Topic: The current Bitcoin economic model doesn't work - page 23. (Read 96539 times)

My exchange rate will not keep rising forever. If new users can't generate a single block within a few weeks or months, what do you think the likelihood is that they will continue running their CPU at 100% all day everyday? The amount of computers generating bitcoins will grow rapidly only while generating bitcoins is not discouraging. Once it becomes discouraging, we'll sometimes have growth from new users, but we'll also sometimes have decline as users stop generating bitcoins. Watch and be amazed!

The answer should always be "it's exactly the same". Any slight imbalance will be quickly corrected.

Geez. It's the same guys. In a free market economy, value and cost ARE THE SAME THING.

There will never be a trade intermediary or transactions for a 19% annual-yield investment.

That doesn't make sense. What I'm saying is that people aren't stupid. They will figure that since bitcoin will never be spendable, they won't join the network except to "hit and run" a quick profit.

Banks? In an anonymity-based system where you can change your identity with a click of a button? I don't think so.

The luckiest coin will be spent by two or three "spenders" at most before finding itself locked on the harddisk of an investor who'll keep it forever. The result? Supply dwindles even more, prices shoot up, and everybody keep their coins intact and watch NewLibertyStandard's graph as it climbs outside the chart while rubbing their hands in anticipation until the big crash.

How does this solve the problem? Too many are saving, prices go down, which leads to even more people saving because they think the prices will go down ever lower and their coins will be worth more later. By saving here we mean "hoarding", not saving as in investing like your typical bank.


Why am I not surprised? e.e

While that is true, you forgot that Bitcoin's expected increase in value (if the project succeeds) is perpetual. It will grow at 19% (or more due to lost coins) forever. How can you incorporate that in its price? If it was estimated today that 1 BTC = $1, 4 years from now it will equal $2. How can you put that in price? Ok, let's make it worth $2 today then. Oh but wait, that makes it equals $4 in 4 years. Hmm, shall we make it equal $16 today then? etc

Exactly. There would never be much difference (if any).

That assumes that the price was above the cost of generating to begin with! We just agreed that they'll virtually move hand-in-hand.

As long as production is possible, which it will always be (if not to the average Joe, then to investors or hackers with botnets), then production cost and market price must conform as you just explained. Moreover, if demand on BTC is more than supply, which will be the case if the coin succeeds, we will be faced with a perpetual shortage leading to perpetual price increasing.

It is because of NewLibertyStandard's graph. People were also estimating the same for tech-bubbles as they watched their graphs before the market crashed. If this model isn't corrected to reflect a somewhat-constant (or decreasing) value on the long term, nobody will be willing to spend their coins, ever. Sooner or later they will be hoarded by investors (if they believed in BTC's future) who'll sit and wait for their 19% annual interest.

Excellent analysis, xc.

A rational market price for something that is expected to increase in value will already reflect the present value of the expected future increases.  In your head, you do a probability estimate balancing the odds that it keeps increasing.

In the absence of a market to establish the price, NewLibertyStandard's estimate based on production cost is a good guess and a helpful service (thanks).  The price of any commodity tends to gravitate toward the production cost.  If the price is below cost, then production slows down.  If the price is above cost, profit can be made by generating and selling more.  At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price.

In later years, when new coin generation is a small percentage of the existing supply, market price will dictate the cost of production more than the other way around.

At the moment, generation effort is rapidly increasing, suggesting people are estimating the present value to be higher than the current cost of production.

Nothing to sweat people.  Nobody ever died of a 'deflationary spiral.'    I agree with "I-am-not-anonymous."  The market will choose the best bitcoin-like currency.  I happen to believe, however, that the rules that Satoshi has founded bitcoin on will be more than adequate for the future of a thriving bitcoin economy.  

Everybody knows exactly how fast the supply of bitcoins will grow: it's set in stone in the rules of the programming and the bitcoin network.  While it's true that there is not a currently existing fully-fleshed out market to truly price bitcoins, such markets and exchanges are being developed.  As far as future would-be bitcoin generators are concerned, the question is not how much will he "demand....to compensate for his costs."  The question he'll be asking himself is "given current market values and my ability to utilize electricity and CPU resources, is it worth it for me to generate bitcoins?"  If the answer is yes, he participates.  If it's no, he stops trying to mine for bitcoins and focuses on trading tangible assets with bitcoins serving as an appropriate intermediary.  If he's not sure, he tries his hand at it for a while and then makes a final decision.

The number of nodes and associated computational cpu power will be in flux, and that competitive flux will allow for costs to approximate value (not the other way around.)  Value being set by the markets and the demand for use of bitcoin as a trade intermediary (a money).  In the far future, the competition of transaction costs will play a more important role for the would-be node operator.

Contrary to the paradox of thrift argument you present, collecting bitcoins and saving them with hopes of earning purchasing power through deflation is not a bad thing.  It will allow for the pooling of bitcoin capital and make purchases of larger capital investments possible.  In the future, there might even be bitcoin banks that lend out saved bitcoins with market-set interest rates, thereby diminishing the effects of hoarding.  All this wonderful saving, however, comes at a price: delayed gratification of present desires.  From the perspective of the would-be saver, the question will always be denying present desires to purchase real tangible assets now versus the future possibilities of purchasing more later.  This time preference naturally varies with people and in different circumstances.

Given the fact that bitcoins are by their electronic nature easily divisible, prices will be able to easily adjust to deflationary pressures.  If too many are saving, prices will fall and the rate of interest will go down.  This encourages demand (lower prices) and decreases the desire to save (less interest).

XC

I will always have dollars and bitcoins available to inject into my exchange service. I may run out today, but there will always be more available tomorrow. It's all detailed on my exchange rate page.

Fine. But regardless of whether someone answers the numerous doubts you've raised in here, I (and anyone with advanced economics background) will believe Bitcoin's current model has a promising future.

OMG. The moment you do that you'll run out of coins immediately because buying them from you would cost only half as much as generating them!

Fine. But until someone answers the numerous doubts I've raised in here, I (and anyone with basic economics background) won't believe Bitcoin's current model has a promising future.

But I already explained why that was irrelevant. Oh well... nevermind.

I use a formula to calculate my exchange rate which is described on my exchange rate page. When I generate my first block of ฿25 rather than ฿50, I can simply change my formula to multiply bitcoins generated by two which will turn that ฿25 into ฿50 within my formula. Bitcoins are worth how much I say they are worth. If tomorrow I say they're all worth half as much as today then it would be so. Go ahead and create your own exchange service using your own formula to value bitcoins and you can have just as much control over the worth of bitcoins.

I absolutely disagree that the current model is unsustainable and I absolutely disagree that people will not spend their bitcoins. If I had my druthers, the amount of bitcoins awarded would grow at the same rate as worldwide human population growth, but it doesn't matter because druthers are just druthers and they ain't important at all.

That's not a problem for Bitcoin or its users. If those CPU cycles aren't used to steal electricity for bitcoin, they'd be used to steal electricity to DDoS some site or brute-force some account. We shouldn't worry about them. As I said, they're just as if those users voluntarily joined the network for all practical purposes.

"Human population" is totally irrelevant. Even if human population was shrinking by, say 1% annually now, I assure you that Internet users population will be increasing and bitcoin users will be increasing at an even higher rate. "Bitcoin users" is the magic word here. With the suggested variable model, we're always sure that new coin generation matches the expanding (or shrinking) user base. But anyway, I see that you're beginning to side with me that the 4-year-doubling isn't a good idea.

Man, if you paid $1,000 for an ounce of gold, then a few months later it was worth $2,000, are you going to sell it for $1,000?! No? Good. Because the early adopter will not treat his coins as if they're worth the pennies he paid for them anymore now that they're worth a ton of electricity. He'd treat them for what they're worth today.

My answer is simple: Assuming people approve the current Bitcoin's model, it will turn out to be the #1 worldwide investment: Just buy (or hack) a bunch of PCs, let them run, and you'll be earning at least 19% annually with no risk involved! Investors (and indeed, botnets) won't leave a chance for normal folks like you and me to earn any BTCs much less spend them. Any bitcoin will be spent 2-3 times at most before falling into the hands (well, "the computers" is the better term here) of an investor who'll keep it for a very long time or forever. This model has to change or it will destroy the otherwise excellent idea. Making bitcoin a way to INVEST rather than to SPEND is its one-way ticket to failure. You also forgot that bitcoins will leave the stream all the time (eg. computer failures or accidental deletion), which will add to their deflating. Might as well turn this 19% into 20% or something.

Even if we assume that Bitcoin's current users will never increase (thus not making it more difficult to generate coins), we're sure that its value will increase by at least 19% annually because of the expected 4-year-old D-day when which all BTCs price magically doubles because it will cost double to generate them.

Can you explain that part? I didn't understand how multiplying by two will achieve stability.

PS. It might be a good idea to merge your previous double-posts in one via Edit to make reading easier for us and those following us. The world is watching (or some three-letter-agencies anyway )

If we assume that dinars can't be used for any other non-monetary purposes (such as jewelry, paperweights, etc), then it's practically very difficult for them to have a demand curve by themselves. Camels can be used to ride, so their gold price fluctuated (i.e. They become more or less popular with time). Bitcoin can only be used as money, so it's used solely to value things not vice versa.

If raising a camel costed more than 50 dinars, you can count on people stopping raising camels until the price goes back up due to supply shortage. With the absolutely arbitray 4-year model, this can never happen. Supply will ALWAYS decrease no matter what. I'm asking for a more flexible method which depends on the actual number of users.

If I wasn't, I wouldn't be here crying my lungs out to correct the model for a one which will work!

I know practically nothing about programming or coding. I'm interested in economics (as you might have guessed ) and was trying to offer a bit of advice to the geeks who do the coding.

In school, they taught us (i.e. me) that a good's value price is based solely on what people can exchange it for.  They also taught us that a good's value was not determined by how much labor went into the good.

We were essentially told that if one camel is worth 50 gold dinars, then 50 gold dinars is also worth one camel.  Or something to that effect.

If this is the case, then the cost of producing bitcoins would only a be a factor in, not a determinant of, their value.

Did I understand the lesson correctly?

_______________________________________________________________________________ ______________________________
On the general topic of whether bit-coin will/will not be successful--I don't really know.  I act as though I am a "bitcoin defender" but this is mostly because I am excited about the new currency and want to support it, not because I know enough about economics to predict it's eventual usefulness.  

I would very much like to see people who dislike bitcoin's design organize and code alternative currencies that inflate according to a monetary rule, or have the built in safeguards you described.  That way, the market will eventually choose the best currency as people move towards the good ones and away from the bad.  

I am not sure if bitcoin's creators will be convinced to implement the changes you recommend--but i think you are very likely to find people who agree with your plan for a better encrypted digital currency and will help you modify or re-write bitcoin's source to make it happen.

My exchange rate will only increase as Bitcoin becomes more popular. There are practical limits to the popularity of Bitcoin. Sure, potentially it could be run on every functional computer around the world, but from practical perspective, that will never happen. The swarm is currently pretty small, so when a few new users join, there is a large effect on my exchange rate and it increases fairly quickly. As the rate of growth slows or reverses and as my exchange rate average increases over the next two years, the exchange rate will steady out with only very small increases AND decreases every day. As for the impending doom and gloom you're prophesying will accompany the decreased payout in a few years, all I have to do is add a little multiply by two to my exchange rate calculation and the problem is solved. The exchange rate stays constant and everyone is happy. In any case, hopefully by then there will be other ways of calculating the value of a bitcoin other than my single solitary exchange service.

The problem with botnets is that their operators are stealing electricity, bandwidth and access to RAM, hard drive space and CPU time. Everyone else is paying for those resources out of their own pockets.

The order of my preferences for how I would like bitcoin to work is first, for the amount of bitcoins awarded to stay constant as I previously described, second, for the amount of bitcoins awarded to increase at a constant rate, third, for the amount of bitcoins awarded to decrease at a constant rate, last and least, for the amount of bitcoins awarded to increase at a variable rate. If botnets did not exist than the variable option would be at the top of my list instead of the bottom.

EDIT: My new highest preference for how I would like bitcoin to work is for the amount of bitcoins awarded to increase at the same rate as worldwide human population growth.

If the TV buyer is an early adopter and the TV seller is a latecomer, then the TV buyer already has many bitcoins and it would cost the TV seller more dollars worth of electricity than the price of the TV to generate 1 bitcoin. I do not agree that it will be hard to get people to spend their bitcoins. People do value potential future increases, but they also value having an item now. Why would someone borrow money on a credit card with a 19% interest rate instead of keeping their money in their savings account? They do it because they value having the TV now more than the potential losses over time. Life is short. You're welcome to save all your high returning money until the day you die, but the rest of us are going to make use of it before it's no use to us.

9000% of the now-cheaper-coin because so much of it is available after they joined. It all balances out in the end, and in both cases they have an incentive to join the network. Actually, under the current model they have even more incentive because the coin can never get cheaper!

To be honest, I don't see what more harm a botnet can make if we changed to the suggested model. Economically, it would be just like 1,000 honest members joined the network. This can even help the project with some free advertising on security blogs

How about a middle solution then? For example, the default difficulty be adjusted to about 1 block/CPU/day (assuming an average 2.4 GHz processor), but in case more than X blocks/day was being created (X = the maximum # of daily blocks afterwhich there is no enough time for propagation across the network), then difficulty gets automatically adjusted. Practically, it would end up being like my second-best and your best model. In other words, very close to the current situation except that we assume the current 4-years-period is extended to forever. So let's at least agree that the removal of the 4-year thing and the 21M limit is essential to avoid an ever-deflating currency.

You only switched the problem to another user then: The TV seller! He would also keep this coin until he has 10,000 coins. The point is that it's very hard (albeit not impossible) to convince people to spend or transfer a coin they are pretty sure will be 19% more valuable within a year. Moreover, economic-savvy folks might as well choose not to join the network if they predict this will happen, or join it with the intent of "hitting-and-running" a quick profit before the system's failure becomes imminent, and they will be right.

He was referring to the price of goods decreasing as value of a bitcoin increases. Eventually the value of bitcoins will go high enough and the price of the goods will go low enough that the person will feel rich enough to spend his bitcoins. To take it to an extreme, if a person has ten thousand bitcoins and can buy the TV of his dreams for one bitcoin, the value of having the TV now is greater than the future potential increased value of the one 10,000th of his total bitcoins.

I stand by my statement that the current economic model is not wrong. You might dislike it and I might not prefer it, but other people do prefer it. Our perspective is no more valid than theirs. But that's not to say that I wouldn't use a bitcoin variant if it more closely resembled the description I offered.

I'm just stating the facts, sir.

Currently a botnet could generate 99.9% of bitcoins per day, but if bitcoin generation payout was variable, they could generate over 9000% of how many bitcoins are generated per day without them. Botnet operators value their CPU cycles, so being able to generate over 9000% until they have as many as they currently want and then being able to stop and use their CPU cycles for other purposes is much more advantageous than having to use their spare CPU cycles to only generate a capped amount per day.

The number of blocks generated per day can not be easily increased or decreased because there has to be enough time to propagate the blocks to all other nodes while still being frequent enough to allow timely transactions. What can vary is the amount of bitcoins per block. The amount of bitcoins awarded per block can either increase, decrease or stay constant over time. If every person had an equal amount of CPU cycles at his disposal, I would prefer for the amount of bitcoins awarded per generated block to increase proportionally to the amount of CPU used to generate bitcoins. As it is, I'm in favor of the amount staying constant over time.

No. Gold was synonymous to "money". Things were valued for how much gold they were worth, not vice versa. We should think of bitcoin today as a new unestablished currency in a world of established alternatives (eg. the Euro 10 years ago). Additionally, if we assume that it became impossible to mine virtually anymore gold today, and we further assume that the demand for gold was perpetually on the rise (for example because women were increasingly using it for jewelery), then yes, it will result in a perpetual deflation for its value and nobody would be willing to sell their gold except for emergencies. Under these conditions, using gold as a means of payment is a sure way for starting a depression!

Old and true

What has gold standard got with increasing the value of BTCs over time? Gold was ALREADY a medium of exchange when the gold standard was applied. I can imagine that the very first time some human discovered the first gold mine, everybody in their area thought it looked cool and started using it as a medium of exchange. People have been mining gold for thousands of years and we haven't still run out of it. BTCs will essentially stop its generation within 15 years.

They won't buy tomorrow when the price is lower because it will never be lower as we approach the "next four years limit".

Computers are totally different because you can't sell them 4 years from now for double what they're worth today. Had this been the case, nobody would ever sell a computer unless he's starving. Heck, just look at NewLibertyStandard's graph. It will keep shooting up as long as this 4-year model continues.

If the value is more than my printing costs, I'll be busy printing like there's no tomorrow until the price equals my cost (remember that I'm acting like a selfish unorganized person, not an entity or a country, just like most of Bitcoin users will be). If the value is less than my printing costs, me or anyone who wishes to acquire that currency will buy it from others instead of creating it, raising the price of coins already in circulation and dropping the competition and cost of creating new ones (and in bitcoin's case that means network and proof-of-work failure). So you see, in our coin's case, its market value must equal electricity & computer cost. Not more or less. And in any perfectly free market you'll find a similar situation: price = cost.

You said it: Supply & demand. What will happen if BTC got successful is that demand will increase while supply dwindles. At some point (after about 15 years) there will be more and more people demanding coins while almost none is generated. This will result in the price increasing until every human on the planet who will potentially use bitcoin has already joined its market (assuming the 4-year doubling thing was removed). And you know what? Maybe that happened to gold in the beginning of its discovery, until almost all people on the planet had gold available to them if they had a reasonable equivalent (e.g. In Arabia, more than a thousand years ago, you could have sold a camel at a time for about 70 gold dinars, and a rabbit for tenth of a gold dinar. Not too difficult to make).

Pyramid Schemes is an absolutely "wrong" economic model!

Who said it should be beneficial to early adopters? I mean, that's cool because I happen to be one, but if it undermines the model's sustainability then it shouldn't stay.

Uh huh, but botnets can't start generating now and collecting 90%+ of newly created blocks? Botnets/supercomputers will always be a problem in any model. But with a limited supply such as 6 blocks/hour, almost nobody can compete with them (can you wait 2 months for a coin to appear?). While if the supply is unlimited, at least we'll end up getting something, and hopefully trading it for a price close to what you've paid for it.

That's what I've been advocating as the second-best solution. But we'll need to increase the # of daily blocks to give enough incentives though as I explained in the initial post.

There isn't a right and wrong economic model. Every model adjusts to supply and demand, they just adjust in different ways.

The current model is beneficial to early adopters in three different ways. First, early adopters generate more bitcoins while there is less competition at the beginning. Second, the availability of bitcoins decreases, which cements their position of wealth. Last, the early adopters have the potential to get rich off the latecomers once generating blocks becomes extremely difficult. Latecomers will have to inject dollars or something else of worth in order to get access to bitcoins and the wealth will go disproportionately to the early adopters.

The idea of the swarm increasing the amount of bitcoins awarded as processing power increases is interesting, but I think it would give too much advantage to botnets. With a constant amount of bitcoins being generated, they can only collect a days worth of bitcoins per day, but if the number of bitcoins was variable, they could swoop in and generate a thousand years worth of bitcoins in a few weeks.

In my ideal model, the same amount of blocks would be generated per day, but 100 bitcoins with no decimal would be awarded for generating a block instead of 50.00 and the amount of bitcoins awarded per block would stay the same forever instead of halving every four years. This would give one advantage to the early adopters who would be able to generate bitcoins more easily while there is less competition at the beginning and it would allow deflation as more people adopt bitcoins, but it would also allow for inflation as more bitcoins are generated, thus encouraging people to spend their bitcoins. Eventually creating bitcoins will still become very difficult and dollars or something else of worth will have to be injected in order for latecomers to get access to bitcoins, but as time passes, that wealth will be distributed more and more evenly between early adopters and latecomers. I prefer 100 to 50.00 because bitcoins are going to take a while before they are worth enough to need to be more divisible and because it's not clear whether a single bitcoin is ฿1.00 or ฿0.01.

Bitcoin is similar to gold in terms of finite supply and increasing mining costs. Every argument you can make against Bitcoin economy you can make against gold economy, but gold economy still works. Actually, gold currency has been throughout the history unmatched by any paper money in stability.

It's an old keynesian argument that deflation is bad because it leads to a "deflationary spiral" where nobody eventually buys anything, because they can get more the next day. That didn't happen where gold standard was applied. Maybe some people will not buy today, but they'll buy tomorrow when the price is lower and they want to enjoy their finite lifetime. A good example is the computers market - you can get twice as good a computer with the same price if you wait a few years, but people still do buy computers today.

Also, it's good to note that production cost doesn't equal value. You could start printing a currency of your own, but it's value wouldn't be equal to your printing costs. The value is zero if nobody accepts them as payment, or it can be more than the printing costs if many people accept it for payment and there's not too many notes in circulation. That's why I've found NewLibertyStandard's pricing by the production costs a bit misleading, giving the wrong picture to some people that bitcoin value is somehow bound to the electricity cost. He may of course sell and buy at whatever price he wants, but he'll be short on either bitcoins or dollars if it's not the market price (supply/demand).

That's only a tiny part of the problem!

What will probably happen is the other way around: Those who create BTCs in the first 4 years will make unreasonable profit as they enter the 5th year, and those who create BTCs in the second 4 years will make unreasonable profit as they enter the 9th year, etc

The "interest rate" would be the expected future value at best, or Bitcoin will be regarded as a currency without a future at worst. Just like Pyramid Schemes: Many people bought them but nobody took them seriously. It is well established that under perfectly free markets, commodities are sold at a very small or even no margin above their cost on the long run. Since BTCs cost will double every 4 years, so will their price. So nobody under normal circumstances would be willing to sell his ever-inflating BTCs unless he wants to escape the system with some profit before it collapses.

I'm really tired and I have work tomorrow so this will be my final post for possibly 18 hours but I see what you're saying--your ability to generate bitcoins will inevitably be reduced because people with high-power server farms will take over production.

But when the first system-wide "halving" of bitcoins occurs there will be 10,500,000 while the server farms get started on the 5,200,000.

This means twice as many bitcoins will be available via exchange than via creation.  If some CPU farmer determines that in now takes double his resources to make bitcoins and thus doubles his exchange rate for his fresh product, he is very likely to be underbid by the people controlling the 10,500,000 because of the time value of money.

You said "only and idiot would sell at 19% interest rates" (paraphrase) but in a free market, somebody HAS to be willing to sell for there to even BE an interest rate, people willing to exchange value today for value tomorrow.

NP, I just sent you a PM

If both doubles then the ratio will stay the same, so the generation will stay the same. You see, it's all relative. Practically, of course, what will probably happen is that your ratio will be much less since more people will hear about Bitcoin (also given the recent surge in capitalist-anarchists and communists).