Topic: The current Bitcoin economic model doesn't work - page 6. (Read 96510 times)

Thank you for the question.

You are right in your statement, that the current money demand is hard, if not impossible to measure. In my opinion, you can give a pretty good estimate by looking at the past demand of money, the part P*T of the equation of exchange.

How are you going to measure the current computing power of the bitcoin network? It's also impossible. But still, the difficulty is changed dynamically by linking it to some average of past computing power.

My idea for bitcoins is to dynamically change the number of bitcoins created per block dynamically and link it to some average of the number of transactions, to keep the price level constant. As the difficulty to solve a block is already changed dynamically this wouldn't be difficult, i think.


Offtopic:

This is how central banks promised they would opperate, its not how they actually operated.
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I'm sure there are more historical details to it, I just wanted to explain the function of the value standard. If you have some more knowledge i would appreciate if you share it.


alexk

Gibberish.

You are clearly correct on your underlying assumption: Bitcoin is similar to gold in that, at equilibrium, it tends to have the same value as the work needed to create it. If by a thought experiment we equate the value of all goods and services with the market capitalisation of Bitcoin we have a full blown eco-catastrophe one our hands: I computed that if Bitcoin were to replace the USD monetary base somewhere in the next 10 years, minting bitcoins would suck up 70% of US's electricity production at current prices.

So Bitcoin is a quite inefficient format of money but I wouldn't go so far as to say "all the society can buy is the value of bitcoins". Once mintend bitcoins have an unlimited shelf life and can participate in an indefinite number of transactions. For the first transaction the global "fee" imposed by bitcoin is 50%, for the second 33% and so on. This is the same way a limited supply of USD monetary base (~2trillion) can participate in a 14 trillion GDP every year.

No, the purpose of printing/mining a bitcoin is to make the block chain more secure and to facilitate transactions. As such you are paid based on how efficient you are at it. If you are more efficient than your competition, then you are paid more than what it cost you. If you are exactly as efficient as your competition, you are paid exactly what it cost you (assuming perfect competition, but which is impossible, so payment will be more than your costs, once investments in production no longer outweigh opportunity cost). If you are less efficient than your competition, then you are paid less than what it cost you (again with the possibility that you might be able to eek out a profit if you're close enough to the mean).


You know, other than the fact that as fewer and fewer people make food to go into electrical engineering, then food prices start skyrocketing. LOL.

Well, if the Banks would stop claiming they have money when they really don't.  AND when the governments stop printing ever increasing amounts of cash.  AND the credit card companies lower their swipe fees.  THEN yes.

Honest banks and honest governments can't survive in this environment.  So, it has to be forced by us.  Because of proof of work, laws are the best weapon against Bitcoin.

I do worry about the miners just up and running but I still think they will remain honest to continue to get profits.   They can only do it once anyhow. 

At present the number of graphic cards doing mining is a small fraction of those ever produced. Hard money that provides efficient transmission of monetary information and resource allocation is arguably the most worthwhile cause you can think of for computing power and information technologies in general.

Today I made my first real world profit from mining; about $150US.To do this, I'm guessing I've spent a LOT more than the government would have to print $150. Now I'm at the point where I'm thinking I should invest this back into more mining (currently i just mine on my 'gaming rig' for fun, but I could buy more powerful cards) and so I have a moral dilemma. You (and others) have noted some great truths about the flaws in bitcoin. But I can't leave now. Why would I? I'm rational, and so while I can still make money I should. But I'm also (somewhat less) moral. This is all a terrible waste of resources, and the cost to mint the final 21 millionth bitcoin is going to be unfathomable.

*Edit*
Also, isn't a system like this going to breed immense distrust? Imagine when we're at the point where solving a block will generate enough wealth to retire you, your family, and all their friends for a number of generations. I can see more than one pool operator running away with the spoils....
Also, does anyone really think that society will allow itself to spend the majority of the earth's computer power on minting money instead of, say, curing cancer, or pretty much any other worthwhile cause?

Generally, that's true. Paper money is made of many material ingredients, means of production and labour. But for Bitcoin this is a problem. The value produced (production costs) per dollar banknote is about 4 cents, whether the note has an exchange value of $1 or $100. But to produce a Bitcoin always costs a Bitcoin. Do you see the problem? Let's make a thought experiment. We assume the dollar was a currency money like Bitcoin. To print a $1 note would cost $1, to print a $2 note $2 and so on. So the only purpose of printing money would be to pay the printer for printing it. The same holds true for Bitcoin. It is impossible that there ever would be given one Bitcoin to the society because the society would have to pay one Bitcoin to the miners to receive one Bitcoin. As I said, the entire model is pointles. We would create a society of miners and hoarders. If the Bitcoin model succeeded – which is impossible because the inevitable crash will stop its expansion –, every person on the planet would work in the hardware or electricity industry.

In your model the currency is neither inflationary nor deflationary. I know this and I don't know why you mention this because it is not related to the restrictions on money creation. You still don't explain how the economy can grow, how the society can pay for any goods. It can't because it has to spend all its money on its money.

More accurate: The value of money produced equals the value of capital sacrificed, with capital being composed of means of production (hardware), used up materials and labour. How could this be desirable? Such a society puts all its efforts into producing its currency. And all it can buy for it is its currency.

Hopefully and then you will realize you can not calculate the demand for money because nobody is able to access the needed information.

Btw, you can keep trying to explain how you can calculate the demand for money. Its entertaining.

I tried to give you a constructive answer.  Maybe a Eureka moment will come.

And this has any resamblance with what happens in reality how?

If in two identical cities in all ways but this, city A and city B has the same number of supplies of bitcoins (staying fixed and nearly constant over time), and you are able to exchange your one bread you are bringing to city A's fair for three bitcoins (in other words one bitcoin can be exchanged for 0.3333 of a bread), and you are able to exchange your one bread you are bringing to city B's fair for four bitcoins (in other words one bitcoin can be exchanged for 0.25 of a bread) - would you say the demand for bitcoins is greater in city A or city B?

City A:  P = 0.33333 breads / bitcoin
City B:  P = 0.25 breads / bitcoin

%P moving from City B to City A:  (0.25 - 0.33333) / 0.25 = -33.33% (Deflationary, medium of exchange or bitcoin gained in value)
%P moving from City A to City B:  (0.33333 - 0.25) / 0.33333 = 25% (Inflationary, medium of exchange or bitcoin reduced in value)

So the inverse of demand for bitcoins, if number of bitcoins stays constant, is measured by %P (where %P negative is better for bitcoins held, and %P positive is worse for bitcoins held and the magnitude indicates measurement of demand) is greater when you move from City A to City B than when you move from City B to City A.

If in two identical cities in all ways but this, city A and city B has the same number of supplies of bread loafs (staying fixed and nearly constant over time), and if you need to exchange three shiny disks out of your pocket for one bread in city A, and you need to exchange four shiny disks out of your pocket for one bread in city B - would you say the demand for bread is greater in city A or city B?

And now, substitute bread above with bitcoins, would you say the demand for bitcoins is greater in city A or city B?

And there you go, you are just doing some nasty approximations, because you have no way of determining the demand for money (bitcoins). Specially calculating the rise in prices is an utopy. Your system would probably do more harm than good.

There is also the problem of implementation that is basically imposible because you dont know if MtGox will exists in the future or if it will the majoritary exchange.

If you are talking about medium of exchange / bitcoin (when you say money), you don't have to do it this way, but I would take average growth / decline of P (ratio of value of exchange between medium of exchange and goods/services/other traded for the medium of exchange) over a certain period.  All goods/services/other value exchange rate with bitcoin from merchants, as well as other rates of exchange for bitcoin and MtGox's LRUS$ exchange rate try to have parity with each other through arbitrage.  Due to significant bitcoin trade volumes, I just assume that MtGox LRUS$ rate will be on parity or will be parity over a certain time period (adjust the time period for growth / decline fit to your liking).

If there is a premium on %P (negative value indicates better value attributed to medium of exchange) then there is a demand for the medium of exchange and it is quantified by the magnitude of %P.  If there is discount on %P (positive value indicates poorer value attributed to medium of exchange) then there is a surplus in the medium of exchange and it is quantified by the magnitude of %P.

And why are you deciding that the dollar is the only reference? And even if you include all the other currencies, how do you weight each currency?

You cant, but even if you did, you are not yet having a mesure of the demand for money, because the exchanges are not the only factor in the bitcoin economy creating demand for money.

Again, how do you measure the demand for money?

A free market determines it by placing a premium on it (%P) negative (negative actually means better exchange value for the medium of exchange) or positive (poorer exchange value for the medium of exchange) against goods/services/other traded for it.  Rate of exchange discovery happens in the free market.

In the example I did not eliminate what you would call the currency - the currency, money, medium of exchange, pebbles, salt, gold, paper (call it what you like) was eggs!!!  Isn't the medium of exchange not the most commonly traded item in a definable system of exchange?

Or are you asking for a measurement of the supply of medium of exchange (money as you would call it) available for exchange for goods/services/other?

Don't you risk bitcoin becoming inflationary instead of deflationary, no matter at which stage you adopt to hold some of the bitcoins issued at that stage?  And isn't capitalism = profiting on the expense of the losing counter party?  Why are there a pyramid with the all-seeing eye on top of it on the 1US$ dollar bill - and written "In God we trust" next to it?  Didn't everything not add up in Madoff's case because you got fraudulent promises instead of the underlying investment you were promised and were under the impression that you are investing in?  Are you promised anything more than a right to a share of the bitcoins in existence when you opt to hold some bitcoins at a certain value of exchange?  When the value of exchange changes in your favor or against your favor don't you have a profit or a loss to show on the value of your share of issued bitcoins?  Wouldn't it be up to each individual to decide whether bitcoin's properties of enabling fluid exchange over vast or small distances quite instantly and securely warrant / does not warrant a risk for profit / loss to be taken?  If this bitcoin venture, or any capitalist business venture, turned out successful at the value of exchange where you convinced yourself to opt in and proved to be profitable, or if it proves not to be so due to unforeseeable / uncontrollable circumstances or future events - isn't the responsibility on yourself and your financial advisor (whom you reimburse for their services) to do a due diligence evaluation of your options, risk profile, what you can afford to loose, etc., etc.?

[quote author=cloud9 link=topic=57.msg171509#msg171509 date=1307294917it was a comment addressing this issue, and your comment on it being impossible to measure the demand for medium of exchange:

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But you are not mesuring the demand for money (bitcoins), you are just keeping bitcoin nominally in line with dollars.

Again, how do you measure the demand for money?

PS: In the example you have eliminated the currency. The problem with that equation is that it does not take into account the changes in the valuation of the currency. But I dont want to discuss about the equation. I want you to answer how do you measure the demand for money.