Bitcoin Forum

I want to here your thoughts on the reward drop effects. At a quick glance, it would seem to cause a bubble in BTC value, but I'm sure there is someone with a better understanding of economics who can give a better explanation.

This is an essential part of bitcoin. Like gold bitcoins have a fixed total amount. Assuming wider adoption, the diminishing supply of BTC drives up price. Unlike gold bitcoins can be divided into ever smaller amounts to accommodate this increase in price. That is also different from fiat currencies, which tend to print more money to fix budget problems and drive value down.

OK, so the infinite divisibility of BTC functions similarly to money printing?

Not exactly money printing as the total amount is not increasing. Instead, smaller amounts have higher value.

Also, they're not infinitely divisible, but only down to a minimum of eight decimal places (0.00000001).

At the moment smallest bitcoin part is 1 Satoshi = 0.00000001 BTC. So there will be only 20 999 999,999999999496 BTC total.

Oh, so there still is a finite number? Interesting. I assume it is pure speculation what happens when demand outweighs supply.

Its an quasi-ortogonal equation, part is designed diminished return connected with new actors entering the game, part is speculation regarding block reward halving, complexity increase, asics entering the ring, etc..

It shouldn't have any affect on price.  Everyone knows the drop will happen, so it's already factored in.  (Imagine if we were bidding on a house and everyone knows there's gonna be a gold toilet installed tomorrow. Today's bids will reflect that.)

Exactly. It's public knowledge that the reward drop will happen late-november or early-december.

The current client only divides them down to eight decimal places, but there is nothing in the protocol that prevents them from being divided further.  If the need should arise, they could be divided further by upgrading the client program. They are essentially infinitely divisible.

Dont forget about lost coins which can never be recovered. Known amount is large. Unknown?

The way you say it, anything is infinitely divisible. Stocks, fiat money, skateboards, or oranges. BTC as we know them are finite and indivisible.

also note, that people have been mentioning a 'doubling' effect since the price was stable at $5. so in that case, it's already happened.

I think it goes without saying that with fewer coins being sold on the exchange by miners, the price ought to rise.  The real question is, has the price already risen in anticipation of the reduced supply?

Not really.
Certainly, stocks split all the time, and will continue to split whenever desired with no finite limit on the number of times it can happen.
In theory, yes, but since it tends to be inflationary, there really isn't any benefit to it.  There are instances where the U.S. dollar is split beyond hundredths.  As an example, my local gas station lists the price as $4.239
No.  Once you get down to a single skateboard (or orange), you really can't divide it any further and still have it be useful as a skateboard (or orange).

somewhat, but i still reckon no matter what, there'll be some kind of ramp up just before the drop, followed buy a huge drop of 'oh shit', followed by another spike of 'ooops', ...repeat for at least 24 hours until some stability kicks in.

i.e. i think no matter how much it's already priced in, it'll still be a bumpy ride over the drop period.

Fair point. But my point still stands; Bitcoin as we know it is finite. A future version that divides it further is a blockchain fork and is not Bitcoin as we know it today.

Interesting. I hadn't really looked into it, but the current precision seems like a design flaw.

Bitcoin is designed such that it can never have more than a total of 21 million BTC, so even if someone somehow owned every BTC ever in existence and tried to create a single transaction to send all of it to another address, the transaction output wouldn't/couldn't ever exceed 21 million.

Looking at the specs, the output is represented as int64_t. This would seem to imply that even if the value stored in signed, the maximum transaction output is 92,233,720,368.54775807 (92 billion)

It seems that in the initial design it would have made more sense to have 11 decimal places.  Then the maximum output in a transaction would be 92,233,720.36854775807 (92 million)

This would still leave enough room for a single transaction that contains EVERY bitcoin ever in existence, but would provide an additional 3 decimal places for if/when deflation eventually drives the value of a bitcoin sufficiently high.

I've lobbied for the creation of three more decimal places in the past (as it would fit into the infrastructure), however, it was rejected on the premise that 2.1 quadrillion units is sufficient for the next year or so.

go on iTunesU and watch an economics course.

http://itunes.apple.com/us/itunes-u/economics/id431795595

Yeah, I can see why such a change in the current design would be considered low priority, I just can't understand why 8 decimal places instead of 11 were chosen in the initial design.  Seems like a rather rookie mistake.

8 was probably chosen because nobody really cared about it back then. Bitcoin was supposedly designed with the average CPU miner mining 50 BTC a day in mind.

I look at the price of BTC as this equation:

Utility/Availability = Price

Don't try to quantify them, who cares. What is important is the rate of increase. Isolating the reward rate's effect on availability, currently at +50BTC/10 minutes. Without an increase in utility, the currently would be slowly inflating, and the price would drop accordingly. Since it's not, we can assume the increase in utility is matching (if the price is stagnant) our outpacing (if the price is rising) the increase in availability. So what happens when you cut the rate of increase of availability without changing the rate of increase of utility? You get a raise in the rate of the price increase.

Of course, that's all without speculation. A fair number of people seem to think the price is going to magically go up. Without the speculation, that is obviously not the case. What you can almost always count on though, is individuals being somewhat sane, and masses being somewhat insane. Expect rational individuals to react to the actions of the irrational masses. If people expect the prices to go up, the prices will go up. If people expect, people to expect the price to go up, the price will get capped by sell orders.

My prediction: Expect prices to fluctuate the day it halves, but to come out the other end basically unchanged or slightly up. Afterwards, I would expect a dip as people sell due to the disappointment in the rise. That followed by a increase in the historic rate of rise of BTC.

(I define "Utility" as the number of people using BTC x how much it is used... basically the total utility of BTC as a whole. Availability is the total amount of BTC available for exchange. Not just on the markets for fiat, but also those BTC being used in transactions for goods and services.)

Well, there would need to be a hard fork.

What really happens is that the tx_out contains a field of int64_t with the value in protocol units (a satoshi currently).  I think that much more likely than adding 3 more places and keeping int64_t, we'll go to int128_t and add a whole bunch more places.  Either way, it would require bumping the transaction version number, and that would break all old clients (more or less, I don't remember off the top of my head if that is a hard fork or not, I think it is, but even if it isn't, it would still mess them up pretty bad).

It is actually a good thing that int64_t has a lot of headroom above the maximum number of coins that can ever exist.  It means that we can still use 64 bit math to do (exact) accounting of value denominated in satoshis.  For example, at current market prices, we could do accounting for a 400+ billion USD entity in bitcoin before we have to start worrying about running out of bits.