logistics are pretty obvious; paper money in circulation is already replaced regularly, all you have to do account for deflation is print bills with smaller denominations on them, and replace bills coming out of circulation in appropriate ratios. If the value of the currency is appreciating and you do this at a ratio which keeps the smallest new bills being currently issued at the same value, the ratio of the cost of printing money to the value of the circulating money remains the same as if you had a relatively-constant value currency and were just replacing bills 1:1. Its not really a logistical problem.
Having a rapidly deflating currency, if it was a main currency rather than a novelty currency operating at a trivial scale compared to the whole economy, may produce economic problems for the economy as a whole, but its not really a logistical problem for the currency issuing system with paper currency. So Bitcoin "solving" the logistical non-problem is a non-accomplishment.
Dividing $100 into 100 x $1 bills makes sense if yesterday an orange cost $100, but one week later it costs $1 ( because of changing the value of money ).
When the whitepaper and subsequent code for the Bitcoin system was drafted, they created a set limit of 21 million bitcoins. After this limit is reached (designed to happen in 2140) there will be no new coins introduced into the network.
The concern then, is that when there is a fixed amount of coins available, people will begin to hoard them because they will appreciate in value. The system avoids this by allowing coins to be subdivided to 8 decimal places (the smallest unit is called a Satoshi). This results in 21 * 10^48 possible Satoshis available to the economy. It is expected that this will be a sufficient amount of currency for the network to avoid hoarding. If hoarding is still an issue, the code can be changed to further subdivide a coin.
The mistake Nicholas makes in this article is confusing the comparison between the dollar and the bitcoin. If you divide a $100 bill into 100 $1 bills, you will not feel any richer because the value of a single dollar bill does not change. If you divide a bitcoin into 100,000,000 Satoshis, the demand for more currency will cause an inflation in the value of an individual Satoshi.
I think the idea is that it's a classic supply/demand equation: With a fixed supply of Bitcoin available to transact with, each individual Bitcoin will become more expensive as demand goes up.
If you sub-divide Bitcoins further to purchase the same items then it's still a deflation: What you used to be able to sell for 1 BTC now you can only get 0.1 BTC for. If all prices drop proportionally at the same time that's not really so bad, but it is bad for any kind of delayed payment agreements (e.g. credit, loans, etc.) as your ability to repay, say, a 40 BTC loan continually gets less and less.
If you don't sub-divide then you make it more and more difficult for currency exchange to happen at all; i.e. the BTC becomes more valuable, which is also deflationary.
In a deflationary economy it's better to hoard your money (which is growing in value without action on your part), which reduces the pool of BTC available to spend, which leads to more deflation, etc. etc.
Of course this is a disaster only if BTC becomes the only currency, but it would seem to put a hamper on the idea that BTC could completely supplant our current currencies. I'd certainly never take out a loan in BTC at this point; even if the lender agreed to "deflate" the principal at a certain APR, the volatility of the BTC value is too high to be sure I wouldn't get taken to the cleaners on the loan.
Why couldn't loans be made which devalue at a rate pegged to a basket of goods? We track the rate of inflation today, we could just as easily track deflation and loans could be pegged to that. Doesn't that solve the loan problem?
The way I see it, that's simply shifting the problem around. Before your loan was based in BTC, now it's based in (essentially) "Number of equivalent baskets of goods".
I don't think lenders would appreciate the volatility inherent in their loaned-out money having value fixed to the amount of crop yield the farmers can deliver this year, or the amount of oil extracted, etc. Similar logic would apply for those trying to get a loan.
It doesn't make sense outside the context of an argument that a lot of pro-bitcoin people make:
That the problem with gold as a currency is not the unpredictable supply, but the lack of divisibility, causing it to be hard to buy a can of coke with gold because of the tiny amount of gold involved.
While I don't disagree with the author I would say that the finite supply shines a light on an even more direct problem.
What happens to 'lost' coins? The BTC supply is not only finite but in fact dwindling over time, as inevitably the amount of currency is going to diminish due to digital loss.
I have personally lost a few BTC due to computer crashes, wallet file lost etc. (In the early days) and considering this the total supply of bitcoins will be diminishing over time at (maybe already?) higher rate then they can be mined.
I haven't taken the time to do ANY form of math on this but I can guarantee that already 10.000s if not 100.000s BTC are lost forever due to people simply not having access to them anymore and the data being destroyed.
Over years of loss this is probably more likely to kill the currency than anything else in my opinion.
I expect this will cause little problem; if 1M bitcoins are lost, the system will just work as if there were only 20M bitcoins created instead of 21M bitcoins. Everything would be a little less expensive because bitcoins would each be worth about 5% more.
Nope. Since no one can ever satisfactory answer the question of the 'real' amount of BTC in circulation, this will only serve as a factor of uncertainty. Lost bitcoins affect nothing, FOUND bitcoins can affect everything.
So, MV=PQ and all that. Lost bitcoins are functionally identical to any other bitcoins that aren't being spent. Burning dollar bills does not move the price of the dollar in a different way than keeping them in your pocket.
Then Bitcoin increases in value, and you keep dividing a Bitcoin more. Nothing really changes.
Does it really matter if you have 20 million Bitcoins that are worth $1 trillion or if you have 10 million Bitcoins that are worth as much? No, it doesn't. The 21 million number was pretty arbitrarily chosen to begin with.
This would be a problem if say half of available Bitcoins would be wiped out overnight - somehow. But the chances of that happening as getting lower and lower as more people start using Bitcoins, and the value gets spread out across many more people.
That works for long as you keep more than you lose. If we get down to 1000000 btc at a reasonable value, what happens when I find my old thumb drive from 2011 that has 100k btc on it? That will be quite a shock to the btc economy.
I don't think this kills bitcoin, but this is part of the "lost coin" problem.
What happens if I find an old chest with a 100kg in gold/diamonds/unobtainium? I think this situation is quite a good analogy to your question, the consequences of which are readily known.
I think the 'point' here is that as opposed to chests with 100.000.000KG of gold there are actually 'lost' wallet files with enough BTC that it would 'rock' an economy with a currency cap in the future.
I am pretty sure if someone found a stash of gold worth $400.000.000.000 that WOULD actually effect gold prices. Also: Gold has 'real life' uses (production of components etc) and real world costs etc. attached to handling (weight, transport costs etc). None of which BTC has.
So I don't know how much gold it would take to rock the price, but I'm guessing it's enough as to be non-trivially "lost" however, any random flashdrive could contain any number of btc.
The analogy to gold isn't gold that was once possessed that has been lost, it is gold that is newly discovered. A new find of a big gold vein, gold on an asteroid, etc. would be a similar shock to the system.
I agree that it's not a 'currency killer' in the short run BUT if we speculate that BTC reaches mainstream popularity and a total market value in the 100-1000s of BILLION USD the fact that an 'unknown' amount is in circulation makes for a very strange variable.
All of a sudden my old 1BTC wallet on my crashed laptop hard drive may be worth 100s of days of mining network wide, and even the speculation that a 'previously unknown' wallet containing 100BTC (there are a LOT of those sitting on old phones and hard drives already I promise) would have possibly disastrous effect on currency value etc.
All I am saying is that there are a LOT of factors to consider and BTC loss over time is a major one.
My argument being: A finite supply of a currency is one of the factors people REALLY need to think about when it comes to BTC. And I guess I am saying that it's a real problem vs. a currency with increasing difficulty and a non-finite supply.
"Lost" bitcoins would just cause all of the other bitcoins to effectively increase in value. It's really only a problem for the person losing the bitcoins and a (small) positive for the rest of the bitcoin community.
It's conceivable that most lost coins will only be lost until the keys can be cracked. Bitcoin keys are extraordinarily difficult to crack right now, but at some distant point in the future, it's conceivable they could be cracked.
IIRC, there are some bitcoins that have been irretrievably lost because it was sent to an invalid key. It's a very small number however.
Nope. That's the problem. LOST bitcoin (as you cannot quantify the availability of anonymous data blocks) wouldn't effect anything. ONLY FOUND bitcoins would.
The potential for destruction of bitcoins is actually reassuring to me. It painfully demonstrates that there is a limited supply of the digital "material" that makes bitcoin possible. It also encourages us to not hoard too much bitcoin, and to actually spend some of it from time to time.
Not sure this will kill the currency, but it will definitely lead to many fewer than ~21MM units being available. As average folks rather than computer wizards try to hold Bitcoin, many more bitcoins will be lost forever, because private key protection and backup is not a natural thing for humans!
In fact, protection and backup are at least a little at cross-purposes: better backup increases the possibilities for compromise.
Except now with Bitcoin, their private keys and associated balances will be lost forever when they die. Or perhaps even earlier, when they go so batty they can't remember their 'brain wallet' seed.
The amount of bitcoins you have just describes what fraction of its wealth humanity owes you.
If you lost some BTC it doesn't destroy any value. It just means that you allowed humanity to forget that it owes you some of it's wealth. If you lost some BTC the fraction that humanity owes all other people who own bitcoins just increased.
I think that's only true if it was known how many wallets were actually lost. As is, the fraction of worth captured in that wallet can never be re-distributed to other people who own bitcoins, because the wallet is never decommissioned, just dormant.
Not quite. Losing your wallet doesn't destroy anything beside the proof that the rest of society owes you anything.
No actual worth is lost. You just lost the proof that you have a right to something useful or pleasant. It will be claimed by other people. Market will discover how much bitcoins were lost and bitcoin price will raise accordingly so other people holding bitcoin will be entitled to tiny bit more of the valuable things that society provides.
If you break your glass bowl it's a loss for the humanity. If you loose bitcoin wallet it's just a loss for you.
That is only true if the loss is actually permanent. If the system comes to assume that there are only 10,000,000 coins in circulation, what happens if a substantial portion of the "lost" 11,000,000 shows back up? Now you just had a 50% inflation overnight...
Of course, the chance that huge amounts are lost together is quite low.
I don't think you could double the amount of bitcoins overnight. And even if you could I doubt that it would lead to rapid inflation. Rather gradual as additional bitcoins spread throughout the economy.
There are many legitimate arguments for the existence of flaws in Bitcoin that could prevent it from becoming a legitimate currency. Unfortunately, this was poorly written, poorly formatted, and has a set of premises that do not lead to the conclusion in the sensationalist title.
From now on, for the purposes of transactions, I am going to refer to bitdollars. In any software using bitdollars, one bitdollar is equal to 0.001 bitcoins.
"Eventually the Bitcoin economy is going to run into the problem of its algorithm and the Bitcoin-hoarding because; there will not be enough currency."
There is an oscillation process at work here - as people hoard bitcoins, the value of each individual bitcoin increases. People will then sell off their bitcoins in exchange for a higher price than they initially payed for them, thus increasing the money supply and allowing others to buy into the system. Am I missing something here?
Yes, there will be (at some point) a downward force on the value of Bitcoin due to hoarding. But that will not be the only force. At some point, it will seem that its probably not going to rocket upward any more, and it might fall a little and then people start actually using it. Also- its important to remember that there are relatively few places to 'use' it now compared to most other currencies. I cannot pay my rent, groceries, etc....
I think to trying to sort it into neat categories of 'investment' or 'currency' is a bit flawed. Its a bit of both. Gold (at least to some degree) was used as a currency at various points in history, but now paying with gold doubloons is difficult for most transactions. The hoarding of gold makes it deflationary as well, but doesn't prevent it from being traded frequently as well (well, at least futures of it on the exchanges).
Gold backed dollars at one point were theoretically limited in number as well.
Another claim against Bitcoin is the fact that it isn't "backed by anything", but neither is gold. Its value is what we assign to it as a market. Aside from industrial processes, the inherent value of gold or diamonds is very low.
I don't think Bitcoin is perfect. I'm glad I bought a handful a few months ago. But some of the 'flaws' that people find aren't as much as flaws as features. One of the things that I do love about Bitcoin is that it isn't a theory- its happening. We could talk all day about the things that are supposed to happen with it from a variety of perspectives, but the experiment is being actively run in a real market which is challenging the perspectives of 'what might happen if...' with what's actually happening.
If we were talking about USD as a new concept, we could write tomes on the 'flaws' of it as a currency. It has nothing backing it. It can be infinitely created at will. A private entity (federal reserve) controls a huge amount of policy. It can be lost, destroyed, stolen. Political forces of a single government can have massive impact on it. It is hugely regulated, and can be relatively easily tracked in its system. Yet, it largely works.
> At some point, it will seem that its probably not going to rocket upward any more, and it might fall a little and then people start actually using it.
No; then people start selling their BTC in a panic, MtGox is overwhelmed and stops working, and a lot of temporary millionaires start looking for work...
That's the state of things now- but in a year? More exchanges could appear. I don't see why they won't. Panic selling will only happen so many times before people stop freaking out over little things.
"More exchanges could appear. I don't see why they won't"
Regulations. The US government has already indicated its stance on what regulations apply to Bitcoin, and other governments will likely follow suit if it gains any more momentum.
"Panic selling will only happen so many times before people stop freaking out over little things."
...or when Bitcoin fails, which is the overwhelmingly more likely outcome.
It might happen other way around - MtGox is overwhelmed and stops working _because_ of the fact that the fiat currencies are falling and the only currency that makes sense to estimate things and services into becomes... well, you know it.
I'd expect it to work about as well as Ido, the better-than-Esperanto: not well. The whole point of currency (and language) is exchange. As you limit yourself to ever-smaller numbers of people in the search for more ideal manners of exchange, the missed point becomes harder and harder to ignore.
I might try to learn Ido someday. I probably won't talk to anyone in it, but it might be fun. It has one advantage over Esperanto: its vocabulary wasn't chosen by one guy arbitrarily, but by a committee that analyzed various European languages and tried to find common word roots. That way knowing Ido might help me to dig some meaning from French, Spanish, Italian texts.
I think Interlingua would be even more interesting to you then, since it was designed to be comprehensible to ordinary speakers of French, Spanish and Italian without any special knowledge. It's sort of like a modern idealized Romance language. It would probably serve your purpose better than Ido.
Or more likely.. the Bitcoin developers release a new version that allows for more than 21m coins. I think a lot of people don't realize that Bitcoin is still an actively developed beta-version software project. There are several parts of the code that the devs are already thinking about changing (such as the way that transaction fees are calculated, or increasing the number of times you can subdivide one coin). If the 21m limit becomes crippling, I'm sure they will change that too. Really, they can change anything they want as long as they can convince 51% of pool owners to upgrade.
> Can you imagine miners or MtGox voting to devalue their own holdings?
I can imagine, if Bitcoin was perceived as a serious currency, nation-states and existing large and wealthy financial institutions investing large amounts in becoming participants in the network.
Can I imagine those institutions acting with regard to Bitcoin the same as they act with regard to traditional sovereign currencies? Easily.
This is already happening. Litecoin is now trading at about $4 per LTC. It is slightly different in that average block generation occurs every 2.5 minutes instead of 10 and the limit is 84M coins, but otherwise it's basically the same idea as Bitcoin.
There are numerous others -- TRC, PPC, NMC, DVC, etc -- that all are slightly different from bitcoin and are actively trading, although their exchange rates are much lower and extremely volatile. Namecoin is actually pretty interesting (embedding a domain service in the protocol), but the others are mostly copycats.
This is essentially the "it will become so valuable, no one will want it anymore" argument.
There are uses of Bitcoin that are complementary to traditional currencies, and can survive both volatility and a large level of hoarding.
One example: an enabler of quick, distant, irreversible transfer under software mediation. That is, you get the transactional Bitcoin you need from a trusted source, then engage in a transaction with a distant/less-trusted source in a matter of minutes. Neither the overall level nor volatility of Bitcoin's pricing level matters much in such a scenario, but it still enables new kinds of transactions.
Also, for a post that includes 15 footnotes, one whopper of a claim goes without support: "Bitcoin is not meant to be an investment it’s meant to be a currency."
Sweeping claims about what Bitcoin or currencies are "meant to be" need more support and careful definition. Maybe, because Bitcoin is something new that's only made possible by computers, networks, and cryptography, it doesn't exactly fit into the classic categories and purposes.
Very well put. I think past experiences are definitely reason to be cautious, but too often it seems that analysis neglects to even consider the fact that there is no direct equivalent to Bitcoin.
It remains to be seen if Bitcoin is 'worth' its current valuation, but I think it's obvious that it has and will continue to have uses in the future.
There are direct equivalents to Bitcoin and I am interested in a global virtual currency however, I don't believe that Bitcoin is going to be it.
I believe that Bitcoin's value is more of a speculative digital asset rather than a currency because, there are two reasons to own Bitcoin - either to derive indirect utility through purchasing goods with Bitcoin in the future OR the expectation that Bitcoin will rise in monetary value. Currently, Bitcoin can be considered elastic (to some extent) although it’s subject to future diminishing elasticity meaning that, in the long run there will be a finite supply of Bitcoins and an inelastic supply (after all there are only 21M of them).
However, a long-run inelastic and fixed supply currency is not useful for a real world economy because, currencies are supposed to be used as a medium of exchange to facilitate transactions which, allows the multiplier effect kick in and increase the economies wealth. Whereas due to the deflationary spiral you're incentivised to hoard Bitcoins & let them appreciate in value instead which is the opposite effect of what a currency is meant to do.
Since theoretically there is a fixed number of bitcoins, and once lost they can't be retrieved, bitcoins should theoretically be worth infinity when the last one is finally lost.
I hope by the time we hit major problems with Bitcoin we will have several new digital currencies to chose from. Nobody ever said there needs to be only one, after all.
Recessions and depressions happen to economies. To critique Bitcoin for its potential to induce a recession or depression is ridiculous, because the USD -- and its influence on the economy -- isn't going anywhere anytime soon.
> Recessions and depressions happen to economies. To critique Bitcoin for its potential to induce a recession or depression is ridiculous, because the USD -- and its influence on the economy -- isn't going anywhere anytime soon.
Its not ridiculous when one of the arguments for adopting Bitcoin is how much better it would be for our economy to be dependent on it than existing soveriegn currencies. Certainly, one reasonable response to this is to argue that the assumption that Bitcoin could displace those currencies is far-fetched, but its also reasonable to accept, for the sake of argument, that it could and then address whether or not it is desirable.
Bitcoin is certainly flawed for a number of reasons, but this article is quite poorly-written; we'd have been better off with just the list of references. Summary: Bitcoin is deflationary.
Firstly, the mining allocation rate isn't meaningfully part of the bitcoin protocol; it's just a setting. Any portion of the network large enough to survive as a detached economy can choose to change the (batty) monetary policy whenever it likes.
Secondly, this probably won't be necessary, as nothing really prevents bitcoin holders from forming banks and issuing inflationary/debased/pegged notes to beat the price down to sanity, using the existing transaction ledger for accounting.
Or even fork off the existing block chain at a pre-determined block.
This way, all existing owners of the parent crypto currency would have equal coin-to-coin values in the new crypto currency as of a certain date.
I'm surprised I haven't heard of any existing alternate crypto currencies intentionally forking off of the existing Bitcoin block chain. They all seem to start off with their own new block chains.
I hear so many disparate opinions about Bitcoin economy that I don't consider them anymore. The classic counter argument to this one is that hardware is constantly improving and still people buy hardware even though everyone knows that in 6 months with the same money you can buy something better. And another one is that Bitcoin is so divisible that deflation is not a problem.
In the end, Economics involves the behavior of people acting on free will. How anyone can attempt how people are going to behave with respect to something? If anyone could predict what society is going to value in the future, or how people will react to some new technology would he be writing blog posts about what is going to fail? Has there been anything remotely similar to the Bitcoin now in history?
I don't know whether deflation is good or bad but I consider the potential advantages of a deflationary currency, if it works, worth trying it. Why not, nobody is being forced to get into Bitcoins. If you don't like it, ignore it and move along.
This fundamental flaw is absolutely glaring to anyone who has any understanding of economic history -- and it's amazing to me how many technologists willfully disregard several centuries of accumulated experience. Because of their built-in deflationary spiral, Bitcoins can never meaningfully be used as a medium of exchange: it will always be tempting to keep your Bitcoins in your pocket and let them appreciate instead of using them for needed goods and services. (And certainly, no one will take on debt denominated in Bitcoins. Can you imagine if you had taken out a Bitcoin-denominated mortgage a year ago?) All of this looks a lot like the 19th century in terms of economics, which suffered from manic booms and absolutely devastating depressions on a regular basis.[1] It took the mother of all depressions -- a decade-long monster that casted a generations-long shadow -- to permanently shift thinking. While economists still debate the precise causes of the Great Depression (and why so many attempts to right the economy in the 1930s failed), there is broad consensus on one key element: deflation is an economic carcinogen, and must be avoided at all costs. As such, Bitcoin is macroeconomic cancer -- no matter how breathless its techno-utopian proponents may be.
[1] Kindleberger, Charles P. and Aliber, Robert (2005 [1978]), Manias, Panics and Crashes. A History of Financial Crises, New York, ISBN 0-465-04380-1
no, because if persons with BTC hoard them as a value store rather than spending them as a currency, the merchant won't see (significant) spending from BTC holders.
Not all sellers pin their BTC values to USD. What if I were offering you a $400 video card for $300 of BTC? (This is especially true of Silk Road prices, by the way).
I have a suspicion that many people are spending their "hoarded" bitcoins, and also immediately moving to buy/mine more...
The principle of dual circulation and 'bad money driving out good' is formulated as Gresham's Law. While this is typically applied to two currencies pegged by fiat, it would also apply to a pair of circulating currencies in which one is appreciating and the other depreciating.
The only problem is that Bitcoin does have an end use—as an anonymous digital currency (c.f. Silk Road). And furthermore, whether you believe it to be 'macroeconomic cancer' or not, it exists and cannot be shut down as a matter of policy.
Not completely, no, but it could certainly be stunted. The first question anyone asks about bitcoin is "What can you actually buy with it?" If it becomes illegal for American or European companies to accept bitcoin payments, that would certainly certainly do a lot to prevent it from taking over.
Yeah, and there are very few markets in the world where the weight of some quantity of metal is used as currency. Let's put it this way: if you had no money at all, and I gave you a gold coin, how would you pay for your dinner?
Except that there are markets where Euros are the currency. Can you actually name a market where weights of gold or other metals are used as currency without first looking it up?
Yes, there are gold dealers all over the place. You might get a lousy deal, but the currency exchange at the airport will give you a lousy deal on a pocket full of Euros, too.
Sort of. I suppose there is some secondary market in beer. Near a college, maybe?
You can readily hock a car for money, so that's a few levels closer to being a currency. You can sell used media.
But there are people in the business of buying and selling gold for the sole purpose of readily converting it to currency and vica versa so that gold can be used as an alternative to paper currency managed by a nation's central bank. That's almost all that gold is used for, and that's what dealers in gold coin and gold bars are in business to enable.
Except that in practice, weights of gold are not used as a medium of exchange in almost every market in the world. Gold may be used as a store of value, but so can land, buildings, collector's items, etc. One of the defining characteristics of currency is its use as a medium of exchange in a market.
IMHO, this isn't a failure. We know that it's not going to be a business-as-usual currency. Easy credit is an incentive for business; inflation is an incentive for consumers. Governments have much better control over that.
BC is better understood as a commodity market with a simpler financial instrumentation. Instead of trading contracts for goods, you are able to trade the good itself, at internet speed and scale. That's a big innovation and we've only started to realize the consequence of it.
1. There's an equilibrium rate that will be reached.
2. Time preference exists.
3. If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?
Re: 3: If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?
> If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?
The conclusion that Bitcoin will only get more valuable as time goes on depends on the assumption that it will acheive and then durably retain a certain degree of importance as a currency.
The people that are pointing to the problems associated with that are not arguing that they believe that will occur, they are making an argument about either why it shouldn't occur or why they believe it will not occur (and, often, both simultaneously.)
Bitcoin is a commodity backed by Mathematics with the convenience of transfer of ownership through electronic rather than physical means. When the last coin is mined in 2140 the point of deflation might hold if it was a currency, but it's not. It is a faith based value store based on supply and demand, just like gold, which has next to no useful properties other than being shiny, non-tarnishing, conductive AND PEOPLE THINK IT'S VALUABLE.
With the FED and Monetary Easing the total amount of dollars in the economy is increasing, but the actual value (purchasing power) of every dollar is decreasing. But since the number of dollars (numerically) that people are holding is increasing there is no speak of deflation because prices aren't going down due to the inflation of the amount of dollars. The actual purchasing power is deflating but due to economic slieght of hand everyone has more dollars. Win win!
The value of money is not the number of dollars but the distribution of the dollars throughout society. Double everyone's bank account and nothing would change after the initial emotional frenzy - prices would settle at twice the original values.
Deflation may be an 'economic carcinogen' but what name is given to the systematic reduction of value and spending power in an economy where there is almost no saving and for what saving there is there's no interest?
The price of gold has been increasing to greater and greater highs for the past decade due to the monitary policies during that time. Bitcoin is reaching a point where it can stand along side with it in some people's minds because it has a strong Mathematical backing rather than a flimsy backing by governments. Gold was taken over as a currency by paper; maybe BTC will end up the same way some day.
"Backing" is also grossly misunderstood in general.
Any "Backing" a currency has can generally be thought of as an put option on something fungible.
For example, gold will never drop below $10-$20 per Oz because of the industrial/jewelry/etc uses people find for it. However, that "backing" only makes up a small percent of the price of gold.
True; in a sense, its a formalized potlatch system in which the publicly-demonstrated destruction of wealth (energy and wear-and-tear on hardware, demonstrated via computation proofs) is rewarded instead of with informal social regard, with concrete exchangeable tokens.
It's unusual in that it does have a cost of creation - the expense of the machinery and power required to mine a bitcoin. So it does have a "base value" of a sort, you just can't redeem it.
>With the FED and Monetary Easing the total amount of dollars in the economy is increasing
Not true. QE is a swap. Take away a bond, replace with reserves. No net change. If anything it's deflationary, as the bond yields more interest than reserves.
Even if the amount of net financial assets in the private sector does increase, it doesn't necessarily follow that the purchasing power of the dollar decreases. It all depends on the capacity of the economy to absorb the extra spending. If there is excess capacity that is mobilized by the extra spending, you get more dollars chasing after more goods. If there is no excess capacity, you get more dollars chasing after the same amount of goods.
Just yesterday I would have rather used Bitcoin instead of a credit card to buy a game on my nephew's PS3 over the Playstation Network. The process of entering my contact details took several minutes. Afterwards, we had no idea how to remove my credit card from the system.
Simply checking out with a QR code and sending the Bitcoin from my phone would have been easier and not required any of my personal information. Instead I had to enter everything required for identity theft and to make fraudulent charges. It was the only way to pay and it was a hassle.
Whether deflationary spirals can actually occur is controversial.
Now I'm not an economist, but I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin.
Suppose the value keeps going up, and a few years from now it's at $1,000 / bitcoin -- lots of poeple have been buying bitcoins wherever they can, and not spending them. Well, at some point people will decide that the price is ridiculous, because it's all based on speculation -- suppose it's $10,000 / bitcoin. And it will either stop increasing in value, or crash a bit.
Well, I don't see how this has prevented it from acting as a currency at any point in this, since it always has a value. There are always going to be some people willing to trade some bitcoins for some price -- and that's just the price, and whether you're dealing with whole bitcoins, or millionths of bitcoins, I don't see what further consequences this has.
And when you're talking about the macro-economic level, running a whole economy on bitcoins would be a separate issue, but there could be tools to deal with that too. For example, not denominating debt or salaries or goods in Bitcoins, but in a multiple of a consumer-price-index or something, that can change relative to current Bitcoin values.
I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin
So deflation is a general decline in prices which usually caused by the reduction in the money or credit supply (in Bitcoin’s case it’s the Money Supply). However if prices are falling through deflation then, you’re not incentivised to spend because; you’re going to get a better deal tomorrow. Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Raising the prices is the essential foundation of an economic recovery because; businesses can increase their profits which takes pressure off debtors etc and an example of this is the fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[1]. However, Bitcoin can only produce 25 Bitcoins every 10 minutes (which is being halved every 4 years from 2017) and this can create a liquidity trap because the injections of cash fail to stimulate economic growth – as a result, if Bitcoin is in a recession and is unable to stimulate economic growth it will eventually turn into deflation & deflation is only bad for people who cannot borrow more and unlike fiat currencies who can borrow more, Bitcoin has a fixed supply (and isn't even backed by a commodity) which means that, there could potentially be serious issues for the economy’s wealth.
Thanks for writing all that up. What I still don't understand is,
> Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
Well, if people are expecting deflation, then that expectation becomes built into the value of the currency, such that there exists an equilibrium between people expecting it to deflate further, and people expecting it do the opposite, because it's already overly valuable.
I can't see how everyone would just hoard it until there's infinite demand and zero supply, and a bitcoin has infinite value. There's always a semi-stable price.
And like I said, I don't see how the standard macroeconomic arguments apply, because right now bitcoin is just a currency "on the side", totally unable to affect economies on a large scale. And if it ever did reach that scale, governments could do things like force contracts to be denominated in some government-controlled ratio to bitcoins, so that the government would still be able to "control" the money supply, and increase or decrease it as desired. (That's just one crude example of how.)
Just because people are using bitcoins, doesn't mean that long-term contracts have to be denominated in bitcoins.
So I guess this is what confuses me about people saying that bitcoin deflation is bad. Deflation=bad arguments seem to rest on entire countries being solely dependent on a single currency, which is not the case with bitcoin. And even that became the case, it would presumably take place in a whole new way. But I still don't see anything inherently wrong with a deflationary currency, especially one used alongside "official" ones.
So by the "economy" think of Bitcoin like they are a country (a really small one) and that’s the only currency for them and in some cases deflation can be beneficial to some people in an economy. For instance as I was saying in the previous comment it's beneficial for those with the cash and income streams as they become more valuable as time goes on and its good for the debtor.
However, you are correct in that there is always going to be a semi-stable price (or a price floor) when the money supply starts to help create inflation and grow the economy again. In terms of how it’s bad for Bitcoin building on the previous comment, let’s pretend that people have bought coins at $200 and deflation kicks which means that, people either hoard it (to try and get something cheaper tomorrow) OR once it hits a certain level everyone tries to recover their losses and starts selling the coins which causes an economic crash to a highly volatile market (a $500k trade can usually cause a lot of issues) and the market will not level out until, there are enough buyers interested to buy back into Bitcoin.
Maybe I'm misunderstanding the argument, so can anyone please point out the flaw in my dismissal of this argument ?
1) assuming bitcoin will deflate
2) this means that existing bitcoin holders will be able to exchange their bitcoins for more $ than ever on mtgox/...
3) the conclusion is that this will make people leave bitcoin
Needless to say, if this is the argument, that people will leave bitcoin because they earn too much without doing anything, good luck with that one. So where is the flaw in my thinking here ?
I would also like to point out that a deflationary system won out over a debt based one many times in history. Saying it can't happen doesn't seem like it's based on anything. The obvious big example would be the end of the (west) Roman Empire, but there's dozens of examples in the last 2 centuries alone. This is yet one more case of people in the west thinking that because it hasn't happened in the west in the last 60 years, that it cannot happen (and they simply don't know just how often it happened before that).
Debt based currencies are fundamentally pyramid schemes, slightly obscured by the fact that the growth phase can last a very long time, but that doesn't change anything, not really (except opening up the possibility of a person being born into a pyramid scheme and aging and dying normally while the pyramid scheme is still growing). This will not work for bitcoin because bitcoin itself depends on infrastructure that depends on those existing pyramid schemes (ie. USD/EUR/...). It will work for house ownership and maybe for gold ownership.
Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
Please correct me if I am wrong, but isn't the value of the total money supply supposed to equal something like the total value of the goods and services in the economy that that money supply represents (not sure if the wording is correct but hopefully I got the idea across). If that is the case, then won't a decrease in spending cause the total value of the money supply to decrease, meaning the expectation of deflation will cause some amount of inflation, such that the system stabilizes? Because of this, I don't see how you can have a deflationary spiral in a depressed economy based on anything other than speculation (and thus a Bitcoin bubble which will eventually pop). I do agree that Bitcoin is naturally deflationary; if there is economic growth, the money supply can't expand to keep up. And Bitcoin's deflationary nature slows this economic growth. Thus, I think that Bitcoin will eventually reach a stable real value. I think there must be a flaw in this reasoning because I'm sure many economists would disagree but I can't seem to find it myself.
>Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
People not spending money is generally a good thing. There are more resources to go around for everyone else and other people can afford more things with the same amount of money. Most people who save money invest it, which benefits the economy in the long term.
>In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation.
This hurts everyone though. Everyone has the same amount of money they did before, but suddenly everything costs more. No wealth is actually created by doing this, the same amount of goods are in the economy. But the person who gets the printed money buys a bunch of them, and then has a larger share of the pie, leaving everyone else with less.
Yes bitcoin has a mechanism for creating new currency, but this was a necessary evil in order to distribute the first bitcoins relatively fairly. It doesn't actually benefit anyone to give free bitcoins to some people just for running their computers a lot.
The boom and bust cycle wasn't caused by deflation and it hasn't gone away today either.
> it will always be tempting to keep your Bitcoins in your pocket and let them appreciate instead of using them for needed goods and services.
What's wrong with this? If you choose to take a choice which actually makes you better off, how is that a bad thing? Shouldn't people saving/investing their money be encouraged?
>And certainly, no one will take on debt denominated in Bitcoins.
They would if the interest rates became low enough to make up for deflation. As you claim, more people would save a deflating currency, which will further push down interest rates (since when people save money they usually invest it or put it in a bank which loans 90% of it back out.)
Inflation necessarily makes everyone worse off. The person that prints money can now buy more goods. But the amount of goods in the economy doesn't change. So there is less for everyone else. It's effectively a very confusing and indirect method of wealth redistribution.
"Deflation is terrible" is a myth propagated by mainstream economists. Its probably true for the fiat money, fractional reserve (fictional reserve?) system we live in but Bitcoin by its construct is a very cool experiment to see if an alternative would work. The smartphone industry has been in continuous deflation for years - you can buy a better phone or same phone cheaper if you wait a year. But that dosent stop us from buying now does it. Hasent caused a recessionary death spiral yet.
It is interesting how the deflation argument is always raised when talking about Bitcoin. Sure, deflation is an "economic carcinogen" in the current financial system (which is inevitably tied to the currency specs), but it won't be a problem in a Bitcoin world. Let me show an example:
Imagine I need to buy a house. Today, I would go to the bank, ask them for money and they will give it to me under the condition of giving it back, plus inflation, plus a fee. I need to give back more money than I received in order to pay the government (inflation) and the 'professional' lender (fee), for their 'services'.
In a Bitcoin world, if I needed to buy a house, I have two choices: Pay it now, if I have enough money (exactly as today) or pay it later (in several installments). As simple as that. Then, the housing market will decide if this is acceptable or not, or how much time the seller is willing to wait. The only difference is that in the Bitcoin world the "professional" lender will cease to exist (the seller will be at the same time the lender). And since there is no inflation, I will not need to pay the government either.
This deflation argument seems to me it's an argument for the status quo, so if you are say Warren Buffet it is a vary valid concern. If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in.
Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.
> If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else.
It would be good if your wage was fixed in bitcoins and your debt was set in dollars, but bad if the reverse was true.
I think, given a deflationary currency, it'll be a lot easier to find people willing to lend money with the loan obligation denominated in bitcoins than it is to find people willing to offer employment with a long-term salary base fixed in bitcoins.
"If on the other hand you just graduated undergrad and had a huge debt and your wage was actually set in bitcoins this would be great for you because the cost of paying off your dept would be from your bitcoin point of view spiraling to zero, as would the cost of everything else. That sounds like a pretty awesome situation to be in."
It would be! Except for the part where that very spiral discourages employers from paying wages in Bitcoin, since they'd make more money just holding on to those Bitcoins and letting the spiral make them money than they ever could paying workers with them. So those Bitcoin-paying jobs never leave the realm of the theoretical.
I'm going to try and be useful to this discussion, and I haven't seen anyone mention this by name yet so, here goes...
The Law Of Diminishing Marginal Utility. It essentially states that the more of something you have, the less additional value each subsequent unit brings to your life relative to the last one you added. (Even billionaires stop with a handful of houses)
The problem is the author implicitly tries to objectify the value of bitcoin, when in fact the value is completely subjective, just as the value of anything truly is.
One cannot take the subjectivity out of value as the author has tried to do here by saying 'More = Good' Value, being subjective, comes in the form of utility. I do not care what you call it, what it's priced in, or if you value it but, if I were to acquire a voucher for unlimited free flights, lifetime duration, transferable from myself to anyone of my choosing, on any airline, I would value that voucher very highly. That being said, while I may keep the next one for family, and several for friends, at some point I'm going to start selling them to others for a metric boatload of money.
Please note none of this implies any kind of 'rational actor' theory or any such thing. I see the law of diminishing marginal utility as just that, a law of nature. Despite what people may say, their actions prove it to be so.
*Also I think the author is implying that people who act like the people he's talking about in his post will take a pretty big haircut at some point in this whole bitcoin experiment. I think that says more about the people than the system at large.
Actually, nothing stops a government from using fiscal stimulus if BitCoin is pervasively used. The US Government will, I'm sure, never accept taxes in anything other than US Dollars (that being the fundamental base of value the US Dollar is based on, and the subsequent avoidance of jail time due to not paying taxes or otherwise satisfying Uncle Sam), and they will remain free to helicopter-drop as many Dollars on the world as they like. If the BitCoin economy subsequently devalues Dollars, well, that's just the expected reaction. It's not as if there aren't commodities already out there doing just that.
(Also, not all of us consider Keynesian stimulus to be some wildly successful proved theory; I for one think you merely need to look out the window to see the failures of the theory to match reality. But fortunately, Keynesian is immune to criticism, because no matter how bad things get, Keynesian saved us from it being even worse, thus, no amount of failure can ever disprove the system. Phew! That said, BitCoin isn't the ideal either.)
Also, not all of us consider Keynesian stimulus to be some wildly successful proved theory; I for one think you merely need to look out the window to see the failures of the theory to match reality. But fortunately, Keynesian is immune to criticism, because no matter how bad things get, Keynesian saved us from it being even worse, thus, no amount of failure can ever disprove the system. Phew! That said, BitCoin isn't the ideal either
Please explain how looking out the window and gathering local anecdotal data disproves a macroeconomic theory that in the short run, demand stimulates economies?
For better or worse, I treat economics as a science, and judge an economic theory on its ability to make accurate predictions, not retrodictions. My point about "looking out the window" is that while we've been operating on a supposedly Keynesian theory in trying to repair our economy these past six years, it has consipicuously, repeatedly, and grossly failed to correctly predict the results of its own massive interventions. You don't need fancy economic theories to see how it has failed, you need merely open your eyes and look around. (And I include newspapers and television, etc, in the looking around, so my point is that it is easy to see the failures, not that it's failing literally right outside my window.) You need fancy economic theories to explain how even though the results are awful, we're still doing the right things even so.
Keynesians cover this by claiming it would have been even worse without the near-continuous and now open-ended "stimulus". I don't believe them. Had they said in advance that the current scenario was a significant possibility, I would at least listen, but instead we've been in a world where "recovery is just around the corner" for about four years now. It isn't, it hasn't been, and it continues not to be. I find it a valid theory that Keynesianism is the reason why, rather than the thing saving us. The fact that we're talking about a "new normal" is also code for "Keynesianism is a failure of an economic theory, but rather than give up the theory because we like it too much, we're going to tell people to just get used to being poorer."
(Of course if you want to say that our politicians are only using the name of Keynes for a cover while in fact not acting particularly Keynesian, well, I beat you to it. Keynesianism isn't, really. But nobody seems to open with that defense, only use it as a fallback when attacked. It's true enough in theory, but a useless defense of the theory's current users, which are what I'm actually critical of. The real Keynes is a great deal smarter than the psuedo-Keynes being used to drive policy today, but also a great deal less influential.)
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[ 4.2 ms ] story [ 189 ms ] threadYou missed the big problem; while one could make an argument that the lack of the capacity for monetary stimulus with Bitcoin is an issue, fiscal stimulus is quite possible with Bitcoin (there isn't any now, because no government uses Bitcoin as the currency in which its budget works), and the multiplier effect resulting from the velocity of money would conceptually work the same way as with any other currency (the inherently deflationary construction of Bitcoin makes the likely velocity lower, which might reduce the effectiveness of fiscal stimulus, but its still possible; and different forms of fiscal stimulus could address the velocity of money.)
But, that doesn't really matter because Bitcoin is _not_ a national currency. It really is more like gold in that it's not really a currency in itself, but a way to store/transfer other currencies. No one buys something with gold without first doing the conversion to their local currency and I don't see that ever changing with Bitcoin either. And, it doesn't have to.
But even if I'm wrong, the currency not being based on gold is only one of a billion other things that has changed in the economy since then. It's a completely different world.
And while bitcoin is not a national currency it has the potential to become a universal currency online. People could work for bitcoins and use them to buy what they need online from other people that accept bitcoins. The currency could circulate through many hands without ever once being converted to another currency.
And since it's online any conversion could be done quickly and automatically so the effective difference between holding two different currencies wouldn't really matter. The only thing you would have to take into account is how likely they were to increase or decrease in value in the time that you aren't spending them, and bitcoin has a clear advantage in that regard.
[1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...
In the past when we were using gold, like during the Civil War, we couldn't pay soldiers so we went to greenbacks (paper money like today). That allowed the soldiers to get paid so we could continue to fight the war. Gold obviously has a physical practical limit that can be traded and transfered. When a gram becomes worth so much it buys a house that makes other purchases of food and bills become impractical and people stop buying, and when building a billion dollar construction project moving it and protecting it has another set of problems and overhead. Bitcoin does not have the division problem--a single coin can be divided into pieces 10^8 pieces as the code currently works. That can also be changed in future versions to be divided even smaller. Ie, when one bitcoin can buy a house, you can just pay 0.0000001 for your stick of gum. So, we are then left with the argument, "Oh My God people won't buy because of the psychology that 0.01 coin today that currently buys a pack of gum being able to buy a car in the future." But, that's almost true now with savings and stocks and people still spend their money today and go into debt. Everyone knows if you save starting in your early 20s compounding interest it will be worth a ton more in 10 years, 20 years, etc.
Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. Venture Capital also would have issues, but if the rate of return on investments is greater than growth of the currency price that wouldn't be an issue either and one would expect it to stabilize over time.
Inflation is built into the current model to encourage investment and prevent concentration of capital. Clearly, given the wealth divide that isn't working (blame exploitation of 3rd world or robots).
From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borrowing, but it exacerbates the problem it creates for lending. Specifically, if the the BTC I have in my pocket today is going to be worth 10 times as much tomorrow, what's my incentive to lend it at all? I've got a strong return without default risk if I just hold on to it. If you propose something that reduces the lenders BTC-denominated payments over the life of the loan to account to mitigate the effect deflation has on the value they are paying back, it makes it even less attractive for me to lend the money.
> Inflation is built into the current model to encourage investment and prevent concentration of capital.
Inflation doesn't prevent concentration of capital (it prevents hoarding cash, but by doing so encourages concentration of capital.) Things like progressive taxation of income are intended to prevent concentration of wealth (but this is undercut by things like favorable tax treatment of income derived from capital compared to income derived from labor.)
> Not to say bitcoin is the solution, but it's something different.
That's a bit like pointing to imperfections in representative democracy caused things like gerrymandering, and then saying "I'm not saying that hereditary monarchy is the solution, but it's something different."
If John's $45,000 house and Jane's $4.5M mansion are built in the same year and equally subjected to wear/tear, 20 years the value of John's house is probably less than 1 percent of Jane's mansion.
I'm not looking for risk. I'm pointing out that a currency that appreciates in value when you stuff it in your mattress makes you far less likely to lend it out to someone and assume the risk of default, especially at interest rates that will be attractive to someone who is going to be uncomfortable paying it off even without interest, since just paying of the original loan value (denominated in the appreciating currency) without interest will mean paying over time many times the value (in purchasing power) of the original loan over its life.
We tend to overlook that we live in the most peaceful times in the history of mankind, and that poverty and hunger in the world is declining steeply.
We don't know what a bitcoin economy will look like. Stimulus packages over the decades have been known to work and not to work. We don't know how a bitcoin economy reacts to depressions and risk. We do know that the current bitcoin economy and any financial engineering (or even just opening a bitcoin-accepting webshop) is extremely more complicated and risky than the traditional money systems.
How are you expecting to get a ton more after 20 years? Even with a ridiculous constant real interest rate of 5%, you'll get only 2.6x your original investment after 20 years.
Well, for last couple weeks, bitcoin is the best investment, just saying ....
I would think, even more than that, loans would have issues in an anonymous system.
Not really; the fact that the currency is anonymous doesn't make the loans anonymous. The lender cares that someone is on the hook for the payment being made, they don't care if that person is the person to whom the cash loaned is actually transferred or the person from whom the payments will, in fact, be transferred.
Of course, to establish credit worthiness and get attractive loan terms when the currency itself is anonymous -- whether its paper dollars or Bitcoins -- people are probably going to have to engage in transactions that are recorded and verifiable by the people who they want to trust them (either directly or through trusted third parties), mitigating the benefit of any anonymity inherent in the underlying currency system.
And, loan terms aside, if you want to take out loans whose enforcement relies on the compulsory powers of the states rather than the compulsory powers of lenders who act outside of the rules imposed by the state, you probably need to adopt some kind of protocol that allows you to prove in court that a loan agreement was made with particular terms by a particular lender and borrower and that repayments of specific amounts were made on that loan, which, again, will require sacrificing some of the anonymity inherent in the underlying monetary system.
http://www.youtube.com/watch?v=mD4L7xDNCmA&t=17m30s
However, a long-run inelastic and fixed supply currency is not useful for a real world economy which is why, Bitcoin is useful as a speculative digital asset rather than a currency.
The "no red tape, no forex hassles" are largely because of immaturity in the regulation of "virtual currencies" that exist largely because most states haven't gotten around to addressing them because of scale issues compared to traditional soveriegn currencies.
This is already starting change.
Still, if someone is looking to preserve wealth, it would seem smarter to wait and see if and where the price stabilises. Or if governments slam the door shut on the currency.
As for the comparisons with other currencies and commodities, it has been exhausted as a subject; money is a matter of trust after all.
The question is what are the actual security threats to bitcoin's p2p infrastructure/integrity?
There has been a successful double spend.
I'm not sure what will happen to clients that don't patch or update.
This was also quoted in a Forbes article but I don't get it. Can someone explain what this means? What does lack liquidity or limited supply have to do with feeling richer by funging your bills?
I'm not joking I seriously have no idea what this has to do with anything...
Some people feel 'richer' with 1 OZ of gold then $1700 in bills, some feel 'richer' with 100x $1 then a check for $100. But why does that matter as a success factor of a currency?
I don't get it.
Because the success or failure of a medium of exchange lies in how it affects human behavior, which it does through its impact on human psychology.
Its actually pretty trivial to issue new paper currency in smaller denominations and exchange existing currency for it; the problem with deflation is that it creates a disincentive to spend or invest, not that there is a logistical difficulty in subdividing currency.
Not a major one recently, because considerable effort is expended to avoid that for reasons which have nothing to do with the logistical difficulties of subdivision.
> Not saying it can't be done with paper money, but it's less convenient than it is with bitcoin.
It could be done with paper money, but nobody involved in managing currency wants it to be done. People managing currencies for use as exchange media don't want the currency to be an attractive investment. But the logistics are pretty obvious; paper money in circulation is already replaced regularly, all you have to do account for deflation is print bills with smaller denominations on them, and replace bills coming out of circulation in appropriate ratios. If the value of the currency is appreciating and you do this at a ratio which keeps the smallest new bills being currently issued at the same value, the ratio of the cost of printing money to the value of the circulating money remains the same as if you had a relatively-constant value currency and were just replacing bills 1:1. Its not really a logistical problem.
Having a rapidly deflating currency, if it was a main currency rather than a novelty currency operating at a trivial scale compared to the whole economy, may produce economic problems for the economy as a whole, but its not really a logistical problem for the currency issuing system with paper currency. So Bitcoin "solving" the logistical non-problem is a non-accomplishment.
Dividing $100 into 100 x $1 bills makes sense if yesterday an orange cost $100, but one week later it costs $1 ( because of changing the value of money ).
The concern then, is that when there is a fixed amount of coins available, people will begin to hoard them because they will appreciate in value. The system avoids this by allowing coins to be subdivided to 8 decimal places (the smallest unit is called a Satoshi). This results in 21 * 10^48 possible Satoshis available to the economy. It is expected that this will be a sufficient amount of currency for the network to avoid hoarding. If hoarding is still an issue, the code can be changed to further subdivide a coin.
The mistake Nicholas makes in this article is confusing the comparison between the dollar and the bitcoin. If you divide a $100 bill into 100 $1 bills, you will not feel any richer because the value of a single dollar bill does not change. If you divide a bitcoin into 100,000,000 Satoshis, the demand for more currency will cause an inflation in the value of an individual Satoshi.
If you sub-divide Bitcoins further to purchase the same items then it's still a deflation: What you used to be able to sell for 1 BTC now you can only get 0.1 BTC for. If all prices drop proportionally at the same time that's not really so bad, but it is bad for any kind of delayed payment agreements (e.g. credit, loans, etc.) as your ability to repay, say, a 40 BTC loan continually gets less and less.
If you don't sub-divide then you make it more and more difficult for currency exchange to happen at all; i.e. the BTC becomes more valuable, which is also deflationary.
In a deflationary economy it's better to hoard your money (which is growing in value without action on your part), which reduces the pool of BTC available to spend, which leads to more deflation, etc. etc.
Of course this is a disaster only if BTC becomes the only currency, but it would seem to put a hamper on the idea that BTC could completely supplant our current currencies. I'd certainly never take out a loan in BTC at this point; even if the lender agreed to "deflate" the principal at a certain APR, the volatility of the BTC value is too high to be sure I wouldn't get taken to the cleaners on the loan.
I don't think lenders would appreciate the volatility inherent in their loaned-out money having value fixed to the amount of crop yield the farmers can deliver this year, or the amount of oil extracted, etc. Similar logic would apply for those trying to get a loan.
That the problem with gold as a currency is not the unpredictable supply, but the lack of divisibility, causing it to be hard to buy a can of coke with gold because of the tiny amount of gold involved.
Good job repeating what's been said by like everyone since the start, and not adding the slightest bit of new insight or information.
What happens to 'lost' coins? The BTC supply is not only finite but in fact dwindling over time, as inevitably the amount of currency is going to diminish due to digital loss.
I have personally lost a few BTC due to computer crashes, wallet file lost etc. (In the early days) and considering this the total supply of bitcoins will be diminishing over time at (maybe already?) higher rate then they can be mined.
I haven't taken the time to do ANY form of math on this but I can guarantee that already 10.000s if not 100.000s BTC are lost forever due to people simply not having access to them anymore and the data being destroyed.
Over years of loss this is probably more likely to kill the currency than anything else in my opinion.
Does it really matter if you have 20 million Bitcoins that are worth $1 trillion or if you have 10 million Bitcoins that are worth as much? No, it doesn't. The 21 million number was pretty arbitrarily chosen to begin with.
This would be a problem if say half of available Bitcoins would be wiped out overnight - somehow. But the chances of that happening as getting lower and lower as more people start using Bitcoins, and the value gets spread out across many more people.
I don't think this kills bitcoin, but this is part of the "lost coin" problem.
I am pretty sure if someone found a stash of gold worth $400.000.000.000 that WOULD actually effect gold prices. Also: Gold has 'real life' uses (production of components etc) and real world costs etc. attached to handling (weight, transport costs etc). None of which BTC has.
Yes, it would. Spain essentially demonstrated this in the 16th Century, with the New World as the "stash".
All of a sudden my old 1BTC wallet on my crashed laptop hard drive may be worth 100s of days of mining network wide, and even the speculation that a 'previously unknown' wallet containing 100BTC (there are a LOT of those sitting on old phones and hard drives already I promise) would have possibly disastrous effect on currency value etc.
All I am saying is that there are a LOT of factors to consider and BTC loss over time is a major one.
My argument being: A finite supply of a currency is one of the factors people REALLY need to think about when it comes to BTC. And I guess I am saying that it's a real problem vs. a currency with increasing difficulty and a non-finite supply.
For instance, the M3 supply of USD isn't even tracked by central banks (not since 2006).
It's conceivable that most lost coins will only be lost until the keys can be cracked. Bitcoin keys are extraordinarily difficult to crack right now, but at some distant point in the future, it's conceivable they could be cracked.
IIRC, there are some bitcoins that have been irretrievably lost because it was sent to an invalid key. It's a very small number however.
In fact, protection and backup are at least a little at cross-purposes: better backup increases the possibilities for compromise.
So you will see adoption by some of the same kind of hoarders who, at death, are found to have millions in cash or gold hidden in their residence. (One vivid recent example: http://articles.latimes.com/2012/sep/17/nation/la-na-nn-cars... )
Except now with Bitcoin, their private keys and associated balances will be lost forever when they die. Or perhaps even earlier, when they go so batty they can't remember their 'brain wallet' seed.
Saw a great relevant tweet yesterday:
@lawremipsum: "There's always bitcoins on the banana stand hard drive." Alt-Future Arrested Development - https://twitter.com/lawremipsum/status/320970532260544512
If you lost some BTC it doesn't destroy any value. It just means that you allowed humanity to forget that it owes you some of it's wealth. If you lost some BTC the fraction that humanity owes all other people who own bitcoins just increased.
No actual worth is lost. You just lost the proof that you have a right to something useful or pleasant. It will be claimed by other people. Market will discover how much bitcoins were lost and bitcoin price will raise accordingly so other people holding bitcoin will be entitled to tiny bit more of the valuable things that society provides.
If you break your glass bowl it's a loss for the humanity. If you loose bitcoin wallet it's just a loss for you.
Of course, the chance that huge amounts are lost together is quite low.
From now on, for the purposes of transactions, I am going to refer to bitdollars. In any software using bitdollars, one bitdollar is equal to 0.001 bitcoins.
Nobody needs to feel less or more rich.
There is an oscillation process at work here - as people hoard bitcoins, the value of each individual bitcoin increases. People will then sell off their bitcoins in exchange for a higher price than they initially payed for them, thus increasing the money supply and allowing others to buy into the system. Am I missing something here?
I think to trying to sort it into neat categories of 'investment' or 'currency' is a bit flawed. Its a bit of both. Gold (at least to some degree) was used as a currency at various points in history, but now paying with gold doubloons is difficult for most transactions. The hoarding of gold makes it deflationary as well, but doesn't prevent it from being traded frequently as well (well, at least futures of it on the exchanges).
Gold backed dollars at one point were theoretically limited in number as well.
Another claim against Bitcoin is the fact that it isn't "backed by anything", but neither is gold. Its value is what we assign to it as a market. Aside from industrial processes, the inherent value of gold or diamonds is very low.
I don't think Bitcoin is perfect. I'm glad I bought a handful a few months ago. But some of the 'flaws' that people find aren't as much as flaws as features. One of the things that I do love about Bitcoin is that it isn't a theory- its happening. We could talk all day about the things that are supposed to happen with it from a variety of perspectives, but the experiment is being actively run in a real market which is challenging the perspectives of 'what might happen if...' with what's actually happening.
If we were talking about USD as a new concept, we could write tomes on the 'flaws' of it as a currency. It has nothing backing it. It can be infinitely created at will. A private entity (federal reserve) controls a huge amount of policy. It can be lost, destroyed, stolen. Political forces of a single government can have massive impact on it. It is hugely regulated, and can be relatively easily tracked in its system. Yet, it largely works.
No; then people start selling their BTC in a panic, MtGox is overwhelmed and stops working, and a lot of temporary millionaires start looking for work...
Regulations. The US government has already indicated its stance on what regulations apply to Bitcoin, and other governments will likely follow suit if it gains any more momentum.
"Panic selling will only happen so many times before people stop freaking out over little things."
...or when Bitcoin fails, which is the overwhelmingly more likely outcome.
http://dustcoin.com/mining
One that avoids the fixed currency limit is PPcoin: https://github.com/ppcoin/ppcoin/wiki/FAQ
As far as I know, there is nothing stopping alternate, new competitors using the same algorithm.
So bitcoins run out and everyone hoards? Start a new currency. A smart implementation can overcome the network effect/firstmover advantage of bitcoin.
Then people trade between the currencies, and hoarding ceases to be as much of a problem.
I can imagine, if Bitcoin was perceived as a serious currency, nation-states and existing large and wealthy financial institutions investing large amounts in becoming participants in the network.
Can I imagine those institutions acting with regard to Bitcoin the same as they act with regard to traditional sovereign currencies? Easily.
There are numerous others -- TRC, PPC, NMC, DVC, etc -- that all are slightly different from bitcoin and are actively trading, although their exchange rates are much lower and extremely volatile. Namecoin is actually pretty interesting (embedding a domain service in the protocol), but the others are mostly copycats.
http://dustcoin.com/mining has the most extensive list I know.
There are uses of Bitcoin that are complementary to traditional currencies, and can survive both volatility and a large level of hoarding.
One example: an enabler of quick, distant, irreversible transfer under software mediation. That is, you get the transactional Bitcoin you need from a trusted source, then engage in a transaction with a distant/less-trusted source in a matter of minutes. Neither the overall level nor volatility of Bitcoin's pricing level matters much in such a scenario, but it still enables new kinds of transactions.
Also, for a post that includes 15 footnotes, one whopper of a claim goes without support: "Bitcoin is not meant to be an investment it’s meant to be a currency."
Sweeping claims about what Bitcoin or currencies are "meant to be" need more support and careful definition. Maybe, because Bitcoin is something new that's only made possible by computers, networks, and cryptography, it doesn't exactly fit into the classic categories and purposes.
It remains to be seen if Bitcoin is 'worth' its current valuation, but I think it's obvious that it has and will continue to have uses in the future.
I believe that Bitcoin's value is more of a speculative digital asset rather than a currency because, there are two reasons to own Bitcoin - either to derive indirect utility through purchasing goods with Bitcoin in the future OR the expectation that Bitcoin will rise in monetary value. Currently, Bitcoin can be considered elastic (to some extent) although it’s subject to future diminishing elasticity meaning that, in the long run there will be a finite supply of Bitcoins and an inelastic supply (after all there are only 21M of them).
However, a long-run inelastic and fixed supply currency is not useful for a real world economy because, currencies are supposed to be used as a medium of exchange to facilitate transactions which, allows the multiplier effect kick in and increase the economies wealth. Whereas due to the deflationary spiral you're incentivised to hoard Bitcoins & let them appreciate in value instead which is the opposite effect of what a currency is meant to do.
Its not ridiculous when one of the arguments for adopting Bitcoin is how much better it would be for our economy to be dependent on it than existing soveriegn currencies. Certainly, one reasonable response to this is to argue that the assumption that Bitcoin could displace those currencies is far-fetched, but its also reasonable to accept, for the sake of argument, that it could and then address whether or not it is desirable.
Firstly, the mining allocation rate isn't meaningfully part of the bitcoin protocol; it's just a setting. Any portion of the network large enough to survive as a detached economy can choose to change the (batty) monetary policy whenever it likes.
Secondly, this probably won't be necessary, as nothing really prevents bitcoin holders from forming banks and issuing inflationary/debased/pegged notes to beat the price down to sanity, using the existing transaction ledger for accounting.
Any government or group of people can go start their own blockchain.
This way, all existing owners of the parent crypto currency would have equal coin-to-coin values in the new crypto currency as of a certain date.
I'm surprised I haven't heard of any existing alternate crypto currencies intentionally forking off of the existing Bitcoin block chain. They all seem to start off with their own new block chains.
In the end, Economics involves the behavior of people acting on free will. How anyone can attempt how people are going to behave with respect to something? If anyone could predict what society is going to value in the future, or how people will react to some new technology would he be writing blog posts about what is going to fail? Has there been anything remotely similar to the Bitcoin now in history?
I don't know whether deflation is good or bad but I consider the potential advantages of a deflationary currency, if it works, worth trying it. Why not, nobody is being forced to get into Bitcoins. If you don't like it, ignore it and move along.
[1] Kindleberger, Charles P. and Aliber, Robert (2005 [1978]), Manias, Panics and Crashes. A History of Financial Crises, New York, ISBN 0-465-04380-1
I have a suspicion that many people are spending their "hoarded" bitcoins, and also immediately moving to buy/mine more...
The only problem is that Bitcoin does have an end use—as an anonymous digital currency (c.f. Silk Road). And furthermore, whether you believe it to be 'macroeconomic cancer' or not, it exists and cannot be shut down as a matter of policy.
You can readily hock a car for money, so that's a few levels closer to being a currency. You can sell used media.
But there are people in the business of buying and selling gold for the sole purpose of readily converting it to currency and vica versa so that gold can be used as an alternative to paper currency managed by a nation's central bank. That's almost all that gold is used for, and that's what dealers in gold coin and gold bars are in business to enable.
Well, now there are few. Historically, though...
BC is better understood as a commodity market with a simpler financial instrumentation. Instead of trading contracts for goods, you are able to trade the good itself, at internet speed and scale. That's a big innovation and we've only started to realize the consequence of it.
2. Time preference exists.
3. If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?
http://www.comedycentral.com/video-clips/tw2ltp/chappelle-s-...
The conclusion that Bitcoin will only get more valuable as time goes on depends on the assumption that it will acheive and then durably retain a certain degree of importance as a currency.
The people that are pointing to the problems associated with that are not arguing that they believe that will occur, they are making an argument about either why it shouldn't occur or why they believe it will not occur (and, often, both simultaneously.)
If you don't expect it to always rise, then you don't have the issue (not that it would necessarily be one) in the first place.
With the FED and Monetary Easing the total amount of dollars in the economy is increasing, but the actual value (purchasing power) of every dollar is decreasing. But since the number of dollars (numerically) that people are holding is increasing there is no speak of deflation because prices aren't going down due to the inflation of the amount of dollars. The actual purchasing power is deflating but due to economic slieght of hand everyone has more dollars. Win win!
The value of money is not the number of dollars but the distribution of the dollars throughout society. Double everyone's bank account and nothing would change after the initial emotional frenzy - prices would settle at twice the original values.
Deflation may be an 'economic carcinogen' but what name is given to the systematic reduction of value and spending power in an economy where there is almost no saving and for what saving there is there's no interest?
The price of gold has been increasing to greater and greater highs for the past decade due to the monitary policies during that time. Bitcoin is reaching a point where it can stand along side with it in some people's minds because it has a strong Mathematical backing rather than a flimsy backing by governments. Gold was taken over as a currency by paper; maybe BTC will end up the same way some day.
"Backing" is also grossly misunderstood in general.
Any "Backing" a currency has can generally be thought of as an put option on something fungible.
For example, gold will never drop below $10-$20 per Oz because of the industrial/jewelry/etc uses people find for it. However, that "backing" only makes up a small percent of the price of gold.
True; in a sense, its a formalized potlatch system in which the publicly-demonstrated destruction of wealth (energy and wear-and-tear on hardware, demonstrated via computation proofs) is rewarded instead of with informal social regard, with concrete exchangeable tokens.
It's unusual in that it does have a cost of creation - the expense of the machinery and power required to mine a bitcoin. So it does have a "base value" of a sort, you just can't redeem it.
Not true. QE is a swap. Take away a bond, replace with reserves. No net change. If anything it's deflationary, as the bond yields more interest than reserves.
Even if the amount of net financial assets in the private sector does increase, it doesn't necessarily follow that the purchasing power of the dollar decreases. It all depends on the capacity of the economy to absorb the extra spending. If there is excess capacity that is mobilized by the extra spending, you get more dollars chasing after more goods. If there is no excess capacity, you get more dollars chasing after the same amount of goods.
Simply checking out with a QR code and sending the Bitcoin from my phone would have been easier and not required any of my personal information. Instead I had to enter everything required for identity theft and to make fraudulent charges. It was the only way to pay and it was a hassle.
15 seconds? Including your address and phone number? With a PS3 controller?
Whether deflationary spirals can actually occur is controversial.
Now I'm not an economist, but I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin.
Suppose the value keeps going up, and a few years from now it's at $1,000 / bitcoin -- lots of poeple have been buying bitcoins wherever they can, and not spending them. Well, at some point people will decide that the price is ridiculous, because it's all based on speculation -- suppose it's $10,000 / bitcoin. And it will either stop increasing in value, or crash a bit.
Well, I don't see how this has prevented it from acting as a currency at any point in this, since it always has a value. There are always going to be some people willing to trade some bitcoins for some price -- and that's just the price, and whether you're dealing with whole bitcoins, or millionths of bitcoins, I don't see what further consequences this has.
And when you're talking about the macro-economic level, running a whole economy on bitcoins would be a separate issue, but there could be tools to deal with that too. For example, not denominating debt or salaries or goods in Bitcoins, but in a multiple of a consumer-price-index or something, that can change relative to current Bitcoin values.
[1] http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
Also, the fact that the supply of bitcoins is fixed by the population of the human race is not means that bitcoins are inherently deflationary.
So deflation is a general decline in prices which usually caused by the reduction in the money or credit supply (in Bitcoin’s case it’s the Money Supply). However if prices are falling through deflation then, you’re not incentivised to spend because; you’re going to get a better deal tomorrow. Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Raising the prices is the essential foundation of an economic recovery because; businesses can increase their profits which takes pressure off debtors etc and an example of this is the fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[1]. However, Bitcoin can only produce 25 Bitcoins every 10 minutes (which is being halved every 4 years from 2017) and this can create a liquidity trap because the injections of cash fail to stimulate economic growth – as a result, if Bitcoin is in a recession and is unable to stimulate economic growth it will eventually turn into deflation & deflation is only bad for people who cannot borrow more and unlike fiat currencies who can borrow more, Bitcoin has a fixed supply (and isn't even backed by a commodity) which means that, there could potentially be serious issues for the economy’s wealth.
[1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...
> Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.
Well, if people are expecting deflation, then that expectation becomes built into the value of the currency, such that there exists an equilibrium between people expecting it to deflate further, and people expecting it do the opposite, because it's already overly valuable.
I can't see how everyone would just hoard it until there's infinite demand and zero supply, and a bitcoin has infinite value. There's always a semi-stable price.
And like I said, I don't see how the standard macroeconomic arguments apply, because right now bitcoin is just a currency "on the side", totally unable to affect economies on a large scale. And if it ever did reach that scale, governments could do things like force contracts to be denominated in some government-controlled ratio to bitcoins, so that the government would still be able to "control" the money supply, and increase or decrease it as desired. (That's just one crude example of how.)
Just because people are using bitcoins, doesn't mean that long-term contracts have to be denominated in bitcoins.
So I guess this is what confuses me about people saying that bitcoin deflation is bad. Deflation=bad arguments seem to rest on entire countries being solely dependent on a single currency, which is not the case with bitcoin. And even that became the case, it would presumably take place in a whole new way. But I still don't see anything inherently wrong with a deflationary currency, especially one used alongside "official" ones.
However, you are correct in that there is always going to be a semi-stable price (or a price floor) when the money supply starts to help create inflation and grow the economy again. In terms of how it’s bad for Bitcoin building on the previous comment, let’s pretend that people have bought coins at $200 and deflation kicks which means that, people either hoard it (to try and get something cheaper tomorrow) OR once it hits a certain level everyone tries to recover their losses and starts selling the coins which causes an economic crash to a highly volatile market (a $500k trade can usually cause a lot of issues) and the market will not level out until, there are enough buyers interested to buy back into Bitcoin.
1) assuming bitcoin will deflate 2) this means that existing bitcoin holders will be able to exchange their bitcoins for more $ than ever on mtgox/... 3) the conclusion is that this will make people leave bitcoin
Needless to say, if this is the argument, that people will leave bitcoin because they earn too much without doing anything, good luck with that one. So where is the flaw in my thinking here ?
I would also like to point out that a deflationary system won out over a debt based one many times in history. Saying it can't happen doesn't seem like it's based on anything. The obvious big example would be the end of the (west) Roman Empire, but there's dozens of examples in the last 2 centuries alone. This is yet one more case of people in the west thinking that because it hasn't happened in the west in the last 60 years, that it cannot happen (and they simply don't know just how often it happened before that).
Debt based currencies are fundamentally pyramid schemes, slightly obscured by the fact that the growth phase can last a very long time, but that doesn't change anything, not really (except opening up the possibility of a person being born into a pyramid scheme and aging and dying normally while the pyramid scheme is still growing). This will not work for bitcoin because bitcoin itself depends on infrastructure that depends on those existing pyramid schemes (ie. USD/EUR/...). It will work for house ownership and maybe for gold ownership.
Please correct me if I am wrong, but isn't the value of the total money supply supposed to equal something like the total value of the goods and services in the economy that that money supply represents (not sure if the wording is correct but hopefully I got the idea across). If that is the case, then won't a decrease in spending cause the total value of the money supply to decrease, meaning the expectation of deflation will cause some amount of inflation, such that the system stabilizes? Because of this, I don't see how you can have a deflationary spiral in a depressed economy based on anything other than speculation (and thus a Bitcoin bubble which will eventually pop). I do agree that Bitcoin is naturally deflationary; if there is economic growth, the money supply can't expand to keep up. And Bitcoin's deflationary nature slows this economic growth. Thus, I think that Bitcoin will eventually reach a stable real value. I think there must be a flaw in this reasoning because I'm sure many economists would disagree but I can't seem to find it myself.
People not spending money is generally a good thing. There are more resources to go around for everyone else and other people can afford more things with the same amount of money. Most people who save money invest it, which benefits the economy in the long term.
>In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation.
This hurts everyone though. Everyone has the same amount of money they did before, but suddenly everything costs more. No wealth is actually created by doing this, the same amount of goods are in the economy. But the person who gets the printed money buys a bunch of them, and then has a larger share of the pie, leaving everyone else with less.
Yes bitcoin has a mechanism for creating new currency, but this was a necessary evil in order to distribute the first bitcoins relatively fairly. It doesn't actually benefit anyone to give free bitcoins to some people just for running their computers a lot.
http://en.wikipedia.org/wiki/Federal_Reserve_Act
> it will always be tempting to keep your Bitcoins in your pocket and let them appreciate instead of using them for needed goods and services.
What's wrong with this? If you choose to take a choice which actually makes you better off, how is that a bad thing? Shouldn't people saving/investing their money be encouraged?
>And certainly, no one will take on debt denominated in Bitcoins.
They would if the interest rates became low enough to make up for deflation. As you claim, more people would save a deflating currency, which will further push down interest rates (since when people save money they usually invest it or put it in a bank which loans 90% of it back out.)
Inflation necessarily makes everyone worse off. The person that prints money can now buy more goods. But the amount of goods in the economy doesn't change. So there is less for everyone else. It's effectively a very confusing and indirect method of wealth redistribution.
Imagine I need to buy a house. Today, I would go to the bank, ask them for money and they will give it to me under the condition of giving it back, plus inflation, plus a fee. I need to give back more money than I received in order to pay the government (inflation) and the 'professional' lender (fee), for their 'services'.
In a Bitcoin world, if I needed to buy a house, I have two choices: Pay it now, if I have enough money (exactly as today) or pay it later (in several installments). As simple as that. Then, the housing market will decide if this is acceptable or not, or how much time the seller is willing to wait. The only difference is that in the Bitcoin world the "professional" lender will cease to exist (the seller will be at the same time the lender). And since there is no inflation, I will not need to pay the government either.
Actually it would be much easier to buy a house.
Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.
It would be good if your wage was fixed in bitcoins and your debt was set in dollars, but bad if the reverse was true.
I think, given a deflationary currency, it'll be a lot easier to find people willing to lend money with the loan obligation denominated in bitcoins than it is to find people willing to offer employment with a long-term salary base fixed in bitcoins.
It would be! Except for the part where that very spiral discourages employers from paying wages in Bitcoin, since they'd make more money just holding on to those Bitcoins and letting the spiral make them money than they ever could paying workers with them. So those Bitcoin-paying jobs never leave the realm of the theoretical.
The Law Of Diminishing Marginal Utility. It essentially states that the more of something you have, the less additional value each subsequent unit brings to your life relative to the last one you added. (Even billionaires stop with a handful of houses)
The problem is the author implicitly tries to objectify the value of bitcoin, when in fact the value is completely subjective, just as the value of anything truly is.
One cannot take the subjectivity out of value as the author has tried to do here by saying 'More = Good' Value, being subjective, comes in the form of utility. I do not care what you call it, what it's priced in, or if you value it but, if I were to acquire a voucher for unlimited free flights, lifetime duration, transferable from myself to anyone of my choosing, on any airline, I would value that voucher very highly. That being said, while I may keep the next one for family, and several for friends, at some point I'm going to start selling them to others for a metric boatload of money.
Please note none of this implies any kind of 'rational actor' theory or any such thing. I see the law of diminishing marginal utility as just that, a law of nature. Despite what people may say, their actions prove it to be so.
*Also I think the author is implying that people who act like the people he's talking about in his post will take a pretty big haircut at some point in this whole bitcoin experiment. I think that says more about the people than the system at large.
(Also, not all of us consider Keynesian stimulus to be some wildly successful proved theory; I for one think you merely need to look out the window to see the failures of the theory to match reality. But fortunately, Keynesian is immune to criticism, because no matter how bad things get, Keynesian saved us from it being even worse, thus, no amount of failure can ever disprove the system. Phew! That said, BitCoin isn't the ideal either.)
Please explain how looking out the window and gathering local anecdotal data disproves a macroeconomic theory that in the short run, demand stimulates economies?
Keynesians cover this by claiming it would have been even worse without the near-continuous and now open-ended "stimulus". I don't believe them. Had they said in advance that the current scenario was a significant possibility, I would at least listen, but instead we've been in a world where "recovery is just around the corner" for about four years now. It isn't, it hasn't been, and it continues not to be. I find it a valid theory that Keynesianism is the reason why, rather than the thing saving us. The fact that we're talking about a "new normal" is also code for "Keynesianism is a failure of an economic theory, but rather than give up the theory because we like it too much, we're going to tell people to just get used to being poorer."
(Of course if you want to say that our politicians are only using the name of Keynes for a cover while in fact not acting particularly Keynesian, well, I beat you to it. Keynesianism isn't, really. But nobody seems to open with that defense, only use it as a fallback when attacked. It's true enough in theory, but a useless defense of the theory's current users, which are what I'm actually critical of. The real Keynes is a great deal smarter than the psuedo-Keynes being used to drive policy today, but also a great deal less influential.)