Topic: Defaltionary Spiral -- Is there a way to make this workout? (hoarding bitcoins) - page 2. (Read 3229 times)

This, i understand.  The unprecedented nature of instant, near-zero fee transfer of money globally, and anonymity, are the strengths of bitcoin.  Are you saying that this 2% spread IS the economy of bitcoin, and that will keep it afloat until a real goods economy can develop?  I see there not being too many places bitcoin can be spent outside of gambling and SR that are truly repeat customers getting a product they really want.  This is probably where we come in and demand merchants accept BC.

Thanks!

1.  I believe you are right.  If we don't spur economic activity with bitcoin, it's going to be long painful crawl to then endgame (whatever that is).  I think bitcoiners have a duty to request merchants (especially online shops) take bitcoin.  If enough people do, maybe they will at least investigate it and become bitcoiners themselves, if not accept bitcoin.

2.  I've been reading about the futures/options aspect and while I understand how it stabilizes prices, I don't understand how to 'bet' on future prices on places like ICBIT.  If you have a good resource on how to understand this, (with pictures, like i'm 5) I'd be much appreciate.  This is the kind of activity I would like to do with bitcoin after I understand it more.

3. I had no idea the 'hoarding' article was funded by one of these forces.  Do you know which one? I am very interested in the interplay of these forces.  I feel the more they fight it, the stronger it will become.  Where does one keep track of this?  Is there a possiblity for a bitcoinwatch site that keeps tabs on these different forces?

Thanks for you detailed response! 

I do believe Bitcoin could be the next Apple or Google.  I have about $300 invested in speculation, but I'm always looking for the "We accept bitcoin" signs on merchants I visit.  I guess I should be asking them to accept it when they don't have it... 

Electronics' deflationary property is a result of an increase in productivity, it is not a result of the scarcity of the money supply. These two effects are completely different and have nothing at all to do with each other. This cannot be used as an argument in favor of a deflationary currency.


People are in too much debt because the majority of money is created via debt and the wealth and productivity of healthy societies has been vultured by the financial sector, thanks mostly to crony capitalism. To keep economies from collapsing, lines of credit have become the new form of money for the poor and middle classes.


There is nothing to suggest that fewer loans would help build wealth. All evidence is to the contrary. Growth requires investment. Without investment, there can be little to no movement between classes. Over-investment/malinvestment is caused by the "thin air" money creation ability of banks, the enormous derivatives market that massively increases systemic risk, and asset bubbles that allow a constant increase of bank leverage. The banking system is an ouroboros that feeds into itself by virtue of the stupidity of the monetary system that prevails in the world today.


pfft

The fundamentals here have been discussed to death.
But the bottom line net fundamentals from a layperson are:

1) = Stability is when there is:
A  fixed supply of goods and services and a fixed demand, and
A fixed money supply
purchasing power is balanced (the market responds only when there is an imbalance)

2) = cost Inflation is when there is:
A fixed supply of goods and services and increase in demand or
A low supply of goods and services and fixed demand or
A fixed supply of goods and services and a fixed demand but increase in money supply
purchasing power is decreasing (the market responds by spending / investing )

3) =cost Deflation is when there is:
A fixed supply of goods and services and a low demand or
An increase in the supply of goods and services and fixed demand or
A fixed supply of goods and services and a fixed demand but a decrease in money supply
purchasing power is increasing (the market responds by saving / not investing)
 
 The demand being the "subjective human preference " that makes what would be a science a social science.

Now the meme that is money adds a variable, the amount of money in circulation should technically describe all the goods and services available, if you increase the money supply you can artificially create cost inflation, if you decrease the money supply you cause cost deflation.

The Bitcoin ecosystem is different to basic economics*.
 It is appealing to people who have a general leaning to Austrians economic principals - people who subscribe to the more practical approach that lets the free market banking system regulate the supply of money, or forces a fixed supply through a gold standard. Leaving a free market to monitor and respond to supply and demand (no central management necessary). As opposed to Keynesian economists who prefer to regulate the money supply to manipulate the free market to respond to an artificially created supply and demand (an all knowing, benevolent central planner is necessary).   

Now where the problem originates with the Bitcoin economy is: when and if Bitcoin becomes money (ie. the unit of measure of all the traded goods and services in an economy) it will prove the Austrians economic principals are superior to Keynesian economic principals in that a free market system without money manipulation will be feasible and flourish.

*The problem lies in how people buy into the Bitcoin economy, in a free market a limited supply and a growing demand = cost Inflation - this you can see in the price people are willing to pay for a Bitcoin. (What this means is the cost of Bitcoins are inflating outside the economy) a free market typically responds to inflation (lack of supply of goods and services) by producing more to meet demand.(not possible with Bitcoin) 

What this demand above means inside the Bitcoin economy is your purchasing power in Bitcoins is increasing, purchasing power increasing is synonymous with cost Dilation. A free market typically responds to deflation (over supply of goods and services) by saving / not consuming / not investing.)

So with Bitcoin adoption we have a paradox as described by Keynesians as the "paradox of thrift", savings causes prices to drop and dropping prices cause people to save, and this continues into a deflationary spiral.  ( Note: this paradox cannot exist in a free market system because inflation is a result of (2) above and Deflation is the result of (3) above. The free market self regulates. 

However in the Bitcoin economy the demand for money, is not related to the supply of goods and services, so the Bitcoin Economy will tend to respond to (3) above as if purchasing power is increasing. The free market responds to such a stimulus by saving / not investing.

so while Bitcoin makes possible a free market economy where there will be no deflationary spiral, the manner in which Bitcoin is introduced to the world is causing a deflationary spiral.

The way I see it working out is crashing loss of faith and the system picking up years later with organic economic growth, and a crash every time the uber rich cash out. 

Yes, Bitcoin's value will be the result of speculation.   Your hoarding helps someone else (someone who is hoping to sell at a higher price).   Your dumping helps someone else (someone who is hoping to buy at a lower price).   Also, your buying and selling helps liquidity, thus shrinks the spreads between the buy and sell.

When I buy bitcoins using Dwolla, I pay a total of $0.25 to send USDs to an exchange, and the 0.55% in exchange fees.  There is also a tiny spread between the bid and the ask price, which might cost under a half a percent.

So, for a $100 purchase, I have about $99 worth buying power.

When I make a $100 credit card payment with a merchant, the merchant gets $97.  Thus the merchant might offer me a discount for paying with bitcoins.

So my bill is:

 $100 (if paying with credit card), or $98 ($98 worth of bicoins, if using that payment method.)

The merchant comes out ahead.  I come out ahead -- I saved about a dollar for converting my fiat and using it to pay with bitcoin, including my conversion costs).

I think there are a few very different concerns here that must be separated:

1) Falling prices of goods/services
2) Price instability
3) Shortage of currency

For shortage of currency, this is not even remotely a concern with Bitcoin.  Physical currencies, even digital currencies tied to them, cannot be divided beyond a couple of decimal points.  Bitcoins can be divided to 8 decimal points, and more if necessary.  There will never be a shortage.  The value will merely rise to compensate.  Now, does that mean that Bitcoin is immune to any ill effects of rising price?  No.  And it is in early adopters' best interests to spend some Bitcoins in order to spur adoption and to grow the real Bitcoin economy.  But that process is a function of the market, and will be regulated as such.  Which leads to...

Falling prices of goods and services -- this will not hurt Bitcoin adopters in the long term at the very low deflation rates expected.  In the short/medium term, once again the proper rate of spending and consumption is a function of the market.  It is difficult for individuals to determine this rate alone.  But with the help of market functions like futures and options and the incentive for traders to stabilize the price, both buyers and sellers can insulate themselves against rapid price swings, and ultimately the natural technological innovation and advancement inherent in any economy will be harnessed to generate wealth in abundance rather than forced consumerism and waste, and everyone will benefit from falling prices.

Now, the big one is price instability.  This really is the worst problem with any unstable currency, both inflationary and deflationary.  Any currency that is a moving target will introduce fluctuations in value that ripple through the economy and amplify, distorting prices and disrupting the price discovery mechanism.  This will be an especially bad problem with Bitcoin, at least while it is growing.  On top of the many regulatory hurdles to adoption, and the anonymous nature of Bitcoin which attracts extra scrutiny, there are entrenched forces which will absolutely not want to see Bitcoin succeed.  In fact, one of them sponsored the study you cite.  Large banks and central banks, payment processors and even governments all have billions of dollars at their disposal which can be used to disrupt the Bitcoin economy.  As long as the Bitcoin economy is small, this will remain a huge threat.  The good news is that, in the long term this will only make Bitcoin stronger.  The bad news is that, in the short term it will make Bitcoin a very poor medium of exchange similar to precious metals which have been manipulated for decades.  So, actually, one of the best defenses against the most harmful effect of deflation, price instability, is self-interested hoarding.

Why do we have to "accept that Bitcoin will likely not make it"?  I just gave you reasons why deflation can work.

Anyone can horde and dump USD or any other currency as they please, Bitcoin is no different in that regard.  More acceptance/use of Bitcoin will reduce price volatility in the event of hordes and dumps as well.  The large price fluctuations are due, in part, because of the smallish size of the Bitcoin economy compared to currencies that entire countries use.

Certainly investment in it is risky, unknown, etc.  But the same could be said of investing in Google or Apple while they were still young and floundering.  Bitcoin could be the next Apple or Google, only bigger, much bigger.  To me, that alone is enough to warrant at least a small long-term investment ($100, or some other amount you don't mind if you lose).

So Bitcoin, like electronics, is deflationary at present?  Should we just accept this and horde and dump as we please, accepting that Bitcoin will likely not make it?

I'm not trying to moralize, I really want to know understand this economy and how one would approach it as an investor... It seems to be too much of an infant to really 'invest' in... 

Thanks for your response!  Every little bit helps.   

Two things to consider:

Electronics are already "deflationary" in nature.  Prices drop like a rock on new tech as it ages, yet people still buy it at one point or another.  If prices dropped on other products, they might slow down their purchases on some items, but it certainly wouldn't stop altogether.

I believe that our inflationary economy encourages over-investment, and therefore bad investments.  People are in too much debt, largely because it is easier to pay back a loan with money that is worth less tomorrow.  Deflation would cause people to take out fewer loans, which would help build wealth instead of build debt.  Yes, the economy would be smaller, but perhaps that would be a good thing?

Ideally (in my opinion), a currency would be perfectly stable, and cause neither price inflation or price deflation.  But so far, there is no way to create such a currency without a central authority, and no central authority would agree to it.

I am ignorant on all the ins and outs of this.  I am posting this to try to learn what the possible economic outcome is of bitcoin.  I am prompted by this comment from the 'Hoarding Bitcoins' 'study' that hit slashdot and everywhere else.  

Comment: "So what you're saying is that there is a limited resource which we cannot make more of that people are hording? And the more people horde it, the higher the deflation? And people watch their value rise in USD as this happens? And you're surprised?

What motive is there to spend your BTC? Isn't this how deflationary spirals [wikipedia.org] occur? Wasn't this an effect of The Great Depression and lead to FDR implementing a pump-priming strategy [wikipedia.org]?

Could someone explain how they would escape that spiral? I'm not an economist so I don't know if there are other routes of which I'm unaware."

What are the economists thoughts on this?  Could small businesses such as satoshidice and webhosting for bitcoins spark an actual economy?  Or is this just a long term pump and dump?



EDIT:  I was made aware below that the article being commented on was funded by institutions that have something to lose if bitcoin goes primetime.  Does anyone have information about this?