Topic: Inflation and Deflation of Price and Money Supply - page 68. (Read 1455140 times)

Sorry for the lack of specifics there! My point is:

Price inflation is not only derived from the market price of whatever it is you're exchanging a currency for, but it is also derived from the value of the currency 'itself', meaning the rate of monetary inflation along with supply and demand of that currency.

In other words, prices of good/services (price inflation/deflation) are reflective of the exchange rate due to FX trading and the Bitcoin generation rate due to mining (monetary inflation).

So, 'something' worth BTC1 can 'deflate' in price to BTC0.5 if any or all of these market forces apply to it:

1. The currency exchange rate of whatever that 'something' is usually traded in doubles (BTC/USD increases from $1 to $2 per BTC)
2. That 'something' becomes cheaper to make (greater supply) or needs to stay competitive in price (weaker demand)

Keeping in mind that the currency exchange rate or PRICE of Bitcoin (force 1), is determined by the value of the currency, which is the SUPPLY and DEMAND and so on and so forth as explained in the OP...

Price inflation would be the opposite.

Let me know if that makes more sense lol

I'm not sure if it's just me but I had a hard time understanding the underlined. Is that redundant? from itself and other currencies?

Anyways, with the ASICs coming out soon, what do you think the value of bitcoin will do for the the first couple of months? I feel like it will start to drop rather rapidly as people are trying to get their hands on more USD to compensate for their expenses. Then they would start to keep the BTC and the difficulty would rise so it would go back up?

thanks man

As mentioned in the original post, a large part of Bitcoin's positive value (which increases the exchange rate of BTC) is the DEMAND for Bitcoin, via the physical manifestation of that ideological value through trade (in this case, BUYING BTC). However, this is not the end of the story, and you bring up this great philosophical question which I am delighted to dive into! So now we must travel deeper into this rabbit hole, as we ask, what creates this demand!? Why do people find Bitcoin valuable enough to trade anything for it?!

Here is my response to this question in a related discussion at What is bitcoin backed by? My favorite answers


Therefore, we can certainly add to our list that "Mining increases the value of each BTC because it reinforces 'the way BTC works'" and its "secure storage of value coupled with convenient exchange of value."  Personally, I agree with you on both accounts and believe those to be some of the more important and valuable aspects of Bitcoin.

As for the comment regarding Market Capitalization: after this post, I think you have a better understanding of where I was coming from when I posted it, so certainly not arguing with you there!  

I am actually working on creating an inflation-adjusted BTC/USD chart at the moment, just to have a solid visual of that here. Though, honestly, you could just look at a Bitcoin chart priced in gold and you would have another somewhat-similar visual. Like the Market Cap chart, this is just another representation of Bitcoin's value, yes, but I do think they are important when attempting to predict market trends, as you know.

A chart of that can be found at a fellow Bitcoin users blog: http://pricedingold.com/



It's a cool blog. He charts pretty much everything in terms of gold. Lots of great data!!

Pulling in some quotes that got the discussion started (each has a link to the original):

thoughtfan, we're both talking about supply and demand.

I ascribe the increase in demand to both exchanges and mining.

If mining 25 BTC was solely an increase in supply, the value of BTC would go down. (This is what I understood your argument to be.)

I feel that mining increases the value of each BTC because it reinforces "the way BTC works":

There will come a point when mining isn't profitable and the network could be vulnerable to attack. At that point, we should have this discussion again. Right now, miners get paid to invest in BTC: they're investing hardware, time, and electricity but the effect is still an increase in the demand for BTC. Right now, mining resembles interest payments: leave your resources in the BTC network and you get rewarded, doubly so when BTC appreciates against other currencies.

notme pointed out that mining must be strong enough to convincingly guarantee against attack.

I'm taking it one step further and saying that (for the time being) mining is a lower-risk way to get BTC, exchanging hardware, time, and electricity for BTC. The reward for mining has been high enough that more effort is spent mining than speculating.

Specifically a miner must put their money in hardware, the risk being that the hardware will lose some or all of its value before the miner stops mining. A miner must also take the time to set up, troubleshoot, and maintain their mining equipment, losing the opportunity cost of their time. I hope this explanation makes sense: the miner is investing – operating equipment instead of exchanging USD (or some other currency) for BTC.

Miners want BTC, so they make the investment to get it. Some miners may be solely looking to dump their BTC back into fiat for a (fiat) profit, but that seems to be the exception, not the rule. This is not just because of the trending value of BTC, or the network hash rate would be more closely correlated to the value of BTC. If BTC crashed low enough things might change, but at present miners do it for the BTC.

That's how I think mining increases BTC's value – "the way BTC works for the time being."

- - -

I believe mining is lower risk than exchanging because the rewards are predictable. It's still possible to be stupid and do something like CPU mining, which gets you practically 0 reward and costs you a lot in terms of electricity etc. But assuming miners are rational and capable of evaluating the cost/benefit, and assuming the ASIC vendors get their act together so that supply and demand for ASIC mining hardware evens out, then mining is lower risk because of the fixed startup costs and predictable exponentially decreasing returns. It's possible to lose money on mining, but the variables (difficulty, block reward, network hash rate, mining pool fees, PPS vs PPLNS vs DGM vs POT etc.) are all in the open. The variables that affect you when you speculate on the exchanges are mostly hidden.

The ASIC vendors right now are creating huge pent-up demand which may even be pushing the price of BTC up as some sort of bubble. Ordinarily a rational actor would see this much demand and respond by cashing in on it and selling ASICs until the demand drops back down. Apparently, successfully shipping an ASIC is so hard that there's a sort of speed bump happening right now.

Finally, back to the original discussion, market cap may be an indicator which we can study to understand supply and demand. However, it is not a primary cause of supply and demand or BTC value. If market cap measured in USD was a primary cause of BTC value, then we should all view BTC as a bank to temporarily deposit USD and maybe collect some interest (making BTC a ponzi scheme).

The appeal of having some BTC is not at all the market cap measured in USD. Without speaking for everyone, I believe BTC's appeal and inherent value is secure storage of value coupled with convenient exchange of value. Looking at the market cap is still informative though.

The value of a USD $1 will decrease because USD suffers continuous inflation. The value of 1 BTC will increase for the time being because demand for BTC is increasing faster than supply. And after most of the BTC have been mined, the value of 1 BTC will increase because of the deflationary nature of BTC. But we should definitely have this discussion again at that point, to see what it means for the miners.

http://dictionary.reference.com/browse/inflation?s=t

noun
1.
Economics . a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency ( opposed to deflation ).
2.
the act of inflating.
3.
the state of being inflated.


Dictionary.com does a pretty good job of defining what inflation actually means, I should point out that I suspect a lot of people are following what they learned in school history which is a form of neo-keynesian economics which I of course think is a load of bullshit, people who believe in the neo-keynesian field are often guilty of outright making up words and ignoring mathematics to try and confuse people, look at words like Quantitative Easing as an example.

Be suspicious of everything, question everything.

An excellent post that I'll sticky so people can learn from.

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer

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Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.

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Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.

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What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading!