Topic: Deflation and Bitcoin, the last word on this forum - page 3. (Read 135916 times)

Here's my view on it:  Hoarding will become much less of an issue as liquidity increases.  When people see that profits can be made by trading between different CryptoCurrencies, they'll start shelling out BitCoins and the price will stabilize.  BitCoins will also become more liquid as it becomes easier to convert them into cash (read, BitCoin backed MasterCard, etc.).

I think the dynamic between BitCoin and other CryptoCurrencies is what holds the key to BitCoin's long-term success.

No, all they haven't done is deferred consumption, because deferring consumption typically means investing in a regular economy. Whether it's with a very low interest rate via a savings account or via 401ks or what have you, the money does not leave the supply. You can pick through the thread I posted, but all of it is from Hayek. So am I supposed to trust you over an economic nobel prize winner?


I don't know where I've assumed any fixed inflation rate.


No, I don't have to be careful, because you know what I meant and so does the rest of the economic world. Deflation has never referred to a reduction of the amount of money in existence. It was a term that came by well after inflation meant price inflation. If you have to redefine the word every time you make an argument, perhaps you are being a bit dense for the sake of density. Hayek decided to let this go whereas Mises could not.

I could pick through all that, but it's pretty tedious. The basic points are:

A "hoarder" must either spend the money eventually or not. If not, then it really is the broken window fallacy. All that's happened is the hoarder has produced. If the hoarder does spend the money, all they've done is defer consumption because they preferred future consumption to present consumption.

You can't assume a fixed inflation rate and then look at how the market will respond to it. That's not how markets work. If the inflation rate is 8%, it's 8% for a reason. And when people react to that inflation rate, their reaction will affect that rate.

Also, you have to be very careful when you compare the type of inflation or deflation that most economics works are talking about to what happens in the Bitcoin economy. Inflation usually refers to governments printing and spending money, not new money being created in exchange for a service. And deflation usually refers to a reduction in the amount of money in existence, not an increase in demand for a fixed supply.

Etlase2, I think You should talk with a programmer. He/She may probably find some elements in Your concept that can be simplified, some that are redundant and some that are insignificant. Right now Your proposal is too complex for me to think about its implementation. Only after starting programming it, You will notice problems.
It may be easier to fix something than to design it from scratch. I know You don't think bitcoins can be fixed :-) I also gave this up :-)

I had to look up what is "broken window fallacy"

http://en.wikipedia.org/wiki/Parable_of_the_broken_window

and there:


I will respond to this interesting point with some biological examples tomorrow, when I wake up [it is late in EU].

I think that one can make a very strong case that there is a big difference between saving and hoarding: https://bitcointalksearch.org/topic/fascinating-information-on-saving-vs-consumption-110708

And that hoarding is good for the hoarder, bad for the rest: https://bitcointalksearch.org/topic/m.1224110

But if you guys want to give up on Austrian economics and stick with bitcoinomics, that's fine.

What you call "hoarding" is actually production. It's kind of strange that you see it as a threat because that is the broken window fallacy. If you imagine that Bitcoins are the primary currency, to "hoard them", what do you do? You produce something of value and .. that's it.

By this logic, the guy who works for a living, buys a plasma TV, and smashes it is better for the economy than the guy who works for a living and saves his money. But they are both contributing equal value to the economy. The former guy is just destroying more value than the latter. That you see this as better shows you have swallowed the broken window fallacy.

the way bitcoin is going it cant be stopped

Satoshi and every one of those early adopters & 'hoarders' that you speak of disagree with your economic worldview.  If we did not, there would have not been Bitcoin, because it would have died in infancy without widespread knowledge that such a thing had ever existed.  The exchange value of gold is only unpredictable in the sense that you don't think in value terms relative to the metal, otherwise it would be the value of fiat currencies that was unstable.  Regardless, the voltility of the exchange rate will dampen as the bitcoin economy grows.  Again, you can start your own version of bitcoin by forking the code and changing whatever you like, but don't count on success because there have been many before you with the same idea, and everyone failed.

In other words the value will be random. It will follow chaotic movements :-)

I believe that gold is not a good currency because in fact it actually fluctuates too much (nobody would sign long term contracts in gold because it's value in 5 years is completely unpredictable). I feel that most members of the forum criticize central banks as regulators of money supply, but do we have a better way to control the value of any asset. The central banks are maybe not perfect but I can't say that BTC has a better model implemented :-) [try ensuring an inflation rate between 2%-4% for BTC :-)]

My statement is that hoarding is a very serious threat. The number of hoarders/speculators will increase as long as the value rises and their BTC assets can easily reach > 90%. The valuation of BTC by the speculators is extremely prone to rumors / accidents. Something like a hacked BTC/forex exchange can provoke a devaluation of BTC in the mind of let's say 5% of speculators. 5% of speculators hold more BTC that is in circulation at that time (!). Because there are so many hoarders (long term BTC investors) this small impulse will cause a huge value drop that can reach 50-90% (seen before).
Now let's be optimistic and add to this scenario a sharp recovery of the BTC price to previous levels. The hoarders will be pleased but ... business will depart from BTC. A highly fluctuating currency is very risky (why are ASIC equipment preorders denominated in USD?) and merchants will go to other media of payment. But they are the ones that add any real value to BTC. Then You have dropping income from hashing (lower fees), departing miners, falling confidence ... it will and with a massive sell off. ... because the ponzi concept remained dominant in the BTC economy.

I take the argument that modification of the bitcoin client that affect the acceptance of a transaction block will cause confusion. But I think it is better to do this now than in 3 years. Now is also a good time to learn how to implement changes.

Neither does gold, which is the physical analog money that bitcoin aims to emulate as much as possible.


If you think that this is fair, then try forking the code and doing it yourself.  I predict that it wont end well, though.


Those same early investors who gave bitcoin it's initial value did so because of the potential bitcoin presented both as a currency and as an investment.  Bitcoin still needs that support, and it would vanish rather quickly if anyone could manage to alter the protocol  in any way, because that ability alone would present a flaw in the system.  It should not be possible to alter the protocol in such a significant way at this point.


Supply and demand.

I agree that the mining profits will later come from transactions fees [a fixed or a minimum transaction fee would help and would not be a problem for most businesses].
But I was trying to point into a different direction. BTC has no mechanism to control its value.
This is not such a big problem for people who use BTC only for transactions, but this is potentially a huge problem for people who decide to invest in BTC. I think it would be fair to discourage people from investing in BTC by designing BTC as an inflationary currency.
I understand that initially the investment prospects were the main basis to give BTC any value, but the currency is now mature and it could function perfectly without the hoarding group.
You could say this is not my problem. Nobody pushes me to hoard BTC.
But it is my problem if the currency experience extreme speculations and panic sales.

=> What are the proposals for maintaining the value of BTC ?

The assumption is that, as the bitcoin economy grows, both the value of bitcoins and the absolute number of transactions will rise.  Right now, many transactions are free because there is little to scarcity of room for new transactions on the next block.  When there are 10K transactions moving across the bitcoin network per minute (or whatever) there will be time delays.  If you are someone who has a need to get your transaction in a block soon, you're going to end up paying a transaction fee to jump the line of free & nearly free transactions.  Miners would, logically, favor fee paying transactions and include as many of them as they can fit into their current block in order to collect those transaction fees.  The current blocksize limit is 1 megabyte, and we know that isn't going to be large enough, but it protects the lower end participants in the full network in the meantime.  Eventually, maintainning a full client on the bitcoin network is going to be like drinking from a firehose, and even with only 10K fee paying transactions in a single block at 0.005 BTC each the transaction fees would be 50 BTC on top of the blcok reward itself.

Ok ... new complaint:

If the earnings from generated blocks are much smaller than the total value of BTC in circulation then the temptation for a take over attack is much higher.
Falling rewards from mining will push miners to shut down their operation and sell older ASIC chips for close to nothing. Mining will be continued in few places that can handle the huge transaction log and have relative small energy costs giving these miners an advantage over others.
Now instead of mining for profit groups of organized BTC crime will combine their retired hashing power not to get block rewards but to facilitate double spending.

... now here I am again not aware what is actually in the code of the bitcoin client and whether mining two consecutive [or a series of] blocks is really sufficient to send two transactions with the same source of BTC.

My thesis is that mining should remain a significant part of the BTC economy for security reasons (and as a mean to absorb volatility).

Now you are misstating my own position.  I have never claimed that hard money is any solution to the business cycle.  I have stated, and stand by the statement, that history of hard money and modern FRB confirms what we should have already known; that a flexible monetary base can and will be manipulated in every manner possible, and this amplifies the business cycle rather than dampens it.

The business cycle is the cumulative effects of many a natural aspects of a diverse marketplace, free or otherwise, and cannot practically be "solved" in any acceptable fashion.  A gold standard will not change this, Bitcoin will not change this, and nothing that you can offer will change this.


Wow, how does that worldview not make your head expode?


Perhaps I would be, but I'm too old to wait for all the data.

There will be no "post-mining" era, nor is there any planned cessation of mining.  Fix your misconceptions about bitcoin, and if you continue to have complaints, restate them and we can have a conversation.

Uhh where have I ever expressed a disbelief in the business cycle? Where our opinions clash on the matter is that I quite strongly believe that a limited commodity currency is no solution to the business cycle.


When gold was left to regulate itself, FRB was its and anti-regulation's lovechild.


The so-called semantics led to your red herring and misrepresentations of my position. As I would be wise to be more careful about history, you would be wise to be less quick to judge.

What I don't like about BTC is the absolute lack of control of its value. Fiat money's inflation/deflation is controlled by the issuer.
In case of BTC the cost of minting it correlates with its value, but this has no (or marginal) effect on the number of generated BTC. This number is (almost) constant. But what happens if we completely stop mining? Something that is planned in near future. There will be absolutely no control of it and the price will be determined only by speculators and affected by panic.

When You estimate the value of an asset that You want to invest in You take the future projection of its value and the RISK associated with the asset. It is very difficult to predict the future value but it is much easier to estimate the risk. The estimation of risk is based on previous fluctuation of the value of the asset (companies don't like it's stock value to go up and down to much). The RISK is a factor that reduces the value of an asset.

My thesis is that in the "post mining" era BTC will fluctuate a lot and it's value will be continuously depreciated due to the associated risk. This will inspire a sharp reduction of the value up to a complete elimination and there will be no counter measures that can be applied.

A deflating currency has a big advantage. Nobody expects it to keep its value, so there is no panic :-)

I disagree.  If they are both effects, then they are both effects of the business cycle, which I know that you don't believe in.  Any amount of a commodity currency is a correct amount, so long as it cannot change faster than the knowledge of that change can distribute across the market.  An inflexible commodity money adjusts value in the marketplace just fine, if left alone to regulate itself.  The real problem is that it's often not in the interests of the soverign powers to permit self-regulation.


Then our disagreement here is one of semantics, not substance.  I would agree with the general idea the free market has historically chosen precious metals as money, but I also agree that was far from universal.


Nor can I disagree with the above statements.

They are both effects of a limited commodity currency.


You are right on pretty much all counts in regards to the arguments about the US. My view was occluded by later interpretations. I concede and appreciate the lesson.


No.


I did not. I said that gold was not chosen in particular. The person I had originally responded to made the claim that "the free market has chosen gold/PMs" which fails a simple logic test.

http://dictionary.reference.com/browse/particular "of or pertaining to a single or specific person, thing, group, class, occasion, etc., rather than to others or all;"

And I used evidence of prior fiat-like money and the massive economic expansion under those schemes to make a case that gold does not need to back free market currency and implied that it might hinder growth. I also used bitcoin as an example.


Again, I did not say that gold was not used as money.