Bitcoin Forum

This is a big issue, everytime Bitcoin price is going up it is at the same time working against it self with the high inflation that we have right now. This is just the way Bitcoin is constructed today. I know that Bitcoin isn't any ponzi sheme, but it will look as it is. The reason for this is very easy to explain, at $3 the inflation rate gives Bitcoin around $21 000/day of fresh capital (or miners that pay this amount by keeping their Bitcoins - the money has to come from somewhere) that is needed to hold the system intact and stable at the rate it is long term. If the price goes up to $10 or $30 then what is needed of fresh money at the exchanges is $72 000/day or $210 000/day to sustain a stable price at those levels. When the inflow of money doesn't come in at a stable rate, then it will act as if it was a ponzi scheme, because soon after it will fluctuate in a very disturbing way. As soon as the interest is gone for a couple of weeks the price will go down dramatically and vice versa.

So my conclusion is that every time anyone or group wants to start to bring in a bigger interest for Bitcoin they are facing a very very hard competitor. They can keep the price high for a couple of weeks, that is possible. But after that the inflation just hits the price every day, it acts today like a Duracell bunny and just gives those inflation numbers to the exchanges and it will not take a pause because the interest in down for a short period. And that will very fast show it self at the exchange price, and when the price goes down people sell in the trend. Exactly the same way they did when the price went up, a herd mentality.

One of my passions of life has been to really understand why the prices in the financial markets (and pretty much everything that is traded) goes up or down. I have been doing this for more then 11 years so what I am saying is my main conclusion why we have all these people that is right now tired of the way Bitcoin is acting, everyone should understand why this reason is.

And also, many super bulls are very blind and just see the positive signs, they really live in their own world. So for the super bulls, you don't need to comment.

You're too fast and furious for me.

I bet you trade 10 sec at a time.

It's not a Ponzi (a single fraudster faking returns) at all.  It's much closer to a pyramid (people buying in then desperately trying to get more people to buy in), though still different in a couple important ways.

As for the rest of it, that's basically what I've been saying for a while.  Until there's a lot more commerce, it's overvalued.  But everyone's so hung up on making sure they don't get left out when people start getting rich.

This won't end in 12/2012.  That will just raise the bar a little by decreasing inflation.  The fact that there's excess currency supply (currently hoarded) will eventually make itself known as people begin putting it back on the market.

This is why I occasionally toss around RevCoin (Exchange-stabilized low-inflation coins), GEM (generation-stabilized low-inflation coins), EnCoin (a more complicated system)...  All of which will undermine the wild "We're gonna be rich!" speculation, and leave pricing to market-based immediate needs and relatively short-term economic speculation.

Yes, the inflation rate is still very high, somewhere close to 25% APR right now.  About this time next year it will be around 12.5%, but will suddenly drop to about 6.25% and resume it's slow decent for another 4 years.  For any increases in the BTCUSD exchange rate to be sustainable, there must be a growth rate in the economy that exceeds that inflation rate.  For the first 18 months, there was no bitcoin economy to speak off, so for the past 18 months maintaining an economic growth rate well in excess of the inflation rate has been relatively easy starting from near zero.  However, as the economy grows larger and the monetary base grows larger, the difficulty in maintaining such levels of economic growth increases.  I still don't believe that an economic growth rate well in excess of the inflation rate is improbable, and that we are as likely to see a return to steady exchange value growth as the general perception in the strength of bitcoin increases while the general mistrust in national fiat currencies also increases.  There will always be noise in the signal to deal with, however.

Revalin, right, pyramid scheme is more the right word. Thanks for that. Also, I think it will end in Dec 2012. The inflation rate is so much lower then, so it will have a big impact.

It is higher then that, it is around 33 % annual inflation rate today. And your conclusion is right as well, good to see people here are able to see the whole picture.

Energizer Bunny.

FTFY.

Remember: Inflation is only one component of devaluation.  The mining inflation rate is already quite small in the current scale of value change.

:)

But the original name is Duracell. That is the name we use in Sweden.

http://en.wikipedia.org/wiki/Duracell_Bunny

I agree, see this economy:
https://bitcointalk.org/index.php?topic=54016.0

Holy shit, today i learned the energizer bunny was ripped off from duracel. 

high inflation? 25% APR is tiny considering how new bitcoin is.  Most disruptive technologies fail. But the ones that don't fail, usually grow a lot faster than 25% APR in the first few years.  

Bitcoin today is not that tiny. The total market cap of Bitcoin is around 24 million dollars at this exchange rate. And the inflation is 33% not 25%.

I don't think the production rate matters that much, it's the propensity to sell BTC in general. Maybe since we already know from historical data that bubbles can form, speculators won't hoard so much and the price will adjust more quickly. Since the trade volume occurring on the exchanges is several times the amount of newly produced bitcoins (last 24 hours MTGox trade volume 47k BTC vs 7.2k produced BTC), I don't think this has much effect. Instead of a price stabilisation in Dec 2012, I expect rather that the network hash capacity adjusts itself. But I'm excited to see what happens nevertheless. From economic point of view, it is an interesting experiment, because we do have all kinds of data that is impossible to collect in other situations, and we know in advance when changes happen.

I think the value will continue to fluctuate as long as there are amateur speculators/"investors". Maybe they're all out of money now or learned their lesson about playing against the pros :-)

this has been discussed a bunch before,  it reached the point where we had to build a calculator that explains how much money is needed to enter into the bitcoin economy.

http://www.flexcoin.com/calc/

That's tiny.

Yes, you're right.  Sorry.

So next year it will be around 25% then suddenly drop to 12.5%.

explain, please.

Yes, indeed. The inflation rate of bitcoin is both a product of how the currency is issued as well as an inventive for miners to participate.  It's very necessary.

Wait, I thought it was going to cut the block reward in half, why is it going from 33, 25, then 12.5?  

While I agree with the general premise of the OP, I think the term "Ponzi scheme" is not appropriate, as it implies an intent to profit at the expense of new adopters.  While I did profit from the naive speculators who flooded the market with fiat in June/July, I never intended to. I never even hoped to.

The inflation rate is relatively high right now, I agree. However, the potential balancing events are unpredictable. We had a huge influx of fiat money due to "get rich fast" speculators in June/July. Most of them got burned, and left. The exchange rate may now plummet, or it may again pick up due to, for example, a sudden adoption for online gambling or for international money transfers. We will only know in retrospect.

+1  And in a ponzi scheme there is a victim who is unaware of the plan. In Bitcoin, it's open source and there for all to see.

This answers the thread and should have ended it.


lol ;D A market of 24M USD. Now, do you want a comparison with USD M1 supply, which is above 900 000 000 000 USD and inflating? But why compare with M1, Bitcoin may be as suitable for fractional reserve banking! Good luck with another order of magnitude when you compare to M2. Don't like USD, want me to start Gold comparisons, or any other target market Bitcoin is aiming for?

Estimate of world gold value: $8,338,701,310,883. Gold. Gold! Come on, the stuff is only ever useful as a coating or to look lol-shiny.

What definition of "tiny" do you use? Bitcoin is currently ridiculously small. If it grows, that growth exceeds inflation in no time.

indeed.
i think f&f counts money in units like burgers or something. i just tried to find a good example of something that costs around 24mio dollars. first thing i tried was planes, unfortunately, the smallest commercial passenger aircraft from airbus already costs 65mio. didnt bother to look up boeing after that ...

24mio isnt much if you consider how many people already work on bitcoin related software or services.

Because the currency is issued at a steady rate, so in the first year the monetary base starts at zero and goes to 2620800, then double that again the second anniversary.  So at the second anniversary, the inflation rate is roughly 50%.  The same amount is issued during the third year, so around the third anniversary the inflation rate is about 33%.  Likewise, the same amount is issued during the fourth year, so around the fourth anniversary, the rate is 25%; then the block reward cuts in half, so the rate suddenly drops to 12.5%.  The inflation rate is relative to the monetary base already issued.

That is tiny compared to global economy (or even a local economy).  Hell it is small compared to just the time value of those creating/development/running Bitcoin businesses (and services).

Currently (or at least in the past) the economy is/was growing at many magnitudes higher than 33%.  The growth of money supply only results in loss of purchashing power IF the underlying economy is growing slower.  Excluding speculation (and speculation would still exist even w/ no monetary growth) if Bitcoin economy grows 100% this year, the money supply grows 33%, and it was currently fairly valued we should expect the "price" of Bitcoin to rise 300%.

When the economy is very small it is very easy to grow by large %.  I open a shop selling t-shirts.  1 per day.  Some news story hits and by growth rates goes up 500% in a day. If I can turn that into a longer term growth trend maybe I end up w/ 20,000% growth the first year.    Nike is never going to have 20,000% growth and as my T-shirt company gets larger it will never be able to sustain 20,000% growth either.

High monetary growth is only material if the economy is growing slower than the rate of monetary growth.  If Bitcoin (at only really <2 years old) can't sustain 33% growth for a couple years then it has no future. If it CAN then by 2017 inflation is more like 4% per year.  Obviously if Bitcoin is a 1 B economy it can't sustain 33% growth but it certainly can sustain 4%.

For the record when Bitcoin was 1 month old it had a (forward looking) monetary growth rate of 1200%.

Oh I see, wasn't thinking about it that way. 

I think that the point of forcing 25 bitcoin over the actual 50.
It's a way to give a kick to the price.

The issue with high inflation rate is extremely overrated. A new technology such as this, if there is anything to it (and I believe there is), will grow fast enough to counter even a 30% yearly inflation. Very easily. Look at what the price of 1 bitcoin was last December and it's evident that we have grown much more than 30%. This will most likely continue to be the case. End of discussion.

What part of the value is from speculative demand and what part is from real trade demand is another issue entirely. Speculative demand will never go to 0 with Bitcoin (unless the cryptography fails or something like that), in fact there is a high probability of it growing due to the properties of Bitcoin as a currency. I find the difference between trade demand and speculative demand important though, if it grows too big we enter a bubble. Currently we are not in a bubble, in my opinion.

This argument can be countered though, it's actually possible for bitcoins to reach a very high and fairly stable value even with a large difference between speculative demand and real trade demand. This has been proven with gold, the actual usage of gold in industry or as a medium of exchange is super small compared to its usage as a store of value or as an investment.

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.

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.

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)

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 (http://en.wikipedia.org/wiki/Stock_and_flow) and demand elasticity (http://en.wikipedia.org/wiki/Price_elasticity_of_demand) 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.

http://noblenomads.com/wp-content/uploads/2011/12/bitcoin__gold_production_stock_to_flow_ratios.png (http://noblenomads.com/bitcoin/)

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 (http://noblenomads.com/bitcoin/) 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 (https://bitcointalk.org/index.php?topic=37405.msg468316#msg468316) 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.

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.

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.

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?

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.

+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.

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.

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.

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.

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.

Do you guys believe me now? :)

no

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.

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

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

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.