Topic: You guys don't get it - Bitcoin will act like a Ponzi scheme until Dec 2012 (Read 5566 times)

I've read every post in this thread thanks.  What are you trying to say exactly?  If you can't get your thesis out in less than three sentences it's too complicated for anyone to follow.  Let me take a stab at it:

Because of the ~7200 BTC per day being generated, as the price rises we will see resistance to new growth due to the rising value of the daily-generated BTC.

It that's it, than yes, you are right.  The exact effect is debatable, but I claim the above statement is true.  If you would like to refine or extend that statement I will gladly let you know how I feel about your modifications.  Or, throw it out and start over, but keep it to the point.

No, you just said "it will act as if it was a ponzi scheme". I love playing these semantic games.

Read what I wrote in the first post. I have never said that Bitcoin is a ponzi.

I may believe you once you state your proposition with some degree of formalism.  But "OMG it's a Ponzi!!!" doesn't really convey anything besides scam, which Bitcoin clearly is not.

no

Do you guys believe me now?

You are making the wrong assumption, this market is manipulated. This is how I see it, the price should be higher than 3.50 USD right now if everything was played as it normally is if you look at the order depth and knowing that it is very hard to get under 3 USD right now. Someone is building up this manipulation, I think they have bought a lot of bitcoins, they really don't want the price to go down, but at the same time they understand fundamentals so they are selling at 3.20 USD and over, by doing this and have a lot of buy order in the market, they are forcing this fake or manipulated stable behavior. At the same time they don't lose that much UDS or BTC, so they are playing the game of manipulating well (right now). The only way they can lose is if someone will sell massively in to this (fake) bid walls, then they will panic as always and the inflation and panic after that will make it worse. The thing is that we are at 3 USD and the downside is not that big. I think they have by doing this fundamentally put BTC around 1 dollar higher than it should be, but it is at a cost and right now we are printing 2,6 million BTC more until Dec 2012, so they will  probably lose (again) in the end. Time is on the downside.

Bitcoin is (very) volatile in it self, so this is just to funny, and it is one more thing that shows that this market is in some way manipulated.

Lets see how many more days they can keep the price this stable.

They could find 50 million barrels of oil tomorrow and the oil price would go down. Even with not one drop of oil drilled for years.

So, knowing that Bitcoin will stabilize a year from now should stabilize it now.

You always hear things about how the "speculators" are ruining gas prices because they drive the prices up. But you do not hear about how speculators are terrible when a new oil field is discovered and the price of gas goes down. That is how speculation works. You look at how things are going to be in the future and you fix the price to that predicted value.

There is a lot of good stuff in this post and I generally agree that over time bitcoin will work out well as a store of value.  However, that doesn't negate its utility as a medium of exchange at all.  You mention stock and flow…if you understand that, then you should understand that regardless of flow, you can rebalance stock as you see fit.  For example, you may wish to maintain a certain balance of assets in your wallet (for now, just pretend that we have coins of various kinds that can serve as contractual proxies for real underlying assets).  You might want 20% in bitcoin, 20% in gold, 20% in a broad stock market ETF, 20% in corporate bonds, and 20% in a real estate trust.  You can maintain that balance as you send or receive funds by automatically selecting which assets to transfer or rebalancing after transactions.  Notice that bitcoin is unique among these assets because it, unlike the others, does not carry counter party risk…all the other assets are contractual substitutes for the real thing and thus have counter party risk.  Due to the lack of such risk, bitcoin will likely always be the preferred medium of exchange (even though you could transfer any of those other assets as easily as bitcoin itself).

Also, given the scenario above, I really start to question whether there is any need at all for an artificially "stabilized" (stable against what exactly?) medium of exchange.  Instead, you can decide on an allocation as above and view your purchasing power relative to any sort of index you choose (i.e. relative to the price of a basket of goods at your local grocery store).  In a sense, all any fiat currency really is is an ETF that tracks the price of some basket of goods…just not very well.  Its utility as a medium of exchange is only relevant because until recently we haven't had computers and software that make it easy to set and view prices relative to anything else.

+1

I agree that Bitcoin is eventually more ideal as a store of value but it is not bad as a medium of exchange either. What many do not understand is that when Bitcoin userbase inflates, people are actually using Bitcoin more because there is a great inflow of new people who just want to try it out. This will always be the case. Once the userbase stabilizes and people get used to using it, we have already experienced the increases in value and decreases in prices. So the incentive to not spend bitcoins due to rising value is only theoretical. It will not be a significant problem unless the rise in value is constant and predictable, and I can't see how it could be.

So I admit that miscreanity has a point, but it's not the complete picture. There is one more thing to take into account as well, which is services such as bit-pay. These allow Bitcoin to be used side by side with fiat without the risk of losing money due to price volatility. The main problem here is the volatility which is a necessary evil as long as Bitcoin is this small. I don't see people or companies who use Bitcoin being very unhappy if the value of their bitcoins is rising. The problem is when the value goes down.

It will deflate as more people start using it (unless traders have all taken that into account). As it approaches market saturation, the value changes will level off and stabilize. With the same number of people and the same number of coins and the same amount of economic activity, you have the same coin valuation. More economic activity -> inflation. More people -> deflation. More (unexpected) coins -> inflation.

Bitcoin is generally not an investment.  It's made to deflate or inflate as necessary and acts as a medium of exchange.

If you want solid, likely rates of growth, why not invest in some blue chips?

Right now, yes. Remember though, these are still the early stages. Inflation is very high compared to what it will be as a mature, stable system. The incentive to spend will invert as stability and adoption increases.

Look at the structure, not just the momentary behavior. If there were no limit on the number of units to be created, what you've described would hold true for the lifetime of the system. That's the key element that makes Bitcoin a store of value rather than primarily a means of exchange.

For a quick example, take the California gold rush. A good number of people were able to accrue large amounts of wealth and many spent a lot. The discovery didn't last long, though. Meanwhile, the gold had been mined and still existed, but with reduced mining production it became more worthwhile to hold gold than spend it.

As evident in the table earlier, a static unit base becomes more valuable over time. Thus, prices decline overall. However, as the size of an economy expands, the prices will drop at an accelerating rate. Imagine paying $10 for lunch one year, $1 the next and $0.01 another after that. It might be great for consumers, but businesses strongly prefer stable metrics - it's very difficult to project for future expenditures when prices aren't consistent. That's why having a currency that keeps pace with the economy is much more desirable for stability, but doesn't work well for savings.

I don't see that at all. It is trival to spend bitcoin on tiny things. Due to its lack of fees and fast transaction rate (~10 minutes is pretty fast) it is perfect for micropayments. If an in-person merchant is willing to accept a transmitted transaction as a completed purchase (fine for paying for something small), than it is instant. Also bitcoin backed coins and bills (physical bitcoins) can easily take the place of fiat.

Bitcoin is not a ponzi scheme. It is not a pyramid. It is not even primarily a transactional currency.

Bitcoin is a reservoir; a store of value.

The reason Bitcoin has experienced the volatility and recent bubble is because capital was flowing into the fledgling economy with an expectation of something different than what it was, not to mention the lack of maturity in the system. The mere fact that the Bitcoin system has survived is incredible and a testament to the elegance and resilience of the underlying structure.

Understanding stock and flow and demand elasticity is critical. The former determines the depth of the reservoir while the latter determines the breadth. Bitcoin is still relatively shallow and small in width, so the volume of capital it can support remains limited.



The above compares the inflation rates and stock-to-flow ratios of Bitcoin and gold (all values starting from 2009 at a base of 1 and showing relational change thereafter; data sources available at bottom of linked page). With gold, both variables have been steady for a very long time (gold production shows the cumulative amount mined, from which the inflation rate can be inferred - that's historically been a little over 1.5% per annum).

A stable medium such as gold (and eventually Bitcoin) can store an unlimited amount of wealth so long as sufficient divisible units are available to maintain liquidity matching the level of demand. Bitcoin is in an early growth phase, so current behavior and performance are not fully indicative of what there will be as a mature system. The system will approximate historical gold performance by the 2016-2020 period at the earliest. That should also be about the time frame in which division of full Bitcoins into Satoshis starts to become a necessity.

Paper fiat money (EUR, USD, etc) is a natural counterpart for Bitcoin & gold in that it functions to maintain stable price levels by allowing unrestricted amounts to be created in order to match economic growth. Bitcoin & gold act as safe, long-term repositories for stored wealth that are affected by, but not dependent upon economic activity the way fiat currency is. This table shows how the two types of money interact:


Bitcoin, like gold, is for saving and major transactions. Fiat is for day-to-day spending/trading. A Bitcoin-like variant that behaves like fiat would provide the spending functionality that most people are trying to force Bitcoin to do. Trying to force one system to act as both is impossible, as even with a perfectly-balanced approach (such as demurrage, which acts to address a management issue that the Bitcoin system inherently solves), divergences eventually lead to catastrophic failure. Two functionally independent systems can interact effectively for an indefinite period of time, all else being equal.

If you can expect that with any reasonable certainty, then you should already be trading for the expected inflation rate.

A lot of people think of inflation as some result of an equation based upon the number of people, amount of money, etc etc.

Really money is worth what people expect its value to be. With zero risk factors, the change in price of bitcoins should be zero from now till the end of time. Risk factors are the major reason the price will change, and if will fluctuate based upon changes in people's perception of it and people fleeing from other currencies to it.

What I am saying is since the future production is perfectly predictable, it can be complete removed from any forecasting models since all rational traders are already accounting for it in the current price.

When future money supply is perfectly known, it is no longer a factor in the change of value.

(Note: I believe this should be moved over to the speculation forum)

Just did some quick calculations on the inflation rate:

now: ~33%
end of 2012: 25% then drop to 12.5%
end of 2013: ~11.13%
end of 2014: ~10.01%
end of 2015: ~9.10%
end of 2016: ~8.34% then drop to ~4.17%

The good news is that by the end of 2012, the inflation rate will be in the ballpark of most fiat currencies (could even be less depending on what govt's do with the printing presses and how you measure inflation).  The drop at the end of 2016 is really going to pinch.

What would happen if the FED said that in January of 2013 they would double all of the money and distribute that doubling to everyone?

The effect would be immediate, even though that money hasn't been printed yet.

Bitcoin is a game of perfect information about future bitcoin production. Everyone knows exactly how much money will exist and when the supply will stop.

This means that all investors already are trading with the knowledge of how much will be out there. They can expect (but this is the fuzzy fun risk section) that all miners will likely dump their coins when production stops.

The actual existence of the coins now isn't all that relevant because they will exist in the future. So stop concerning yourself with the coin production side of things. Just assume that 21 mil exists, and some people just aren't willing to let go of it until later.