Bitcoin Forum

Bitcoin money base is still growing at the moment, but the deflationary expectation is starting to settle in.

With a deflationary currency, people have the tendency to hoard, it is harder for businesses to make money in this kind of deflationary environment.

If I am not mistaken, since the inception of Bitcoin economy, in this system, very few business has been more profitable than hoarders.

So, if it's not good for trading, it's destined to be a tool for speculation?

And I still get coding jobs. Go figure.

Why would anyone buy an apple for $1 if tomorrow it would be $0.99? Because you want an apple now.

Why would anyone buy oil if it was going to be cheaper tomorrow? Because you need to drive today.

This is a myth. Do inflationary currencies could cause people to hoard commodities? Does a gas station refuse to sell me gas today because he hopes to sell it to me for more tomorrow?

Say I'm considering buying a car and you're considering selling a car. Regardless of the properties of the currency, inflating or deflating, stable or risky, since they affect you and I equally, I should consider the car worth more units of that currency than you do. So we would trade some amount of currency for the car. The properties of the currency might affect the amount of currency we exchange for the car -- it must be less than the car is worth to me and more than it's worth to you -- but it can't close the gap that incentivizes us to perform the transaction.

How do you hoard currency? Well, first you have to get the currency, which means you have to produce something of value and trade it for the currency. And then, well, you do nothing. So hoarding is production and mutually beneficial trade and that's it. It's not a bad thing at all.

Even though the currency is still inflating at a little over 10% per year for the next year or so, there are people convinced that the future demand over these next years will cause the exchange rate to rise.  So they are holding their coins ("hoarding", as you describe it), and the exchange rate is rising.



If these people weren't investing in bitcoins they would be putting their wealth in something else.  But for now, they're taking this money they would have invested elsewhere and have put it in bitcoin and are not spending it on consumption.   They wouldn't have spent that money anyways .. .they are speculators and investors, and they invest with some of their income and wealth and use some for consumption as well.


Agreeing with you 100% on that.  Yet nearly every day there's some type of Bitcoin-based venture launched.


Nope, because there still are reasons bitcoins are useful for spending.  What is the easiest way to send money to your favorite online gambling service today?   Bitcoin.   Bitcoin is the largest online payments system that works without participation of the banks, and thus gaming services use it without concern about funds being frozen.  How is BitcoinStore able to undercut Amazon and NewEgg?  Because they use the lowest cost payment network (fees about a penny or less) with no chargeback risk -- from customers anywhere in the world.  And on and on.  There will be people using bitcoins for the benefits of bitcoin.    Merchants will adopt bitcoin because there are bitcoins to be spent.  It matters not that some value of bitcoins will not be used in spending.  If you are concerned about that you are looking at the wrong side of the equation.  Or at least one there is no control over.  Bitcoin is not an academic study or theoretical concept.  It exists today.  If there will be huge amounts of value transferred into it, there will huge amounts of value transferred into it.  That's the way free markets work.

FYP

And no, being good tool for saving doesn't preclude it from being a good tool for trading. Actually it's quite the opposite, only a good tool for saving can possibly drive healthy trading.

Are we talking about an economy based only on bitcoins with no possibility of substitution?

First. Hoarding itself is not such a bad thing if prices and wages immediately drop as money supply decrease. The problem arises when prices and wages are not dynamic enough to clear to market changes. In this case a drop in money supply will lead to a drop in consumption.

Second. Money deflation is caused primarily by a decrees of velocity of money and/or the amount of money supply pro capite. If bitcoins are going to be used for purchasing goods or service in the real economy than the velocity of the money supply side can support a grow in the economy.

Regards, Inge

Something else to consider:

If you bought a bunch of BTC when they were relatively *cheap* (let's say at the 5 USD dollar level they were at for quite a while last year) and you now want to use a VPS service (which you can pay for in BTC for the current USD price through various providers) then you'll find that your VPS is now 5x cheaper for you than if you had just stuck to paying USD and it keeps getting cheaper every month (at the moment) so even if you say bought 100 BTC worth at 5 USD that may well be enough to cover your VPS usage for the next 10+ years!

This is very unlikely to happen though.

First, if people don't expect this to happen, then there's a good chance it might not happen. That means you're taking a risk by holding.

If it's a nearly sure thing, then people will expect it to happen, and then they'll bid the price up sooner. If everyone expected gasoline to be $50/gallon in a year, few people would sell it at $4/gallon today. They'd just wait until the price rose pretty close to that $50 right now.

This.

In a legacy economic system like today's, things like wages, rents, insurance fees, etc just don't adapt and drop fast enough.

Bitcoin is not technically deflationary, since the supply will not contract in the long run. The supply will just remain constant.

But in terms of supply and demand, usually when demand for a good or service increases, production increases to match the new demand. So what worries me about Bitcoin economics is that once the 21 million supply is hit, new demand cannot be accommodated for, so even though the supply of Bitcoin is not deflationary, keeping a constant supply with additional demand has the equivalent effect of no new demand and decreasing supply. This doesn't mean that everyone saves and no one spends, but it does mean that the balance of saving/spending will be tilted in favor of more saving and less spending, meaning it is not economically optimal.

In the real economy today, rampant increases in the supply of money facilitate more spending and less saving, also not economically optimal.

So in my mind the one economic problem with Bitcoin is that production is fixed regardless of demand.

Who gets to define "optimal"?

Bullshit on a stick. Prove it. Prove that it is not "economically optimal".




p.s.: After you fail, this comic book might give you an idea why you failed: http://www.youtube.com/watch?v=bFxvy9XyUtg

Optimal is when supply meets demand. If demand keeps increasing when supply is constant, prices will never be stable. It seems to me like Satoshi just made a guess on what the Bitcoin adoption curve would be: percentage-wise, adoption will be faster earlier on, justifying the current constant increase in Bitcoin supply. But once the supply maxes out, enough people will ideally be already using Bitcoin so that demand cannot increase enough to justify more production.

It's exactly what I did. :)

(actually even better - my VPS is effectively less than free - but will not disclose how I managed that)

Why the hostility? I've already read that comic by the way.

I'm perfectly familiar with the requirement for savings to facilitate production. Savings in Bitcoin will be higher than they otherwise would be if production matched increased demand. Just as in the world of dollars, spending is higher than it otherwise would be if the supply of dollars wasn't expanded so much.

But if you're educated in the matter, please inform me what the ideal economic circumstance is.

I am also entertained by your request for proof, followed by usage of a comic book to prove your own point.

The ideal economic circumstance is the one that all participants freely choose; the circumstance that exists when coercion is removed.

Precisely this, and regardless of the outcome. Everything else is enslavement and I do not agree to any of it.

Why must economy grow?

In a fiat money debt driven society, you have to grow the economy continuously, otherwise society as a whole could not pay back the interest and the credit system will collapse

But in a debt free society, it is not mandatory to grow the economy continuously, you can select, as long as everyone have enough saving, grow is voluntary for anyone, everyone can be very rich while there are almost no grow for the society

hmmm, let me guess... because no-growth is boring?  

Life is short and I don't want to get bored?

Invent a time machine, go back to 1990, find 100 people, give them the choice of having a Japanese economy or having a Chinese economy, I wonder how many would prefer two lost decades?

This made me going back to look up the difference between saving and hoarding:
 
   http://www.wisegeek.com/what-is-the-difference-between-saving-and-hoarding-money.htm

Saving: Accumulating money for the purpose of spending it on something planned.

Hoarding: Accumulating for the sake of having more money.

Well, it turns out I am a hoarder, and at least I admit it.

Don't ever save money for an unplanned rainy day, then.  That would be hoarding, not saving.  Maybe we can fix that in the bitcoin protocol somewhere.

China grow fast since majority of people were still poor and lacked a decent living standard

I think an economy have a certain degree of optimum size. Over time, there will be less and less things need to be constructed and only small improvements are needed. Most of people's time should spend on enjoy life, the labor force should move to produce entertainment related products and services

Businesses try to make value, not money (except maybe banks :D). Just because the number of coins used to represent value is going up or down does not mean that created value is changing relative to other items in the market. Bitcoin price is irrelevant, it's just that old ways of thinking are hard to get rid of.

Maybe having less consumption and "infinite growth" is actually a good thing for both society and the environment. It might force people to ask if they really need that useless trinket from china contaminated with lead  :D

There were some economists (especially bankers) say that current saving is for future spending, so bank will help you spend your saving by lending them out to boost the economy growth, and when you want to do your future spending, they will move someone else's saving to you

I do not buy this, this is typically a poor people's way of thinking. The purpose of saving is mostly for security, it does not hurt to have lots of money left when I die, that will be the heritage for the next generation, so they could start from a totally different height. With current system which discourage saving, many people exhausted their saving and even need the next generation to pay for their retirement

I think today we should all give praise to mathematics for relieving us all of this really moronic way of thinking :P

Bitcool didn't you know that a deflationary currency lowers prices drastically and makes it actually easier to purchase things because of the purchasing power you have? There is nothing bad about deflationary currencies, but something tells me you're just another pro-inflation troll coming here to bash Bitcoin because you don't like how it exposes the paper currencies for what they are. Let me put this into perspective for you, if I earn just 5000 Bitcoins, I will be able to buy a full house within my lifetime, if I did the same amount of work in paper currency I would be forced to work my whole life to pay for a £60,000 - £70,000 house unless I got really lucky and struck it rich somehow. How the hell is saving up for that kind of thing 'bad'? No really, explain it to me because I just see a load of statements coming from you and no explanation.

To claim that Bitcoin is only good for speculation is ridiculous and shows you don't know anything about inflation or even simple mathematics, or have even looked at compound interest for that matter, I should also point out that the people who 'hoard' are the ones that are paying for all your spending sprees because where do you think all the money you borrow comes from? At least that's what happens in a traditional economy but thankfully we actually own the Bitcoins we have so banks can't use it for that.

+1 @O

LOL.

Slow down young man, not need to get excited and cocky. It was a serious academic question, no emotion attached.  Go back read my old posts, when I came on board as one of those original gold/silver bugs discussing Austrian economics, you were probably still in your diapers   ;D

Back to the topic. Bitcoin itself may be deflationary, but it's economy is part of an open, voluntary-based value-exchange system. Alt-chains have been introduced into this system constantly, the overall cryptocurrency world is actually highly inflationary right now. It's fascinating to watch how this pans out.

lmao in that case sorry for that :D been dealing with a lot of trolls lately >_< there's been an influx of them on the board lately trying to bash Bitcoin and lolz it shouldn't be about gold/silver really, it's mathematics vs morons. The problem is like others you're mistaking price rises by itself for 'inflation' how can Bitcoin inflate when there's a set volume of the currency? it's impossible unless a hacker somehow developed magic and hacked it, the only time your statement could hold true is if it were a currency like the dollar which can end up inflated by criminals because of how easy it is to mess with. Inflation is the price rising because of an increase in the amount of a currency, it isn't because of price rises by itself.

The reason the prices are rising and falling so dramatically now is because the market is so small, once it increases and we get more adopters then things will start to level out, prices will still rise and fall but it should happen a lot more steadily over time and markets will be able to adjust better.

... isn't the growth of the bitcoin economy in the face of massively deflating price levels proof enough that it can happen?

If the evidence doesn't fit the theories, it is time to change the theories.

i know that you are respected. So I am saying this humbly. This is complete garbage. 
 

"Do inflationary currencies could cause people to hoard commodities?" Of course they do! Dont you think that during the German hyperinflation people refused to sell of course they did!

"Regardless of the properties of the currency, inflating or deflating, stable or risky, since they affect you and I equally" What? I cant make heads or tales out of this comment. If the currency you gave me inflates and the value of the car goes up how does that affect us equally? You got a car that appreciated in value and I got your devalued cash.

"I should consider the car worth more units of that currency than you do." This assumes that one human being is capable of processing all of the millions of signals that set price. One person can not know the market as a whole knows.

"So hoarding is production and mutually beneficial trade and that's it. It's not a bad thing at all." Saving is good. What is happening here is not savings it is market manipulation. The problem that I have with hoarding is that it is manipulating the price and availability. It is a tactic that adds no contribution to forming a real market and inhibits the adoption and use of BTC. People don't stash dollar bills away and think they are " going to be wealth men". It is also a tactic that could end BTC as a currency. Is is all fun on the way up, but you dont see people rushing back into home buying. If you create a market where people are being stolen from and lots of people get hurt with it on the way down people will turn their backs on it.   


This was from the the op (I think?) "With a deflationary currency, people have the tendency to hoard". This is a hard question to answer because the people misuse these phases. If you mean that the currency supply is deflating, then yes. If you mean that the currency price is deflating then no.   

No, they refused to exchange for currency. The reason they couldn't exchange was because they had no functioning medium of exchange, not because they had an inflating currency. Unpredictable or absurd inflation or deflation can make a currency unusable. (Which is no problem if there are other currency options but a big problem if there aren't.)

It affects us equally because it reduces the value of the money I offered to you in exchange for the car just as it reduces the value of the money you received in exchange for the car. This perfectly cancels out.

For example, say I have a piece of gold that will be worth $50 more tomorrow. We both know this, and it affects the way we value the gold equally. To whatever extent it makes me want to hold onto the gold more (to gain that future value) it precisely equally makes you want to get the gold from me (so you can gain that future value). Presumably, we both equally value a $50 gain from today to tomorrow, so it should not discourage the transaction -- you want to buy it from me as much as I want to keep it, so we should agree on a fair price for it.

Or, for inflation, say I have a piece of gold that will be worth $50 less tomorrow. I will be more willing to part with that gold because I don't want to sustain that loss. But you will be precisely equally less willing to accept the gold since you don't want to sustain that loss. This perfectly cancels out.

Or, to view it one last way, say the government was about to impose a $100 one-time tax on cars such that whoever owned the car had to pay a $100 tax on a particular day. (This is precisely analogous to a currency deflating -- the value goes up in the future after the tax is paid.) This affects the buyer and seller of the car equally -- they each value the car $100 less before the tax is paid than after. So it won't discourage trading the car, it will just change the price.

That doesn't make any difference. (Unless you want to argue that unpredictable inflation/deflation creates friction. I agree, it does. But predictable inflation doesn't, nor does predictable deflation.)

All the confusion in this thread... Things are not "worth less" tomorrow because there is inflation, nor they cost more in real terms. Things are not "worth more" tomorrow when there is monetary deflation, nor they cost less in real terms. The metric is changing, is all.

Sure, when I lived through a hyperinflation I wanted to convert inflating currency into another currency or goods/services as soon as I received it but that did not make me spend more in real terms. It didn't make the economy grow - on he contrary, everybody wasting resources on this conversion game resulted in less overall productivity.

By the same token, even if I tend to save/hoard bitcoins because of expected increase in value, the economy can still grow. A company may be worth a 100 bitcoins today, and after growing, it may be worth 90 bitcoins next year. It has still grown, becausr these 90 coins can buy more stuff.

Have you ever heard of inflation-corrected historical charts? Why can't you apply the same concept and embrace deflation-corrected data?

But.. assume there are two people,
One person setup a company, worked his butt off and after a year, his company "grew" from 100 btc to 90 btc.
Another person saved his 100 btc, lay on the beach everyday, he still have 100 btc after a year.
What's wrong with this picture? 

Nothing. Savers, i.e. people who purposefully underconsume their wealth are suppose to be left with more than those who consume more. Also in your little story you forget that the company may now be worth 90 BTC but it could be earning 20BTC in yearly profits.

"It affects us equally because it reduces the value of the money I offered to you in exchange for the car just as it reduces the value of the money you received in exchange for the car. This perfectly cancels out."
This doesnt cancel out at all. You dont have the the currency you exchanged for the car you have the Fing car!

 "I have a piece of gold that will be worth $50 more tomorrow. We both know this" how? how do we both know this not only that but how does every market participant know that?

 (Unless you want to argue that unpredictable inflation/deflation creates friction. I agree, it does. But predictable inflation doesn't, nor does predictable deflation.) 
"Predictable by who? Every rise and fall of inflaion or defaltion is unpredictable with out knowing all of the information the market knows. For example a guy in china finds a problem with the code for BTC. HE knows that it is going to collapse BTC. He sells off everything he has got and tells all his friends, So the guys in china are liquidating and the merchants in the US are stacking. 

Nothing wrong; the company in my example has grown slower than the overall economy. Your example simply proves that economy indeed can grow if deflationary currencies are around. We agree.

There is a difference between saving a speculating. It wont matter in the future. Once BTC loses it's monopoly status. Once the SR takes litecoin? And then all you hoarders are gonna hate life. I dont think this crash will play out like the last one. I dont think it will have a facilitating event like the mt.gox crash I think it will collapse under its own weight. It will be interesting to see how high followed by how low it goes.   

FTFY. I took your example as an assumption and hypothetical example proves nothing. Sorry to bring the bad news to you  ;)

Not sure why this is so hard. Bitcoin price vs other currencies floats freely in the markets. Therefore, the valuation of anything expressed in bitcoins will fluctuate. This has got nothing to do with growing or shrinking of the economy. Just like nowadays we are used to "inflation-corrected" data when discussing "real" value of something over time, we can get used to "deflation-corrected" data.
 

Saudi Arabia can easily double their oil export by halving the size of the blue barrel. If you doubt it, ask any mainstream economist.

We all agree that unpredictable monetary changes are bad compared to similar ones that are predictable.

I think we all agree that anything that can't be predicted is likely worse for the economy than anything that can be predicted. The majority of the economy already operates with money whose value can't be well predicted and commodities whose future values can't be well predicted. To suddenly say this is an argument against deflation is unfair.