Topic: The current Bitcoin economic model doesn't work - page 17. (Read 96541 times)

But if you buy bitcoins today for $7 and sell them after three years for $100,000 isn't that enough reward for you? Sure, the value of a bitcoin after 3 years may still be $7 or even zero, but there is a also a chance that it really reaches to extremely high values.

Hey, I'm a software engineer who after seeing all the constant posts on Slashdot about bitcoins, decided to come see what all the fuss was about. After reading the FAQ, I immediately wanted to come and make a post containing the exact points that "Suggester" has made.

I would totally be excited to get involved in both mining and using BTC as currency if it weren't for the flaws he's outlined. I won't restate every point he made in his original post, but my own thoughts are as follows.

BTC will work fine once it gets enough people using it and accepting its worth (maybe a few slight modifications are needed), but the biggest problem is reaching that many users of BTC. As a potential user who is "late to the game" I see a system that hugely favors the early adopters--it just doesn't come off as "fair", and as such, I'm not too anxious to get involved. Why should the early adopters be rewarded with incredible wealth while I get a pittance?

Anyway, I'm not an expert economist, but I'm guessing my thoughts after reading and understanding how the bitcoin system works are going to mirror those of countless others who stumble upon BTC this late in the game and then investigate how it works. If you want the currency to succeed, you need to attract myriad people, and the only way I see that you're going to do that is to avoid coming off as a "ponzi" scheme, which, even if BTC isn't, it certainly comes off as one at first glance (huge rewards for early adopters, little to no incentive to adopt as time passes).

edit: I know the retort is going to be, "Bitcoin isn't about mining, it's about having a stable currency for exchange." And to that I say, "I agree!" Which is why you need to remove the huge incentive that early adopters get. With that gone, I wouldn't even want to mine, I would just want to immediately get involved in utilizing the currency for its intended purpose.

It isn't so much that the system is flawed, but that from a psychological perspective, people have a real problem getting involved in a currency system that looks like a ponzi scheme--my gut reaction is to reject a system that provides substantial wealth to early adopters, while providing significantly less incentive for new adopters to get on board.

Clearly suggester doesn't know what "Time Preference" is. Goods now are worth more than the same amount of goods later. Everybody has different amounts of time preference, so we don't know exactly how much of an increase in goods later is worth the goods attainable now. Just know that if you increase the amount of goods now, you'll have to increase the goods later proportionally. Risk also plays a part in this, since it's not "known" whether or not that proportional increase will be reached.

"Only an idiot would spend bit coins now if he knew that the price would double"

Except you know, if she has want's and needs such things as food or entertainment. It's called having a high time preference. People want to consume goods and are willing to spend their coins for it at some price (amount of goods). The lower the price, the higher the time preference. Also, why would you ever be able to buy bitcoins? Clearly some people want to trade bitcoins even at $7. But no, those people are idiots.

Suggester also doesn't understand what marginal utility is. The more of something you have, the less valuable each extra individual unit is to you. e.g. I have 1000 gallons of water. The first 100 gallons I use to drink, the second 100 gallons I use to bathe. If I only had 100 gallons, I would forgo bathing, and continue to drink. Therefore the first 100 gallons > second 100 gallons. The same applies to bitcoins. I'm more willing to spend 100 bitcoins if I have 1000, than I would be if I had 500 bitcoins because that 100 bitcoins is worth more to me. So hoarding and increasing your stockpile doesn't make sense into infinity because as you increase the amount you have, the less utility you are acquiring.

Also, the higher the value, the more you can buy with it, and the more you can buy with it, the more incentive you have to spend it. Yes, some people have really low time preference, and so they save their bitcoins. But everybody has a price. At some price, they will spend their bitcoins, thus increasing their availability and lowering the amount people are willing to pay for coins certis paribus . Supply/Demand.

Quit thinking that your grand ideas are what will save bitcoin. They won't. People calculating their own value and actions is VASTLY superior to your ability to predict markets and manipulate software to change the rules of this game in the middle of it. Stability is important, not the particular % of growth in the money supply.

Snip.  It goes on and on and on like this for a while.

Dude, pretty much every one of your points is founded on the wildly incorrect premise that some other currency is fixed and stable in some way.  No currency in use today has this "anchor" that you seem to think is so important.

And thus, of course, you also sincerely hope no one will actually listen to what you advocate here and act on it?

/thread

Not before I sell my coins as 1 BTC reaches $100! I sincerely hope the system won't collapse before then.

Suggester: I suggest you start your own chain, SuggesterCoin, and given it's overall superiority to the current bitcoin blockchain yours will surpass bitcoin usage very soon. Cheers.

That's even worse. Now we won't even be tied to the electricity anchor at all. The price will be ridiculously volatile with no limits whatsoever. It will be a speculator's heaven and a spender's nightmare.

Not quite. Transaction fees are not a reliable estimate for the coin's price because they cost nothing. Does it cost you anything to fire up Bitcoin.exe and join the network? No? Me neither.

Miners will never lose. If they did, they'll simply stop mining until it becomes profitable again. It's a fact of economics that mining is and will continue to be profitable for the foreseeable future (including expectations of price increase). I'm explicitly complaining from the "increased BTC value" part because it's simply perpetual deflation!

Rly? And what will determine the price of those coins? "Supply and demand" I hear you say? That's exactly where the catastrophe begins. Here we are, having a wild currency with no anchor with a daily (or an hourly, even) new price determined solely by supply and demand instead of by the stable cost of electricity.

There is a very strong relation. Had the system been tamed from the start by a supply-fits-demand model, none of this crazy speculation would've been taking place. The amount of generated coins would then suit the number of generating nodes and everyone would be happy spending their predictable coins with no hoarders or investors ruining everything. Hell, I've got a nice sum of coins which I generated during the cheap times last year and you know what? I'm not spending them till I absolutely need to or till it seems the system is about to collapse. The thing is getting more precious by the month! You think I'm the only weird person thinking that way?

Oh, they might as well donate it to Santa Claus.

What a great way to promote bitcoin. "Save till it bursts, spend, then save again!" Imagine if the Euro acted this way when it was rolled out. You're not taking this seriously.

I just gave you one.

That's included in the proposed model. The hashing will maintain the difficulty so that only 144 daily blocks are produced anyway. The difference will be in the amount of coins those blocks have.

No. If the rate is predetermined we'd fall into the same problems. We want a flexible rate changing with the user base.

According to that logic, we might as well stop updating the code no matter how grave mistakes we discover in it.

That'll never happen. It will only get worse as producing becomes harder and the economy relies on the coins-in-circulation to determine the price via sheer supply and demand with no stable anchor like electricity.

And by being in beta, there's room for improvement.

Bitcoin should model itself after silver, not gold.

The biggest problem I have with inflationary money is the fact that there's virtually no collective education about how it works and the guys in charge are basically an oligarchy.

Like silver, bitcoin should have a natural inflation.  Say 1% per year.  That way, it keeps its status as a store of value while weakening the delusional "one day, one BTC will equal one million dollars." I'm in it for anonymous cash.  The true definition of cash.  This store of value stuff seems to be like creatine effects-- fake muscle, real water retention.  

Spoke with an old, accomplished(meaning that he did well and then did time) financial con artist about bitcoin…  He swears that the "trading programs" of the eighties and nineties were started by the phone companies so people would run up long distance bills.  While noting his lack of knowledge in computers, he fingered electric companies and possibly hardware manufacturers at the culprits here.  :-)

I have more than a drop of knowledge about computers…

How many people are going to use four PCI-e x 16 slots and the remaining PCI-e x 1 slots to run one program on the linux CLI 24/7 without a belief in financial reward down the road?

I am fascinated by bitcoin.  I want to rip power out of the hands of central bankers through decentralized money.  That is the allure of this project.

No matter how great a currency is, it needs circulation.  Without circulation, you will get swelling and then death.

I think some people might be confusing and natural tan with pooling blood.

I'm sorry Suggester, but your analysis is very wrong.

Myth. The exchange value will be determined by the people willing to buy and sell bitcoins, and mostly affected by the volume of commerce done in bitcoins.
In the future, mining rewards will be almost solely transaction fees, which I assume will be about 0.1%. So I think it's safe to say miners will be about 0.1% of the economy. In that capacity, their decisions to hoard, use or sell bitcoins will affect the market, but they're only 0.1% of it.

You're forgetting that eventually mining rewards will consist in transaction fees. Until that point, halving will create a combination of decreased difficulty, increased BTC value, and decreased profitability for miners (which they'll have to consider in their business plans in advance).

He can ask whatever he wants, he can't force anyone to buy at that price. There will be other coins circulating, and all miners combined will be a small part of the economy.

There is nothing certain about it, bitcoins are a high-risk investment and will be in the foreseeable future. And again, halving will only have a small effect on the bitcoin value.
Anyway, a combination of growth and speculation allowed the bitcoin value to increase tenfold in a month without any relation to halving.

People will hoard some of their bitcoins, but most of them will know that their investment gains value by people using it and will be happy to use it themselves.
This will self-balance to some degree. If nobody uses bitcoins, any speculative bubble will burst, making people less tight-fisted about spending bitcoins, restoring some level of commerce.

This is nothing like either a pyramid or a ponzi.

Your premise has been debunked, so most of the rest is pretty moot.

Given advances in hardware and software, and the development of special-purpose mining hardware, it will be very difficult to find an objective system that will make the cost of creating BTC constant. Also, once in a while the hashing algorithms used will be changed which will completely shuffle the cards.

I'm not against this per se. A system where the currency continues to be generated at a predetermined rate can work. But people signed up to Bitcoin on the understanding that 21M is the limit, so this must be a separate currency.


All that said, I agree that it seems that currently bitcoins gain their value more by speculation than by use. This is unfortunate, but is part of the growing pains and should stabilize to some degree in the future. "Stability" here means - the purchasing power will not fluctuate too much, but will still increase due the spread of Bitcoin at first, and due to the growth of the economy later.

I believe there can be stability but this project is still in it's infancy. It seems like everyone wants it to be perfect immediately. Allow it some growing pains and go along for the ride. If you truly want it to succeed as a currency. I mean the program is still in beta at this point.

+1

Quote: "I don't understand how people expect BTC to have a stable price if the market for their use keeps expanding."

Okay lets take an extreme example to illustrate a point by using exaggerated figures.

If only a few trillion dollars worth of bitcoins exist by, say, the end of the Mayan calendar in december 2012, then, yes, a few trillion more dollars choosing to enter the market could still cause quite a jump in price.

But if many trillions of dollars are in bitcoin form by that time, then a paltry few trillion entering ought only cause the price to rise by a small percentage.

Get the drift? (Stability increasing as sheer value of the whole shebang increases compared to potential "outside" influencers.)

-MarkM-

The inelastic supply of bitcoins is why it has 'market cap' of $40M and your idea isn't valued. Bitcoin can hold value, your system can't. Don't believe me, just do it. Maybe you are right and I'll eat my internet hat.

Looks like you want to vote "Yes" to the poll above then! With enough people expressing their concern, perhaps we can convince Gavin Andresen and the other developers to update the system.


There's no market cap in the suggested model. The price will stabilize around the electricity costs as explained in the first post. If it's higher, more generators will join the network until it stabilizes. If it is lower, less generators would be encouraged to produce until the price matches it again. A typical supply-demand scenario. There will be no major BTC price shifts unless worldwide electricity prices significantly change.

Ok, I read the original post briefly. I will take a closer look at.

I don't understand how people expect BTC to have a stable price if the market for their use keeps expanding. What market cap would you expect to go by and how much per BTC would be appropriate. The only way it would stabilize is if the BTC Economy grows at the same exact rate as coins are produced

Anders, please refer to the first post in the thread to read the current suggestion. What you just quoted are the removed obsolete paragraphs. They're only posted for historical context.

That sounds good. I'm new to Bitcoin and the concept of this kind of digital currencies so I don't know if your proposal is possible or not, but yes the incentive to hoard bitcoins will make the system more clogged up I think. Adding or removing zeroes however sounds burdensome. It would be nice if the currency would remain very stable, so for example if a Big Mac costs 3 bitcoins today, a Big Mac year 2111 would also cost 3 bitcoins (of cource, there will likely be nanotech matter compilers by then that can materialize Big Macs out of the vacuum energy for free, but anyway :-).