Topic: The current Bitcoin economic model doesn't work - page 7. (Read 96390 times)

Would MtGox dollars be traded at all in the Bitcoin economy if there were no "intrinsic" demand for it?  Doesn't the equation of exchange apply to any definable ecosystem where exchange happens, also with regards to the rate of exchange discovery happening on MtGox between bitcoin and LRUS$?  Isn't the %P (change in rate of exchange discovery) reflected in most trades of goods/services/other offered in exchange for Bitcoin here https://en.bitcoin.it/wiki/Trade ?  Also total bitcoins exchanged in past 24h at MtGox is 23,417.37BTC.  Total bitcoins sent over bitcoin network in past 24h in total is 468,263.71 BTC.  Total bitcoins in existence is 6,440,750 BTC.  (Source http://www.bitcoinwatch.com/ )

Can we then call the housing bubble, the dot com bubble, the commodities bubble, and wall street crashes of 1928 and 1987, social security and public debt ponzi schemes as well?  Capitalist ponzi schemes? Doesn't some rate of exchange crash (suddenly inflates) because it was overvalued - and a sudden revaluation happens?

While it's easy to find a party willing to receive the proceeds of seigniorage, how do you propose to diminish the monetary base in inflationary times ? A tax perhaps, so that besides loosing value, the money you hold are automatically taxed by the system ? Basically, rewarding those responsible for inflation (debtors) and punishing savers ? I think this would quickly lead to an inflationary spiral where everybody wants to get out of that pesky currency that looses value by the minute.

The only way to achieve what you are proposing would be if the receivers of seigniorage are committed to defend the currency during inflation, by selling for bitcoins the assets bough during expansion. I think it's fair to say that will never happen, so the best we can hope is for a non-deflationary currency, that could lose value at any moment if the market decides to abandon it.

PS: I'd very weary of using the equation of exchange without fully understanding what's being exchanged: the "goods" are MtGox dollars, for which there's no intrinsic demand inside the Bitcoin economy, and the price index is purely artificial, driven by the speculation that someday the economy will exchange other things besides dollars.

PPS: what you are seeing in the block-chain is not the velocity of money, but rather an artifact of how the system operates. There's no basis to use that for macroeconomic purposes since it would be easy to manipulate the apparent velocity for example by moving my BTC 1.000.000 from one wallet to another, all day long. If you don't trust the goverment published CPI, the only valid estimator of inflation is the price in bitcoins of one alpaca sock.

PPPS: let's agree not to call the current Bitcoin block chain a ponzi scheme, because it enrages the locals and is not exactly true. It's a speculative mania, where everybody is holding the inflated asset and nobody is yet getting rich (because if they were, the price would crash). When it does finally pop we can call it a ponzi scheme where there will be widespread evidence of early 'investors' cashing out early at the expense of later ones.

its in the message posted that you are commenting on:


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it 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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Let's say in a village there are 100 eggs everyday on the market (M=100 eggs).  Chickens are traded the most on this market and is used as a medium of exchange.  Each of these eggs changes hands 2 times on average everyday (V=2 times/day).

On the entire village market, on day 1 and 2 only oranges are traded for eggs.

1:  On day 1, 50 oranges are traded for M1=100 eggs in the morning and in the afternoon all M1=100 eggs are traded for 50 apples.  Apples do not generally exchange easily for oranges directly normally in this market, as sometimes there are goats, chickens, cows, etc. as well - but we take a simple day for example.  Thus for day 1, Q1=[(50 oranges + 50 apples)].  Thus P1=[(50 oranges + 50 apples) per 100 eggs].  V1=2 times/day as eggs changed hands twice on this day.

2:  On day 2, 100 oranges are traded for M2=100 eggs in the morning and in the afternoon all M2=100 eggs are traded for 100 apples.  Another simple trading day taken as an example to simplify matters.  Thus for day 2, Q2 = (100 oranges + 100 apples) = [2 x (50 oranges + 50 apples)].  Thus P2=(100 oranges + 100 apples) per 100 eggs = [2 x (50 oranges + 50 apples) per 100 eggs].  V2=2 times/day as eggs changed hands twice on this day.

So, change from day 1 to day 2 is (%... indicates % change in ...):

%M = (M2 - M1) / M1 = {100 eggs - 100 eggs} / 100 eggs = 0%
%V = (V2 - V1) / V1 = {(2 times/day) - (2 times/day)} / {2 times/day} = 0%
-%P = (P2 - P1) / P1 = {[2 x (50 oranges + 50 apples) per 100 eggs] - [(50 oranges + 50 apples) per 100 eggs]} / {[(50 oranges + 50 apples) per 100 eggs]}
 %Q = (Q2 - Q1) / Q1 = {[2 x (50 oranges + 50 apples)] - [(50 oranges + 50 apples)]} / {[(50 oranges + 50 apples)]}

So if M x V = P x Q, and
%M + %V = %P + %Q, then

0% + 0% = -{[2 x (50 oranges + 50 apples) per 100 eggs] - [(50 oranges + 50 apples) per 100 eggs]} / {[(50 oranges + 50 apples) per 100 eggs]} + {[2 x (50 oranges + 50 apples)] - [(50 oranges + 50 apples)]} / {[(50 oranges + 50 apples)]}

Is this true? Simplifying for a = oranges, b = apples, c = eggs, gives:

0% = -{[2 x (50a + 50b) / 100c] - [(50a + 50b) / 100c]} / {[(50a + 50b) / 100c]} + {[2 x (50a + 50b)] - [50a + 50b]} / {[50a + 50b]}

or

{[2 x (50a + 50b) / 100c] - [(50a + 50b) / 100c]} / {[(50a + 50b) / 100c]} = {[2 x (50a + 50b)] - [50a + 50b]} / {[50a + 50b]}

simplifying,

{[(50a + 50b) / 100c]} / {[(50a + 50b) / 100c]} = {[50a + 50b]} / {[50a + 50b]}

simplifying,

1 = 1

resubstitute a = oranges, b = apples, c = eggs, if you like.  1 still remains 1.

So if you say 1 = 1 is wrong, I can't convince you otherwise.  You may complicate the example to test it for more complicated scenarios, but I tried to keep it simple.

Where are you getting this calculation from?

If I suspect correctly you are trying to keep the price of bitcoins nominally stable in dollars (I can not be sure until you tell me where you get that number). Why would you want to keep bitcoins nominally in line with the dollar? And more important, how does that answer my question?

PS: The M*V = P *Q equation is wrong, but I am accepting for the sake of argument.

Note: see post above for explanation of Equation of Exchange symbols,

Doesn't the free market measure bitcoin's demand in %P, by finding a balance between bitcoin supply available for exchange (M), and goods/services/other available for exchange with demanded bitcoins (Q)?

Isn't MtGox' previous expired 24h (%Pchange)24h: BTC = 14.29 LRUS$ Open, BTC = 18.89LRUS$ Close, giving (%Pchange)24h-4Jun2011 = -32.1903% (smaller than zero value indicates deflation of bitcoin against LRUS$)?

Isn't current 24h %Mchange for total btc system 50 btc x 6 x 24 = 7,200 BTC divided by 6,439,500 BTC in existence ( http://bitcoinwatch.com/ ) = 0.1118% = (%Mchange)24h ?

so, if

M x V = P x Q

by approximation, (with % indicating percentage change in ... ),

%M + %V = %P + %Q

assume %V = 0% gives

%M = %P + %Q

%M - %P = %Q

to have %P = 0% (zero inflation / deflation):

(-%P + %M)_{representing %M in your system where %P=0%} + (-%P +%P)_{representing %P in your system of %P=0%} = %Q

reduces to,

(-%P + %M)_{representing %M in your system of %P=0%} + (0%)_{representing %P in your system of %P=0%} = %Q

%M's representation in your system where you would prefer %P=0%  will equate to (-%P + %M), so in order to have %P = 0, wouldn't you have to adjusted the number of bitcoins with a total of (-%P + %M) for a given %Q?

So for yesterday's %P of -32.1903% (smaller than zero value indicates bitcoin deflation against LRUS$), in a system of zero inflation/deflation against LRUS$ with %P set to 0%, wouldn't you have had to adjust the number of bitcoins by ((-32.1903%) + 0.1118%) = 32.0785% ?  Would you have issued 6,439,500 BTC x 32.0785 % = 2,065,695.0075 BTC to keep %P = 0% ? Who would issue it, and receive it to be exchanged for the given %Q?  If %P were positive (indicating inflation of bitcoin against LRUS$ on MtGox), from whom would you collect the bitcoins to destroy to keep %P = 0% for a given %Q?

Says the guy who thought billionaires held all their assets in cash.

Yes, but that was not the question. The question was: how do you mesure the demand for money?

Doesn't Bitcoin automatically adjust the medium of exchange by fairly fixing the bitcoin supply (limiting the quantity of the medium of exchange but making it infinitely divisible - very similar to gold divisible down to the molecular/atom level), and making it nearly infinitely divisable, and rewarding/punishing a holder during deflation/inflation when tradeable goods,service,other increases/decreases in relation to tradeable bitcoins?  Isn't a balanced Equation of Exchange achieved without addition/removal of bitcoins, due to the above?  Is gold a physical accounting record and bitcoin a digital accounting record?

alexk, how are you going to measure the demand for money?

Hint: its impossible.


Offtopic:

This is how central banks promised they would opperate, its not how they actually operated.

Without the introduction of any assumptions, the Equation of Exchange is a tautology ( http://en.wikipedia.org/wiki/Tautology_%28logic%29 ) like it is stated in http://en.wikipedia.org/wiki/Equation_of_exchange . Equations always need to be fulfilled - that's why they are called equations!  On the left, (M=Total quantity of bitcoins in exchange) x (V=Total number of times the quantity of bitcoin in exchange is exchanged in a certain time period) should equal the right, (Q=Total quantity of goods/services/other exchanged for bitcoin in exchange in a certain time period) x (P = Value relationship between M and Q, giving rise to a rate of exchange, inflation/deflation in the rate of exchange)



Is it equitable to have a system where you reward some arbitrarily issuer during deflationary periods with more bitcoins, and inversely punish subsequently all bitcoin holders by debasing their existing holding during inflationary periods?  Will you be able to withdraw bitcoins during an inflationary period to keep your M constant in your system? Are you only going to ask the arbitrary issuing parties from the deflationary period to return their bitcoins when an inflationary period arrives, or are you going to give to some in a deflationary period and take from all in an inflationary period? When goods/services/other offered for exchange with bitcoins decreases (inflationary bitcoin system) - all the holders of bitcoins will have to bear the brunt of the decrease in the value relationship (rate of exchange = P = Value relationship between bitcoin and goods/services/other available for exchange with bitcoin).  The holder of bitcoin makes the decision whether he would offer more bitcoin available for exchange, thus influencing M (M = bitcoins available for exchange).  Thus holders of bitcoins should be rewarded/punished as more or less goods/services/other are offered for exchange with bitcoins available for exchange.  Bitcoin already adjusts the Equation of Exchange dynamically - and does not reward some arbitrary issuer under deflationary circumstances - and punish all bitcoin holders under inflationary circumstances.  Coin generators are incentivised by network difficulty changes in combination with their reward (for securing the network) based on P (value relationship of bitcoin to other) to increase/decrease their share of supply to the network difficulty - bringing balance in network difficulty based on the Equation of Exchange's balanced P.  Every coin generator has another profitable decision point on this, depending on his cost/profit/future expectation structure.  Your system is doomed for failure - as it will reward a non-holding issuer (imagine that in the sense of company shares, I'm a holder of shares but someone else dilutes my value by issuing more shares not to us holders - but to himself!!) during deflationary periods and punish existing holders during inflationary periods (imagine that in the sense of company shares, now that the shares are less valued - the other person who is issuing shares in deflationary periods are not un-issuing shares now that we have an inflationary period and all holders of shares now get devalued shares!!)  Deflation/Inflation is necessary as a measurement of how much bitcoin is valued.  If you feel uncomfortable with deflation/inflation (of bitcoin, shares, pigs, gold, etc.), don't be a holder of them - if you still want to use them in trade - trade for them and minimize your risk by minimizing your exposure risk period by exchanging on the fly.  Ultimately the holder of bitcoin is taking the risk, and should be rewarded or punished by uptake or flight of exchangeable goods/services/other from the bitcoin system.

If you do not want to invest in Bitcoin by being a Bitcoin holder and having the subsequently reward/risk on your investment (free market capitalism),

but still want to use it as a medium of exchange and reduce your exposure to its reward/risk (deflation/inflation) - there is a simple solution - exchange it immediately after you received it in exchange, back to your medium of choice (on the fly, programmatically if you prefer).

With regards to hoarding - as long as people have needs and only other people can fulfill in that need and they have some medium of exchange, wouldn't they use that medium of exchange to fulfill in that need?  Isn't nearly 5x more bitcoin exchanged than gold due to its ease of exchange?

With regards to early adopters - wouldn't people adopting now, again be viewed as early adopters in a year as well?  If you valued something when no one else did, didn't you satisfied the equation of exchange at your time of adoption?  Again aren't you exposed to possible reward/risk (deflation/inflation) from your point of adoption?

Thank you for your reply, this is a very good question. It is difficult to give an answer to this, but i'll try.

Short answer 1:
It would be absolutely stable in value in comparison to the theoretically optimal value standard. So find me a good that's absolutely stable in value, w.r.t. that good it would be stable in value. This good does not exist, but gold was used as a value standard when currencies were linked to it, it can be considered a good that is fairly stable in value. So, if you really want a good it would be stable to in comparison, it would be gold, approximately.

Short answer 2:
Since you adjust the money supply to the demand dynamically, supply and demand will always be in balance, so simple economics tell it will always have the same value. "w.r.t. what exactly" is the wrong question in this context, since all other goods will now be measured in this new currency/value standard, instead of the other way round.


Long answer:
During the gold standard, gold was the value standard and money was the medium of exchange. Central banks gave the guarantee, that everyone can, at any time, exchange his currency holdings into gold. This guaranteed that the value of money was linked to the value of gold, that's why gold is called "value standard" here.
Suppose that the central bank overestimated money demand and increased money supply too much. People would then start to exchange currency into gold more, which would force the central bank to limit money supply to protect their gold holdings. If the central bank underestimated money supply people would start to exchange gold into currency, thus giving the central bank an indicator to increase money supply.

Since the gold standard does not exist anymore there is no value standard anymore. Instead, money is both medium of exchange and value standard in our current monetary system. Central banks try to keep the value of money stable by looking at the price level as an indicator for inflation, in other words, they try to stabilize the purchasing power of money, which is an approximation to the value of money, but not necessarily the same.

The central bank is not independent of the government in most political systems, so there is a conflict of interest: The government is usually the biggest debtor in an economy, so it has an incentive to devaluate its debt by starting inflation. Governments then usually try to hide inflation by changing the definitions of the cpi (the indicator for inflation), see e.g. http://www.wnd.com/?pageId=59409 or google some more on this.


With Bitcoins, I see the great opportunity to create a currency that's both value standard and medium of exchange, but, unlike other currencies, you can adjust the supply dynamically to the demand exactly, since the number of transactions and the velocity of money can be calculated exactly. This would result in a currency that's a perfect value standard. Money supply can not be manipulated by governments, since it is coded into the system. Savors had more incentive to save, since their currency holdings would not be devaluated by inflation, giving more and cheaper capital for investments, giving the possibility of more economic growth.

I welcome everyone to work with me together to create an alternative crypto-currency, if the bitcoin community does not want to change its money supply system.


alexk

w.r.t. what exactly?

How would you define a Ponzi/pyramid scheme?

If counter trade for Bitcoins is Q = goods/services/other available for countertrade with Bitcoins,

and Number of Bitcoins in existence is M = number of Bitcoins in existence

and the velocity with which Bitcoins in existence M is traded for Q = V

and the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins = P (with increase/decrease in P giving the systems inflation/deflation)

then in accordance with the equation of exchange ( http://en.wikipedia.org/wiki/Equation_of_exchange ), this equation needs to be satisfied in all instances:

M x V = P x Q

Thus, for inflation/deflation benchmark level P = M x V / Q,

and approximated to:

%Pchange = (%Mchange) + (%Vchange) - (%Qchange)

so if %Mchange is fairly constant or very close to zero (only 50btc generated every 10 minutes)  -> take as 0%
and assume %Vchange remains constant (liquidity remains unchanged) not to complicate matters in this relationship  -> take as 0%

what remains of the above equation of exchange in relation to %change is:

%Pchange = -(%Qchange)

The above is telling us that there are an inverse relationship between %Pchange and %Qchange
This means that if Q (goods/services/other offered for exchange with bitcoins) increases drastically, there is a resulting equally drastic decrease in P.

If %Pchange is a very large negative number (or in other words P is decreasing drastically, or in other words the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins is decreasing drastically) you have deflation of the system.

If %Pchange is a very large positive number (or in other words P is increasing drastically, or in other words the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins is rising drastically) you have inflation of the system.

So if you want to have inflation or stabilization of the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins, you will need to decrease or stop/stabilize any new goods/services/other available for exchange with Bitcoins.

That's the equation of exchange.

Fixing bitcoin to electricity prices would create the unnecessary tension of supply/demand of electricity mismatch with supply/demand for unregulated free currency. You would waste untold energy fighting two vastly different markets. Suggestercoin credits that could always be redeemed for a fixed quantity of kW.hr electricity are a viable market option but only if trade freely with bitcoin.

You could use the Open Transaction platform to issue Suggestercoin electric credits yourself. People could trade in a truly anonymous exchange then. But how would you guarantee that they could be redeemed for electricity?

https://github.com/FellowTraveler/Open-Transactions/wiki

https://github.com/FellowTraveler/Moneychanger/wiki

There's no problem with money being created with commodities. After all, milk is created with cows and grain is created with other grain and fertilizers. On the contrary, the problem occurs when we don't have a stable anchor to which we can tie our money to. Central banks use government powers including interest rates and money supply for that purpose, but what does Bitcoin use? That's right, mainly electricity. I'm simply proposing holding the amount of required electricity to generate X amount of coins constant.

That's not in my proposed system. In my proposed system your money doesn't gain value over time (nor does it lose value, for that matter). Therefore you have no reason to hoard nor a reason to squander. You'll just spend as you normally see fit without worrying the money's value will jump up and down in a crazy unpredictable manner.

That's exactly the beauty of my proposal: The amount of money produced actually depends on the amount of electricity sacrificed. Under the current system, the same bitcoin created a year ago costing a couple of cents is the same bitcoin produced today costing (tens of dollars?). That's insane. It doesn't make any sense. And it causes the price graph to appear like you saw in my first post because that same one bitcoin progressively gets more expensive to produce. As far as the ecological and global effect is concerned, I think you're overestimating its impact. You're better off banning video games for that matter.


Although I disagreed with your ideas I feel obliged to congratulate you. Believe it or not, you're just about the first person in this thread to actually try coming up with counter arguments instead of crying Burn him at the stake!

Yes, for every successful trade the must be, by defintion, a seller and a buyer.  This is true whether the bitcoin is being traded for US $, Euros, carrots or alpaca socks.  Even the block reward can honestly be considered a trade, of sorts, as there is a definable amount of hashing power (or electricity if you prefer) that had to have been contributed to the security of the system for that block to have been found.  From a certain perspective, all 21 M bitcoin can be considered to exist, it's just going to take some time for the algorithim to pay it out in trade for calculations.

There is no free lunch in bitcoin, not even for the miners.  Every transaction and reward in bitcoin represents value in motion; otherwise it wouldn't move.

An ecommerce site can simply peg their fiat currency prices into a script that uses the 24 hour volume weighted average price from bitcoinwatch.com, and the script update the bitcoin prices each morning.  Yes, the exchange prices are very volitile as of late, but they were between 5 and 7 cents for months at one point.  The bitcoin rallies go in fits, this one will level off like the rest.


You can't really owe anyone anything in Bitcoin yet.  There is no credit system.  You pay the price when you order it, just like you would if you were ordering from anywhere else; using paypal or a credit card.  If the price changes before the product arrives, that is neither your problem nor your gain.  The bitcoins are in the possession of the vendor within an hour, and they can choose to sell them on the exchanges immediately if they wish.



If we ever see 20 cents again, the system has failed.  I predict that it'll settle down soon around $25 per, and stay between $20- and $30 for a couple months before it shoots to $100 in the fall or winter.

We shall see how good I am at this.

As long as a merchant converts on the fly to his currency of supply - he is not exposed to the markets.



If bitcoin is a rapidly appreciating asset, can you not afford to lend your bitcoin for currency at negative rates in exchange for currency?  In other words, if you expect a 10% appreciation in bitcoin's value over the loan/exchange (to be exchanged back after a certain period) term against some currency, wouldn't it still be worth your while to lend it out at -5% bitcoin interest, and still get a real return expressed in the currency that you gauge the appreciation of bitcoin against?



Because bitcoin's supply is fairly fixed, it becomes a demand side balance act.  As long as demand is increasing or goods/services/other is offered for exchange with bitcoin, bitcoin will show greater value in the equation.  If demand is decreasing or goods/services/other available for exchange with bitcoin is decreasing, bitcoin will show a decrease in value in the equation.