The demand is mostly from people wanting a savings medium that isn't being debased and speculation of price appreciation based on other people realizing this and wanting to get in now to enjoy the speculation. The more people save in Bitcoins, the tighter the supply becomes and the drives prices even more. It is self-supporting, you will see sell-offs when people want to "lock-in" gains at certain prices points. Most likely they will reinvest them later on once the corrections is completed and that will start the cycle again.
Mining was the best investment initially because it gave you the lowest cost of acquiring Bitcoins. With ASICs coming online, that will not be the case unless you took the gains from your previous mining investment and upgrade to keep up with the innovation of technology. Now trading the markets or creating attractive businesses for people to invest in will be the next step in the cycle.
Topic: Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable? - page 10. (Read 14623 times)
September 19, 2012, 02:21:30 PM
September 19, 2012, 02:18:38 PM
The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.
The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.
The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.
This is the nature of a currency-like commodity. The commodity is always going to interfere with the function of the currency.
September 19, 2012, 02:05:55 PM
When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases. That price change conveys information about, e.g., the growth rate of the overall economy. In contrast, when you allow a central bank or other authority to set "stable prices" as a goal by printing money to counteract the natural process of deflation, you've effectively introduced price controls on money. Those price controls (like all price controls) interfere with the signalling and rationing functions that prices are supposed to perform. Because printing money keeps the "price" of money artificially low, the effect is to encourage money's overconsumption and thus overconsumption in general.
Beautifully said. +1
I agree with the sentiments expressed this is why I love the idea of a Bitcoin economy.
Please help me digest the paradox I see in the Bitcoin ecosystem:
Quote
When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases.
The goods and services that must be exchanged to "buy" a particular amount of "Bitcoin" has increased about 100% in 3 months (by definition, deflation has occurred) Quote
That price change conveys information about, e.g., the growth rate of the overall economy.
The price change would signal that the Bitcoin economy has grown over 100% in 3 months.* the Bitcoin economy by the definition of economy has not grown that much. (can't give evidence just a hunch I imagine Silk Road is over 50% of the economy)
** the cost of money by definition has increases.
The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.
The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.
As we have a functioning market I conclude the current cost of Bitcoin's is unsustainable and we should see inflation (or a big correction down) in the cost of Bitcoin's, a market reaction to the growth rate of the overall economy.
September 19, 2012, 08:41:29 AM
At the moment the act of lending is heavily subsidized by central banks. The mechanisms for doing that don't exist in Bitcoin so the subsidies also will not exist, so lending will be less common even without taking the deflation into account.
September 19, 2012, 05:53:40 AM
I just wanted to point out as "food for thought" that Bitcoins are a fixed issue currency. This means is can not be expanded at this point beyond the initial 21 million projected coins. I believe we have some people that have not really applied this to how they think about Bitcoins. It is very interesting to see any long-term interest bearing arrangements that are marketed.
If I agree to accept your coins and pay you an interest, that means regardless if my business idea I use creditors funds for is profitable, I still need to continually go into the market to not only cover principle but also the interest. This becomes increasingly difficult with Bitcoins. Like the title says, its a zero-sum game, to get Bitcoins, someone needs to sell Bitcoins. As the supply gets more and more concentrated that will cause the nominal price of a Bitcoin to increase. Even through Bitcoins are a useful exchange unit, I believe more people are actually "saving" Bitcoins as a store of wealth.
This is why I question any long-term interest bearing arrangement or instrument that is not paying out in USD (or other currency) with the OPTION to get paid in BTC at the current spot price to remove the exchange risk from the person running the investment operations.
What do you think about this perspective?
If I agree to accept your coins and pay you an interest, that means regardless if my business idea I use creditors funds for is profitable, I still need to continually go into the market to not only cover principle but also the interest. This becomes increasingly difficult with Bitcoins. Like the title says, its a zero-sum game, to get Bitcoins, someone needs to sell Bitcoins. As the supply gets more and more concentrated that will cause the nominal price of a Bitcoin to increase. Even through Bitcoins are a useful exchange unit, I believe more people are actually "saving" Bitcoins as a store of wealth.
This is why I question any long-term interest bearing arrangement or instrument that is not paying out in USD (or other currency) with the OPTION to get paid in BTC at the current spot price to remove the exchange risk from the person running the investment operations.
What do you think about this perspective?
OP-- Haven't read all the posts... but you are simply referring to the time value of money. Economics 101. Bitcoin, cash, pez dispensers... it doesn't matter. In BTCs case, if the exchange liquidity is tight, it might drive up interest rate. The market will sort that out soon enough.
September 19, 2012, 01:13:59 AM
...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.
Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.
Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.
@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?
Not sure what you mean. The value of the Bitcoin economy is created by the usefulness of the technology.
The size of the Bitcoin economy is small in comparison to the total value of all the Bitcoins.
IE. The total value of all goods and services in an economy = all the money in the economy.
Now I have the current value of all the Bitcoins in circulation.
But if I convert all the Bitcoins to USD I could possibly buy more than 50 times the total goods and services in the Bitcoin economy.
Yes Bitcoin has a huge value - it is potential value.
It is the demand (current consumption) that is driving up the price of Bitcoin. (Causing price deflation in the Bitcoin economy)
Not the productivity of the economy that is causing price deflation in the Bitcoin economy at the moment.
At this point in time it looks to me that the wealth in the Bitcoin economy is created by "consumption" of Bitcoins , not the "production" of them.
If Bitcoin is the currency, the inherent deflation in the Bitcoin economy is sending the wrong signals to stimulate growth.
September 19, 2012, 12:50:20 AM
You know talking about economy I realized that deflating currencies might actually be more Keynesian than Keynesian policies today:
If the entire economy starts shrinking due to a massive crisis the normally deflating currency would either deflate less or even loose value. This would then create a system-wide incentive to invest in solving the crisis, leading to a wave of capital!
If the entire economy starts shrinking due to a massive crisis the normally deflating currency would either deflate less or even loose value. This would then create a system-wide incentive to invest in solving the crisis, leading to a wave of capital!
September 19, 2012, 12:41:29 AM
... As the deflationary rate increases, the number of potentially good investments decreases, and the number of investments made decreases as a result.
Correct, once the economy has reached it's optimal size, only new innovation causes price deflation (or economic growth) the effect you describe ensures the economy scales appropriately to prevent boom bust bubbles.
Not so, price deflation can only occur if the economy is growing, the cost of goods and services decrease because of over supply. Investment is not needed to stimulate more growth.
Conversely price inflation occurs when there is more demand than supply. In this case the economy needs to grow to satisfy demand. Saving is not rewarded and investment is rewarded - growth is encouraged.
(No central planing - only market driven auto-correction)
September 18, 2012, 11:56:17 PM
When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases. That price change conveys information about, e.g., the growth rate of the overall economy. In contrast, when you allow a central bank or other authority to set "stable prices" as a goal by printing money to counteract the natural process of deflation, you've effectively introduced price controls on money. Those price controls (like all price controls) interfere with the signalling and rationing functions that prices are supposed to perform. Because printing money keeps the "price" of money artificially low, the effect is to encourage money's overconsumption and thus overconsumption in general.
Beautifully said. +1
September 18, 2012, 10:56:27 PM
He did contribute to the growth over the last 10 years though, by not pulling goods and services out of the economy. He earns a general interest rate of return. All those shoes he produced are in the economy, creating even more growth. Hence, by not spending his coins he is investing in the general economy.
If anyone can actually link me to a non-bitcoinomist that has ever said anything remotely close to this, I will give them a cookie.
September 18, 2012, 10:52:51 PM
However, I don't see this as a bad thing... people borrow too much money, and it is, in large part, due to inflation being present in the money we use. Inflation encourages overspending and too much debt. Deflation encourages saving and too little debt. Maybe it is time we bring deflation into our lives and see what happens?
People borrow too much money because the real wage-earners have been titanically screwed in favor of the financiers for the last 3 decades or so. Unsurprisingly, this came about the same time that money became unbound from gold, and banks were allowed to print as much as they wanted from thin air. Saving money is punished when the banks don't need your money and just print their own. It isn't inflation that encourages overspending and too much debt, it is the central banking system that is designed to separate the classes even further that does so.
September 18, 2012, 09:27:00 PM
When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases. That price change conveys information about, e.g., the growth rate of the overall economy. In contrast, when you allow a central bank or other authority to set "stable prices" as a goal by printing money to counteract the natural process of deflation, you've effectively introduced price controls on money. Those price controls (like all price controls) interfere with the signalling and rationing functions that prices are supposed to perform. Because printing money keeps the "price" of money artificially low, the effect is to encourage money's overconsumption and thus overconsumption in general.
September 18, 2012, 08:59:53 PM
You are ignoring all the work that man did to acquire those coins. You're looking only at a slice of time and saying he is being a bad economic participant. Plug time into the equation, and you discover the benefit he created happened in the past, and that must be factored into your equation of whether he is "useless". His holding of 100,000 BTC represents the amount of production he provided to the world in the days prior. You should thank him, not scorn him.
And indeed, if he starts spending it, it will drive up prices, making goods more scarce and more difficult (costly) for others to acquire.
So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.
And indeed, if he starts spending it, it will drive up prices, making goods more scarce and more difficult (costly) for others to acquire.
So in fact, rather than being "useless to the economy," the thrifty, productive saver will go to his grave having produced more for humanity than he consumed, and he should be respected for that. Many people could learn a lesson from his life.
Owning a fixed fraction of all coins -> his "reward" for the production he provided in the past will continue to grow as the economy grows. I guess here is where I differ in valuing what he did in the past. I think if he produced 10,000 pairs of shoes for those 100,000 coins, then, if he holds them for 10 years, he should only be able to buy 10,000 shoes with them.
You feel that if the economy grows, then in 10 years he should be able to buy 20,000 shoes - even though he never contributed an iota to the growth over the last 10 years.
Aha, but again you are ignoring the time-value of money. The producer produced in the past, and deferred his consumption. It is from his delay of consumption that he "earns" more consumption over time. By not consuming something on each day, he enables that thing to be consumed by another market participant - by opting out of consumption, he enables others to opt-in for that same consumption at that price. If he consumed, then he'd be "taking" resources from others (by bidding up the price of those resources upon his consumption of them).
Also remember that by saving that money, he is not taking one iota of wealth from anybody else. Further, everyone has the exact same opportunity to enjoy the benefits of the appreciating money. Anyone who defers his consumption will be rewarded in the exact same way, in proportion to the consumption deferred. There is no special privilege, other than the skills, work, and talents of the individual producer - and these things are bestowed by nature. If you're upset about the unfairness of nature, then take it up with nature
September 18, 2012, 08:54:48 PM
Over time if someone is getting interest "rent", it has to come from somewhere and as evoorhees correctly said, Bitcoin is a limit asset.
In a properly functioning market, interest comes from future profits, and that's healthy. The fact that there is a limit to the number of bitcoins doesn't mean this dynamic doesn't work.
1) I loan you 10 btc for your business. Terms are you pay back 11 btc in a year.
2) You start your business, and earn back enough to pay the loan.
3) You pay the loan off, and all is well.
There is no requirement for the money supply to be perpetually increasing for this to work.
Yes and where did these profits come from? (agreeing with you). The extra 1 BTC you earned by getting my to see value in your service and price.
You forget the element of time. Imagine I owe a debt of 100 bitcoins, but there are only 50 bitcoins in the whole world. Can I pay off that debt? Yes. I just have to produce, earn bitcoins, and pay off over time. Each single coin can pay off n amount of coin debt over time. Money moves around, it circulates.
This is true. The other factor to keep in our thoughts the that Bitcoins are similar to gold in this regard, they are both wealth reserve assets. Bitcoins being even more so because you can find more gold in the ground but not more BTC.
Ehhh it's probably more accurate to consider Bitcoin the same as gold in this regard. There is a set amount of gold on the earth, and there is a set amount of Bitcoins on the earth. Miners mine both of them, and it gets harder and harder to do. Until humanity figures out at way to create new gold cost effectively, it is the same as Bitcoin in its supply and production characteristics.
The one difference between them is that the supply is Bitcoin is perfectly predictable, whereas the supply of gold varies somewhat year to year.
September 18, 2012, 08:52:25 PM
...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.
Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.
Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.
@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?
Not sure what you mean. The value of the Bitcoin economy is created by the usefulness of the technology.
September 18, 2012, 08:23:29 PM
... As the deflationary rate increases, the number of potentially good investments decreases, and the number of investments made decreases as a result.
Correct, once the economy has reached it's optimal size, only new innovation causes price deflation (or economic growth) the effect you describe ensures the economy scales appropriately to prevent boom bust bubbles.
September 18, 2012, 08:03:16 PM
What do you think about this perspective?
I guess what is important is the actual deflation rate and how long you can keep your dividends above that - it needs to be long enough to pay back your investment.The funny thing is that deflation increases with sound investments in a BTC economy: If tomorrow we had twice the BTC economy, services would all earn half the amount of BTC, though those BTC would be worth twice as much also.
As a BTC investment though these services would likely loose though - basically deflating currency punishes over-spending/-investment by an economy as a whole.
(This is all assuming a somewhat constant average speed of money, which may not be correct - still looking at blockchain.info it seems to be)
An alternative I have been thinking about is if the deflating currency is unstable, in that case people might choose to panic hold a long term asset and later buy back into BTC. This would lessen their loss or increase their gain compared to dollars no matter what.
Of course that leaves a big question as to what happens when the currency is stable, but still growing at 4% in value per year.
Honestly BTC might be bad for investors in some ways, but lets see - if BTC is going crazy I guess people can still invest fiat, time and resources to get BTC.
This would spread BTC to more "needing hands" which would lower the rate once they traded for food or other essentials.
September 18, 2012, 07:49:33 PM
By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.
In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.
In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.
That is the same as moving the decimal place. That does absolutely nothing except for perhaps arcane psychological effects.
That is true, to some extent the Bitcoin protocol punishes savers because it allows for inflation. If I save my BTC, I have to suffer from the inflation that is caused by the miners' block rewards. Others who spend Bitcoin a lot benefit more because they don't have to pay transaction fees, or the fees are lower due to the block reward subsidy. However, these effects are relatively negligible compared to other currencies. Also, this problem pales in comparison to the irregularities caused by Bitcoin's lack of liquidity and volatility.
September 18, 2012, 07:46:33 PM
What people who are worried deflation really want is passive income. The idea that they will have to work to earn all the value themselves just doesn't compute.
+1 Inflation is a transfer of wealth to spenders of new inflated money. (Producers/ entrepreneurs lose - capitalists / bankers win) - you need constant growth to maintain equilibrium on a finite planet.
By contrast, deflation is providing direct benefit to the producers who invest in building wealth in the economy. (Producers/ entrepreneurs win - capitalists / bankers win) equilibrium is restored on a finite planet
September 18, 2012, 07:33:59 PM
By the way, there is one kind of inflation that is harmless according austrian theory that could eliminate all price deflation. That would be a completely even distribution of the newly created money. We could let the money supply double at the end of every year, as long as the newly created money is distributed proportionally according to how much money you currently have (the value of each bitcoin adress is simply doubled). All this would cause is that prices would instantly double as well (and lending contracts would start compensate for this). No one would lose or gain any purchasing power.
In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.
In fact, someone could even create an inflationary bitcoin client without even forking the block chain. Just change the unit of representation in the UI at the end of each year, without changing the underlying code. So at the 1 of January every year, everyone's balance doubles. Thinking about it, this would actually be a really good idea to shut the inflationists up. Just give them their inflation client, where they can pick their own rate of inflation.
That is the same as moving the decimal place. That does absolutely nothing except for perhaps arcane psychological effects.
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