Topic: Finite Supply vs Steadily Increasing Supply - page 2. (Read 3148 times)

Here's your problem.  You concern yourself with one side of an equation while dismissing the other side.

The reward of monetary deflation is neatly countered by the risk of coin loss.  This is a truer stability, the stability of the average purchasing power of a position in Bitcoin.


"Bitcoin hoarder greedily increases holding as others lose keys.  Loses key."

Perhaps I should say that the theoretical ideal for any altcoin is that the largest possible community gets involved with the highest possible market cap gain (for their efforts) with the lowest possible risk, thereby maximizing risk vs. reward.  There are funds on the stock market that err heavily on the side of lowest possible risk, rather than being get-rich-quick options.  In my mind, this would be a better altcoin option (for those who want or need greater stability for some part of their portfolio).  Money market funds, stable value funds, treasuries, and municipal bonds tend to offer poorer returns, but manage a large market cap anyway, because there is less chance that such diversified funds will decline.

Accomplishing the same with an altcoin, in my mind, means gaining maximum growth through CPU mining (since everyone has a CPU, and there are various barriers in place to buying altcoins with the cash in your pocket).  Developing a wide index of prices (precious and semi-precious metals, international price indices, etc) would be the difficult part.  Reading in those values each day to determine if and how much demand exists for reward coins is less difficult.  New altcoins are less known, are accepted by fewer vendors, and will be seen on fewer exchanges.  Early adopters need a real incentive to download the wallet and CPU-mine, but that increase can decline as such an altcoin becomes more widely used.

This chart and the article attached to it explain the need for monetary stability much better than I ever could.  Basically, you have to start with a deflationary currency in order to get it widely established.  Once it's widely accepted, you lower the rate of return until you can get as close to zero as possible.  Ideally, you develop an inflation rate over the long run that tries to stay between 0-2%, which would not be difficult at all with a crypto-currency.

http://www.economicsonline.co.uk/Managing_the_economy/Stable_prices.html

minerva already beat me to this, but I would like to expand on my reason as to why I don't agree with your statement.

First, 'X' can be thought of as variable, whereas in my suggestion it is not, but instead a statically increasing rate for all time (ignoring an initial growth period which is essential to any new system like this).

Second, I believe that a static supply has the potential to increase price VOLATILITY, since the quantity of the currency would slowly decrease over time (see premise #2) thereby driving up prices.

Please don't mistake my ideas to suggest that we could have perfect stability.  I only seek to determine if offsetting the loss of currency by steady inflation would help decrease the volatility of prices as compared to either fiat currency (where inflation is unchecked) and a system with a static money supply (where deflation would be unchecked).

In any case thank you for your post, it helped me being these points (previously omitted) out.

Thanks for your response, I was hoping for responses like this to help me flesh this out (or prove me wrong).


I take number one as coming from the essential functions of money, primarily that of a "store of value".


Agreed that I cannot define those terms from an empirical standpoint.  I should probably have worded my first premise differently.  How about this:

1) Stability in supply supports the essential functions of money


I do admit to falling into the definition of money vs currency trap (if that is what you were talking about) and am not careful enough with how and where I use those terms.  Any help in better differentiating when to use one versus the other would be appreciated.

At any rate I would be interested in your definition.


Correct, this is a purely hypothetical exercise based on assumptions.


Given my redefined first premise, do you still think so?  If so, can you explain?

...no it doesn't. It doesn't increase price stability.

1 is not a given.  You can't possibly define "best", much less "stable".  Hell, you probably can't even define currency, but that isn't important here.   At any rate, you certainly haven't tested various configurations to check their properties for bestness (whatever that is).

Also, it does not appear to me that your conclusion follows from your argument.  You have a bait and switch thing going on.

This is not a post intended to point out any flaws in Bitcoin nor is it intended to suggest any changes.  I am simply looking for input from the Bitcoin community on my ideas.

From what I understand the problem with many fiat currencies is the incentive for the printing authority to increase the number of notes in circulation.  The reason this incentive exists is because of the time-lag between the increase in the money supply and the corresponding increase in prices.  Additionally, when the printing authority and government are one in the same, there is an additional, political cause of this incentive in that it allows politicians to spend on programs that will keep them in office while not immediately and plainly passing the costs onto their constituents.

In the longer term, the inflated money supply causes price inflation.  However, despite this, Bitcoin is currently in an inflationary period (until all 21 million are mined) and there is actually price deflation overall (ignoring the ups and downs due to the current volatility).  I believe that this is because in the much longer run there is a known, finite amount of Bitcoin.  Basically, despite the current fluctuating quantity of Bitcoin, there is long term stability, which, from my understanding, is the ideal state for any currency.

While I believe this is a good thing, since I view inflation (and the following price inflation) as tantamount to theft, the downside is the risk of coin loss.  I am not concerned with an individual's loss of currency, but the loss to the system as a whole and over time.  This problem is made more dangerous, in the Bitcoin case, by the current concentration of coins in the hands of the few.  I will pause here to indicate that I believe any allocation of wealth to be just and take no issue with someone or group of someones amassing any degree of wealth, so long as they do so by honest means.

All of this being said, I wonder if a currency where the supply is constantly increasing, to replace lost or inaccessible currency, but at a defined and unchanging rate.  While this still would likely amount to overall inflation, the inflation would be totally predictable and controlled (the purported holy grail of modern central banking), thereby allowing people to predict and account for any price inflation that might follow.

To sum up, my basic argument is this

1) The best possible state for a currency is one of stability
2) Units of currency are lost or made inaccessible

Therefore;

Controlled and steady inflation is better than a static money supply.

Any further thoughts?