Bitcoin Forum

Hi,

I think I have a pretty good handle on the economic model of Bitcoin. As I understand it, as demand for BTC increases, the value of BTCs increases, pushing prices etc. down. Sounds reasonable to me. I think.

In the inflationary model, when prices go up too much John Q. Factoryworker goes to his boss (or his union) and says that prices have gone up, he needs a raise. Eventually (hopefully) he gets a raise, and the company raises its prices to cover its increases in expenses, thus triggering another round of inflation and economic growth. Everybody's happy.

In the deflationary model, prices will drop, which means the companies have fewer bitcoins to hand out to employees, so their salaries go down, so they barter down the amount they spend, thus triggering another round of deflation and everyone is happy.

Except - how do you convince the majority of people, who have no clue how the economy works, that getting pay cuts is... well, maybe not "good" but is certainly normal? And unless you can convince people to start using Bitcoins in every day transactions, I don't see how BTC are going to be accepted very much. And if they're not going to be used in every day transactions, what's the point?

You don't convince people to use Bitcoin. They will have to find it for themselves.

Bitcoin is for the rational. That's a good thing.

Yes, I just gave you a non-answer. I consider this to be sufficient because any further evaluation will require the generalization of individuals. I like to think most are capable of some freewill.

People either accept it because they realize its fundamental sustainability or they don't. Frankly, I don't give too much of a damn one way or the other.

I don't think bitcoin is going to replace national currencies any time soon. It is more likely to end up working in parallel.

To simplify taxes I imagine an employer that offered to pay in bitcoin might keep track of all wages in the local currency and then just pay at the exchange rate if the employee wants to be paid in bitcoins. That would also eliminate the need for pay cuts.

You have already answered yourself.
The prices will drop first, triggering the drop of salaries later.

The prices should always drop faster than salaries are falling, thus this system is much better for employess because in the current system prices rise first, and salaries rise second. In Bitcoin world, it's the opposite.
It is truly incredible how deeply manipulated society we are. Bankers made us think that (EDIT: deflation is bad) for us, while it always was the opposite.

So f you want to convince somebody to deflationary environment, say to him that not only will everything get cheaper faster than salaries fall, but it will be possible to earn money just by keeping them in your socks, without investing them or putting them to savings account.

That is an excellent selling point for the bitcoin system. Maybe it ought to be better publicized?

Encrypted socks bitcoin storage solution?

My socks alre already encrypted. Aren't yours ?

I think you're demonization of banksters goes too far, they're simple folk really, not quite the devious masterminds you seem to take them for.

Do they conspire amongst themselves to rip the rest of us off? Sure! But you should realize that banksters like deflation too, because it makes their money worth more as well. But they are conflicted, profit motive means they like high interest rates... to charge as much as they can get away with for the use of the money they control. But they also operate in a market environment... It is a profound struggle in the soul of the bankster.

Few hundereds years of ripping everybody off is quite enough to do some demonization.
Some time ago they would be hanged for this. It's just today we are so stupid that we allow them to suck us dry and they not only go away with it, but they are actually treated with respect.

This is sick, and I am not exaggerating. Being a "simple folk" is not an explanation of anything.

Yes, but I said somewhat more than that didn't I.

Sir, I respectfully propose that although bitcoin is really great, generally speaking ideological tunnel-vision is always worth snapping out of. The world is a very complex place, and demands more respect than "it's all <Groups> fault!"

Banksters shat all over the place and everyone knows it. Being simple-minded psycopaths, their response in the words of Bob Diamond is

"Banks Should Stop Saying Sorry"

These people aren't devious masterminds, they're just assholes. Various imperfections in human affairs have permitted such people to bungle and steal their way to the top of their chosen method. I'm more interested in better systems than I am in hating opportunistic scam-monkeys for exploiting a tactic that's worked so far.

Agreed, today's bankers are not devious masterminds.

Devious masterminds were the ones that designed this system and put it in motion (probably Rotschild, Rockefeller, JP Morgan families). Possibly their descendants too.

The deflationary model (well, not deflationary, just very slowly inflationary) will encourage individuals to use it. It will not encourage institutions to choose it, but institutions may have to end up using it if enough individuals do.

For a time, yes.  But that is how it works already.  Bitcoin is a parallel currency, that's not a future condition, and it's not the end result either.  IF you think about it, there are already many currencies that function in parallel with fiat currencies, but are not those currencies themselves.  One good example of this is Paypal.  They may express a user's account balance in their own national currency, but that balance is most certainly not that currency in any real form.  Paypal uses bits and bytes as much as Bitcoin does, but Paypal ties those bits and bytes to a currency, and takes the exchange fluctuation risks unto itself, which is one reason that Paypal must charge as much as a credit card company even though Paypal doesn't have the overhead of maintaining a massive transaction network itself.

I could give a dozen other examples of parallel currencies also pegged to the national currency, but in every case there is no harm to the national currency because it's pegged, and users think about their value in relation to the national currencies.  In this regard, Bitcoin is different.  There is neither the need, nor the realistic ability, to peg a bitcoin's value to any other currency.  So as laymen begin to discover and use it, their thought processes on value calculations change; from using a national currency as their sole common reference of value, to using more than one reference of value.  In doing so, it becomes impossible not to compare those frames of reference, and one will appear "better" to each individual.  If Bitcoin appears "better" than the fiat currencies, and is useful in this regard, then those fiat currencies begin to fall out of favor.  And it is favor alone that supports their value.  At this point, the values of those same fiat currencies crash, and then there is no more parallel currencies, or there will be, but they will be expressed in Bitcoin as their common value reference instead of the national currencies.

This process could take decades, but I doubt that it really will.

As we move toward the future, the saturation of technological adoption is being reached at an ever faster pace.

Therefore, if bitcoin is a pivotal technology, then it will reach adoption at a rate that will exceed the ability of governments to react.

This is a good point.

I think an interesting problem is to determine the threshold size of hashrate for the bitcoin network for when it becomes unstoppable, in terms of brute force hash attack.

You would have to consider how much other power could be bought against it, e.g., combined hash-power of G20 spooks and banks machinery for example.

Anybody want to come up with a number?

Note that technological adoption saturation in general is getting faster. (I will need to cite this, though)

Bitcoin was invented in 2009, but only really took off about 8 months ago.

Governments reacting quick qnough to stop a technology ? Highly doubtable.

Just check out the following examples: Internet, P2P, BitTorrent, ThePirateBay... Government was never there on time to stop developments of that things.

Wait!, what?

So, just how am I going to get anyone to accept a pay-cut?
From a employees perspective, a round of deflation is just like a raise. Just keep the current salary and you get to buy more stuff with the same amount. I don't see why anyone would agree to a pay-cut.

And as an investor, why should I take a risk and invest my money in any business if I get "safe interest" by doing nothing?

I like bitcoin, and I think it has potential as an internet currency, but I doubt it'll be a major player in the financial market.

Greedier people will invest their bitcoins. People who want a safe investment will just hold onto them.

Inflationary model is a hindrance to general adoption of a currency because who would want to invest in something that lose value?

Reverse the question.
How is everyone going to make you accept a pay-rise when there is inflation ?

It's the same problem, just different person will have to deal with it this time.



That somehow didn't stop americans on the wild west (1800s).
It was a deflationary period, and simultaneously one of the greatest periods in terms of wealth increase in society.

So how did they do that ? It seems that is not a problem.

Perhaps you should only do smart & high-profit investments - investments which will bring you greater profits.
Doing not-so-good investments becomes useless, because you can earn more just by keeping money in a safe. So this encourages better, wiser, smarter, more profittable investments than inflationary environment.

For "safe" investments, just hold on to your money. No need to work hard. Simply wait.


We shall see.

Greedier people will invest their bitcoins. People who want a safe investment will just hold onto them.
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Perhaps.
Although my university studies wasn't en economics, I did manage to pick up a thing or two from those classes.
The big problem with a deflationary economic model is that your money will be worth more tomorrow, we all know this, and this does works as a break for the economy, right.

Very few people will risk their money if they don't have to. There will be some, but most investments will cease.
Most consumers will "wait" with their purchases of the non essential things. Everything will be cheaper tomorrow.
Business will fail since people won't buy there, or they will downsize. Investors will see this and hold on to their money harder. More business will fail to get funding and end up in trouble.

From an environmental perspective it might not be bad if people held on to their stuff longer, but economically it's quite bad.
If you have a different truth I'd love to hear it, but in essence this is mainstream economics, and it does seem quite reasonable.

All of this is merely extending the consumer's time preference horizon and making it less possible for companies with unprofitable ideas and execution to succeed. See https://en.bitcoin.it/wiki/Deflationary_spiral

For price deflation to sustain itself, real growth must be achieved. This is what happening in the Bitcoin economy, therefore it isn't such a bad thing.

It seems to me that you were reading some of today's economic theories which claim that any deflation is bad for economy.
They are lies, natural monetary deflation itself can be good for economy, and the history of the world proves it without any doubt.

Using inflation to run entire economy is very new invention, it has maximum 200-300 years. Before that there were only bullion - based, bullion - backed deflationary economies (with some small exceptions from the rule perhaps).

Suppose I accept the premise that deflation would make people hold on to their stuff longer.

Of course it's good for the environment, as you point out. But why is it "bad economically"? If people hold on to their stuff longer, fewer things are needed, and we all get more leisure time because we're not frantically working to replace stuff that we can hold on to for longer.

Remember, there's no such thing as "the economy". There is just people doing stuff. And if people prefer to work half as long and hold on to their stuff twice as long, it's not a problem. We don't owe slavery to "the economy".

Business will fail? but won't that reduce the supply of goods driving prices back up?

In a fixed money supply system, deflation is a consequence of growth; the economy is more efficient at creating goods, so prices go down. This is good!

In our fractional reserve system, the banks multiply by 10 the money supply. When there is a recession they stop lending and the money supply can plummet back to 1x. This may be a very disruptive situation and some call it a spiral.

The value of the money supply roughly equals the value of goods that can be bought with it. If there is deflation and the economy is growing, then who cares, great. If there is deflation and the economy is contracting then deflation will stop, people will spend more, shazam! It's a self stabilizing system.

In any case, the problem with deflation is entirely attributable to the fractional reserve system. Inflation is just an excuse for big government. That's it.

Generally, less efficient companies will fail. The surviving companies are forced to drive for ever increasing efficiency to remain profitable.

Deflation fear mongering is beyond retarded. OMG I'm going to be richer tomorrow, nooooo. Economies don't grow because people buy and use shit; economies grow because people make more than they use. Jesus, this would be Econ 001 in a sane world. Guess what, people close to the fucking spigot lie to you.  

How the %$&^ could it be better for people who work for money to have their money lose value instead of gain it?

Deflationary bitcoin is predicated on the assumption that bitcoin demand will grow faster than bitcoin supply (currently BTC 7200 per day).

Bitcoin has lots of money supply inflation now, but that will slow and then stop. It could have price inflation if new coins were not met by new users or increased use.

Which was generally the case since the first slashdotting happened.

Um, OK, but... if the company I'm working for is more efficient, and its costs go down (partly because its suppliers' prices go down) won't my company want to keep its prices at the same level, to increase its profit margin?

--
Jim

Your profit-margin might get eaten up by competitors who charge less.

My friend you worry too much. Gold which has similar properties as BitCoins has been chosen by the market consistently throughout the last 6000 years so as the best suited commodity to use as money. As long as people are free to choose they'll always pick sound money over fiat and you have to keep in mind that currently people don't have a choice but are forced by law to accept ever depreciating currency.