Topic: Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable? - page 9. (Read 14623 times)

The correct level of investment is the level which people choose in the absence of coercion.

You have to keep in mind that the Bitcoin economy exists alongside (and is positively dwarfed by) the "regular" fiat-based economy.  If your concern is that a deflationary currency will result in "too little" investment, it doesn't seem fair to point to the relative lack of Bitcoin loans for investment as evidence to support your argument.  The purchasing power of bitcoins has increased enormously in the last four years.  And I expect that trend to continue because I expect (hope) that the currency will be massively successful.  That long-term increase in purchasing power has also coincided with very high volatility.  This is all to be expected.  Naturally bitcoins were worth essentially nothing when the system was new and untested.  And naturally they'll be worth a huge amount if and when Bitcoin becomes massively successful.  That implies some "growing pains" (although I haven't personally found the experience to be too painful).  So of course people are reluctant to borrow bitcoins for investment purposes.  Of course it makes more sense to borrow fiat and buy bitcoins if you're trying to raise capital for a new business that requires a bitcoin bankroll.  (The principal reason for borrowing BTC over fiat that I can see is if you want to short bitcoins.)  Again, the regular inflationary economy is the dominant economic force, and it's still encouraging too much investment and consumption.  Bitcoin is currently acting as a (still very tiny) safety valve that's encouraging some actual SAVINGS to partially offset the fiat economy's destructive tendencies.  I don't know about you, but I'm excited as hell about the deferred purchasing power I'm holding in my bitcoin wallet.  But if and when bitcoin becomes the dominant currency, it won't need to operate as a "safety valve" anymore.  The volatility and deflation (in terms of purchasing power) will be much slower and more predictable.  The real question is whether THAT economy will encourage the "correct" level of investment / savings.  I think it might.  But I don't have an economics degree. (I do, however, dabble in bitcoinomics.)

But inflation is an effect, not a cause. I mentioned somewhere else that it isn't very fair to compare bitcoin to fiat because bitcoin is free market and fiat is not. Fiat encourages too much debt as a matter of policy--new money goes to banks, and inexplicably governments take on debt. A free market currency with an unfixed supply would do no such thing. You are aware, Spike, that I've spent a lot of time trying to figure out how to do that.

Right, I agree.

I think where many people disagree is what the appropriate amount of investment is.  Obviously, investment based on inflation (at least the rate of inflation in the US) is bad, as it encourages too much debt.  When that debt-based bubble pops, it wrecks all kinds of havoc.  But I think investment based on deflation is bad as well - too few investments will be made, and not enough innovation or production to "keep up" in a global economy.  Sure, we'd still survive, but we wouldn't be as productive or innovative as we could be, and the economy would not be optimized because of it.  Lower monetary velocity and lower paychecks for, well, everyone would ultimately be the end result.

That said, I think Bitcoin (and thus, a deflationary currency) could still be the lesser of the two evils.  And since a perfectly stable currency is still impossible to create, perhaps the best solution to be found for now.

The malady of investing in Bitcoin is compounded by the fact that investing lowers the price of money. If more money is available, interest rates go down (and likely exchange rates), at least in a free market that isn't dominated by a central authority's funds. I have a thread sitting in this forum with 1 anecdotal reply and zero discussion on what Austrians actually think of this situation. Apparently head-in-sand bitcoinomics is much more comforting.

Very interesting.  I actually have a business I have been holding off launching because of the exchange rate fluctuations and at this point it has been more profitable to just sit on my reserves then expose myself to the exchange risks.   Nice points Sgt. Spike.

In a way, yes. But you're missing out on what that investment could have been making had you just held on to the money.  I'll do some maths.

I have 200 BTC to invest.  I have the option of holding on to it and gaining 3% in value each year, or the option of investing in another company and making 2% per year.

So, first year:
Holding: 200 BTC = 206 BTC (effective purchasing power compared to initial investment)
Investing: 4 BTC dividend

Second year:
Holding: 206 BTC = 212.18 BTC
Investing: 4 BTC dividend + 0.12 BTC effective purchasing power increase on prior balance + 4 BTC prior balance = 8.12 BTC

Third year:
Holding: 218.55 BTC
Investing: 4 BTC dividend + 0.24 BTC effective purchasing power increase on prior balance + 8.12 BTC prior balance = 12.36 BTC

So, you see how it never "catches up" compared to just holding the money?  Or, maybe it eventually will LONG into the future, as long as the dividends are saved and you let the purchasing power continuously compound on itself.

Now, if you don't like seeing the purchasing power increase in BTC (because your BTC balance doesn't increase, just the purchasing power of your BTC balance increases), then I'll format it differently to what would actually happen:

First year:
Holding: 200 BTC
Investing: 3.88 BTC

Second year:
Holding: 200 BTC
Investing: 3.88 BTC prior balance + 3.77 BTC new dividend = 7.65 BTC

Third year:
Holding: 200 BTC
Investing: 7.65 BTC prior balance + 3.66 BTC new dividend = 11.31 BTC

And the investment dividends would keep decreasing (the investment wouldn't make more money just because the purchasing power of the currency used increases), making it a LONG time before that 200 BTC was ever recovered.  Actually, doing a quick calculation, you'd never recover more than 133.33 BTC, making it a bad investment vs the 3%.  Which, I suppose that makes sense, given that 200 BTC * 2% / 3% = 133.33 BTC.

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.

It's not really possible to predict one way or the other.

A dislocation somewhere in the non-Bitcoin economy could cause money to come flooding in (or out...) of Bitcoin. It's also possible for BitPay to sign up enough merchants and get sufficient trade flowing to backfill the missing commerce before there's a correction.

So is it correct to assume that if the speculative aspect grows disproportionately to the economy, the market will correct, or else it will fail to grow (as a result of deflation)?

Yes your are describing the benefits, the end goal, but without the economy base there is nothing to trade, just like I can't eat gold, I can't eat Bitcoin.

Bitcoins are not consumed, they are just traded form one person to another. The value of the bitcoin economy lies in the ability of the bitcoins to be transfered in trade for other goods or services.

Absolutely speculative but here is the rub, they are right.  A non-debased savings medium (wealth reserve asset) is in high demand with all the quantitative easing (money printing) and now actual debasing (tungsten filled gold bars).  People are desperately trying to hold on to value.  They tried real estate, we saw how that turned out.   Tried food and energy futures, no one like $4 a loaf bread & gas.  This might be the next place where we see serious money enter the market and calculate the the Bitcoin is highly undervalued and not leveraged.

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 
Gold is a bit odd agreed, but if you make something out of gold it will never erode or tarnish there is value when you amortise the usefulness of a gold cup over eternity.

I did say commodity-like, and gold is often considered a commodity, though it has very little practical use. The commodity of bitcoin is how much value can I make by not using it? Rather silly, if you ask me.

That is what I think too this is probably the bases for the ponzi criticisms that Bitcoin some times receives

Sure if I use a commodity money eg. rice as money, it has 2 functions 1 as food (a comodity) and 2 as money easily traded for anything I want because of its inherent value.

The value of rice as money is somewhat susceptible to drought, the resulting supply and demand I understand ( and agree with you) will interfere with the function as a currency.(I see how this problem is managed by the market)  

the question is Bitcoin a commodity based money?

LOL....
Ok here is one way to resolve the problem.  The commodity that backs Bitcoin is the idea that a free market, frictionless, fixed currency economy is possible.

No that brings me back to a real commodity, can eat rise, I can only use Bitcoin to trade, and I can't trade without an economy. The result inflation to encourage investment.  

Traders don't care about economics or long-term viability - they just care about not being the last bagholder.

I Agree this is what is happening.[/quote]  

Now trading the markets is all good and well if there is an economic base, if you are just trading up all the time demand will catch up with you and you will be holding a bunch of nothing if there is no economy to support it.

My concern is "creating attractive businesses for people to invest in will be the next step in the cycle" is discouraged by the nature of deflation. (you get your benefit by saving during deflation not investing) 


But what are people saving for is there is nothing in the economy to spend it on except the demand created by the traders who are always trading up.