Topic: Bitcoin's first major deflation event, and its consequences - page 5. (Read 14159 times)

Some people here argue against classic investing maxims.

"Let your profits run and cut your losses quickly."

You argue basically daytrading vs long terms investment.

My point is, that market simply punishes such disruptive behaviour, and promotes stabilisation. Losing large amount of money is one of strongest incentives NOT to repeat particular investing strategy. Im aware that bitcoin constantly attracts new people who dont get that they can harm themselfs by excessive hoardnig, but most of them will learn the lesson the hard way further or later.

I do not see anything really unusual in current price action. This is what bitcoin was doing all along, except about one year break 2011/2012 due to market's temporarily insanity. LOL.

Sell and risk being left behind. Do you think all those who sold at 1$ ever had a chance to buy again at that price? Nope and before getting to 1$ it was at .30$. It is rather very typical not only for Bitcoin but for decent companies trading on stock market too. GOOG, APPL etc would be most recent examples. Sell GOOG for 120$ soon after IPO and you never see that price again, enjoy your 20% in a month profit and then kick yourself for missing on 6000% run over 6-8 years. Nothing new here.

you're exactly right. the bagholders will be the hoarders who bank on the deflation for profit. there is a lot of greed in the air on the speculations sub. 'cashing out' i.e. purchasing things with your profits, is the smart thing to do. hoarding coins is like re-investing interest payments into a ponzi, except worse because it is a self-reinforcing behavior.

"this brings us back to a very important, and possibly dangerous, idea: the deflationary spiral. users are reluctant to sell their coins because of the idea of larger future worth (standard deflation), which causes them to hoard their coins which creates a feedback loop which increases the perceived value of the coins."

The question is: Who gets burned in the end?

Certainly not me, since im slowly selling my bitcoins, securing my gains in fiat.
Certainly not merchants who due to prices instability are converting into fiat instantly. They also dont seem to lose their customer base, since me and other people who are leaving the "hot potato game" love to buy stuff and have fun with it.

But

At whos expence we are buying those goods, services or fiat?

Hoarders? Naaaaaaah that cant be!

twolifeinexile and thefiniteidea : I think you are missing his point. If Bitcoin's purchasing power goes up, you should expect to see a drop in the share price of Satoshi dice coupled with a drop in revenues in BTC. It is possible that you would suffer a loss on your investment in BTC terms. This should be further amplified as more competitors to SD come on board, whereas there does not yet appear to be any worthy competitor to BTC mainly because there isn't any real flaw in it and anything lacking can be built atop of Bitcoin as services(eg Facebook/email integration/etc..) and thus furthering the gap between BTC and any newcomer.

Assuming you only had 10 coins and you stayed with BTC for investing at the beginning of the year:
Net profit at 1 year is actually 3.2 stablecoins when you consider the BTC apprecation of 10% at the end of the year.


Assuming you only had 10 coins and you converted to STC for investing at the beginning of the year:
Your STC have been invested wisely at 20% ROI yielding you 2 extra STC in 1 yr, they would not have had the luxury of Bitcoin appreciation though...

The difference ends up being 2 STC when not investing in BTC, and 3.2 STC when investing in the BTC denominated stock.

So if you're going to buy stock, buy stock listed in BTC, not STC.

If you can't, but you know exactly what your ROI is going to be, like in this scenario, go ahead and convert because 20% is better than 10%

Regardless, your best gains are going to be from buying stock denominated in BTC...

So I suppose you could say hoarding BTC can be useless if you have something worthwhile to invest in...

Maybe that's what all these hoarders are waiting for?

Well said.

Sure, you are right that it does not make economic sense to invest in Bitcoin companies(using BTC) if you think that the currency will appreciate faster than the company. But people still invest in these companies, could they be out of their minds or just bad investors?
Its easy to forget that not everyone thinks alike. Some possible reasons why people are investing in Bitcoin Companies

1) They invested with the fiat they have (just buy btc for this purpose without touching your existing btc)
2) People don't believe BTC will appreciate faster than Satoshidice or that Satoshidice's growth will match and be parallel to the Bitcoin's adoption growth.
3) People are not sure if BTC will survive a superior crypto-currency or outlawing of the currency by nations. Yet Satoshidice offers dividends, something BTC does not, you could "cash out" every dividend if you were unsure of BTC's future. The truth is that we do not know what will happen 5 years down the road. Its easy to get carried away on the optimism on these forums that Bitcoin $100k is a sure thing that we do not see or refuse to acknowledge possible downside risks.

I have many friends in the IT sector whom ive asked whether they have heard of Bitcoin, i was surprised that most who had heard of it did not think much of it or associated it with virtual play money and brushed it off. I have a friend with very high IQ who thinks Keynesian economics is valid and that inflation induces growth by forcing people to invest instead of hoarding cash. Then again so do Economic Nobel Prize winners. I came to the conclusion that as smart as they are, they lack critical thought to question mainstream thought. They can absorb and understand all the intricacies and theories of Keynes but they lack the conviction to question if it makes sense.

Here in Singapore, ive observed that many of our top students and scholars are what i call Textbook smart. They can absorb anything you throw at them, but they can never think critically or be skeptical of the theories thrown their way because you don't score in exams by arguing with the textbook.

The point im trying to make is that as much the small group of existing Bitcoiner's see the benefits of Bitcoin, there is a very high chance that the rest of the world is not capable of doing so, thus making the $100k Bitcoin a pipe dream. After all these are the same people who voted in the very politicians who brought them their current plight.


Again you do not state how it is dangerous/negative.
Back before i heard of Bitcoin, i was less motivated to think of starting a business.
Id have to slog and take risks to earn ever depreciating currency, maybe ill just stick with my day job.
On the contrary(personally), the "deflationary" expectation for Bitcoin motivated me to think of ways to earn Bitcoin which led me to start my exchange. If i think that Bitcoin is going to the moon, would it not make sense for me to accquire/earn as many Bitcoins now? To earn, you have to serve/produce(ie start a business). The motivation to start a bitcoin business is very high for me if i know that any profits are going to grow in value.

You mean economy has never growed under gold standard?

Massive unemployment is caused by concentration of production into a few multinational corporations with the aid of technology advance, it is another topic. Apple do not need to finance, they hold tons of cash, while other similar companies still can not get financing since their market share is eaten by Apple

Anyway, FED will take care about that, none of BTC's business

Theres not many places outside the US where you can buy products for BTC. Exchanging coins for fiat and then buying things doesn't count.

thanks for taking me seriously.

bitcoin can, and has, for the majority of its lifetime, been both a store of value and a currency. the recent shift towards the former that i have perceived can be described as follows:

say you wanted to invest in shares of satoshidice. say your expected ROI is something like 50% yearly. if your expected ROI of simply holding bitcoins is 500% yearly, then it would not make economic sense to use bitcoins to purchase shares. it would make a lot more sense to use a currency that is not expected to appreciate in value more than 50%. however, even if bitcoin is expected to appreciate in value by only 45% yearly, it would still make more sense to purchase the shares with another currency, so you can get 50% returns on the shares in addition to the 45% returns on the value you have stored in bitcoins, instead of just the marginal increase of 5% yearly that you'd get from purchasing the shares with bitcoin.

example: (using imaginary currency whose value fluctuates negligibly 'stablecoin' or STC)

100 shares of satoshidice available for sale for 10 stablecoins.
at t=0, 1 stablecoin = 1 btc
satoshidice shares yield 20% ROI yearly
bitcoins appreciate 10% yearly

scenario 1:
seeing the good investment opportunity, you purchase 100 shares for 10 BTC at t=0 (remember that the BTCSTC rate is 1 at t=0)
at t=1 yr, you sell those shares for a net profit of equivalent value to 2 stablecoins (20% of 10 btc at t=0).

however, in scenario 2:
instead of purchasing shares with BTC, you purchase them with STC and keep your 10 BTC.
at t=1 yr, you sell the shares, and you also sell the BTC for a net profit of:
2 stablecoins (from above) + (1 [btc at t=0] = 1 STC) = the equivalent value of 3 STC

in other words, you lose out when you purchase shares with bitcoin because you are no longer holding the bitcoins, but only the shares. whereas in the second scenario you are holding both BTC and shares. and this is for an ROI for btc that's LOWER than that of the shares. the very fact that BTC has a non-negligible ROI creates the better economic strategy of using an alternate currency for investments, limiting its use in this respect.

---

for your other points, there isn't anything 'wrong' with deflation. that statement is rather malformed. further, it is true that there is a small inflation rate associated with btc right now. however, that is dwarfed by the large increase in demand. as the BTCUSD rate rises, the purchasing power of a btc increases compared to the proverbial basket of goods. this is the definition of deflation. there are two halves: supply and demand. the supply is inflated, and will eventually be stable, but the demand will increase until the price discovery phase is over. once this happens, deflation will stop.

in other words, the deflationary spiral i am describing is not a never-ending process that will end in the death of bitcoin, but rather a long phase of its growth that may exhibit a dangerous positive-feedback behavior that will have negative effects on the makeup of the bitcoin economy and commerce and its adoption as a currency.

i'm glad you think this issue doesn't exist so we can discuss our differing opinions. my problem is exactly your tone in this post. you don't mean to be rude but because you are so sure that you are correct you're hampering actual discussion by being dismissive (with comments like ). one gets the same reaction going to a creationist forum and arguing for evolution. i'm trying desperately to explain that i'm not beating the deflationary spiral IN THE GENERAL dead horse, but rather reopening the discussion in light of the present price increase, which seems to me to be a deflation event. i'm not arguing against fundamentals of the free market, i'm not a keynesian, and i'm not stupid. please stop treating me as the above criteria. i mostly spend time in the speculation forum, and as such, the recent price behavior has brought some questions to my mind as it seems fundamentally different than any movement in the past two years. if you think otherwise, please elaborate.

tl;dr

the price increase looks like a deflation event, not a rally or a bubble. if you disagree with me here, please explicate.

how do you think users and markets are going to react to the 5x price increase? we haven't seen such a movement in such a short time frame in quite awhile.

Im still having trouble seeing the problem, maybe you can elaborate.

-Why cant Bitcoin be both a store of value and a currency?

-What is wrong with deflation?
Again your definition of deflation is referring to the Keynesian definition where prices are falling.
As far as im concerned, Bitcoin is still inflating and will then be stable in terms of money supply.
Deflation was never part of the design, save for people losing coins which should be minimal/0 by the time rewards reach 0.

Wow, they are very similar posts. But you went in to much greater detail than I did. I learned Silk Road and Gambling are the two major forms of BTC commerce though:)

What is your problem? You came on this board to raise an issue that doesn't exist, and which has been talked to death already. Saving (hoarding) is a natural market action when there is a certain confidence the price level will maintain. Given the built-in scarcity and the fact more people are willing to put their time and effort (money) into it then you have a steady price increase.

I'm not trying to be rude at all, only save you time, money and reputation. I don't think you go onto gold bulletin boards and tell people to stop stashing gold because they will experience some deflationary spirals. Get on with your life and start learning how markets really work.

http://www.goodreads.com/quotes/tag/free-market

you're stating things with certainty that you really don't have certain knowledge of. at least i'm stating my assumptions. may we discuss?

do you believe that:

a) the current rally is not a deflation event
b) these kinds of five-fold price increases will be commonplace and you'll be VERY VERY rich
or
c) you stopped reading my post three sentences in because it's obviously misguided fud and definitely not worth your time to deconstruct my argument.

if a) i beg to differ
if b) your assumptions are wrong as markets minimize such profits
and if c) why even come here at all? go throw your bits in the air around you and act smug elsewhere.

I'm sorry this deflationary spiral issue left a "scar" on your mathematical brain but you're completely wrong on your assumptions. Free market will prove you that with enough time.