Bitcoin Forum

Edit 24 May 2011: This post has just been majorly updated after more than a year to address the technical issues raised against the original suggestions. The ones presented now are practical. They're also credible as the early warning turned out to be true: Bitcoin has transformed into a ridiculously volatile speculation and hoarding tool rather than a stable medium of exchange.

http://s3.postimage.org/2zivvoft0/chart.jpg (http://postimage.org/image/2zivvoft0/)

I dare not spend a coin today lest its price doubles tomorrow, nor dare I receive a payment in coins today lest their price crashes before I rush to sell them, nor dare I, naturally, store my wealth in the form coins so I'm relying on vulnerable exchangers to store it in the form of fiat currency. Something must be very wrong...

Yet that was all but unexpected; it was inevitable given how the limited supply system was designed. Let's stop and think about this for a minute:

Satoshi stated in his FAQ that When Bitcoins start having real exchange value, the competition for coin creation will drive the price of electricity needed for generating a coin close to the value of the coin. Now the only problem is that this "real exchange value" itself would be determined in part by electricity, computer deterioration, and time expenditures needed to generate new BTCs. And those expenditures increase with time. We have a loop.

Every four years a miner needs to exert double the virtual effort to create the same amount of coins, which means he'll be constantly demanding higher prices to compensate for his costs. Which also means that bitcoins won't generally be spendable. Why? Because only an idiot spends a currency which he is certain its price will double within 4 years, effectively granting him about 19% real annual interest--significantly better than any bank or mutual fund.

Great! I hear you say, free money for everyone, right?

Wrong.

Just as it's futile to create and distribute free extra coins to anyone already owning them "to make everyone richer", built-in deflation won't be helping anyone on the long term. That free money will encourage people to hoard BTCs forever or until another wishful investor buys them, fueling speculation and price bubbles. Bitcoin will ultimately be regarded as a phony investment with no real value, just like the good ol' Pyramid (Ponzi) Scheme where everyone purchases a ticket just to sell it to someone else later for a high profit until the whole system collapses when it runs out of new victims.

This scenario can only be avoided if the cost of generating new BTCs got constant. Which can only happen if participating nodes needed to exert a more or less constant amount of work (cost) to generate a given amount of BTCs. Only then will people be inclined to actually spend their coins, and they can finally serve their purpose as a stable medium of exchange.

But that's not it. The very fact that the newly-generated coin supply dwindles as its user base (hopefully) continues to grow will raise that 19% deflation rate even higher. Let alone that many coins are forever destroyed via HDD failures and lost thumb drives, pushing the deflation even higher and higher. High deflation is bad because nobody spends their money, they only save it because it gains value over time. Can you imagine what would've happened if, say, the Japanese government hasn't printed any (or very few) Yens during the last century while the population exploded? One 1911 Yen would have been more than enough to buy a house today. Who then would've spent their Yens in 1911? Why, almost noone of course! This scenario is only avoidable if the number of available BTCs continues to grow with its user base at least proportionally. If both figures match, we won't have deflation nor inflation.

But under the current model the price wouldn't necessarily be tied to the increasing generating electricity costs forever, which means there's a different scenario other than a perpetually deflating currency, and it's much worse: After about 14 years almost no new coins will be produced. Generating costs could then be largely irrelevant, resulting in a lack of a price anchor. This would leave the price solely to the market's supply and demand forces. Just like Picasso paintings, a coin could then be worth $1 on a given day then literally be worth $100 on the next and vice versa.

So what's the solution? Well, as you might have already guessed, we should remove both the 4-years doubling interval rule and the 21M limit. Just allow BTCs to be generated indefinitely.

Don't sigh in relief just yet. After removing the limit we're better off but still have another issue: The number of users and generating nodes grows exponentially while the existing coins grow arithmetically. We therefore need a mechanism to reflect the number of generating nodes (i.e the total exerted effort) into the resulting bitcoins. But blocks aren't the answer: Technical difficulties have been addressed against my original suggestion which advised rendering the amount of generatable blocks unlimited and totally dependent on the number of nodes. The problem was that a minimum "cooling down" period is needed to propagate who owns the new block across the entire network to avoid conflicts.

My modified suggestion therefore is to reflect the total exerted effort in the number of coins, not blocks. So we'd still have only 144 new daily blocks, but the amount of coins in these new blocks will depend on the proof-of-work difficulty (which automatically adjusts to the number of generating nodes). That makes sense. A late adopter who needs to spend weeks, months, or even years to generate a block should end up with more coins in that block than an early adopter who had to spend only a couple of hours.

And no, sorry, early adopters didn't take any risk to deserve a reward. Running a computer program which pops deflationary money isn't a risky activity, not one that warrants a 1,000,000% profit anyway. No wonder Satoshi (not his real name, which is unknown) was fiercely defending the original design and wanted to keep it going for as long as possible. It allowed him to initially produce all 144 daily blocks (7200 coins/day) for quite a while before having competing miners drive his coins' price way up. He's probably following up on this forum from his Caribbean beach seat now, with other "early adopters" eager to join him. The proposed system is the way to halt this pyramid scheme.

The coins' price will then depend on the total cost of electricity sacrificed to generate the newest block. Think of it as if everyone in the network bought some electricity from their utilities company before loading it all onto the network where the roulette runs every ten minutes on average with one lucky winner hitting the jackpot. Bitcoins would have a real value equal to the amount of electricity sacrificed to create them, and their price would essentially be a function of the (pretty stable) average worldwide home electricity costs, not a function of the number of generating nodes nor total demand, which will never stabilize in the foreseeable future. Under the proposed system, if the number of generating users doubles tomorrow, the number of coins generated tomorrow will double as well, offsetting the demand surge with a supply surge without the need for a price jump followed by price crash as is the case now.

This flexible supply system will be telling everyone there's no advantage to being an early adopter. A user doesn't need another victim to reap rewards later because there are no rewards to begin with. Bitcoin is a medium of exchange, not a profit-making tool. Speculators and investors can go ruin another currency for there's nothing for them to gain here until they can manipulate global electricity prices. By eliminating risk and uncertainty we're showing them the door, thus accomplishing the most important task towards achieving a stable medium of exchange the general population can trust.

Finally, a simple numerical example: If we assume the average worldwide cost of running a modern CPU for 24 hours is 20 cents, and if our initial goal is to have one BTC roughly equaling one US dollar, then the amount of coins each new block contains should equal: (fifth of a BTC/144 * the estimated equivalent of the modern CPUs number in the network). Thus, if the exerted power was then estimated to equal 10,000 CPUs, the new block created at that point would contain 14 BTC because the whole network spent $14 during the last 10 minutes to create it. If it was 20,000 CPUs, the new block would have 28 BTC and so on. Once enough coins are produced for ฿1 equaling $1, miners would generate just enough to cover the economy's expansion because any excess will come to them at a loss. The price would then fluctuate approximately along the lines of 99¢-$1.03.

Practically speaking, if the price of 1 BTC after implementing the new system was, say $10, we could simply add a zero to increase the amount of existing coins ten-fold, making 1 BTC equaling 1 dollar, after which the price will essentially stabilize itself automatically forever. Note that the estimated CPUs figure is arbitrarily set using current computer power and running costs. Errors won't be detrimental because the market will correct itself resulting in 1 BTC equaling slightly more or less than $1. For example, if computers became more energy-efficient while electricity costs stayed constant, then ฿1 will equal a bit less than $1 because it now costs less to produce and vice versa. Whatever the case may be, the price would be stable on the short term and move slowly along with electricity costs and CPU/GPU efficiency on the long term, rendering coins as stable as major fiat currencies.

Note that some replies before page 7 might seem irrelevant because of the suggestion improvements addressing them. The removed obsolete paragraphs from the original entry have been copied below in the third post of this thread just in case anyone wants to have a look to understand the full context of the discussion.

Note2: I've revived the thread at the bottom of page 20 due to the increased hacking and abuse of intermediary services such as the MtGox and Bitcoin7 exchangers. The underlying logic is that, had the coin's price been stable, we wouldn't have needed to trust them as often because we wouldn't have been forced to keep our wealth with them in the form of stable fiat instead of in our computers in the form of unstable coins.

As I understood it people will not need to double their CPU power to get the same amount of coins, rather there'd be half as many coins "up for grabs" by anybody with enough CPU power.

In other words, let's say a Powerful CPU can pull in 500 coins a day and a weaker CPU can pull in 300 coins per day from a pool of 10,500,000.

After 4 years, they are still pulling in 500 coins and 300 coins respectively, but now they can only access a pool of 5,250,000.

I could be wrong though.  Somebody who know what they're talking about please comment instead of me!

The plan is to halve the value of the block every four years. So if your PC is making 6 blocks/day now (i.e 300 BTC/day), in 4 years it could be also be making 6 blocks/day, but your balance will only increase by 150 because the block would equal 25 instead of 50 BTCs

Edit 24 May 2011: These are the removed paragraphs from the original 2010 first post. They are obsolete and no longer relevant as the post is now heavily edited. Nevertheless I thought I'd include them for anyone who wishes to understand the full context of the 2010 discussion (up to page 7).

So what's the solution? Well, as you might have already guessed, we should remove both the 4-years interval thing and the 21M limit. Just let BTCs continue to be created forever at a constant rate*. The rate should be divisible enough to give up to, say, 100,000 people an incentive to run the network simultaneously. In other words, the current 144 daily blocks (or units) aren't enough because this means that @ 100,000 users, one has to wait an average of 757.6 days (that's 2+ years) to see something pop up on his screen. 100k is an arbitrary figure, but remember that we need to mobilize as many nodes as possible to resist the tampering attempts of supercomputer-owning governments who can and will try to generate their own proof of work to ruin the project if it ever reaches mainstream. Also note that this will not lead to inflation in the foreseeable future, because the user base of bitcoin will continue to grow for years to come, let alone natural economic and population growth (unless the Mayans turn out to be right, of course).

This way, when the number of bitcoin-generating nodes approaches stability, we will end up with a slowly-growing number of bitcoins matching a slowly-growing number of nodes, resulting in the currency's relative price stability, leading in turn to the ultimate goal of it being used for exchange purposes.

Now for the fun part, a numerical example: If the system is producing 10k bitcoins/day at a constant rate (with difficulty adjusted by collective CPU power just like it is now), and the number of users attempting to generate BTCs was 10k after 1,000 days from now, and increasing at a constant rate of 10 new users/day, we will have and continue to have an average of 1,000 BTCs/user. No inflation, no deflation, no incentive to hoard BTCs, and no incentive to spend BTCs quickly (though that wouldn't necessarily be a bad thing!). Remember that we can always add or remove zero's if the numbers turned out to be awkward at some point, like Germany did in the 1920's hyper-inflation. Note that under this model, an initial price surge is inevitable because the number of nodes increases at abnormal rates at the project's beginning. As the project matures, there would be only reasonable user-base increases, so the price won't fluctuate much any longer (think the percentage increase in newly opened email accounts from 2000 to 2001 vs from 2020 to 2021, for example).

*Another idea would be to set the BTCs creation's difficulty irrelevant of total CPU power in the network so that, say, the average computer would create 1 BTC/day. The global price would then automatically adjust to the participants' average electricity and machine consumption cost. It would be sort of like buying some electricity from the utilities company and loading it on your machine as transferable BTCs. If electricity happens to be cheapest in India, Indians will initially profit from creating BTCs, but as their proportion among the nodes increases, the BTCs price will decrease as it approaches India's average electricity cost. Exchangers will quickly balance supply and demand just as in ForEx fluctuations, Econ 101, remember? Non-Indians would purchase BTCs from Indian exchangers at a very small profit margin because of competition. I personally prefer this model to the constant rate one because the amount of BTCs in circulation would generally be proportionate to the amount of users (sort of like farming gold in MMORPGs), instead of picking an arbitrary constant figure and letting users adjust to it. Thus this model avoids the initial price surge because there will be a balance from day one.

Admittedly, BTCs' price would be tied to energy's under this model. But then again, this is also the case in both my other and the current model. Besides, using Bitcoin for casual quick transfers (rather than as savings) would virtually eliminate this risk. Also granted that creating zillions of BTCs (eg. via governmental sabotage) would lead to inflation in this case if they flood the market with cheap coins, but then again this problem exists in the other two models as well, and can also be avoided by those using the coin for transfers only. But whereas in the other two models a supercomputer-or-two can ruin the whole project by barring most of the honest nodes from creating coins (via controlling most of the CPU power and skyrocketing coin-generating needed effort), under this uber-flexible model everybody will be able to create some coins and use them for transfers regardless of sabotage attempts.

I think I understand, thank you for correcting me.

Right now, Your average coin creation rate will be (6 * 50 coins / hour) * (your CPU speed / the total CPU speed in the system)

4 Years from now, Your average coin creation rate will be (6 * 25 coins / hour) * (your CPU speed / the total CPU speed in the system)

Because the amount of bitcoins per block halves every 4 years.

My question is, what happens if (your CPU Speed) and (The total CPU Speed in the System) double in 4 years?

NP, I just sent you a PM :)

If both doubles then the ratio will stay the same, so the generation will stay the same. You see, it's all relative. Practically, of course, what will probably happen is that your ratio will be much less since more people will hear about Bitcoin (also given the recent surge in capitalist-anarchists and communists).

I'm really tired and I have work tomorrow so this will be my final post for possibly 18 hours but I see what you're saying--your ability to generate bitcoins will inevitably be reduced because people with high-power server farms will take over production.

But when the first system-wide "halving" of bitcoins occurs there will be 10,500,000 while the server farms get started on the 5,200,000.

This means twice as many bitcoins will be available via exchange than via creation.  If some CPU farmer determines that in now takes double his resources to make bitcoins and thus doubles his exchange rate for his fresh product, he is very likely to be underbid by the people controlling the 10,500,000 because of the time value of money.

You said "only and idiot would sell at 19% interest rates" (paraphrase) but in a free market, somebody HAS to be willing to sell for there to even BE an interest rate, people willing to exchange value today for value tomorrow.

That's only a tiny part of the problem!

What will probably happen is the other way around: Those who create BTCs in the first 4 years will make unreasonable profit as they enter the 5th year, and those who create BTCs in the second 4 years will make unreasonable profit as they enter the 9th year, etc

The "interest rate" would be the expected future value at best, or Bitcoin will be regarded as a currency without a future at worst. Just like Pyramid Schemes: Many people bought them but nobody took them seriously. It is well established that under perfectly free markets, commodities are sold at a very small or even no margin above their cost on the long run. Since BTCs cost will double every 4 years, so will their price. So nobody under normal circumstances would be willing to sell his ever-inflating BTCs unless he wants to escape the system with some profit before it collapses.

Bitcoin is similar to gold in terms of finite supply and increasing mining costs. Every argument you can make against Bitcoin economy you can make against gold economy, but gold economy still works. Actually, gold currency has been throughout the history unmatched by any paper money in stability.

It's an old keynesian argument that deflation is bad because it leads to a "deflationary spiral" where nobody eventually buys anything, because they can get more the next day. That didn't happen where gold standard was applied. Maybe some people will not buy today, but they'll buy tomorrow when the price is lower and they want to enjoy their finite lifetime. A good example is the computers market - you can get twice as good a computer with the same price if you wait a few years, but people still do buy computers today.

Also, it's good to note that production cost doesn't equal value. You could start printing a currency of your own, but it's value wouldn't be equal to your printing costs. The value is zero if nobody accepts them as payment, or it can be more than the printing costs if many people accept it for payment and there's not too many notes in circulation. That's why I've found NewLibertyStandard's pricing by the production costs a bit misleading, giving the wrong picture to some people that bitcoin value is somehow bound to the electricity cost. He may of course sell and buy at whatever price he wants, but he'll be short on either bitcoins or dollars if it's not the market price (supply/demand).

There isn't a right and wrong economic model. Every model adjusts to supply and demand, they just adjust in different ways.

The current model is beneficial to early adopters in three different ways. First, early adopters generate more bitcoins while there is less competition at the beginning. Second, the availability of bitcoins decreases, which cements their position of wealth. Last, the early adopters have the potential to get rich off the latecomers once generating blocks becomes extremely difficult. Latecomers will have to inject dollars or something else of worth in order to get access to bitcoins and the wealth will go disproportionately to the early adopters.

The idea of the swarm increasing the amount of bitcoins awarded as processing power increases is interesting, but I think it would give too much advantage to botnets. With a constant amount of bitcoins being generated, they can only collect a days worth of bitcoins per day, but if the number of bitcoins was variable, they could swoop in and generate a thousand years worth of bitcoins in a few weeks.

In my ideal model, the same amount of blocks would be generated per day, but 100 bitcoins with no decimal would be awarded for generating a block instead of 50.00 and the amount of bitcoins awarded per block would stay the same forever instead of halving every four years. This would give one advantage to the early adopters who would be able to generate bitcoins more easily while there is less competition at the beginning and it would allow deflation as more people adopt bitcoins, but it would also allow for inflation as more bitcoins are generated, thus encouraging people to spend their bitcoins. Eventually creating bitcoins will still become very difficult and dollars or something else of worth will have to be injected in order for latecomers to get access to bitcoins, but as time passes, that wealth will be distributed more and more evenly between early adopters and latecomers. I prefer 100 to 50.00 because bitcoins are going to take a while before they are worth enough to need to be more divisible and because it's not clear whether a single bitcoin is ฿1.00 or ฿0.01.

No. Gold was synonymous to "money". Things were valued for how much gold they were worth, not vice versa. We should think of bitcoin today as a new unestablished currency in a world of established alternatives (eg. the Euro 10 years ago). Additionally, if we assume that it became impossible to mine virtually anymore gold today, and we further assume that the demand for gold was perpetually on the rise (for example because women were increasingly using it for jewelery), then yes, it will result in a perpetual deflation for its value and nobody would be willing to sell their gold except for emergencies. Under these conditions, using gold as a means of payment is a sure way for starting a depression!

Old and true :)

What has gold standard got with increasing the value of BTCs over time? Gold was ALREADY a medium of exchange when the gold standard was applied. I can imagine that the very first time some human discovered the first gold mine, everybody in their area thought it looked cool and started using it as a medium of exchange. People have been mining gold for thousands of years and we haven't still run out of it. BTCs will essentially stop its generation within 15 years.

They won't buy tomorrow when the price is lower because it will never be lower as we approach the "next four years limit".

Computers are totally different because you can't sell them 4 years from now for double what they're worth today. Had this been the case, nobody would ever sell a computer unless he's starving. Heck, just look at NewLibertyStandard's graph. It will keep shooting up as long as this 4-year model continues.

If the value is more than my printing costs, I'll be busy printing like there's no tomorrow until the price equals my cost (remember that I'm acting like a selfish unorganized person, not an entity or a country, just like most of Bitcoin users will be). If the value is less than my printing costs, me or anyone who wishes to acquire that currency will buy it from others instead of creating it, raising the price of coins already in circulation and dropping the competition and cost of creating new ones (and in bitcoin's case that means network and proof-of-work failure). So you see, in our coin's case, its market value must equal electricity & computer cost. Not more or less. And in any perfectly free market you'll find a similar situation: price = cost.

You said it: Supply & demand. What will happen if BTC got successful is that demand will increase while supply dwindles. At some point (after about 15 years) there will be more and more people demanding coins while almost none is generated. This will result in the price increasing until every human on the planet who will potentially use bitcoin has already joined its market (assuming the 4-year doubling thing was removed). And you know what? Maybe that happened to gold in the beginning of its discovery, until almost all people on the planet had gold available to them if they had a reasonable equivalent (e.g. In Arabia, more than a thousand years ago, you could have sold a camel at a time for about 70 gold dinars, and a rabbit for tenth of a gold dinar. Not too difficult to make).

Pyramid Schemes is an absolutely "wrong" economic model!

Who said it should be beneficial to early adopters? I mean, that's cool because I happen to be one, but if it undermines the model's sustainability then it shouldn't stay.

Uh huh, but botnets can't start generating now and collecting 90%+ of newly created blocks? Botnets/supercomputers will always be a problem in any model. But with a limited supply such as 6 blocks/hour, almost nobody can compete with them (can you wait 2 months for a coin to appear?). While if the supply is unlimited, at least we'll end up getting something, and hopefully trading it for a price close to what you've paid for it.

That's what I've been advocating as the second-best solution. But we'll need to increase the # of daily blocks to give enough incentives though as I explained in the initial post.

I stand by my statement that the current economic model is not wrong. You might dislike it and I might not prefer it, but other people do prefer it. Our perspective is no more valid than theirs. But that's not to say that I wouldn't use a bitcoin variant if it more closely resembled the description I offered.

I'm just stating the facts, sir.

Currently a botnet could generate 99.9% of bitcoins per day, but if bitcoin generation payout was variable, they could generate over 9000% of how many bitcoins are generated per day without them. Botnet operators value their CPU cycles, so being able to generate over 9000% until they have as many as they currently want and then being able to stop and use their CPU cycles for other purposes is much more advantageous than having to use their spare CPU cycles to only generate a capped amount per day.

The number of blocks generated per day can not be easily increased or decreased because there has to be enough time to propagate the blocks to all other nodes while still being frequent enough to allow timely transactions. What can vary is the amount of bitcoins per block. The amount of bitcoins awarded per block can either increase, decrease or stay constant over time. If every person had an equal amount of CPU cycles at his disposal, I would prefer for the amount of bitcoins awarded per generated block to increase proportionally to the amount of CPU used to generate bitcoins. As it is, I'm in favor of the amount staying constant over time.

He was referring to the price of goods decreasing as value of a bitcoin increases. Eventually the value of bitcoins will go high enough and the price of the goods will go low enough that the person will feel rich enough to spend his bitcoins. To take it to an extreme, if a person has ten thousand bitcoins and can buy the TV of his dreams for one bitcoin, the value of having the TV now is greater than the future potential increased value of the one 10,000th of his total bitcoins.

9000% of the now-cheaper-coin because so much of it is available after they joined. It all balances out in the end, and in both cases they have an incentive to join the network. Actually, under the current model they have even more incentive because the coin can never get cheaper!

To be honest, I don't see what more harm a botnet can make if we changed to the suggested model. Economically, it would be just like 1,000 honest members joined the network. This can even help the project with some free advertising on security blogs :)

How about a middle solution then? For example, the default difficulty be adjusted to about 1 block/CPU/day (assuming an average 2.4 GHz processor), but in case more than X blocks/day was being created (X = the maximum # of daily blocks afterwhich there is no enough time for propagation across the network), then difficulty gets automatically adjusted. Practically, it would end up being like my second-best and your best model. In other words, very close to the current situation except that we assume the current 4-years-period is extended to forever. So let's at least agree that the removal of the 4-year thing and the 21M limit is essential to avoid an ever-deflating currency.

You only switched the problem to another user then: The TV seller! He would also keep this coin until he has 10,000 coins. The point is that it's very hard (albeit not impossible) to convince people to spend or transfer a coin they are pretty sure will be 19% more valuable within a year. Moreover, economic-savvy folks might as well choose not to join the network if they predict this will happen, or join it with the intent of "hitting-and-running" a quick profit before the system's failure becomes imminent, and they will be right.

The problem with botnets is that their operators are stealing electricity, bandwidth and access to RAM, hard drive space and CPU time. Everyone else is paying for those resources out of their own pockets.

The order of my preferences for how I would like bitcoin to work is first, for the amount of bitcoins awarded to stay constant as I previously described (https://www.bitcoin.org/smf/index.php?topic=57.msg399#msg399), second, for the amount of bitcoins awarded to increase at a constant rate, third, for the amount of bitcoins awarded to decrease at a constant rate, last and least, for the amount of bitcoins awarded to increase at a variable rate. If botnets did not exist than the variable option would be at the top of my list instead of the bottom.

EDIT: My new highest preference for how I would like bitcoin to work is for the amount of bitcoins awarded to increase at the same rate as worldwide human population growth.

If the TV buyer is an early adopter and the TV seller is a latecomer, then the TV buyer already has many bitcoins and it would cost the TV seller more dollars worth of electricity than the price of the TV to generate 1 bitcoin. I do not agree that it will be hard to get people to spend their bitcoins. People do value potential future increases, but they also value having an item now. Why would someone borrow money on a credit card with a 19% interest rate instead of keeping their money in their savings account? They do it because they value having the TV now more than the potential losses over time. Life is short. You're welcome to save all your high returning money until the day you die, but the rest of us are going to make use of it before it's no use to us.

My exchange rate will only increase as Bitcoin becomes more popular. There are practical limits to the popularity of Bitcoin. Sure, potentially it could be run on every functional computer around the world, but from practical perspective, that will never happen. The swarm is currently pretty small, so when a few new users join, there is a large effect on my exchange rate and it increases fairly quickly. As the rate of growth slows or reverses and as my exchange rate average increases over the next two years, the exchange rate will steady out with only very small increases AND decreases every day. As for the impending doom and gloom you're prophesying will accompany the decreased payout in a few years, all I have to do is add a little multiply by two to my exchange rate calculation and the problem is solved. The exchange rate stays constant and everyone is happy. In any case, hopefully by then there will be other ways of calculating the value of a bitcoin other than my single solitary exchange service.

In school, they taught us (i.e. me) that a good's value price is based solely on what people can exchange it for.  They also taught us that a good's value was not determined by how much labor went into the good.

We were essentially told that if one camel is worth 50 gold dinars, then 50 gold dinars is also worth one camel.  Or something to that effect.

If this is the case, then the cost of producing bitcoins would only a be a factor in, not a determinant of, their value.

Did I understand the lesson correctly?

_______________________________________________________________________________ ______________________________
On the general topic of whether bit-coin will/will not be successful--I don't really know.  I act as though I am a "bitcoin defender" but this is mostly because I am excited about the new currency and want to support it, not because I know enough about economics to predict it's eventual usefulness.  

I would very much like to see people who dislike bitcoin's design organize and code alternative currencies that inflate according to a monetary rule, or have the built in safeguards you described.  That way, the market will eventually choose the best currency as people move towards the good ones and away from the bad.  

I am not sure if bitcoin's creators will be convinced to implement the changes you recommend--but i think you are very likely to find people who agree with your plan for a better encrypted digital currency and will help you modify or re-write bitcoin's source to make it happen.

That's not a problem for Bitcoin or its users. If those CPU cycles aren't used to steal electricity for bitcoin, they'd be used to steal electricity to DDoS some site or brute-force some account. We shouldn't worry about them. As I said, they're just as if those users voluntarily joined the network for all practical purposes.

"Human population" is totally irrelevant. Even if human population was shrinking by, say 1% annually now, I assure you that Internet users population will be increasing and bitcoin users will be increasing at an even higher rate. "Bitcoin users" is the magic word here. With the suggested variable model, we're always sure that new coin generation matches the expanding (or shrinking) user base. But anyway, I see that you're beginning to side with me that the 4-year-doubling isn't a good idea.

Man, if you paid $1,000 for an ounce of gold, then a few months later it was worth $2,000, are you going to sell it for $1,000?! No? Good. Because the early adopter will not treat his coins as if they're worth the pennies he paid for them anymore now that they're worth a ton of electricity. He'd treat them for what they're worth today.

My answer is simple: Assuming people approve the current Bitcoin's model, it will turn out to be the #1 worldwide investment: Just buy (or hack) a bunch of PCs, let them run, and you'll be earning at least 19% annually with no risk involved! Investors (and indeed, botnets) won't leave a chance for normal folks like you and me to earn any BTCs much less spend them. Any bitcoin will be spent 2-3 times at most before falling into the hands (well, "the computers" is the better term here) of an investor who'll keep it for a very long time or forever. This model has to change or it will destroy the otherwise excellent idea. Making bitcoin a way to INVEST rather than to SPEND is its one-way ticket to failure. You also forgot that bitcoins will leave the stream all the time (eg. computer failures or accidental deletion), which will add to their deflating. Might as well turn this 19% into 20% or something.

Even if we assume that Bitcoin's current users will never increase (thus not making it more difficult to generate coins), we're sure that its value will increase by at least 19% annually because of the expected 4-year-old D-day when which all BTCs price magically doubles because it will cost double to generate them.

Can you explain that part? I didn't understand how multiplying by two will achieve stability.

PS. It might be a good idea to merge your previous double-posts in one via Edit to make reading easier for us and those following us. The world is watching (or some three-letter-agencies anyway :))

If we assume that dinars can't be used for any other non-monetary purposes (such as jewelry, paperweights, etc), then it's practically very difficult for them to have a demand curve by themselves. Camels can be used to ride, so their gold price fluctuated (i.e. They become more or less popular with time). Bitcoin can only be used as money, so it's used solely to value things not vice versa.

If raising a camel costed more than 50 dinars, you can count on people stopping raising camels until the price goes back up due to supply shortage. With the absolutely arbitray 4-year model, this can never happen. Supply will ALWAYS decrease no matter what. I'm asking for a more flexible method which depends on the actual number of users.

If I wasn't, I wouldn't be here crying my lungs out to correct the model for a one which will work!

I know practically nothing about programming or coding. I'm interested in economics (as you might have guessed :)) and was trying to offer a bit of advice to the geeks who do the coding.

I use a formula to calculate my exchange rate which is described on my exchange rate page (http://newlibertystandard.wetpaint.com/page/Exchange+Rate). When I generate my first block of ฿25 rather than ฿50, I can simply change my formula to multiply bitcoins generated by two which will turn that ฿25 into ฿50 within my formula. Bitcoins are worth how much I say they are worth. If tomorrow I say they're all worth half as much as today then it would be so. Go ahead and create your own exchange service using your own formula to value bitcoins and you can have just as much control over the worth of bitcoins.

I absolutely disagree that the current model is unsustainable and I absolutely disagree that people will not spend their bitcoins. If I had my druthers, the amount of bitcoins awarded would grow at the same rate as worldwide human population growth, but it doesn't matter because druthers are just druthers and they ain't important at all.

OMG. The moment you do that you'll run out of coins immediately because buying them from you would cost only half as much as generating them!

Fine. But until someone answers the numerous doubts I've raised in here, I (and anyone with basic economics background) won't believe Bitcoin's current model has a promising future.

But I already explained why that was irrelevant. Oh well... nevermind.

I will always have dollars and bitcoins available to inject into my exchange service. I may run out today, but there will always be more available tomorrow. It's all detailed on my exchange rate page (http://newlibertystandard.wetpaint.com/page/Exchange+Rate).

Fine. But regardless of whether someone answers the numerous doubts you've raised in here, I (and anyone with advanced economics background) will believe Bitcoin's current model has a promising future.

Nothing to sweat people.  Nobody ever died of a 'deflationary spiral.'  :)  I agree with "I-am-not-anonymous."  The market will choose the best bitcoin-like currency.  I happen to believe, however, that the rules that Satoshi has founded bitcoin on will be more than adequate for the future of a thriving bitcoin economy.  

Everybody knows exactly how fast the supply of bitcoins will grow: it's set in stone in the rules of the programming and the bitcoin network.  While it's true that there is not a currently existing fully-fleshed out market to truly price bitcoins, such markets and exchanges are being developed.  As far as future would-be bitcoin generators are concerned, the question is not how much will he "demand....to compensate for his costs."  The question he'll be asking himself is "given current market values and my ability to utilize electricity and CPU resources, is it worth it for me to generate bitcoins?"  If the answer is yes, he participates.  If it's no, he stops trying to mine for bitcoins and focuses on trading tangible assets with bitcoins serving as an appropriate intermediary.  If he's not sure, he tries his hand at it for a while and then makes a final decision.

The number of nodes and associated computational cpu power will be in flux, and that competitive flux will allow for costs to approximate value (not the other way around.)  Value being set by the markets and the demand for use of bitcoin as a trade intermediary (a money).  In the far future, the competition of transaction costs will play a more important role for the would-be node operator.

Contrary to the paradox of thrift argument you present, collecting bitcoins and saving them with hopes of earning purchasing power through deflation is not a bad thing.  It will allow for the pooling of bitcoin capital and make purchases of larger capital investments possible.  In the future, there might even be bitcoin banks that lend out saved bitcoins with market-set interest rates, thereby diminishing the effects of hoarding.  All this wonderful saving, however, comes at a price: delayed gratification of present desires.  From the perspective of the would-be saver, the question will always be denying present desires to purchase real tangible assets now versus the future possibilities of purchasing more later.  This time preference naturally varies with people and in different circumstances.

Given the fact that bitcoins are by their electronic nature easily divisible, prices will be able to easily adjust to deflationary pressures.  If too many are saving, prices will fall and the rate of interest will go down.  This encourages demand (lower prices) and decreases the desire to save (less interest).

XC

Excellent analysis, xc.

A rational market price for something that is expected to increase in value will already reflect the present value of the expected future increases.  In your head, you do a probability estimate balancing the odds that it keeps increasing.

In the absence of a market to establish the price, NewLibertyStandard's estimate based on production cost is a good guess and a helpful service (thanks).  The price of any commodity tends to gravitate toward the production cost.  If the price is below cost, then production slows down.  If the price is above cost, profit can be made by generating and selling more.  At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price.

In later years, when new coin generation is a small percentage of the existing supply, market price will dictate the cost of production more than the other way around.

At the moment, generation effort is rapidly increasing, suggesting people are estimating the present value to be higher than the current cost of production.

The answer should always be "it's exactly the same". Any slight imbalance will be quickly corrected.

Geez. It's the same guys. In a free market economy, value and cost ARE THE SAME THING.

There will never be a trade intermediary or transactions for a 19% annual-yield investment.

That doesn't make sense. What I'm saying is that people aren't stupid. They will figure that since bitcoin will never be spendable, they won't join the network except to "hit and run" a quick profit.

Banks? In an anonymity-based system where you can change your identity with a click of a button? I don't think so.

The luckiest coin will be spent by two or three "spenders" at most before finding itself locked on the harddisk of an investor who'll keep it forever. The result? Supply dwindles even more, prices shoot up, and everybody keep their coins intact and watch NewLibertyStandard's graph as it climbs outside the chart while rubbing their hands in anticipation until the big crash.

How does this solve the problem? Too many are saving, prices go down, which leads to even more people saving because they think the prices will go down ever lower and their coins will be worth more later. By saving here we mean "hoarding", not saving as in investing like your typical bank.


Why am I not surprised? e.e

While that is true, you forgot that Bitcoin's expected increase in value (if the project succeeds) is perpetual. It will grow at 19% (or more due to lost coins) forever. How can you incorporate that in its price? If it was estimated today that 1 BTC = $1, 4 years from now it will equal $2. How can you put that in price? Ok, let's make it worth $2 today then. Oh but wait, that makes it equals $4 in 4 years. Hmm, shall we make it equal $16 today then? etc

Exactly. There would never be much difference (if any).

That assumes that the price was above the cost of generating to begin with! We just agreed that they'll virtually move hand-in-hand.

As long as production is possible, which it will always be (if not to the average Joe, then to investors or hackers with botnets), then production cost and market price must conform as you just explained. Moreover, if demand on BTC is more than supply, which will be the case if the coin succeeds, we will be faced with a perpetual shortage leading to perpetual price increasing.

It is because of NewLibertyStandard's graph. People were also estimating the same for tech-bubbles as they watched their graphs before the market crashed. If this model isn't corrected to reflect a somewhat-constant (or decreasing) value on the long term, nobody will be willing to spend their coins, ever. Sooner or later they will be hoarded by investors (if they believed in BTC's future) who'll sit and wait for their 19% annual interest.

My exchange rate will not keep rising forever. If new users can't generate a single block within a few weeks or months, what do you think the likelihood is that they will continue running their CPU at 100% all day everyday? The amount of computers generating bitcoins will grow rapidly only while generating bitcoins is not discouraging. Once it becomes discouraging, we'll sometimes have growth from new users, but we'll also sometimes have decline as users stop generating bitcoins. Watch and be amazed!

Yes it will. And the only thing stopping me from exploiting you by purchasing then reselling to you at a higher price a couple of weeks after is ethical reasons.


Right. And what are those new users going to do as generating becomes more challenging, you think? They can't generate now anymore. Oh, they'll buy from existing ones, of course. What happens to the price when people buy with no adequate supply? Correct. It goes up, and up, and up. And the more the difficulty increases, the more demand will be on the existing coins, and the more the price will shoot up. Typical bubble scenario.

I won't be amazed when you guys learn that inadequate supply versus growing demand was a bad idea... the hard way.

Wrong! Go look at my exchange rate history. See where the available bitcoins spikes up while the available dollars drops down? That is people SPENDING their bitcoins.

I won't be amazed when you guy learn that there will always be more supply at midnight Greenwich Mean Time.

OMG that's not spending, it's liquidation. It's also called "getting out of the system with as much as you can before it collapses". Say, why did they "spend" these coins when they could've waited for a week and earned a 20% (or whatever) bonus? Kindness of heart? Needed a kidney transplant ASAP?

Not for long. If the project proceeds in expanding, in a couple of months you won't be able to generate almost any coins.

Ethical reasons? I'm running an EXCHANGE service! I expect people to "exploit" me. There is absolutely nothing ethically wrong with buying low and selling high. How about you "exploit" me right after midnight GMT by sending me $0.50. Feel free to again "exploit" me the next week by selling those bitcoins you received back for more than $0.50. Better yet, "exploit" me right now!!! Please, please, send me as many bitcoins as I have dollars to buy! If you think the system is so doomed, why haven't you sold all your bitcoins? Do I detect a hint of confidence?

Already taken into account! I assure you I will have both bitcoins and dollars to inject indefinitely. The day I post ฿0.00 in a black font under available bitcoins, you're more than welcome to come rub it in my face. But until that day, you're freshly wrong everyday at midnight GMT until the day you die.

Unless the person states that they are pulling out which none of them did, it's not liquidation, it's plain ol' buying and selling. I don't know why they SOLD their bitcoins to BUY dollars because they didn't tell me and in any case I wouldn't tell you if they had told me. But as the date was just before Valentine's Day, perhaps he or she wanted to buy a gift for his or her sweetheart. That's certainly more valuable than an improved rate a week later!

Who would have spent their Yens in 1910, then? Why, noone of course!

What is wrong is your assertion that people will not exchange a currency because it will invariably increase in value...

Time Preference...
People need goods to survive, the medium will have to exchange in order to satisfy the time preference...

Are you suggesting someone will hoard a virtual asset because it will increase in value and never use it?

Well this is silly, (in this case bitcoin trade-able production) the value will increase as the amount of products that are exchangeable for bitcoin increase, it is an increase in utility that will determine the fate of bitcoin...

As it is an alternative currency, it will have the drawback of the bi-metal fiasco, but the expectation is because there will be a cap in the amount of bitcoins ever available, bitcoin would win the value race IF, and only IF we can generate a real economy with bitcoin as the monetary agent.

How to do this...
Stability, utility is important to gain the acceptance, stability will retain it, so long as we are operating outside legislation and people individually need to make the choice...

Bickering about theory when action is necessary is useless...
Good Job NLS, I may be contacting you about your services soon...

Good discussions, valid points and constructive arguments are offered by all in this thread. I have enjoyed reading the posts and deliberating on the issues myself. It's probably one of the most interesting threads on this forum so far...

I could write an essay in response, but I'm not going to. Instead I will post a few thoughts and perhaps solutions.

(1) I don't currently see Bitcoins as a currency. At the moment they are a commodity with potential 'real' economic value for the future. When investigating Bitcoins as a valid currency (using neural networks and comparisons with other existing currencies, commodities and existing markets) the more I see Bitcoins future model behaving somewhat like Gold i.e. a fairly stable 'base' commodity / currency.

(2) I don't see the current Bitcoin economic model as unsustainable. The fact that their are a finite number of Bitcoins, is precisely what gives them any potential / actual economic value at all. However, I fully understand Suggester's concerns, particularly regarding hoarding etc.

(3) Bitcoins are a finite 'base' commodity / currency. So, when 'production' eventually slows down to an unacceptable and perhaps unusable rate you simply introduce a 2nd 'Bitcoin' client which provides an infinite supply of eCurrency which is based on 'real' Bitcoin production and / or exchange rates.

Let's call it 'Bitnote' i.e. an infinite electronic 'paper money' which is based on real Bitcoin 'value' and Bitcoins existing model. Similar to what the banks did with the inception of real 'paper money' ! 8)

(4) Concerns over hoarding, bot net control, government and bank intervention etc. can largely be solved by increasing Bitcoins user base as quickly as possible. No one wants to see a monopoly for a peer-to-peer network based anonymous digital currency.

So, I'm going to post the Bitcoin pages on some internet traffic / hit exchanges ! People who use these services for promoting their online 'businesses' or personal pages are already big users of existing internet payment and eCurrency services. They are also 'surfing' for 'the next big thing'. Also, they are perhaps the most likely to try and implement Bitcoins into their accepted methods of payment etc. I encourage others to do the same or similar. "Bitcoins for ALL !"

The above, in my opinion, will go a long way in helping to solve the perceived issues and future problems with Bitcoins as a currency with 'real' merchantability and 'true' economic value in the future.

Get ready for the 'Gold Rush' ! :o (maybe) ;D

Except then you have the issue with the current paper money, the virtual printing press will cause an inflationary boom and subsequent bust...

It would be better to have a finite exchange medium that increases in value with the increased utility

The primary recipients of additional "bitnotes" after the first creation will benefit from the prices of the initial volume of bitnotes, but as the increased supply of notes moves around the economy, it depreciates, therefore increasing prices. Basically the time it takes the notes to circulate those who are not receiving the initial boost are paying higher prices, this is the reason why fiat currency is a moral hazard...


Government and bank should not be an issue, as it is illegal to do this in a sense...
creating a fiduciary media is against the law in any country, anyone who exchanges in this media is breaking a law...
as the transactions are anonymous they are nontaxable, I think we can see where the governments will have an issue...

Hoarding is a silly notion, sure someone may do such, but at the peril of the thing they are hoarding becomes useless and therefore destroys the value, if I were to control all the bitcoins, as there is no mandate securing the use of such a media, everyone can move to another media, and additional to this fact, since we have left the realm of legality, what stops someone from creating a competing currency, or any number of people, which if hoarding takes place utility diminishes and value decreases, people then move their product in other free market money supplies...

The commodity is not the coin, it is the products that the coin is accepted in trade for, it has no inherent value of its own, just a value in relation to what one may obtain for a certain unit of it...

Sorry for getting carried away Suggester. I get frustrated when I encounter someone as stubborn as myself.  :P

I again changed my mind for my preferred way for some Bitcoin variant to work. I don't like the idea I had of increasing at the rate of worldwide human population growth because it creates ugly fractions. I like my original idea (https://www.bitcoin.org/smf/index.php?topic=57.msg399#msg399) but in addition to it, I think it would be nice if by default the program wouldn't show a decimal, but allow people to optionally view and send currency with as many decimal places as they want.

@ ihrhase

To clarify I don't mean that paper money should be printed. I mean to build a 2nd implementation of the existing P2P software, that is directly related to the first, although has an infinite generation. However, I was looking way into Bitcoins future.

Welcome to the forum btw.

@ NLS

Yes. Decimal place additions are the obvious way to go. However, most existing currencies rarely show more than 2 decimal places I suppose...

To clarify I know what you meant, it is not the paper aspect that makes FRN's unstable, it is the unlimited printing of them that does...

The reason the gold standard was superior to non gold standard money was because there was a maximum amount of money printable...

imagine there are 100 BTC...
When there are 1000 BTN in circulation they can be exchanged for .1 BTC per BTN
If creation of BTN is unlimited this exchange is then unstable (always decreasing as more notes are made)

If you lock finite the amount of BTC's and more people use them in exchange, each BTC will purchase more, as the store value of the BTC will increase.

The way the stepped generation of BTC seems to be explained in the FAQ, it will attempt to keep pricing stable as BTC are generated, but overall the prices will drop once BTC production ceases and utility still increases.  This is a good thing, eventually equilibrium will be hit, let the market do it...

Offering uncapped note production is in reality doing what governments do with a money supply, that is, they add notes with nothing to back them up, and if we use the value of the BTC, infinite printing will yield the same issue the USD  has with its former commodity value store (gold), almost a century ago FRN's hit the market, and gold was $20/oz, in the 70's we dropped the standard completely and gold was $35/oz, now gold is over $1000/oz regularly (and this is only due to Congress' meddling with the figures)...

We have an excellent opportunity here, to show government is not necessary, or even desirable in the market, that honest free market alternatives are not only viable, but are also desirable...

Maybe I am insane for wanting a world where market prices are free, and not padded by regulation, taxation, rife with price controls or subject to the desires of the few whom victimize the many, but I am happy with this insanity...

The economic model is sound in principle, but what happens when people start to notice?  The Empire isn't going to tolerate this kind of behaviour.  There is too much at stake.  The fiat currencies are hanging by a thread and there's no reason to believe that's going to change any time soon.  At best, they'll discredit Bitcoin with endless propaganda.  At worst, they'll hunt us down as "criminals" and "terrorists".

I suspect they will try to regulate the internet even more, not bitcoin itself.

And yes, they will try to deter others from using it by means of a media smear. (See the smear campaign they did to e-gold back in the day). Will this stop people from using it? Yes, some. Will it stop it completely? No.

If the rate at which blocks are generated is on average constant and the amount of bitcoins awarded for generating a block is constant then bitcoin availability is not really infinite. Sure, infinitely in the future there are infinite bitcoins, but if you pick any point in the future, you know exactly how many bitcoins are available. On the other hand if the amount of bitcoins awarded for generating a block is variable, then the botnet operator becomes the bitcoin reserve. Likewise, if a botnet decides to work hard on Bitcoin under the current model for 32 years, he is then and forever the reserve. I don't like the current model or Suggester's model because it allows for the currency to be horded by the few. It gives advantage to whoever has access to more processing power than everyone else. I like my model because it gives as much of an advantage to the people as is possible. Sure the the person with lots of computing power can edge everyone else out, but only so long as he keeps working on it forever. The moment he stops, or whenever people collectively offer more computing power, the advantage doesn't completely balance out, but it becomes less skewed. The person who I think has the most to gain under the current model is satoshi because he knew about bitcoin before anyone else and probably has a nice fat collection of bitcoins. Although I probably have less than him, I have a lot more bitcoins than people who are going to join later than me, so the current model also benefits me. If I was a fan of a pure free market, that would be fantastic for me. Unfortunately I lean towards populism. I think everyone is better off, including myself, when advantages are spread out as equally as possible. That isn't to say that everyone will be forced to be equal. Some of course will be richer and others poorer, but I think that it's in the benefit of everyone, including the rich when the gap between the rich and the workers is under control.

Although I lean toward populism, I'm not really a pure populist either. I sort of dislike big business but I respect them because they often do what they do very well. Sort of like majestic lions, tigers and bears, oh my! I just like it when there is a balance in the fight between ruthless business and ruthless democratic government.

Yep...
Most likely, once they start seeing a real decline in tax receipts, it will be a combination of the two...


Precisely Madhatter...

NLS, If I may...

Infinite BTC production will cause the same issues we have today, inflationary bubbles and then busts, this will deter people from using BTC as they will already have the same service with government mandated Fiat, and no risk of penalty for using that...

If you were a fan of the free market you would believe everyone, including yourself, is better off when they have equal potential for gain...

You are forgetting the point that BTC only has any real value in trade, so the people generating the coins will have to trade them in order to maintain their value.  If I hoard 20 million BTC, the Value of the other Million will decline as utility will not support BTC, I do not think it will need to come to that with the precariously small number of coins.  Hoarding will be seen, by economic tells, within a 10% share hoard.  I will tell you right now, there is "hoarding" because of the small amount of available business in BTC, I am, but my "hoarding" is waiting for products I want, there is little utility as of yet in BTC for me, though I am willing to do business in BTC.  I do not have a tremendous amount of power dedicated to BTC production, I am a minor player at best, but I offer a product none will be able to attain with BTC as of what I have seen, does this give me an unfair trade advantage?  No, anyone can enter the market against me and compete freely, as with any other Black Market, the advantage to competition here is we are not about to shoot each other over trade.

The democratic governments is what is wrong with the current monetary system which inspired this creation, maybe we should stop considering them as good.  They violate human rights as a constant activity, they murder on wholesale levels, the rob entire populations, they enslave humans, all without any threat of punishment...

I would suggest if you have time looking up the lecture series "The End of Laissez Faire: 1870 to WWII" by Murray Rothbard.  It does well to prove with historical accuracy, Business + Government = Corporatism, and this is NOT conducive to free market...

Someone spending $1 now to create $1 worth of coins isn't a person who needs goods to survive. He's probably an investor, or will end up paying his coins to an investor.

This increase is one of the main reasons Bitcoin is doomed under the current model. I think you lost me.

Which will not happen under the current model due to its enormous "investability".

Which will also not happen under the current model due to increasing generating cost.

Taking thoughtless action without proper planning is catastrophic.

I disagree for obvious reasons :p

Gold didn't become increasingly difficult to mine from the first day it was discovered. And by the time it becomes impossible to mine anymore, nobody would be using it as a medium of exchange. And if they were, the world would be doomed by depression because everybody would be saving as much as they can because their gold would be worth more tomorrow. Mild inflation (or stability at least) solves this problem.

That doesn't make sense. All (infinite) fiat currencies have a value. Infinite milk and infinite corn have a value. Infinite electricity has a value. Why are you people so obsessed with the idea of "finite supply"?

Why not just use more decimals on the existing coin?

With 144 daily blocks, you can hardly keep a large user base interested. Sooner or later (especially if a botnet or a supercomputer began competing with us) you'll need to work months before seeing a single block appear. All this has to change.

Soon to be followed by a 'Gold Crash' (probably)


Right. Consider it an un-self-fulfilling prophecy. Because people with reasonable economic background and thought can predict right now that all this would happen, they wouldn't probably use Bitcoin in the first place.

NP. I'll probably keep frustrating you for quite some time then :)

You never stop surprising me with your analysis man.

That doesn't make it "finite". It's infinite but accurately predicted.

Stop worrying about botnets, please. They're gonna have an edge under any model. Plus they don't change anything economically. They are just as if normal people donated their coins to a charity or whatever. Limited blocks means people need to wait more for coins to appear in their console, which means less people interested in joining the network after some threshold (maybe 1000 connected machines or something. 500 machines 4 years from now, etc). Bitcoin needs more people to join in order to both spread the system worldwide and for the proof-of-work to be strong.

dwdollar, I think we can safely add add "communists" to your list.
On a side note, NLE, my model of unlimited coin production is very communist because it doesn't grant any advantage to early starters. You won't need to exert double the effort in 4 years to generate the same amount of coins today. Just put your CPU to work (or buy electricity-in-the-form-of-BTCs from an Indian exchanger) and you'll get what you paid for in untraceable, nontaxable, spendable coins. Plain and simple. It's not fair to grant this huge advantage to early adopters on the expense of later comers (even it wasn't going to crash the whole thing!)

This has to be the most biased statement in this thread. Compared to fiat currencies, bitcoin is a wild crazy horse which will undergo extreme bubbles and bursts. Fiat currencies are fairly stable in price.

So the hoarder will spend some of his coins in order to give value to the rest? This will only lead to another hoarder jumping at this chance to add some more to his hoarded hoards. If the current system was successful (which it won't be), investors will gladly liquidate some of their 10%-yielding assets to purchase the 20%-yielding coin. You guys are missing the whole point. Hoarding = No exchange, period.

Ain't gonna happen if the current model isn't rectified.

True. But the problem is, dictatorships weren't/aren't any better.

If the overall plan is not to build a counter economy you would be correct, but I think people involved here are looking to, in the long run at least, do more than trade valueless digital blips...


If it does not increase in utility it will not increase in value...

The value to these digital blips is NOT in how they are created but in what one can get for them...
Subjective Theory of Value and Bitcoin
I have a list of products I would like to attain for my bitcoins, these are capital goods, that is for use in production of a consumer good.  When I attain these goods, the value of the bitcoin is in relation to how much of these factors can be attained with each coin.  You can assert that 1 BTC = $1, but if I can obtain more capital goods with $1 than 1 BTC, then the $1 is valued higher to me than the 1 BTC.  The logical choice for me is to then dump all BTC for dollars in order to obtain capital goods, and therefore sell my consumer good in dollars....

*side note* When I bring my consumer good to the market, how much the market clearing price for my supply is will determine whether I am using the resources efficiently, or if I should rethink my business model.*

What you guys are talking about is Labor Theory of Value, this theory was shot to pieces in the late 1800's, I do not think I need to repeat the process...

The invest-able nature of the BTC will disappear if there is no commodity market that supports it, it is why the dollar has stayed afloat, well that and military might...

I Agree, but you are thinking that a planned economy is a sustainable system, look at the world of economy and tell me how well that is working, the free market can handle all your issues, it is something we are not seeing today, so the comparative advantage in logic is based on the unused system.  It was the less planned economy (more laissez faire), that accumulated the major part of the world's monetary gold in the US prior to WWI.  There was less regulation and taxation inflating prices, BTC mimics this, as it is a counter economy currency, if it retains the capped amount of BTC, it will be able to stabilize in the long run...

Keynes thought this too, are you going to have a privilege class that gets new BTC to spend to solve your problem too?

Yes they have a value, that consistently depreciates over time, it retains utility by government coercion, if you had the choice to abandon a depreciating fiat currency for a stable commodity based one, why would you allow inflation to rob you perpetually?...  This is an unsustainable model
There is not infinite milk or corn, and they are not currency, they are commodities
There is not infinite electricity either
Finite supply is what this world is about, resources are scarce...

So are you looking for some perceived fair share before a more efficient producer comes along?  I am sorry, but IF someone chooses to dedicate more resources to production of BTC, they deserve more BTC.


Except those that are looking to use something that will get them out from under the current failing economic models, which as far as I can tell is not your issue...
People that see no value in anonymous transactions will abandon BTC, I am certain, but I think there are more people looking to not pay for every government misadventure through inflation and taxation...

Not Quite, it is infinite, just at a planned progression on the way to it.  It still interferes with the market value of the BTC...

I disagree, it needs a trade base, that will prove the currency, without the trade base it is as useful as $$ in an MMORPG, sure people do dedicate real $ for MMORPG $$, but in the end there is no production...

Only in your rendition of how BTC should be, there is no way to propagandize me a communist...

Why should the early comers not have the advantage?  They are taking the risks initially, for something that could go nowhere, the later comers, after the system is proven have considerably less risk and if they dedicate less to generation they have less to lose.
 
No you are missing the whole point, no exchange = NO VALUE, and therefore no point in hoarding, it is the common fallacy seen in marxist, so I do not blame you, you just have to realize marxism is wrong before you can think coherently in regard to this argument.  You are completely disregarding ALL economic laws in regard to your analysis, once you try to benefit from hoarding Marginal Utility destroys the potential gain, you completely ignore time, and this is why you think hoarding may be beneficial...

The model has nothing to do with this, it is the utility the producers of capital goods have that will rectify this.

And this would be why Communism is not a good idea either... Are you one of those inevitability of government people?  I am sorry but there is no regulation on BTC and it is nontaxable as it stands now, it is operating without government, do you assume that government should be involved?

I doubt any of us will convince the others of their views. Agreeing to disagree is boring, so I think the best solution is to turn it into a competition. Lets create two alternatives and let the three battle it out. :) But what would we call the alternatives? I think that my alternative would be pretty easy to implement by making some small adjustments to the Bitcoin code. But I'm not sure how Suggester's idea would work from a technical perspective because generating a larger number of blocks per hour makes it harder to propagate those blocks across the swarm.

As far as this end of the technology is concerned I am not sure how that all works out...

Can you explain:
1 How yours solves the issue of inflation?
2 How yours can calculate a meaningful price system?
3 Outside of a commodities market, how does yours have a meaningful value for the BTC?

I don't consider steady predictable low inflation an issue that needs solving. The rate of inflation would be decreasing constantly because the amount of bitcoins being added to the system would be constant whereas the amount of bitcoins within the system would be increasing constantly. An increase of 100 when the total is 100 doubles the amount of available bitcoins, but an increase of 100 when the total is a million is a very small percentage increase.

Just like the current implementation, they would have the base value of the cost of production plus any additional value which people give and demand. The only difference is that my alternative bitcoins are like renewable resources. There is not an infinite amount available today, but we can always generate more tomorrow.

Would you rephrase the question?

Alright that sounds interesting. I don't know how fast can propagating blocks go, but let's assume for starters that it takes 10 seconds to propagate a block across the network. There are 8,640 deci-seconds in a day, which means that on average, the system will be able to support something like 2,880 daily blocks (third of 8,640) at a maximum to reasonably avoid collisions. In other words, if we froze the difficulty of generating 1 block so a modern computer would need to work for 1 day on average to create it, it wouldn't be good enough because we hope for much more than 2,880 users to join soon.

The solution would be to make generating a block extremely difficult right from the start. Say, a modern dual-core computer would need to work continuously for a month to generate 1 block regardless of how much CPU power is in the network. With the 10-seconds assumption, this will give us room now to accommodate about 86,400 (which is 2,880 x 30) connected machines without considerable problems. You might complain today that a month of waiting is too much, but assuming the current model succeeds, it will soon need much more than a month to see a block coming under it. Additionally, coin production will be done via specialized businesses and dedicated computers left to work only for that purpose who'll sell to you and me, so a month wouldn't bother them and it would create a killer proof-of-work. And as NLS always fears, a botnet can and will stop all of us from producing under the current model. A botnet will not be able to do so under the suggested model. It will only make its owner rich, which happens anyway.

"What if we listened to your stupid idea, and soon enough we got more than 86,400 connected users?" you may ask. First, please don't resort to name-calling. Second, remember that as time progresses, internet speeds improve faster than computer speeds. So by the time we get 86k PCs connected 24/7 (which may take a couple of years for example), we'll have a propagation time of only 5 seconds. Two more years and it will be 3 seconds, naturally allowing the system to accommodate more newcomers (including a couple of botnets :)) without destroying the economic system via perpetual deflation. The network however wouldn't grow too large because Westerns would prefer to buy coins from people who live in cheap-electricity countries to save on their bills, keep reading...

I think that request was for NLS but I'll answer them for my model too :D

Under my model (and indeed, the current one) the generating costs are generally tied to the price of energy. Those may go up and down all the time, but aren't affected by how much people are in the network and don't double every four years either.

Prices will be determined in my model (and also in the current model) by how much cost (i.e. electricity mainly) was spent to generate a block of say, 10 BTCs (or whatever).

My favorite question :). If we assume that running a high-end computer in a Western country continuously for a month costs $10, then under my model, a ฿10 block will more or less have an agreed-upon value of $10 ($1=฿1). As more people from countries with cheap electricity (eg. Venezuela) join to exploit that difference and compete with each other in selling to Westerns, price will more or less stabilize just a tad higher than the average cost of electricity in these countries. This will also serve as a way to limit the network so it wouldn't grow too large for propagation (because why run your PC for a month in the US and pay a $10 bill when you can purchase that block for $4 from an Indian dude while avoiding the melting of your machine -and nervous system- via all that heat and noise?). The network will be filled with generating Mexicans and Zimbabweans (and botnets) because they're most efficient at electricity cost. It's a shame because botnets may eventually become our main providers, but that's better than having them ruin the whole system by stopping participants from producing under the current model, right?

Now that Bitcoins would rarely increase in value (because people will continuously find a place where electricity is 3% cheaper), nobody will be hoarding his coins. People will gladly use them as a means of exchange and even spend them ASAP before they lose another 3%, causing the ฿ economy to flourish. Additionally, even 20 years from now, anyone will be able to generate a coin by running his machine for a few weeks, granting newcomers who don't want to purchase from botnets for ethical reasons or from Mexicans for security reasons a chance to join at any point in the future.

I wholly appreciate NLS's model, which is exactly like mine with the difference of freezing the generation at, say, 2,880 daily blocks. Under his model, if one computer is connected, it creates 2880 blocks/day. If 10,000 computers are connected, they create something like 1 block/4 days each. The problem with this is that the cost of generating a block would continue to deflate for the foreseeable future until the number of participating nodes stabilizes, which could never happen as long as the price keeps increasing because of the increasing cost due to more people joining the network (due to more people using the internet and hearing about Bitcoin, for example), inevitably having us stuck in the perpetual-deflation scenario. Additionally, if a couple of large botnets join the network (which will happen sooner or later, to be honest), the average user would then have noway to generate his own blocks and would be forced to buy from them instead. Some people afraid of government witch-hunting those who purchase BTCs might be afraid to use conventional methods like paypal and would thus have almost noway of acquiring coins (both because botnets/crowds make generation difficult and because 16 years have passed effectively making it impossible). Finally, if those botnets/supercomputers belong to a government, they would not sell their 2,879 daily blocks in order to hinder Bitcoins's usability. Ego aside, that's why I prefer my model of user-base-dependent-block-generation over NLS's of perpetually-fixed-block-generation.

Satoshi, please do consider changing the current model to one of those two (or something new). We're not trying to win an argument here; we're trying to find the best way to make this project successful. This becomes more difficult with time. If we're going to change anything before the word catches on, now is the time to do it.

As I think I understand you, if the goal is to have price stability I'm not sure I see the advantage.

Even if bitcoins were to increase at a set amount, and therefore increase at a decreasing rate, the pricing system would react the same way as it does now with a final cap: price deflation.  The only difference really is the degree, except that in your system we would still be propagating new blocks (though future computing power probably minimizes this added cost). 

Milton Friedman proposed a similar system to maintain price stability by trying to have the rate of dollar inflation mechanically approximate population growth.  The problem with his proposal though, was that no government (constitutional amendment or otherwise) would limit itself to population growth once it had sanction to increase the money supply.  Besides, they've already given themselves permission now even though the US Constitution forbids it.

As long as we can effectively divide bitcoins (as Satoshi mentioned down to 8+ decimal places), prices will be able to adjust to deflation and increasing purchasing power.  So, Keynesian deflationary spiral crisis ideas aside, absolute price stability is really not necessary.

XC

My exchange rate will not always rise without ever falling. The only reason why it is rising steadily right now is because I calculate it using a large average to reduce volatility. If I used a smaller average, you would regularly see much higher highs and very frequent lows.

Neither the current model nor my model will continue to deflate forever. Once generating bitcoins becomes exceedingly difficult, most people will not try to generate bitcoins.

I know that my model is similar to the current model. What I don't like about the current model is that people generating bitcoins at any given time can generate twice as many as others after four years. That is what I want fixed.

It's Suggester's model that strives for price stability from the beginning.

It does if there is a crash from inflated prices, slow steady inflation is what we have now, in an attempt to stabilize the prices (failing)


There is a logical inconsistency, can you tell someone that you wish to sell BTC's to, "this costs me $1 to create this, so give me a dollar for it"?  The cost of production has no bearing on the price system in BTC, only the products attainable by it has such.  What your slow stream if inflation does is stabilize prices if more products over time are available in exchange for BTC, however, if they do not increase your price system increases the prices, AKA devalues the currency, and as this is different than government currency, you cannot compel usage, would it not be more beneficial to have an increasing value currency and declining prices in relation to BTC?

You sort of answered this in the second, without an exchange of goods that has a measurable value, how do you determine the value of the BTC itself?


1 your answer has nothing to do with the question, the finite cap on available BTC is how the current system deals with inflation
2 the cost of generating a bitcoin has nothing to do with the price one demands for a commodity in BTC, if I would rather have 1 BTC than x amount of commodity, regardless of the cost of generating that 1 BTC, and the cost of attaining that commodity, no exchange will take place.
Economic law
For a transaction to take place both parties MUST perceive a benefit
The price system is how prices will be determined in the market, if you are proposing that dedicating 4 years time should give equal opportunity to someone dedicating one year, you are devaluing the bitcoin for the long time users...
3 Well if you are concerned with trade in BTC, why are you not concerned with production in BTC?
If the BTC level is capped at 21 million, and there are no more BTC to be made your options are to go into business and sell something for BTC or buy them from someone who has them that sells things for BTC, it is obviously in the interest of producers, without the addition of BTC to the market to sell their BTC off or trade them for capital goods.

Why is price deflation bad?
Monetary deflation would be bad, but we are talking about, as I am lead to believe, there will be a constant amount of BTC after a time, where none will be added or leave the system.  Monetary deflation will not occur, just a decrease in nominal price, which is an indication that the value of the BTC is increasing, a good thing...

maybe you all should look into the philosophy of free market economics, since that is what we are realistically doing...

Off the top of my head...
I think the stabilization of the amount of BTC is crucial to the integrity of the unit
I think that we should stress market trade instead of concerning about the cost of BTC production
I think that IF megabots or whatever decide to dominate the market for generating coins their business will be short lived and only serve to be an exchange service after a time
The fact is that IF there was a hoarder, watching nominal prices would indicate such, and it would be silly for someone to do so, the most they could to is exchange them for $ and then their dominant market share is compromised

Democracy Dollars is now the name for my theoretical currency which is based on Bitcoin but with a few modifications. $1.00 DMD would be awarded per generated block instead of ฿50.00 BTC. The amount of dollars awarded for generating a block would not decrease every 4 years like with Bitcoin. Two decimal places would still be displayed because dollars usually have two decimal places. Ideally users would have the option to display and use hidden decimal places. The client would be called Citizen Bank.

A competing currency?

BTW New liberty, what is the site you do your exchanges at...
I would like to look.....

More like a currency cousin (http://en.wikipedia.org/wiki/Sister_cities). ;D

http://newlibertystandard.wetpaint.com/page/Exchange+Rate

I think you're mixing the terms "inflation" with "deflation". We currently have a sharp deflation (i.e the currency's value is increasing). I predict it will continue to occur.

Yes. If he's willing to pay less, less people will produce BTCs causing their production to be easier until price equates with cost. If he's willing to pay more, more people will produce BTCs causing their production cost to increase until it equates with cost. If you don't understand this very basic economic principle then you should've read the previous posts. And under my model, a similar equation is in effect but is not changed as more people join the network and isn't doubled every 4 years.

No. And I'm tired of having to explain why a deflating currency is a bad idea. Please refer to previous posts.

It does. Because as long as energy costs don't increase by, say, a constant 10% annually, coins won't.

Oh God...
Did you forget that 99.99% of goods purchasable via coins are also purchasable via cash? You're not making any sense.

Refer to my previous posts, please. I thoroughly explained why this won't happen.

Because it greatly reduces the wish to spend now.

Many will leave the system via computer failures, many will leave the system via sabotage attempts, and there would be noway to bring them back.

That's exactly what a "monetary deflation" is.

I'm mysteriously resisting the urge to give a really mean response here.

Same here. The current model doesn't grant that.

They go hand-in-hand. With constant deflation there would very little market trade if any.

If he earns $ via exchanging them, he wouldn't have a reason to stop generating even more. Nominal prices now does indicate that more people are producing, whether botnets or otherwise.



You forgot the most important question: How many DMD's do you suggest being produced per day on average? You do want it to be a fixed amount, no?
I did a quick and dirty research and it seems that the lowest electricity cost worldwide is about 1/4 of the US average. In an attempt to shoot for ฿1 = $1 to make calculations easier, I think making my block worth about ฿3 (for a month of work) should be close enough.

I didn't forget. I was only pointing out the differences. Democracy Dollar blocks would be generated at the same rate as Bitcoin blocks, on average once every ten minutes. You could call yours DC Dollars, short for Direct Current Dollars since you are trying to tie yours more closely with to the price of electricity and computers use DC electricity.

So you want the rate to be constant @ 144 blocks/day forever? Why not increase it to, say, 1/minute (1440/day) so the system could accommodate more nodes without much delay? With 10,000 nodes at the current difficulty, you need to wait an average of 70 days for a coin to appear. If your dollar became an international currency, you might have to wait for a whole year or more for a coin to appear!

I imagine that my idea will make downloading the existing blocks very difficult after a couple years or so though because of their size (1M blocks?!), isn't there a way to compress them or something?

I could just name mine Electric Bitcoins (EBC's, yummy!), because they're directly proportional to how much electricity you've put into them regardless of how many people are in the network.

Yes, I want the rate to average out at 144 blocks per day forever. I like that rate because I understand and trust satoshi's judgment on that aspect of how Bitcoin works (https://www.bitcoin.org/smf/index.php?topic=43.msg376#msg376). The Democracy Dollar client requires only a few minor changes to the Bitcoin code. Your currency would have to work very differently from a technical perspective. I'm certain that a P2P digital crypto-currency with the economic model you envision is possible, but it would require a competent programmer to redesign how it works. Electric Bitcoins is a good name. :)

My model should be fairly simple to implement. We'd just freeze the amount of effort needed to find a new solution so the odds of finding it would need, on average, a month of continuous work for a modern 2.0 Ghz core-2-duo for example.

Satoshi and other pioneers: I understand your reluctance to change the current system: you guys don't want to sacrifice all the effort you've put into the project and start from scratch with no coins. But all we need to do for Bitcoin 0.3 is remove a couple of zero's for an average month's production to equal 3 new coins for instance. Perhaps every 4,000 Bitcoins can equal 1 NBC (new bitcoin) or something like that?

The problem is that blocks are also the equivalent of checks clearing. They are how financial transactions are verified and propagated. If you set the difficulty very high from the beginning, it would take days or weeks to send money until it became more popular.

At 1 block/month on average, with only 30 computers in the network it would take about 1 day to create a new block. 1/2 a day with 60 computers etc.

I admit that we need to correctly estimate the minimum amount of time to broadcast a new block across the network though. And is it possible to use timestamps for blocks so even if the difference was 0.1 second they could be re-organized on our machines? How about something like programming lines with 10-figure differences reserved in case of double-block-creation before broadcasting is complete, is it possible?

But what do you do when there are hundreds of thousands of nodes generating coins? You would have many people generating blocks every second which breaks the current implementation.

That's what I'm talking about. If we have something like "spare blocks" designed to be occupied by double-entries as in programming lines (they go 10, 20, 30 not 1,2,3 to make room for later changes), and if we have timestamps which say when was each block exactly generated down to the 100th second, maybe we can solve that problem altogether.

If worst comes to worst, and the number exceeds the proposed 86,400 before we achieve enough technological progress to significantly reduce the latency time, then some blocks will inevitably be lost until this progress is achieved. So, say, if 100,000 nodes are simultaneously generating coins, maybe 10% of the new blocks will be lost which should be an incentive for some of them to leave the network (or, ironically enough, perpetually raise the price they charge to accommodate for their losses!).

This scenario, however, is extremely unlikely. If each node is connected to 10 exclusive others, it should take only 5 "hops" to reach the whole 100,000 connected network. How much time would it take for each hop at most?

I'm actually not in a hurry to implement Democracy Dollars. I might look into it further at the end of this year or the beginning of next year. Perhaps I can come up with an even more fantastic name before then. :D

People need to buy food and goods right? And more savings leads to lower interest rates, which incentivise people to borrow more and move toward interest rate equilibrium ;)

We would all be way richer and more developed in the present, had the inflationary meddling taken place in the last century. You see, high savings rates decrease real interest rates, which makes high order capital industry investments profitable, which otherwise wouldnt be due to their low return. These high order capital industries in turn make lower order industry and consumer goods cheaper, and lead to increased productivity.

There will be monetary inflation and, monetary inflation causes interest rates to be below their market level, thus creating speculative bubbles and malinvestments as the resulting capital industri invesments arent supported by actual time preferences.MONETARY INFLATION = BUSINESS CYCLES

Bad idea mate, monetary inflation causes business cycles.


Overall, a lotta ya'll would do good to brush up on some real economics, that is Austrian Economics. Rothbard's MES is a and thorough good start.

http://mises.org/rothbard/mespm.PDF

I already explained why is this different than purchasing food and why banks and loaning aren't realistic when it comes to Bitcoin. Please refer to the previous posts under this thread and comment on them if you find them unreasonable.

I rethought about my model and found that if we adjusted the constant difficulty so that we need a month (or more) to generate a block, not many folks will be generating, so the network wouldn't be overcrowded for propagation purposes; people would prefer to buy from professional generators instead (who'll make a small profit margin). But then again we then have a problem that the proof-of-work wouldn't be as strong, although that's surely better than the current situation.

I hope Satoshi or Sirius would take these suggestions seriously and provide some feedback on them, but I think they've totally 'programmed' themselves that the current model works best to the extent that they don't welcome different recommendations very much.

Your proposed changes to bitcoin WILL NOT WORK with the current implementation of Bitcoin. Absolutely everything about the program would have to be completely and fundamentally redesigned from the ground up in order to implement your suggestions. That is why I don't take your suggestions very seriously. Although I think that such a currency is probably possible, your current suggestions on how to implement it WILL NOT WORK.

Why do you say that? Apart from some aesthetic features like reducing the block size to about 3 coins (if difficulty was set to 1 block/month/CPU) in order to have the approximate value of ฿1=$1, all what's needed is to simplify the code by removing the automatic proof-of-work difficulty increases. "Want $3 worth of coins? Go ahead and spend $3 worth of electricity to generate a PoW block, or buy from someone who'd done so".

It ain't gonna double in 4 years, so you can spend it today with no worries. It ain't gonna double in two weeks either if the number of nodes doubled in two weeks. It's pretty stable as long as the lowest global cost of electricity is. We're not gonna run of out it because people constantly lose their virtual wallets. And after 15 years, anybody could still join in and create some coins or buy from generators. How can you claim that the current model beats that one?!

Your economic model is fine. But not adjusting the difficulty of block verification leads to problems of scale. Having all transaction clear once a month is unusable and unacceptable for a currency and if it did happen to become a huge hit, clearing blocks very much faster than once every 10 minutes does not work. The whole system would get stuck. Not to mention, what can be done in a month right now, will be able to be done in a much shorter amount of time in the future as computers become capable of running more processing threads concurrently.

Bitcoin is great because it works well on a small scale and a large scale and the value can adjust dynamically. While there is demand, the value goes up and while there is not demand the value goes down. A currency tied tightly to the cheapest price of electricity AND with all the other benefits of Bitcoin would work fine, but such a currency has not yet been invented and your suggestions on how to invent such a currency would not work from a practical perspective.

You misunderstood me. And we've gone through this before. Nobody's going to wait for a month for their block, because that assumes only one node is generating coins. If 30 nodes were generating simultaneously, we'll wait only for a day. 90 nodes and we've got it down to 8 hours, etc.

But would cost the same amount of electricity in this much shorter amount of time. You'll be able to rise your electricity bill to $3 within two weeks instead of a month that's all (for eg. via using a quad-core 3.2 GHz machine in 2013).

I rest my case :-/

30 Days in a Month * 24 Hours in a Day * 60 Minutes in an Hour * 60 Seconds in a Minute = 2,592,000 Seconds
In a few years there are 1,000,000 users with the average computer having two 16 core processors with hyper threading.
1,000,000 * 2 * 16 * 2 = 64,000,000 Threads
The current 30 day estimation is based on a dual core processor, so 64,000,000 / 2 = 32,000,000 blocs per month.
2,592,000 / 32,000,000 = On average, each block needs to be spread among 1,000,000 peers every 0.081 seconds.
Now imagine even more users and thousands of cores per processor (http://news.cnet.com/8301-13924_3-9981760-64.html).
FAIL!

A million wth?? That's extremely unlikely to happen. To compare, Tor which is virtually indispensable for anonymous surfing (something more important than, and a prerequisite for anonymous currency) has been around for 7+ years now and its users are about 250,000 AFAIK. Remember that we're speaking about users not nodes here. Nodes are about 2000 or less. To compare, we can reasonably estimate that in 7 years we'll have 250,000 casual Bitcoin users, and 2000 dedicated nodes working on creating new coins. I know we shouldn't be comparing that simply, but I'm trying to tell you how fast these projects spread. You don't get a million users in two years for a very specialized service like this.

You further forgot that internet speeds and computer efficiency would be much better by the time we reach the impossible figure of a million nodes. It would be like comparing today's internet speeds with 1995's. By the time we have a million nodes (maybe by 2050 or something?), the network would be able to propagate new blocks almost immediately. Under the proposed amendment (1 block/month/machine), the system will need 4320+ nodes to reduce the average propagating time to less than 10 minutes. In other words, until we have 4320 nodes, it will be "less congested" than the current build, with an average of 1 new block every 10+ minutes. I think we can easily live with 10k nodes TODAY with the proposed 1 block/month/machine, and by the time they exceed 10k permanent generators (if they ever do), there would be great leaps in both technology and bitcoin's design.

The current model is DEFINITELY a fail. With one or ten nodes, the coin isn't spendable and supply in circulation will dwindle over time due to losses and hoardings. If you don't like my model try to offer something better, but stop advocating something which obviously won't work just because you've put effort into it!

PayPal has 184 million accounts after 10 years. Bitcoins can be spent on dollars right now. There are physical limits to how much latency can be improved. It will always take multiple milliseconds to send information around the world.

Hi Suggester,

Let's take a look at the two main issues that you raise:

1) "Because bitcoins get harder to produce every year, it is the same as receiving 19% annual interest for free."

Yes, the marginal cost of a bitcoin increases by 19% per year, as posited by you. However,  note that this is the cost of making *one more bitcoin*. This phenomena does not confer 19% free interest to all existing bitcoins. Here's an example:

Mickey Mouse opens a mine which mines gold. His is the only gold mine in the world. The first year he mines 5000 ounces of gold. In the second year, the gold is harder to find, so he is only able to mine 2500 ounces of gold. The gold becomes harder and harder to find, and he must spend an increasing amount of money to mine the next ounce. Eventually, he can never mine out that last ounce of gold, so its cost rises to infinity.

Now, let's say you bought an ounce in the first year, back when he mined 5000 ounces. In the second year, the supply of ounces rises to 7500, in the third year, it rises to 8750. Now, given that the supply of gold increased rather than decreased, why would the value of gold increase? There is more gold on the market now than there was before, so from the supply side, the pressure should be on the price to lower, not increase.

Let's say a few more years pass, and the price of mining gold is now astronomical. Let's say it takes $1 million dollars to mine the next ounce. Are you honestly going to tell me that the value of EVERY gold ounce in existence suddenly goes to $1 million? No. On the demand side, the mining would simply stop, because at some point, people would refuse to pay more than X for another ounce of gold. Mining would no longer be profitable, which technically makes the cost of one more unit infinity. The mistake you make here is in believing that the marginal cost of the next unit somehow imparts its value onto ALL existing units. It does not.

2) "Again, because bitcoins become harder to produce, everyone will hoard, so there will be massive deflation. Deflation is bad!"

There are a couple of problems with this. First of al, there would not be monetary deflation, there would be price deflation. In terms of price/performance, computers have been decreasing in price at quite a fast rate. Are you honestly going to tell me that this is a bad thing?

Your next argument is that price deflation encourages people to hold on to dollars. Yes, it does, but understand that when people withdraw money out of the market like this, it has several effects. One is that less money in circulation means that prices drop faster, thus encouraging more people to use these hoarded dollars to buy something. I believe someone on the forum also said: ""Even after bitcoins can no longer be created, in a deflationary environment all bitcoins equally appropriate increased purchasing power.  In an inflationary environment (i.e. USD), on the other hand, purchasing power is redistributed from all dollar holders to those first receiving the newly created dollars - generally government and government-connected institutions." This is a strong advantage for a monetary-fixed and price-deflationary environment as opposed to a monetary inflationary environment.

You will not be able to perfectly control who creates the new dollars. In the current system, the scope of inflation is limited in time and limited to contributing users.

The second is that the flood of hoarded dollars increases competition for lending money, which causes interest rates to drop, thus increasing the attractiveness of borrowing dollars and reducing the attractiveness of saving dollars.

Finally, bitcoins do not exist in a vacuum. If hoarding goes too far and bitcoins cease to be useful as a medium of exchange, then their value will actually start to go down. People will start using other currencies, and people will actually start demanding more bitcoins for goods as their perceived value will decline.

Finally, the value of anything in this world is solely the subjective opinion of the person doing the valuation. I can pay a gang of workers a million dollars to dig a big hole in the ground. By your logic, that hole must be worth at least 1 million dollars. However, if the hole isn't worth anything to anyone, then its value is zero, regardless of what it cost to produce.

A hole is a stupid example you say? Then I can produce a wooden horse using wood manually dragged in from 1000 miles away, paying my workers $10,000 for the job. Are you honestly going to tell me the value of the wooden horse is $10,000 simply because it cost me that much to make? Nope, that might be what I personally value it at, but if nobody else wants to buy it, then it is actually worthless as far as other people are concerned.

Two lessons:

cost != value
money is a good, and like all other goods, its price is determined solely by supply and demand; i.e., how much the market will bear (and how much it won't bear)

I believe that the fatal flaw, finally, is with your critique of bitcoin's economic model, and not with bitcoin's economic model itself. If you truly believe bitcoin's model to be flawed, then why not start your own client? If it truly is better, you will be competiive. There is room for more than one currency in our digital future, and I am sure there will be competition, and the consumers will choose the currency they prefer.

I also recommend you spend some time reading up on the subjective theory of value and Austrian economics; it might help to clear up some of these misconceptions.

---

TO THE CREATORS AND MAINTAINERS OF BITCOIN:

Thank you for creating this project and bringing sound money to the digital realm. Please, do not listen to the criticism directed at you by Suggester and others; it is misplaced and not well-founded in economics. You guys are doing the world a great service, and I commend you for that.

Welcome to the forum Bitcoiner!  That is an excellent rebuttal.  I couldn't agree more.  Maybe Suggester likes playing devil's advocate?  I don't know.

But what would stop anyone with a large enough botnet, or even a company such as Google, Microsoft or Amazon with a big cloud, generating the bulk of the coins for themselves and leaving very little for everyone else?

It doesn't really hurt anyone else if they do. If they never spend the coins, it's as if they don't exist, which means everyone else's coins are worth more. Coins can be fractionated to 8 decimal places, so transmitting small value isn't a problem.

The danger would be if the big cloud attempted to undermine the network by screwing around with the block chain, instead of simply generating coins.

I strongly suggest everyone to read entire Part V of Walter Block's "Defending the Undefendable" (http://www.indytruth.org/library/books/block-defending/defending.pdf). The rest is also good, but beyond this particular discussion. Other book I could recommend would be "Economics in one lesson" by Hazlitt (http://www.hacer.org/pdf/Hazlitt00.pdf).

I strongly suggest everyone read the children's books of Dr. Seuss and Roald Dahl as well as the Harry Potter series.

Please let us know why or what about the books you're recommending. Honestly, nobody is probably going to read either of the books, so you might as well at least let us know that they offer a good argument in this or that direction.

I would recommend everyone read "How an economy grows (and why it doesn't)" by Irwin Schiff. In graphic novel format, it's an easy introduction to the basics of economics and on how an honest banking system becomes dishonest. It's quite relevant to this thread and other threads about Bitcoin, actually.

"How an economy grows (and why it doesn't)" (http://freedom-school.com/money/how-an-economy-grows.pdf)

http://freedom-school.com/money/how-an-economy-grows.pdf

A very entertaining libertarian cartoon.  It has some major flaws, but it is certainly an entertaining read.  Not sure what it has to do with bitcoins though.  Bitcoins are kind of the opposite of fish.

It does have its flaws, but it's still a good introduction. It's biggest flaw lies perhaps in the presentation of inflation in the form of steadily shrinking fish; surely people would have noticed :P

Still, it's relevant to the idea of fractional reserve and how banking can both become dishonest and stay dishonest for long periods of time. The first chapter about loans and capital accumulation are also good as a primer if you don't want to read something like economics in one lesson.

I also like the part about why you shouldn't lend people money to spend it on consumption, i.e. to go on vacation. I happen to know some people that behave exactly like how the two jokers behaved when they "wanted to go on their vacation NOW!" ;)

Just read the chapter list for both and you'll have a pretty good understanding... Don't have to lash out with "Dr. Seuss" and what not. Both book titles are fairly self-explanatory.

Ok. Both books are preaching the Austrian school's ideas, so they should be a right fit for this community.

"Defending the Undefendable" covers various social aspects and practices of our lives, which are under heavy ostracism by the society (off the cover : The Pimp, Prostitute, Scab, Slumlord, Libeler, Moneylender, and Other Scapegoats in the Gogue's Gallery of American Society). Part V covers financial personages, such as The (Nongovernment) Counterfeiter, The Miser, The Inheritor, The Moneylender, The Noncontributor to Charity, and shows how those are not bad guys, but it fact are required for a normal economy; also covering a good deal about the economy in general.

"Economics in one lesson" is a very old treatise on economics, circa 1946, which is still surprisingly valid in describing current state of economical affairs.

I honestly don't think the titles are self explanatory, so thanks for the explanation. I think the books I recommended are self explanatory, but in case they're not to you, they're very enjoyable to both kids and adults. In fact they're pretty much my favorite books. They're a bit off topic, but considering the point I was trying to make, they're quite on topic. Sadly I don't think you got it. I wasn't lashing out, but nonetheless apologize for coming across that way. Happy bitcoining!

I'm a big fan of Harry Potter myself :) Dr. Seuss is pretty much unknown where I come from :)

I just read this thread - quite a long one there.

I agree with Suggester. I also believe that a competitor to Bitcoin which works in a way he/she describes will be the better currency in the long run. While I agree that competition will run its course and this will become obvious, it would be a shame for Bitcoin - it does so much right and in a clever way, that it would be a shame to see it lose out in the longer run; the team deserve much credit, IMO.

One of his first posts made the point worth repeating: keeping the system as it is, is like a ponzi scheme. As we all know, these have a habit of not lasting the test of time.

I see the usage of CPU resources as a potential roadblock to Bitcoin - better alternatives here may be found. If legal tender collapses, that's a potential roadblock as well, since that takes away some motive for wanting to use things like Bitcoin. In short, there are many things that could happen between now and the future, but you know what? The best way is to experiment and try.

If you're right, and an expansionary money supply is what people want, then people will choose it. If I'm right, and a stable money supply is what people want, then Bitcoin will prosper and grow. Either way, the consumer wins, and therefore, we win. Without competition and the test of the market place, we could never know what the consumer wants for sure. There is nothing shameful about this; it's all part of the process of creative evolution, and Bitcoin has already captured an important part of that history.

I'll have to disagree that Bitcoin is like a ponzi scheme; there is nothing pyramidal in its nature at all. I believe this criticism stems from a flawed theory of value.

It will be a great experiment, for sure. I agree that Bitcoin will have its footnote in history too, but I think the devs hope it will turn out as more than that. I could well imagine that the Bitcoin approach would be the hare, while the alternative expansionary (with user base) money would be the tortoise. We know who won in that race.

I assume you agree that the value of Bitcoins will increase, while there is limited supply and growing demand? Follow that rational through and see where it takes your path of thought.

History is not on your side. There was a stable supply of money once in the form of gold and silver but from about the 16th century onwards people picked an expansionary one - this was not forced on them. The first formalised  bills of exchange preceded the formation of central banks by somewhere in the region of 200 years.

I guess we will see in time - though in actual fact while people are also using other possibly expansionary monies this grand austrian experiment will be somewhat corrupted in terms of experimental purity.

I hate for this to be my first post because I have lots of nice things to say to Satoshi Nakamoto and the team. I'll have to put those in another post though.

My first though when I saw bitcoin's disbursement model is that it is structured like a ponzi scheme. Or at least structured like systems people often express frustrations over.

Ponzi like things...

1. It may seem like coins are somehow distributed "fairly" but in reality, 1/2 of all bit coin value is distributed to the initial bitcoin operators. (first four years). If you expect bitcoin to go mainstream (exponentially growing number of users, over say 20 years). Then you've created a class of "landed gentry" based upon arrival time rather than outside commodity value. Ponzi designed his scheme the same way. Early "investors" see disproportionate benefit even though everyone is given the feeling they start equally.

2. Initially bit coins have limited commodity value. No matter how many you have, there are simply few commodities you can buy with them. Relative latecomers are expected to bring "your" commodity value with them. The more relative latecomers you attract, the more your existing savings is expected to increase in commodity buying power. Ponzi would have been proud.

3. While the accounting is clean. The market seems subject to manipulation. For example, this forum is obviously a tightly knit group relative to the worlds general population. And this tight group has all the bit coins and decides the rules of how they operate. For example it would be trivial for you bit coin rich to decide that you would keep the community in close beta for a year or two. Thereby assuring yourselves an initial hidden stash. Those coins could be considered "lost" to the latecomers. Then after  commodity values begin to rise, this group would control say 30% of all currency.  That is as close to a fiat currency and a federal reserve as I've ever seen.

Am I missing something?
 

Deflation is bad. Unless of course you hold lots of cash-on-hand. In that case it is invaluable. Early users that hoard bit coins are rewarded for doing nothing to help the bit coin ecosystem. They are simply "lords".



 

It is a bad idea to keep out people, because it mean that your market is limited. There are less goods and services to buy. It would only make sense if you want relative power over others. However, if you're interested in wealth, you would instead open the market up to more people.

You could say that, but that is your hunch based on your imagination, not an objective truth about the future.


I already have, along with many others. Perhaps you'd like to read
"Deflation and Liberty", by Jörg Guido Hülsmann (http://mises.org/daily/3231)?

What does this have to do with what I've said, or Bitcoin? I haven't said anything about credit. Honest credit is a legitimate function of a free market economy.

Well, the coins have to get into distribution somehow. We can't just say "here's the money supply" and be done with it. The way it's done now rewards the early contributors to the system, yes, but without those early contributors, there would be no system. We can discus a better way of distributing the initial set of coins, but they must be distributed somehow.


I don't quite understand what you are trying to say here. Are you saying that as demand rises, Bitcoins can be exchanged for things of more value because people demand them more? Well, that is true by definition.


Yeah. The biggest thing you are missing is that Bitcoins are a voluntary system. If the developers are dishonest, the value of the currency goes to zero. If the early adopters hoard, then other people can make a profit by selling their more valuable Bitcoins. For every action, there is an appropriate reaction.
 

The color purple is bad. Unless of course, you happen to have a lot of purple dye on hand. In that case it is invaluable. Early users that hoard the purple dye are rewarded for doing nothing to help the purple dye ecosystem. They are simply "lords". See, I can assert things if I want to, too. Doesn't make what I say any more than my own subjective hunch.

Right, he's somehow assuming that Bitcoins will be forced on us all and the developers will become our lords, somehow. It just doesn't work like that in a free market where anyone can easily come up with a competing system and easily switch to it.

Well I lost a great post. I'll retype it when I get to a real keyboard.

I'm not actually worried about the developers. If they haven't accumulated wealth already, they are held hostage to the same "fiat of the code" as everyone else.

However, as with a ponzi pyramid they could have stacked the early deck and no one can know. I'm not making any accusations here or casting aspersions.

Relatively speaking, I'm an early adopter. For $1,000 I could buy up and hoard 1% of the currently available coin. Anyone long term bullish would do so. Only a bearish early adopter would sell.

According to the deflationary model, there is no reason to ever be bearish.

Unless you think bit coin will fail to gain acceptance. In that case you should cash out, as in any ponzi scheme.

The lords are not the developers. The lords are the early adopters. Isn't that why everyone is here?

No, they couldn't have, not without us knowing.  The block record shows the creation and time stamp of every coin.  They couldn't have started it for 4 years, and then release it, as it would show up in the block chain as having started 4 years ago.  If they tried to fake it to get themselves more coins, every other client would have rejected it.  The source code is open source, so we can verify that there's nothing shifty going on with the verifying of coins (if(developer) accept(); else verify(); or something)

I know the coins and  blocks were generated according to the code fiat. But no one knows who they belong to. That is the point of the system. If it's not, I'm no longer interested.

Noone knows the identities of who the coins belong to, but they do know that they belong to "some entity".  The first transaction in each block says "Ok everyone, listen up:  Someone from address asd;lkfjads;lfkjasd;lfjkasd;fj owns 50 new bitcoins, even though it didn't come from anyone else."  This doesn't reveal the persons identity, but it DOES reveal when they were created.  Looking back to see when the bitcoins were released to the public, and when the first coin was generated, we can see if the developers left coin generation on for a long time to develop a monopoly.

Actually no pro bitcoin argument changes if 1,000,000 coins each were distributed to the first 21 node operators.

It just seems less like free money to the 22 node operator.  

I can take your word that you were here at the beginning and you know the identities of all the initial node operators. (and I do!)

But I hope you realize, that aside from trust, I and anyone that comes afterwards can't know. And the point of bitcoin was not to have to rely on trust. That's in the white paper. :-)

Well, more like, you trust the bitcoin network.  For everyday currency transactions (buying and selling), some level of human trust is almost always involved.  You trust that a business will likely give you a service, in exchange for giving them money.

That's the choice of the developer, nothing wrong with it. I was around pretty early and from what I could tell, the network really had been public the whole time. In fact I think I was the first person, or at least one of the very first people, to start pushing for real financial transactions. 8) You're welcome everybody! :D

Well, a single person can have multiple addresses, so you don't neccesarily know if two transactions go to the same person, as different addresses could be either the same person or different people.

I think you have it backwards my friend. The value of bitcoins will be determined primarily by demand. As demand increases the value will rise and the profitability of generating will adjust accordingly. So, as the number of generators increases, so does the difficulty, thus the profitability levels off at about the cost of electricity/hardware to do the generation.

What you're forgetting is that the cost of generation (In electricity) changes. It depends on the difficulty. The profitability of generation will adjust according to demand/value.

Satoshi has really thought this one through.

Re: computers...the point there is that by the logic of the "deflationary spiral," people should put off their purchases of computers and cellphones, since they can get so much more for the money next year (or the same thing for a lot less money). Yet these are some of the most dynamic sectors of the economy, despite a deflation rate approaching 50% per year.

It's true that we had deflation during the Great Depression. What people overlook is that we also had deflation during the Roaring Twenties. What's more, "Between 1870 and 1896, prices fell consistently amid rapid economic growth—with plenty of booms and busts along the way." Source: http://www.slate.com/id/2258810

Deflation caused by lessening demand, due to everyone being too in debt to buy as much, can be pretty horrible, since it makes it that debt even harder to pay off. But deflation that's just due to the money supply not keeping up with economic growth doesn't appear to be a problem.

It doesn't work like that for computers.  Last years computers can run last years software, but if you can be more productive with this years software, you need a better computer.  Most people land on a reasonable compromise, and buy the cheapest computer capable of what they need for a couple of years ahead.  This goes for any piece of technology -- cars, planes, factory equipment, whatever.  It makes more sense to buy today and be more productive, than to wait for everyone else to drive you out of competition.
In a normal economy deflation is countered by printing more money.  Inflation is needed for an economy to work.  Economy is driven by the trading of goods, and money makes it effective.  If there is deflation, it makes more sense to keep the money and not trade it for goods.  If goods keep their worth at best, while money keeps getting worth more and more, then no one will be willing to trade their money for goods and the economy collapses.  In my country it was government policy during the 1930ies to have deflation until the money was worth the same as before the crash, and this made the depression last for ten years more than it would if they had just devaluated and started the inflation again.  A lot of rich people would be poorer, but the economy would have recovered faster because of more incentive to spend and invest.  (Hyperinflation is not good either, because money needs to be trusted to not lose their value to fast.)

This is poor economic reasoning.

The necessity of monetary inflation does not follow toward economic exchange and the effectiveness of money. In other words, this is a non-sequitar.

His reasoning also ignored the fact that people need foods, water, and the like. All of which will exceed the desire to horde.

It is worth noting that money, by themselves are not an end. For any of the money to have any use at all, they must be spent and invested, or otherwise saved for some future catastrophe, spending needs, and others.

All the saving rate does is forecast the time-preferences of the consumers, thus economies will follow consumption pattern that are longer term and make possible capital intensive projects.

I say his reasoning is a bunch of gibberish easily disproved.

I've seen a lot more of that since joining this forum.  Considering the main topic, I was expecting a higher level of economic education from the average active member than I've actually seen.

It add nothing of substance to the topic...

It add nothing of substance to the topic...
add nothing of substance to the topic...
nothing of substance
nothing
.

... by Nobel price winning economists. There is a short summary in the Wikipedia article about the gold standard http://en.wikipedia.org/wiki/Gold_standard#Suspension_of_the_gold_standard (http://en.wikipedia.org/wiki/Gold_standard#Suspension_of_the_gold_standard).  Read the paragraph titled "Prolongation of the Great Depression".

Some inflation is good. Deflation is bad. Every nation in the world governs by this principle.
Economic exchange today is about a lot more than food. If money keeps increasing in value as long as you hold onto it, you would want to spend as little as possible on other stuff than necessities.  You wouldn't even put it in a bank, because banks can go bankrupt.  And they will in this scenario, because very few will borrow money if their loan keeps getting higher and higher in money value every year. It also discourages investment. The number of possible investments which gives you more in return than you get by keeping the money gets lower, and this limits economic growth.
Yes!  And it makes no sense to spend more money than absolutely necessary if the coin which buys you one bread today can buy three breads tomorrow. The other way around makes a lot more sense, since that is an initiative to keep the money flowing in exchange for goods, which keep the economy growing.  Within limits, of course, since lack of trust in money induced by hyperinflation is just as bad.
Then disprove it.  It would certainly earn you a Nobel price.

Yeah, like that one who believes in the broken window fallacy: http://www.youtube.com/watch?v=QG4jhlPLVVs

The Nobel prize has already lost any respect it might had long before giving the peace prize to the guy who just raised the budget of the strongest armed forces on earth.


What prolonged the depression was all government interventions and attempts to recover the economy.
You want to see how can a strong crisis be quickly "solved"? Just read about the 1920 crisis: http://www.washingtontimes.com/news/2010/mar/18/a-tale-of-two-great-depressions/


And that's why the world will suffer a major economic crisis in less than one generation time.
There is nothing bad about deflation. It rewards savers (and savings is good since it makes capital accumulation easier) and also make it easier for the poorer to consume stuff that otherwise they wouldn't manage to.


First: savers should be rewarded. They make everybody else's life better.
Second: for such a strong price deflation to occur, not only a frozen monetary base is needed, but a strong increase in productivity is necessary as well. Your scenario is self-contradictory. If prices going down causes such bad consequences, how could the prices keep going down in the first place? Productivity would drop and the price of goods would raise since they would become more scarce.
The thing is that prices going down do not cause economic problems. On the contrary, they represent a previous increase in productivity. Prices going down are the result of economic growth.
By the way, the technology industry is a living example of that. Their productivity increases even faster than the central bank printers work. Electronic goods' prices are always falling, and that's not negative at all. That doesn't stop people from wanting to consume them by the way (assuming people would just keep money in their pockets and never use it's quite silly, come on... money is not and end in itself).


If that happens it means your baker triplicated his productivity in one-day time. Give him a medal or something.


No, no! That's the source of all your mistakes! It's not money flow that allows the economy to grow, it's not consumption that increases productivity.

Memorize it: It's not consumption that allow economic growth. It's saving.

Repeat it to yourself several times....  ;D

Seriously, a raise in consumption is the end consequence of economic growth, not its cause.
First, somebody has to save. Then, this savings can finance capital accumulation. More capital, more productivity. More productivity, more goods and services. More goods and services, more consumption is possible.
Consumption is in the end of the chain. Savings is on the beginning.



It already has been disproved since the 20s.

The economics prize is almost as bad as the peace prize. Despite the name it is not actually a Nobel prize but was instituted by the Swedish central bank in 1968.

It's not that simple. Unexpected, monetary deflation (and inflation) is bad. That is if there is an unexpected change in the amount of money units that contracts, loans and wages denominated in the currency does not take into account then things get skewed for no good reason.

But that is not the kind of deflation we talk about here. Growth deflation  arising from economic growth is as predicatable as that growth and a good thing because it does not artificially push down the level of investment from the optimal as an inflating money supply does.

Every country in the world has trade tariffs too. That's certainly not because they are good.

But hoarding growth deflating money is investment so it's actually the exact opposite. It encourages investment and increases economic growth.

Some people even believe in gods or wear a cowboy hat.  Some are even clueless about the Nobel prices.  This do not mean they are incompetent or wrong about everything else.

The economists in question did not receive the peace price.  If you believe that, you are wrong.  The prices are not related by anything but their name.  The two prices are even given in different countries.

The article fails to mention that the correction in 1920, when millions (yes, millons) of soldiers returned home from a ruined Europe to a transition from war to peace time economy was completely different from the depression in the thirties in both cause and effect.   And I can't see anything in the article that supports deflation in the long term.  This is not about crisis resolution, but about keeping an economy going in the long term.  This is a highly political and very unscientific article.
Which planet do you live on?  Those statements must be based on some political theory.  It is certainly not sane economics.  Capital accumulation slows economic growth.  I'll give you a real world example.  My country has about four times the amount of fortune in an international fund as The USA has debt per inhabitant.  It is from oil revenue which is saved in good times to keep the national GDP in check, and spent in worse times.  We expect it all to be gone in 50 years because of an aging population and empty oil wells, but for now we are rich.  When the crisis came in 2008, this country spent a lot of money from the fund to keep people at work and the economy going, and avoided recession.  This spending from the fund increased GDP, just as putting money away keeps GDP from growing too much for us to stay competitive with the rest of the world.

Deflation is very bad for the poor.  When you owe money to someone else, and the money you owe them keep getting more and more worth while you get paid less because of increasing money worth, you don't have any chance of paying back at the end.  With interest you know how much you can borrow, providing the interest keeps at approximately the same level and your income does the same or increases.  With deflation your income will go in the opposite direction, and if deflation increases you pay double.  At least interest levels and inflation tend to cancel each other out in the long term.


First: savers should be rewarded. They make everybody else's life better.
Second: for such a strong price deflation to occur, not only a frozen monetary base is needed, but a strong increase in productivity is necessary as well. Your scenario is self-contradictory. If prices going down causes such bad consequences, how could the prices keep going down in the first place? Productivity would drop and the price of goods would raise since they would become more scarce.
The thing is that prices going down do not cause economic problems. On the contrary, they represent a previous increase in productivity. Prices going down are the result of economic growth.
[/quote]
Try to explain this to the Japanese.  Japan has been troubled by deflation for two decades.  Try to explain that this is good for the economy.  I doubt you'll find anyone who agree with you.  Only ten countries in the world have lower GDP growth than Japan.

As I have noted earlier -- electronic goods are an exception because they increase productivity by themselves.  Modern electronics lead to a productivity increase high enough to pay for the quickly decreasing value of the goods.  There are many other examples, which all have the same property.

No.  This will make the baker able to buy more breads.  Quite the opposite, in fact.  The flour he paid a coin for yesterday is now only worth 1/3 coin, and he will lose money because he can't sell the breads for that much.

It is wrong as a general rule, which I have proven by counter examples.

1. Save capital.
2. ?
3. Profit!

Capital will not increase productivity anywhere unless it is invested (which is the same as spent, just with different expectations).  I can collect tons of gold in my basement.  This will not lead to increased productivity anywhere.  I can give it to poor people, who spend it.  This leads to increased demand, and inflation, which lead to increased productivity because it is needed to fill the demand.

No it hasn't.

Dude, you couldn't do worse by using the Japanese as an example. They tried interventionists measure, didn't work. The Japanese stuff their money under the bed.

Even if they were to spend it, there would be massive inflation. It's bad for the Japanese all around.

There are good deflation and bad deflation, just as there are good inflation and bad inflation. Though generally, most inflation that happen today are just bad.

You may say that if a mathematician believes in gods that doesn't make him incompetent in Math, but if a so called "economist" believes in one of the oldest fallacies concerning economics, that's a different scenario, don't you think?


Err... lots of people coming back, with no jobs or money, wounded and all... shouldn't that make everything even worse?

And by the way, the cause of the 1920 crisis was exactly the monetary expansion done by the Fed during WW1.


What? Wow ... wait... so... buying more machines, training more people, that slows economic growth??

I don't know what you think capital means, but capital = means of production. Machinery, plants, tools, even immaterial things like knowledge, all these are capital. The more you have it, the more productive you are. Economic growth = increase in productivity.

Accumulating capital is the only way to sound economic growth. There's no "monetary magic" that, just by the printing of some paper, will create real capital from thin air and make a society richer. It seems you believe in this keynesian illusion.


I highlighted an important word from your paragraph.
You're talking about Norway, right? The funds of the Norway state are real savings. The Norwegian society produces more than it consumes, the state confiscates it but, instead of doing like most states in the world and burning it immediately, it saves.
That's exactly what I've said before, when I stated that savings is in the beginning of the economic growth chain.
First, you have savings. The more savings available, the easier it is to invest them in the creation of new capital. More capital, more production. More production, more consuming becomes possible and voilà, you have, at the end of the process, a raise in consumption. It was only possible due to the savings in the beginning, otherwise, if everybody consumes exactly what they produce, where will the new capital come from?

Memorize it:
Savings -> Investments -> Capital accumulation -> Increase productivity -> Increase in consumption.

So, when the Norwegian state forces its citizens to save or consume, it is provoking artificial changes in temporal preferences, but, at least, it's not completely illusionary - the savings were real.
But when a state prints money in order to artificially push down the interest rates, all he's doing is manipulating prices. No real savings are created. In this fake prices scenario, people will consume and invest more (since the interest rate is artificially low), and will not be interested in savings... the real savings will eventually dry out, and many long term investments that were started will have to be abandoned because there's not enough resources to complete it.

That's what will happen to the word economy in the near future. And will be strong!

Ah, and regarding spending increasing the GDP... of course, GDP is a measure of spending! That's what it measures, it doesn't measure savings!


As already noted by someone, Japan suffers from intense government interference. The "too big to fail" idea has made the government drain all the resources of its people to sustain big, wealth destroyer companies.


Well, I was thinking about electronic consume goods, not electronic capital. You claim that under deflation people don't ever spend. So why do people buy HD TVs? Why not wait forever until they get cheaper/better?

And you noted an important thing also: increase in productivity. Just a frozen monetary base won't cause price deflation. Frozen monetary base + economic growth = price deflation. And if the economy is growing, that means new capital is available. As you noted by yourself, these more productive capital compensates the deflation.


You don't save capital (if it's "saved", it's not being used as capital at least), you save resources.
And resources saved can be invested to create new capital. With new capital, then, Profit! ;)


You're confusing capital with resources. Of course capital increases productivity. And first you invest, then you have capital. Tons of gold in your basement is savings, not capital.


Here it's clear you're influenced by keynesianism...

So, people go and spend more. And then, magically, from nowhere, productivity increases! Machines fall from the sky, people wake up more skilled, electronic chips spontaneously mutate into faster circuits, just because you distributed money to the spending-poor!

Sorry for the irony, but, seriously now, how do you think productivity increases? Aren't you missing some important steps in this reasoning?

(And sorry all for the huge post...)

Wherever you received your economic education from, you should return and demand your money back.

I think the only way to resolve it is that the bitcoin economy will disprove sturle.

I haven't read all this thread but I'd like to say that keyneysianism makes me sick.   I've seen the part where Krugman promoted a "broken window" concept and I felt like vomiting.

The "Nobel Prize" argument is absurd. Would reality change if the Nobel committee had decided differently? Or in that case would we actually get to analyze arguments instead of credentials?

And it is totally backwards as an indicator even. You can't get a Nobel until a bunch of people already heard you and agreed, so who cares now? It just a recognition of popularity after the fact.

And they aren't even trying to make it a good indicator anymore. They gave the peace prize to the commander of the largest military in the world. If it was funny it would be a joke.

Keynesian economy already failed miserably many times (see the latest world crisis caused by nothing else than INTERVENTIONISM), and it will fail again.

I would sooner say that fiat currency model is unsustainable.

Talking about Nobel prizes: http://www.spiked-online.com/index.php/site/article/9776/

Hi again fellow bitcoiners. And thank you for (presumably) missing me!

I'm here after a very long time of inactivity to majorly update the first post in this thread so it contains realistic solutions to the deflation problem and, of course, to yell at all skeptics who opposed my suggestions last year: TOLD YA!

Please refer to the first post of this thread before replying.

Okay, I'm finally convinced, you can go ahead and do it now.

Yes, for sure, if it is so much better get it up and running.

-MarkM-

That sounds good. I'm new to Bitcoin and the concept of this kind of digital currencies so I don't know if your proposal is possible or not, but yes the incentive to hoard bitcoins will make the system more clogged up I think. Adding or removing zeroes however sounds burdensome. It would be nice if the currency would remain very stable, so for example if a Big Mac costs 3 bitcoins today, a Big Mac year 2111 would also cost 3 bitcoins (of cource, there will likely be nanotech matter compilers by then that can materialize Big Macs out of the vacuum energy for free, but anyway :-).

Anders, please refer to the first post in the thread to read the current suggestion. What you just quoted are the removed obsolete paragraphs. They're only posted for historical context.

I don't understand how people expect BTC to have a stable price if the market for their use keeps expanding. What market cap would you expect to go by and how much per BTC would be appropriate. The only way it would stabilize is if the BTC Economy grows at the same exact rate as coins are produced

Ok, I read the original post briefly. I will take a closer look at.

Looks like you want to vote "Yes" to the poll above then! With enough people expressing their concern, perhaps we can convince Gavin Andresen and the other developers to update the system.


There's no market cap in the suggested model. The price will stabilize around the electricity costs as explained in the first post. If it's higher, more generators will join the network until it stabilizes. If it is lower, less generators would be encouraged to produce until the price matches it again. A typical supply-demand scenario. There will be no major BTC price shifts unless worldwide electricity prices significantly change.

The inelastic supply of bitcoins is why it has 'market cap' of $40M and your idea isn't valued. Bitcoin can hold value, your system can't. Don't believe me, just do it. Maybe you are right and I'll eat my internet hat.

Quote: "I don't understand how people expect BTC to have a stable price if the market for their use keeps expanding."

Okay lets take an extreme example to illustrate a point by using exaggerated figures.

If only a few trillion dollars worth of bitcoins exist by, say, the end of the Mayan calendar in december 2012, then, yes, a few trillion more dollars choosing to enter the market could still cause quite a jump in price.

But if many trillions of dollars are in bitcoin form by that time, then a paltry few trillion entering ought only cause the price to rise by a small percentage.

Get the drift? (Stability increasing as sheer value of the whole shebang increases compared to potential "outside" influencers.)

-MarkM-

+1

I believe there can be stability but this project is still in it's infancy. It seems like everyone wants it to be perfect immediately. Allow it some growing pains and go along for the ride. If you truly want it to succeed as a currency. I mean the program is still in beta at this point.

I'm sorry Suggester, but your analysis is very wrong.

Myth. The exchange value will be determined by the people willing to buy and sell bitcoins, and mostly affected by the volume of commerce done in bitcoins.
In the future, mining rewards will be almost solely transaction fees, which I assume will be about 0.1%. So I think it's safe to say miners will be about 0.1% of the economy. In that capacity, their decisions to hoard, use or sell bitcoins will affect the market, but they're only 0.1% of it.

You're forgetting that eventually mining rewards will consist in transaction fees. Until that point, halving will create a combination of decreased difficulty, increased BTC value, and decreased profitability for miners (which they'll have to consider in their business plans in advance).

He can ask whatever he wants, he can't force anyone to buy at that price. There will be other coins circulating, and all miners combined will be a small part of the economy.

There is nothing certain about it, bitcoins are a high-risk investment and will be in the foreseeable future. And again, halving will only have a small effect on the bitcoin value.
Anyway, a combination of growth and speculation allowed the bitcoin value to increase tenfold in a month without any relation to halving.

People will hoard some of their bitcoins, but most of them will know that their investment gains value by people using it and will be happy to use it themselves.
This will self-balance to some degree. If nobody uses bitcoins, any speculative bubble will burst, making people less tight-fisted about spending bitcoins, restoring some level of commerce.

This is nothing like either a pyramid or a ponzi.

Your premise has been debunked, so most of the rest is pretty moot.

Given advances in hardware and software, and the development of special-purpose mining hardware, it will be very difficult to find an objective system that will make the cost of creating BTC constant. Also, once in a while the hashing algorithms used will be changed which will completely shuffle the cards.

I'm not against this per se. A system where the currency continues to be generated at a predetermined rate can work. But people signed up to Bitcoin on the understanding that 21M is the limit, so this must be a separate currency.


All that said, I agree that it seems that currently bitcoins gain their value more by speculation than by use. This is unfortunate, but is part of the growing pains and should stabilize to some degree in the future. "Stability" here means - the purchasing power will not fluctuate too much, but will still increase due the spread of Bitcoin at first, and due to the growth of the economy later.

And by being in beta, there's room for improvement.

Bitcoin should model itself after silver, not gold.

The biggest problem I have with inflationary money is the fact that there's virtually no collective education about how it works and the guys in charge are basically an oligarchy.

Like silver, bitcoin should have a natural inflation.  Say 1% per year.  That way, it keeps its status as a store of value while weakening the delusional "one day, one BTC will equal one million dollars." I'm in it for anonymous cash.  The true definition of cash.  This store of value stuff seems to be like creatine effects-- fake muscle, real water retention.  

Spoke with an old, accomplished(meaning that he did well and then did time) financial con artist about bitcoin…  He swears that the "trading programs" of the eighties and nineties were started by the phone companies so people would run up long distance bills.  While noting his lack of knowledge in computers, he fingered electric companies and possibly hardware manufacturers at the culprits here.  :-)

I have more than a drop of knowledge about computers…

How many people are going to use four PCI-e x 16 slots and the remaining PCI-e x 1 slots to run one program on the linux CLI 24/7 without a belief in financial reward down the road?

I am fascinated by bitcoin.  I want to rip power out of the hands of central bankers through decentralized money.  That is the allure of this project.

No matter how great a currency is, it needs circulation.  Without circulation, you will get swelling and then death.

I think some people might be confusing and natural tan with pooling blood.

That's even worse. Now we won't even be tied to the electricity anchor at all. The price will be ridiculously volatile with no limits whatsoever. It will be a speculator's heaven and a spender's nightmare.

Not quite. Transaction fees are not a reliable estimate for the coin's price because they cost nothing. Does it cost you anything to fire up Bitcoin.exe and join the network? No? Me neither.

Miners will never lose. If they did, they'll simply stop mining until it becomes profitable again. It's a fact of economics that mining is and will continue to be profitable for the foreseeable future (including expectations of price increase). I'm explicitly complaining from the "increased BTC value" part because it's simply perpetual deflation!

Rly? And what will determine the price of those coins? "Supply and demand" I hear you say? That's exactly where the catastrophe begins. Here we are, having a wild currency with no anchor with a daily (or an hourly, even) new price determined solely by supply and demand instead of by the stable cost of electricity.

There is a very strong relation. Had the system been tamed from the start by a supply-fits-demand model, none of this crazy speculation would've been taking place. The amount of generated coins would then suit the number of generating nodes and everyone would be happy spending their predictable coins with no hoarders or investors ruining everything. Hell, I've got a nice sum of coins which I generated during the cheap times last year and you know what? I'm not spending them till I absolutely need to or till it seems the system is about to collapse. The thing is getting more precious by the month! You think I'm the only weird person thinking that way?

Oh, they might as well donate it to Santa Claus.

What a great way to promote bitcoin. "Save till it bursts, spend, then save again!" Imagine if the Euro acted this way when it was rolled out. You're not taking this seriously.

I just gave you one.

That's included in the proposed model. The hashing will maintain the difficulty so that only 144 daily blocks are produced anyway. The difference will be in the amount of coins those blocks have.

No. If the rate is predetermined we'd fall into the same problems. We want a flexible rate changing with the user base.

According to that logic, we might as well stop updating the code no matter how grave mistakes we discover in it.

That'll never happen. It will only get worse as producing becomes harder and the economy relies on the coins-in-circulation to determine the price via sheer supply and demand with no stable anchor like electricity.

Suggester: I suggest you start your own chain, SuggesterCoin, and given it's overall superiority to the current bitcoin blockchain yours will surpass bitcoin usage very soon. Cheers.

Not before I sell my coins as 1 BTC reaches $100! I sincerely hope the system won't collapse before then.

/thread

And thus, of course, you also sincerely hope no one will actually listen to what you advocate here and act on it?

Snip.  It goes on and on and on like this for a while.

Dude, pretty much every one of your points is founded on the wildly incorrect premise that some other currency is fixed and stable in some way.  No currency in use today has this "anchor" that you seem to think is so important.

Clearly suggester doesn't know what "Time Preference" is. Goods now are worth more than the same amount of goods later. Everybody has different amounts of time preference, so we don't know exactly how much of an increase in goods later is worth the goods attainable now. Just know that if you increase the amount of goods now, you'll have to increase the goods later proportionally. Risk also plays a part in this, since it's not "known" whether or not that proportional increase will be reached.

"Only an idiot would spend bit coins now if he knew that the price would double"

Except you know, if she has want's and needs such things as food or entertainment. It's called having a high time preference. People want to consume goods and are willing to spend their coins for it at some price (amount of goods). The lower the price, the higher the time preference. Also, why would you ever be able to buy bitcoins? Clearly some people want to trade bitcoins even at $7. But no, those people are idiots. ::)

Suggester also doesn't understand what marginal utility is. The more of something you have, the less valuable each extra individual unit is to you. e.g. I have 1000 gallons of water. The first 100 gallons I use to drink, the second 100 gallons I use to bathe. If I only had 100 gallons, I would forgo bathing, and continue to drink. Therefore the first 100 gallons > second 100 gallons. The same applies to bitcoins. I'm more willing to spend 100 bitcoins if I have 1000, than I would be if I had 500 bitcoins because that 100 bitcoins is worth more to me. So hoarding and increasing your stockpile doesn't make sense into infinity because as you increase the amount you have, the less utility you are acquiring.

Also, the higher the value, the more you can buy with it, and the more you can buy with it, the more incentive you have to spend it. Yes, some people have really low time preference, and so they save their bitcoins. But everybody has a price. At some price, they will spend their bitcoins, thus increasing their availability and lowering the amount people are willing to pay for coins certis paribus . Supply/Demand.

Quit thinking that your grand ideas are what will save bitcoin. They won't. People calculating their own value and actions is VASTLY superior to your ability to predict markets and manipulate software to change the rules of this game in the middle of it. Stability is important, not the particular % of growth in the money supply.

Hey, I'm a software engineer who after seeing all the constant posts on Slashdot about bitcoins, decided to come see what all the fuss was about. After reading the FAQ, I immediately wanted to come and make a post containing the exact points that "Suggester" has made.

I would totally be excited to get involved in both mining and using BTC as currency if it weren't for the flaws he's outlined. I won't restate every point he made in his original post, but my own thoughts are as follows.

BTC will work fine once it gets enough people using it and accepting its worth (maybe a few slight modifications are needed), but the biggest problem is reaching that many users of BTC. As a potential user who is "late to the game" I see a system that hugely favors the early adopters--it just doesn't come off as "fair", and as such, I'm not too anxious to get involved. Why should the early adopters be rewarded with incredible wealth while I get a pittance?

Anyway, I'm not an expert economist, but I'm guessing my thoughts after reading and understanding how the bitcoin system works are going to mirror those of countless others who stumble upon BTC this late in the game and then investigate how it works. If you want the currency to succeed, you need to attract myriad people, and the only way I see that you're going to do that is to avoid coming off as a "ponzi" scheme, which, even if BTC isn't, it certainly comes off as one at first glance (huge rewards for early adopters, little to no incentive to adopt as time passes).

edit: I know the retort is going to be, "Bitcoin isn't about mining, it's about having a stable currency for exchange." And to that I say, "I agree!" Which is why you need to remove the huge incentive that early adopters get. With that gone, I wouldn't even want to mine, I would just want to immediately get involved in utilizing the currency for its intended purpose.

It isn't so much that the system is flawed, but that from a psychological perspective, people have a real problem getting involved in a currency system that looks like a ponzi scheme--my gut reaction is to reject a system that provides substantial wealth to early adopters, while providing significantly less incentive for new adopters to get on board.

But if you buy bitcoins today for $7 and sell them after three years for $100,000 isn't that enough reward for you? Sure, the value of a bitcoin after 3 years may still be $7 or even zero, but there is a also a chance that it really reaches to extremely high values.

Right, but it still doesn't fix the gut reaction problem that even small children have. Split a candy bar with two kids 70/30, and the kid with the 30 isn't going to say, "Sweet, three tenths of a candy bar!" He's going to say, "Why did he get twice as much as me?!"

I think at a base level, we all have that concept of "fairness" in our decision making processes, and so long as that isn't rectified, I don't see BTC gaining a level of appeal necessary for its success.

What's the incentive for early adopters to promote and use bitcoin?

Hi Rlutz welcome to the forum.  

I wouldn't dismiss bitcoins as a currency because these perceived "flaws" just yet.  From what i see, its commonly mentioned that early adopters are rewarded disproportionately, its a pyramid scheme, etc, but as posters has noted already, these complaints completely discount the huge risk that early adopters are bearing.  If you speculate on something that fails, you lose, and its hard to tell if something will win or lose when its just getting off the ground.  The reward should be proportionate to the risk taken.  Starting a new currency like bitcoins is a huge risk in terms of success or failure, it's something most people would consider impossible and or/a waste of time.  I think its brilliant that early adopters have a chance of big rewards, it gives new comers great incentive to get involved with using or earning coins NOW - to catch the wave - so to speak. Removing this incentive means there is less interest in this new money, and less growth.

This may seem unstable now, but bitcoin is a tool for exchange, the more people have it, the better chance there will be to build a thriving economy with it, once speculation stops being so novel, and mining stops being so profitable, it will start being used the way it was intended, because there really is no better use.

This is not to say that getting in "late" is bad though.  Mining is not the only way to make coin, trading goods and services is an excellent way to earn your way into the economy. This will eventually be the primary method of earning coin.  The currency is young now, and the infrastructure is still building up to this, but it will eventually happen.

People tend to have this notion - if I do something where someone will gain more than me, then I wont do it - Even if that thing is a win win.  It's not a very constructive way to think about things, but I agree, it may dissuade a lot of people.  People also tend to be overly concerned with "fairness", unfortunately there is no objective way to measure this.  One may consider a free-market unfair because wealth and earning power are distributed unequally at any point in time, while another person may consider it the fairest, because each individual is free to take action to increase their wealth in any way they see fit.  One may consider bitcoins unfair because there are already people with so much more coin than them, others may consider it very fair because there is no one in charge of distributing new money, its just based on your participation in the network.  Unfortunately I don't think there can be a single solution to this problem, its personal.

If you have a deflationary growth economy, everybody win, even if you're a latecomer.  ;)

jesus what is with all the bitching about being "late to the game?"

you snooze you lose, why does this argument keep coming up?

and also like stated above if this works out well they'll be worth potentially thousands more.

a return in the tens of thousands of percents is pretty solid

It doesn't stop people from continuing to sign up for and use Facebook.  Not only is Zuckerberg getting a lot more out of the deal than any of Facebook's users, but he's also way more of an asshole than any of Bitcoin's early adopters.

Give people compelling enough value and they will overlook fairness.  When the pie (or candy bar) is really small people will bicker forever over how to divide it.

"I am not going to adopt bitcoin because it unfairly reward early adopters...boohoo!"

10 months later.

"Damn! I should have invest in bitcoin!"

The fact that so many people who already adopted the original bitcoin imagine mining a new but similar currency to be a waste of time might allow late-comers a window of opportunity each time they start yet another similar currency, because it seems possible that not a lot of huge mining corporations will immediately jump on their blockchain and mine a few million coins of it "just in case it does take off".

Thus simply start yet another one yourself, or jump on one of the ones the bitcoin-plutarch-cabal considers beneath their notice and large mining pools seem like they might actually be able to resist the temptation to throw lots of processor power at.

Maybe it will only take a few iterations to accomplish something or maybe it will have to get close to "one blockchain-based currency per person" but hey, is it really so much more wild a gamble than Satoshi's gamble of gosh knows how many programmer hours gallons of skullsweat etc?

There are more and more new blockchain-based currencies springing up all the time. If original bitcoin is not quite to your taste pick another or create one tailored to your precise tastes.

-MarkM-

There is only $45 Million dollars worth of Bitcoins in the world.  If you think you are "late to the game" and also there's some "incredible wealth" out there, I think you are mistaken.

There are 11,000 people registered in this forum.  Probably most are like me, with just a little bit of Bitcoin.  Some registered users probably have none, but on the contrary some bitcoin holders probably aren't registered in the forum.

The first 960 participants registered prior to 11/1/2010.  Back then there were about 4 Million bitcoins issued (so a current value of about $28 M).  Even if 280 of them split the 28M, that's only an average of $100K each.  Not exactly "incredible wealth".  Or even if only one person has the vast majority of coins issued prior to 11/1/2010, that's only one person getting very rich ($28 Million).
 
I suspect that you could apply the 80/20 rule.  20% of the 11,000 own 80% of the current $45M wealth.  Splitting $36M over 2200 people won't exactly make them all rich.  That's $16K a person.   Maybe the top 20% own 80% of that wealth.  So 440 people split $28M.  That's 64K per person, for 440 people.  Still no incredible wealth.  And if you apply 80/20 one more time, you have 88 people splitting $22M.  That's 88 people getting $250K each.  Still not a lot of money, but respectable.   And 80/20 one more time gets you to 18 people splitting $18M.   So it made 18 millionaires. 

18 millionaires seems about right.  And that's if they didn't dump their bitcoin when the value quadrupled, the first time, or the second time, or the third time.


Besides, there is SOooooo much money and opportunity in other services, and there are soooo many more people that still need to be introduced to Bitcoin.  You are hardly late to the game!

Part of me wants that yes. But I would've felt guilty had I not warned everyone and told them the way out of this Ponzi scheme. I feel better now, and still hoping to get away with as much cash as I could.

Really? I don't remember the last time my electricity bill skyrocketed 10 times in a month.

With the exception of people being forced to sell their coins for an emergency and the exception of "hit-and-run" transactions, most buyers buy now on hope that the coin's price will rise and most sellers on the expectation that it will drop. How otherwise can you justify a ten-fold increase in a single month? It wasn't a sudden surge in child porn anonymous sales I suppose. No, it was speculation. Virtually the whole bitcoin market is speculation.

Hmm, I wonder how we ended up with quite a few millionaires and billionares on this planet then. Weird. Perhaps they don't understand marginal utility either. Why don't you explain it to them DrSammy? Maybe they'll give up their hoarded money to charity.

I'm pretty tired of having to repeat this, but let's say it one more time: Yes they will sell at some point, but to another investor who'll keep the coins till the price is right before selling them again. That's a Ponzi scheme by definition.

That just shows you understood nothing of what I said. Stability doesn't come except with a supply proportionate to the demand. Otherwise you'll continue to see these roller coaster prices and/or perpetual deflation.

You didn't even need to see the historical price graph to figure the current design has issues? I see you're smarter than quite a few folks here :)

You join now on the hope that in a year or two you'll be a relatively "early adopter" and then grab a new "late adopter's" cash for your coins which would be even scarcer by then. In other words: Pyramid Scheme

The incentive is to get other fools to join the pyramid so they can fatten their wallet even more before running away with their money.

Another great definition for a Ponzi scheme. And totally true. I mean, the first few people purchasing the ticket are indeed taking more risk since the scheme isn't popularized just yet! The only problem with that, however, is that with bitcoin everyone is an "early adopter" at some point if he holds on to his coins long enough (as long as the system didn't collapse yet).

I explicitly outlined in the first post why that scenario would be much worse than the current one. You're hoping for the total removal of the electricity-cost anchor. That's a nightmare.

You forgot to add: "provided the coins' price doesn't drop in half before you get the chance to sell/reuse them".

Unless enough people realize the trick and escape the ship before it sinks. But if we live in a world of zombies then sure, it won't fail until it snatches enough victims so that it has no space for any new naive newcomers. We're talking hundreds of millions of potentially stupid (or speculative) people.

Must be a ponzi scheme! :D http://bitcoinweekly.com/articles/reactions-to-bitcoin

That comic was not created by me. I paid somebody to create it and I paid somebody 22 times total for content on http://bitcoinweekly.com. I have one current employee, several freelancers, and two cartoonists over the lifetime of Bitcoin Weekly. I am even employed by somebody else. Some spectulative economy, eh?  ;)

Did ya know the marketplace is buzzing with so much activities that moderators have to subdivide it into sell and buy? You said virtually the whole market is speculative, right? So, is that 95%, 85%, 75% or what? How would you measure it?

Let end it with a bitcoin bubble comic: http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-rise-of-bitcoin-s-value

I hope you paid them after the price crashed not before ;)

If you received your bitcoin sallary around the 12th of April you probably wouldn't mind the speculative economy. If you got it around the the 10th of May though you would've been on my side now.

So? I never said it wasn't growing. I said it was a Ponzi scheme. A growing Ponzi scheme is still a Ponzi scheme. Moreover, Ponzi tickets were a valuable commodity at a time.
Tell me, how would a commodity buyer or a service provider like to price their goods/services to a roller coasting currency? I personally would never sell anything in BTCs unless I can liquidate it into fiat within 24 hours. Make that 12 hours if the transaction was huge.  How does that serve a "medium of exchange" purpose? Hell, you can't even go on vacation for a week without worrying your coins might be worth next to nothing by the time you come back. That's poison for any currency.

I don't need to "measure it". Suffice is to see the price skyrocket 10 fold in a month before crashing 50% within 10 days. I don't think that was due to the increase of genuine demand on bitcoin, do you? The bitcoin market didn't expand 10 times in a month before suddenly shrinking to half in 10 days. The current design has turned this beautiful idea into a speculators den.

Actually, I paid my writers through all the turbulence. I dropped the payment rate there and there, but I don't remember much raising prices. The price deflation was extreme  that I was not sure if I keep pace with the salary.

I don't have any regret at all. Growing the bitcoin economy is a marathon and my business is not a sprint.

@ Rlutz - FAQ added (https://en.bitcoin.it/w/index.php?title=FAQ&diff=8889&oldid=8854).

@ Suggester - As I said, I agree that Bitcoin is currently highly speculative which is unhealthy. The way to solve this is to get more mainstream shops to accept Bitcoin payments. Why do you keep obsessing about speculation as if that's all there is to Bitcoin?

In a pyramid, each person can own at most one ticket and can sell as many copies of that ticket as he likes. This will necessarily collapse as we run out of people without tickets. In Bitcoin I can have as many bitcoins as I can get, and I can send each only once. Thus it's like any other commodity.

In a ponzi, there is someone running the show who promises high returns on investment. In Bitcoin - even in its current unfortunate highly speculative state - there's no one at the top, and there's nobody (except some crazies) promising returns. It's you who evaluates the situation (perhaps based in part on the opinions of some people) and expects them to rise. If your evaluation turns out correct, more power to you.

And what exactly is the problem in joining a sane, stable marathon? I have yet to see a single economic or technical argument against my suggestion. I think most "skeptics" are simply happy with the current system because they want to earn huge early-adopter profits when more patsies join in.

I'm even beginning to seriously doubt that Satoshi (not his real name) specifically designed the system that way so he could get away with whatever he made at the very beginning before the network went public. The dude could simply be a millionaire now. You guys are just hoping to become mini-Satoshis when more people jump on board.

If you don't want to join in the bitcoin spectulation and ignore all the arguments that been made, that's fine.  :P

When somebody invest 10 million dollars into the market, it's going to increase the price widely anyway. You can't expect price stability at time of extreme adoption.

In the meantime, I will keep posting that bitcoin bubble comic everytime somebody cry "BUBBLE!" on this forum. More traffic for me. ;D

That's not addressing the problem. What happens if the whole world accepted bitcoin tomorrow? The price would still be jumping up and down because it's not tied to any stable thing. We need a damn price anchor for stability. Bitcoins will eventually be like Picasso paintings, they can be sold at absolutely any price at any point in time.

In the ones I was familiar with you get only 3 or 5 or whatever limited number of tickets. Had it been unlimited the system would've collapsed too early because all patsies would be "early adopters" with no one to cough up the money.

Regardless, with bitcoin you simply earn more money the longer you hold on to the coins. Deflation is the same as "more tickets coming from nowhere".

So early adopters didn't have the advantage of creating 1 block per hour or per day when now you need to wait for weeks to create one? How the hell does that make any sense? Can you imagine the EU giving early "euro adopters" more euros?

And that whole risk argument is strawman. It's all about "early adopters taking more risk". Crap. Had they immediately spent their coins then they took no risk. But had they kept them then they're speculators not adopters. They were waiting for the price to go up because the system was built so the price perpetually goes up. And what risk did they take anyway? $10 on their electricity bill to generate 1000 BTCs? Does this justify the current profit rate of 100,000% for "early adopters" and even higher for "earlier adopters"? That's a pyramid scheme by definition.

Nobody smart enough to make $10M would join a Ponzi scheme. And it's exactly these kind of expectations which paralyze the market: "I'll hold on to my coins because soon enough some dude with $10M will enter the market, and then I can exit making a good buck!" Given no such thing can happen in the proposed system, it's much better than the current one as far as stable medium of exchanges (as averse to crazy speculations and price bubbles) are concerned.

People didn't know about bitcoins before, then it go a lot of publicity, now people want the value that they didn't know it had before. Demand grew, price went up. Dollars are becoming worth less, and that hasn't been reflected in bitcoins until just now. I suspect the volatility is due to the inability to short bitcoins right now. So all speculators can only go up. Once we see speculators shorting, we'll get less volatile exchange (assuming the dollars being exchanged aren't themselves volatile)


They don't hold those billions in cash. They hold them in assets with different uses. Liquidity is less and less valued the more they have, then they start doing stuff with their money, not hording it all. Also, bitcoin isn't going to represent all transactions of the entire economy. There will probably be other monies and competing currencies. It's up in the air whether or not they understand marginal utility, but clearly you do not.


No, that's called a bubble, not a ponzi scheme. A ponzi scheme is where you pay the old people dividends with the new people's money but everybody get's to keep the assets they had in the scheme. Bitcoin is a clear transfer of assets. Also it's only a bubble if the underlying value of it is much much lower than what it's trading for. And it's only a bubble if the underlying value can never catch up to the trading price. That all depends on it's ability to be traded for goods and not just dollars. The increase in value will convince people to accept bitcoin for trade. Which if it is in a bubble, will decrease it's severity.

You mean like the dollar is stable because it is anchored to the...  Or the way the Euro is stable because it is anchored to the...  Or the way the Yen is stable because it is anchored to the...

Well, shit.  I guess nothing is anchored to anything.  Hint:  currency stability comes from depth, not unicorns.

Quote: "Given no such thing can happen in the proposed system, it's much better than the current one as far as stable medium of exchanges (as averse to crazy speculations and price bubbles) are concerned."

Great, lets do it. What IRC network and channel do you want it to use, or do you propose leaving out the IRC method in this new better currency?

How much better, in dollars cents or bitcoins, is this new currency, exactly, to you personally, as in how many dollars cents or bitcoins are you willing to buy how many coins of it for? There are quite a few blockchains already up and running any one of which might be more amenable than this crowd to simply eliminating the ever-less-minted "feature" from their code, so how many you want to buy will help determine which will be eligible (as in having already minted sufficient coins to satisfy your initial demand for such coins) and how much you want to pay per coin can then serve to eliminate those that consider your offer too low to be worth bothering with...

...Or, looking at it another way, once I know the price per coin you are willing to pay, for how many of these better coins, I will have the info needed to select among the various blockchains already implementing your idea or amenable to implementing it those closest to fulfilling your order...

-MarkM-

Fiats are relatively stable because they've got central banks keeping them stable. They manipulate interests and money flows to keep inflation and deflation in check.

If you want stability in a decentralized p2p system you must have it tied to some external stable commodity such as global electricity prices. The recent bubbles and crashes along with perpetual deflation says enough. I shouldn't need to "prove" my point because it's empirically proven by the price graph. You can't have a medium of exchange without stability, period.

I'm still waiting for one sound argument against the proposed suggestions.

I am not against the proposed suggestions, I am saying great idea how much is it worth to you.

However, I believe you are wrong in your above-quoted assumption set.

These so called central banks of which you speak are in essence an early-adopter-cabal that, for various reasons (possibly including reputation, national reputation, or even (not so sure of this one) patriotism; or maybe even some even-more-practical reasons and rationalisations; and likely also fraud law adjudicators eager to punish them for giving the nation or law or legal system a bad name) seem by and large to prefer to attempt to prop up their ponzi scheme than to "cut-and-run" aka "fly by night".

What is there to stop those who converted early cheap bitcoins into millions of dollars, yen, GBP etc from using a possibly even very large proportion of such holdings to "prop up" bitcoins much as various nations attempt to keep their national currency from dropping too low in price by buying it back using their reserves of other currencies?

If anyone has managed to convert early bitcoins into vast sums of fiat currencies they should be in an excellent position to buy back bitcoins any time the price of bitcoins seems poised for a precipitous fall.

It might actually be very useful for such purposes to deliberately launch a bunch of variants that they *do* treat as ponzi schemes, both to make money with which to prop up the "real" / "original" bitcoins and to "demonstrate" that "no competing blockchains can in fact compete because we the original are so cool and so first-mover-fiat-reserve-rich we can back ours with more fiat than competitors can back competing chains with".

-MarkM-

Hmm... You could be right. I'm not sure, but I would like to have a digital currency whose value was even over time, with some algorithm that stabilized inflation and deflation, pretty much in the way the Bitcoin algorithm stabilizes the amount of coins produced into a linear and steady pace.

Your analogy does not take into account the risk of early adoption. A better example is investors who bought an expensive stock at dollars per share when first offered. Is it unfair to an investor years later that they must pay hundreds of times more for the same share?

Yes, it is fair. They were either unwilling or unable to take that risk at that time. If it wasn't for those both willing and able to do so, they would have nothing in which to invest.

That's exactly what they did. They gave euros to adopters of the national currencies in proportion to how much they already had. In general, fiat currencies are introduced by the people with the printing presses printing it and then spending it. And bitcoin, that releases currency to anyone who helps secure the transactions, no privileges, is somehow worse!?

Seriously? The guy says such a thing and yet receives attention?

Stop feeding the Keynesian troll.

I noticed that in BTC, all those other currencies are fluctuating wildly.  The Bitcoin is the ONLY one that's stable, relative to the BTC.

 ;D

The problem with fractional reserve banking is that it has inbuilt inflation. There is never enough money in circulation at any given point in time to pay both the loans PLUS the interest. So new credits are continuously forced to be created in order to keep the fractional reserve banking monetary systems going. This leads to overall inevitable inflation. Even exponential inflation!

The Bitcoin system has massive deflation built in instead. I don't know if that is a sustainable model. It could be! It will be interesting to see what will happen with Bitcoin. One problem could be that Bitcoin will be less liquid than it would be with another algorithm. Money (currency: from current as in flowing) is like the blood flow in society. Clogging up the flow of money in society is similar to a cardiovascular disease in the human body.

It seems like a pretty good model for a reserve currency.

Keep your wealth in bitcoins until you reluctantly find you need some pocket change to make it through another day or even just another meal, then cash it out to inflationary fiat as close as possible to the time you plan to eat / spend.

Maybe it is not necessary for merchants to accept it directly at all, as if you constantly keep facing those horrible inflationary fiats each time you face the prospect of spending maybe you'll be reminded why you prefer to hold the good currency and spend the bad stuff.

When bad currency forces out good, does that make the good stuff worthless as currency, or just make it worth more as reserve/savings than as pocket-change / spending-money?

Hmmm is having merchants directly accept bitcoins for goods really as important as seems hitherto to have been thought?

(Is having them directly accept gold silver platinum and palladium bullion as important too?)

-MarkM-

Perhaps money is more like electrical potentials in an electronic system. Change something and they shift around into a new equilibrium. Move them by outside force and things start burning.

That was an interesting analogy. Hoarding money is like a capacitor in an electronic system. I like the idea! It's less depressing than thinking of hoarding money as blood clots that hinder the flow. It would be interesting to do a more analytical examination of both those analogies.

The part of the money flow as electrical flow model that always intrigued me is the step-up transformer...

-MarkM-

On the Internet it would be good if more and more websites started accepting bitcoins (or similar digital currency). And to have easy ways to quickly convert ordinary currencies from and to bitcoins. To be able to buy hamburgers at McDonald's with bitcoins is not equally important yet I think. Bitcoin would first have to be used a lot on the Internet. Imagine the majority of transactions on the Internet being done with bitcoins. That would be pretty cool. That's a huge amount of money transactions.

"Internet as a sector is about 3% of GDP, or bigger than agriculture or energy, and represents over 20% of economic growth in the past 5 years, and growing." -- From: http://www.businessinsider.com/mckinsey-report-internet-economy-2011-5#ixzz1NM8ZxI2x

In an electric system there is the flow of current and also electric potential and resistance. Such as in Ohm's law. The transistor is also an important component in electronic systems which allows a small current to regulate the flow of a much larger current. The Bitcoin system could perhaps be modeled using the electronic analogy. I don't know how though. ???

Yes. Bitcoins will have no value if nobody accepts them as payment.

Hmm. How do we know that?  Perhaps they would have pure "collectable" value as the first block chain currency.

I guess they will. But it will be negligible compared to the value they can have as the de-facto global currency.

Again, I'm not sure how we know that.  Let's say there is a BTCv2 that succeeds as a de-facto (or even potentially official) global currency.  BTC (v1) might still be worth more to collectors even if it doesn't circulate in commerce.  In fact, it could be BTCv17 that succeeds globally, and I would guess that BTCv1 would be worth more than BTCv2-BTCv16.  There is rare currency of various types that isn't legal tender any more and wouldn't be accepted in commerce by anyone, but still has significant collector value.  But none of those are "The First Currency" of their type.  That could be huge.

 

Bitcoins are divisible to eight decimal places giving 2,100,000,000,000,000 total units.

Or 300,000 per person on the planet in 2033

The speculative price in terms of dollars doesn't particularly matter.  It is the trust in the network that the transaction is good and verifiable that gives the currency value.

What is the value of trust?  

Do you trust banks and governments to value your goods?

As the dollar becomes less and less trusted around the world and as the number of them in circulation increases, people will flee from it anyway.  It's backed by the "Full Faith and Credit of the US Government" in other words blood shed and exploitation of resources. In other words, if you don't trust the dollar as a system of valuation, we'll kill you.

What people will be looking for is a trusted way to transact.


The problem with tying it to energy prices is that energy prices, while stable, are still centrally determined and the price of which is subject to the manipulation of energy prices through speculation. The problem with Bitcoin is that it still relies on an external valuation system, that of what the people who issue currencies think stuff is worth.

What happens when distributed generation (http://distributed generation http://en.wikipedia.org/wiki/Distributed_generation) is achieved?

http://openfarmtech.org/weblog/2010/10/distributed-generation/

http://openfarmtech.org/weblog/category/global-village-construction-set/steam-engine-construction-set/


Right now through centrally issued currencies the price of things is determined by a minority of people. In Bitcoin, it requires a majority of people to participate in the valuation of things.


Is deflation bad?

The effects of deflation are:

Decreasing nominal prices for goods and services ( I like cheap stuff)
Increasing real value of cash money and all monetary items (I like when $10 buys lots of cheap stuff)
Discourages bank savings and decreases investment (Money actually circulates in the economy rather than being horded)
Enriches creditors at the expenses of debtors (Isn't that why we're here? To enrich ourselves rather than our creditors?)

 Inflation reduces the real value of money over time; conversely, deflation increases the real value of money.

This allows one to buy more goods with the same amount of money over time.

The problem you are talking about arises from the issuance of currency.  Deflation is correlated with depressions – including the Great Depression, as banks defaulted on depositors.  Not all episodes of deflation correspond with periods of poor economic growth.

 In modern economies, deflation is usually caused by an induced drop in aggregate demand, artificially created by the currency issuer to induce a recession and (more rarely) long term economic depressions, so that those with money can buy assets at fire sale prices before prices are artificially inflated again.

it comes down to whether or not you believe bitcoins will be viable in the global community.  If you do, then you invest because 21 million coins spread out over billions or trillions of dollars means inevitable gains.  If not then you sit on your hands and go about other endeavors.

Suggester: its difficult to formulate a response to "disprove" what you are saying since you are arguing so many points with so many people.  I suggest you boil down your arguments to the basic assumptions you are making, rather than the effects of those assumptions applied to a complex system such as bitcoins. This would make it easier to come up with counter arguments.  

For simplicity Ill try to list some assumptions you are making as I have deduced from your posts, correct me if I am wrong.

• Subjective value cannot come to a consensus without some authority or "backing" by an already established good, ie prices can never stabilize with out a "peg" such as electricity or USD.
• Deflation has a fundamentally different effect on price stability than inflation, ie prices are more unstable with a controlled deflation than they are with a controlled inflation.
• Any investment where early adopters have incentives to get others involved, and gain the most if the investment actually becomes popular is a ponzi scheme and therefore unsustainable.
• There is no value in bitcoins, or anything else for that matter, as a tool used purely in trade and commerce, it is only viable for speculation; essentially trading against already established currencies.

I would like to address these points, and perhaps it will make it easier for others as well, as I feel its much more manageable than addressing the multitude of predictions as to the effects of these assumptions on the bitcoin economy.

Though I do agree with suggester on the idea of a stabilizing force for the value of bitcoins.

Is it being overlooked thats the massive internal price deflation of bitcoins is the offsetting force to hording for speculation? In otherwords hording the currency for monetary gain is essentially useless because the deflation of bitcoin values of goods and services will force their circulation. It becomes pointless to keep trying to mine for fed dollars at some point vs just spending all the mined and accumulated bitcoins.

@zen  thanks synthesizing the discussion


Isn't that the case with Gold?




Is deflation about BTC value or "consumer prices"?  I can't see BTC as a mainstream currency.



We can see this kind of investment everyday in the stock market. 


They're many values in the Bitcoin system for trade and commerce (secure, anonymous, non repudiable,...) but those won't be in our minds until BTC reaches an stable value.

Others are investing in the Bitcoin system, as you would have invested in Google's IPO if it's initial offering was set at 0.01. Now you only trade shares against established currencies, and this is the same thing, I see BTC now as 'shares' of Bitcoin's "IPO".



Jaime
--------------------------------
Madrid, Spain

You could say that gold is backed by its industrial uses. But AFAIK the value of gold is much higher than had it not been used as a currency, so indeed the lion share's of gold's value does not come from backing.

In principle, consumer prices, but currently exchange rate with USD is used as a proxy because everyone uses it as a guide for BTC prices.
Why wouldn't BTC be a mainstream currency?

It gets worse.  The price of A can't be stable unless it is pegged to the price of B.  The price of B is stable because it is stable.

All prices, of all things, in all places, and at all times, are backed by supply and demand only.  Everything else is an illusion.

Well, one of the main threats for Bitcoin will come when that possibility becomes a real one. The owners of the current system wont allow something like Bitcoin to take over --too many years working in the other direction--

I just have this to say. The idea that people won't sell something that over time has been rising is a very silly and unrealistic idea. Despite the Govt inflating our fiat currency to the moon causing gold and silver to rise people have always bought AND SOLD those metals as those who bought low take profits to spend NOW rather than wait to take larger profits to spend later. For this reason it does not matter that bitcoins will someday not be created anymore...so what? Yes of course the bitcoin will rise in value just as the Canadian dollar rises against the USD because those making US dollars are insanely printing tons of them out of thin air,much morer so than their Northern cousins do. Just because a currency is rising against other currencies doesn't mean people won't spend it if and when they need to. Bitcoins is where I expect savings to be kept.
Martin

I think this point is quoted out of context. Deflation only discourages savings on fear of bank insolvency. It does encourage hoarding of money via other means. We don't have banks to collapse, so I think this point is completely the wrong way around - deflation encourages people to hoard BTC.

I'd gladly join a BTCv2/fork which does away with the total currency limit by removing the halving of rewards. I'm also rather convinced by Suggester's arguments in favour of tying BTC reward to network hashrate.

I'll give 5 BTC to anyone who can provide an economic definition of "hoarding" which does not rely on personal preference and is demonstrably different than "saving".

Ok.  Here is the thing about the bitcoin hoarding arguments.

If people are sitting on bitcoins instead of spending them, then the amount in circulation will fall, and prices (of everything) will fall too.  These low prices will provide an incentive for "hoarders" to spend their coins while prices are low.  Which means that the amount in circulation will go up, which will cause prices (of everything) to go up.  Which will cause people to hold onto their coins instead of spending them.  Which will cause prices (of everything) to fall.  These low prices will provide an incentive for "hoarders" to spend their coins while prices are low.  Which means that the amount in circulation will go up, which will cause prices (of everything) to go up.  Which will cause people to hold onto their coins instead of spending them.  Which will cause prices (of everything) to fall.  These low prices will provide an incentive for "hoarders" to spend...

Get it?

The one thing that I wish that everyone understood when they got out of high school is the concept of the dynamic equilibrium.

I'll give it a shot:

Hoarding has three general meanings in an economic sense.  They are as follows: (1) acquiring excessive quantities of items that have little value in the market (think the crazy person who hoards paperclips), (2) acquisition based on an expectation that certain items will become extremely valuable related to current values during times of economic, political, or environmental crisis, or (3) acquisition based on on an expectation that such items will become extremely valuable compared with current values due to future scarcity.

Saving, on the other hand, merely involves guarding or preserving an asset for future use.  It does not require an expectation of future windfall profits, or excessive acquisition of items that have little value in the market.  

Did I win?

1JxsbbP2k5KHYGWtmggT7yJJ4eRtj7n9sJ

Concept of the dynamic equilibrium works on large ensembles only, and also, on large time intervals, compared with single interaction's time. For now, to input/output BTC/$/goods from the bitcoin market, one may spend many hours or even days. Even if one sell/buy a small thing like T-shirt or coffee-cup or $ equivalent of that.

From physical point of view, Bitcoin society is like a highly rarefied gas, with some thousands of atoms, @ time intervals of some microseconds. It is apparently NOT an equilibrium system.

It is not yet an equilibrium system.  But it will be if it catches on.  And if it doesn't catch on, then who cares about hoards of coins?

What the hell are you babbling about? How is selling anything for bitcoins any different than selling them for dollars or seashells?

1) does not apply to this discussion, though you are correct, but it relies on a subjective evaluation of "excessive"
2 and 3) seem to be a definitions for speculation, not hoarding

Ask Kjj, he did understand me. Selling does differ in numbers - how fast, how easy, how many goods available.
If you compare dollars, bitcoin & seashells in such view, you see THE HUGE DIFFERENCE. As for now, bitcoins are much more like seashells. And you give no way for bitcoin society to grow: you can not say 'bitcoin is just in it childhood'.

I would say so, but then I'm not the judge here.

In our current system, saving almost always means "deposit in a bank".  Bank deposits are still in circulation, since the banks use the deposited funds for lending.  (That isn't really true.  In reality, banks make loans, and then seek deposits to meet reserve requirements.)

By contrast, stuffing currency under your mattress could be seen as hoarding.  That money is prevented from circulating by being under your mattress.

That meets the second part of your criteria, but there is no way to meet the first criteria.  All asset allocation is a matter of personal preference.  Bank account, mattress, gold bars, fancy cars, all preferences.  But only one of them actually keeps cash out of action.

Burning federal reserve notes removes them from circulation, is that hoarding?

My point is that when people use the term "hoarding", what they really mean is "saving more than I think is necessary", which is why I used the bit about personal preference.

1) the market values it as excessive, that's the point.  Yes, the crazy person may value paperclips a lot more than the market, but the point is that the crazy hoarder's subjective valuation of the item is out of sync with the market. 

2/3) may also work for a definition of speculation, but I think 2 more specifically defines hoarding, no?

No, not really.  That is the function of speculation, as a predictive market.  If the speculator is correct in his predictions, then he profits while the market has stored resources that it needs during the crisis.  If he is wrong, he loses money.

Speculation is defined as "investment involving high risk but also the possibility of high profits"  My definition did not focus on risk, hoarding doesn't necessarily involve high risk, it merely involves an anticipation of windfall profits due to either scarcity of the resource or external catastrophe (or both).  You can hoard something that is not a high risk asset, speculation requires a high risk of loss. 

If you are saving something in order to capitalize on anticipated future increase in value, you are speculating on its future value. You can speculate over any time period... minutes or years. Would you consider it hoarding to buy one bitcoin expecting that its value will increase in the next two minutes?

I think in most cases you are correct.  The dictionary definition, however, generally looks at speculation as a risky investment.  Most of the time an asset that may appreciate significantly might also decline in value significantly.  But this is not necessary for hoarding.  For example, I could "hoard" guns and liquor on the belief that anarchy will break out and these assets will become incredibly valuable.  But I don't think this is "speculation" because these are not high risk assets, and they generally maintain their value over time.

Ok, I agree with you on this point, but what is the difference between "hoarding" guns and liquor and "saving" guns and liquor? Can I save something with the expectation that it will increase in value, or is that always hoarding?

Does that mean that putting aside an asset is only saving if you expect it to stay the same or decrease in value?

The difference between hoarding and saving is the expectation of windfall profits, or (in the case of the crazy person) the "saving" of items that have no value in the market.  Saving doesn't entail expectation of windfall profits.  That's not to say it can't happen, and of course when you put money into the bank you hope it increases in value, but the proper definition of saving does not involve an expectation of windfall profits in the future.  Amassing a storehouse of guns and liquor in anticipation of the apocalypse, however, that is hoarding. 

"Windfall profits"... that is a subjective valuation essentially meaning "too many profits". Rather like "hoarding" = "saving too much".

If I hold 1 BTC with the expectation that it will someday buy me a house, is that hoarding?

If I hold 5,000,000 BTC with the expectation of a mild increase in value, is that hoarding?

I think the language I used originally is probably clearer, that hoarding involves an expectation that the future price will become "extremely valuable compared with current value" (for the non-crazy hoarder).  The distinction between hoarding and saving is that saving does not require an expectation of significant or extreme price increases, while hoarding does.  The distinction between hoarding and speculating is that hoarding does not require a significant risk of loss, while speculation does.  These definitions can overlap depending on the circumstances, but that does not mean they are the same. 

As for your examples, I would think that neither involve hoarding.  In the first case while you do have an expectation of significant price increases, you just hold 1, whereas hoarding probably requires amassing significant quantities.  In your second case, while you have amassed significant quantities, there isn't the expectation of significant future price increases.  The first case may be an example of speculation (because the value of the BTC is currently around $9 USD and could drop significantly), and the second may be an example of saving. 

Your definition requires the subjective valuation of a personal preference and does not qualify for my bounty.

I don't think it does.  Significance can be measured statistically, and can be defined as "observations that are unlikely to occur by chance and that therefore indicate a systematic cause."  Someone that amasses significantly more guns and liquor than the average Joe, as measured statistically, and does so because of the expectation of extreme price increases in times of anarchy or scarcity, is hoarding. 

What is significantly more? Twice as many as normal? Ten times? What is an extreme price increase? Double? Ten times? Fifty times?

This all subjective and is no different than "you are saving more than I think you should, thus you are hoarding".

The problem with your logic is that the only person who can tell what is the correct amount of anything to save is that person, no one else.

There are different ways of measuring significance using statistics, but that does not mean it can not be done in a manner that does not rely on personal preference.  

Also, I really didn't think there were any value judgments expressed in the definitions I offered.  In popular discourse hoarding may have a negative connotation, but I thought you were looking for an economic definition that distinguished it from saving, which I think I provided.  

With the exception of the crazy person, the definition I offered had nothing to do with personal preference.  I could hoard guns and liquor and have no personal preference for these items, I could be someone who never drinks and never shoots.  

The definition of hoarding simply refers to the acquisition based on an expectation of significant future price increases.  Again, this is something that could be measured statistically, you could look at historical price variance for these assets, and if I was buying them with the expectation that their prices would increase beyond the normal distribution, I would probably be hoarding, regardless of my preference for the items.  

With savings, on the other hand, there is no requirement that the saver expect that his savings will increase beyond the normal range of increase based on historical data and variance.  

hoarding means your expected price appreciation/depreciation is entirely in the market price for the object itself.

saving covers everything that involves investing in a productive venture to receive more of that item in the future.

hoarding you have X of some item and expect that to be worth more in the future.
saving you have X of some item and try to make it grow by some percentage over time.

hoarding is stuffing your mattress
savings is making loans

Hoarding tends to be a loaded term implying possible wrongness or something a bit off.

A community might save up lots of stuff to build a big project, but a dragon does not save up oodles of gold and jewels to any purpose other than to have the largest hoard er I mean savings.

People might save boxtops or someting to some purpose but although I don't watch the television show "hoarders" I get the impression much of the so called hoarding is not to any particular purpose it is just sheer accumulation.

People might save eggs or a nice roast or something for sunday dinner but in wartime the longer they save rationed items for more sunday dinners they never actually have the more likely they are to be accused of hoarding.

-MarkM-

"Hoarding" is a moot concept. It's not important. It's a bogeyman.

As money is "withheld" from circulation, interest rates rise as the demand for money increases. As these rates rise, it becomes increasingly attractive to loan out "hoarded" funds and thus it's a self-correcting problem. ie- not really a problem at all.

You guys seem to forget that the kinds of people that buy irrationally are also the same kinds of people that sell irrationally. If they can't afford to keep buying up the new coins as they are issued/minted/mined at the same rate in which they purchased their last coins, the price will eventually fall. Once it does, it falls heads over heels because these same fools raised their cost average over time as they bought every week or day while the price was rising.

The real people you sound like we should worry about are the ones who bought massive amounts three months ago and have been sitting on it all while the price increases. But these individuals then aren't really hoarders, they are savers. If your only beef with them is that they purchased "too much Bitcoin" then you're basically saying we should despise people who had a lot of capital they wanted to translate into legitimacy of Bitcoin.

I first heard about Bitcoin in 2009 when I was looking for a way to generate money idly by running a Prime Number generator. I found the community and even downloaded a cruddy client. The community was so small then that no one offered money at all for coins. I even forgot the name (or it was never really called Bitcoin). I never took it seriously and left, finding it again well over a year later.

It took a lot of people taking Bitcoin seriously to get it to where it is today. It's going to take a lot more people taking it seriously to get it where it competes with government-backed fiat currency on a global scale. That means larger and larger investors and custom mining ASIC in large datacenters.

The best thing all of us have going for us right now is that we were the pioneers.

Trivial case: 2 people. The "hoarder" and the "other".

The "hoarder" gets all the bitcoins. The prices fall to zero. The "hoarder" can get anything by spending nothing. The "other" then becomes a slave.

Am I wrong?

Yes. As the "hoarder" attempts to acquire all the coins, the exchange rate rises (supply diminishes, demand stays the same). The "other" becomes rich in the other currency, while the "hoarder" becomes rich in bitcoins. Essentially, nothing changes.

So a system with 2 currencies would be more 'stable' than a system with just 1?

What do you mean by "stable"?

I'm sorry. "Stable" was not the right word.

You said that "other" will become rich in the other currency. What if that other currency doesn't exist?

The "hoarder" must trade something in exchange for "other"'s bitcoins. Either some sort of work, a finished product, or another medium of exchange (money). Since he is hoarding (saving) the bitcoins, as he gathers them the supply is still effectively reduced, increasing their purchasing power. That means that the "hoarder" must trade more goods or services in exchange for the same number of coins over time. He will eventually be doing an infinite amount of work for an infinitely small number of bitcoins.

In the real world though, he will quit long before that since there is no point to trying to own all the coins.

What good does it do for someone to horde all the bitcoins? If someone gets all the bitcoins everyone would leave the network and the hoarders coins would be worthless. Who would he spend them with? Whats the advantage of hording them? They are only valuable if people are buying them which means someone has to be selling them. Has anyone been able to horde ALL the gold in 5000 years? Not yet. I don't see how something do divisible and liquid as bitcoins could be horded anymore than gold.

Money must originate from a commodity with intrinsic value - ideally, one that is durable and divisible. Money starts out as a commodity with utility value, then, through demands which it satisfies alone, becomes a common medium of exchange, i.e., money. Even the fiat dollar derives its purchasing power from when it was backed by gold. We went from gold, to a paper substitute for the gold, to the acceptance of the paper notes themselves, to paper that is now completely divorced from gold, but has a purchasing power that descends from when it was originally backed by gold. This is best explained by Ludwig von Mises' Regression Theorem.

If I were to make cute little paper certificates and call them, say, Anderson notes, nobody would just accept them. Money originates as a commodity with utility value, and the dollar had to descend from something with a pre-existing demand.

 Since money is a commodity, then paper money is supposed to be a substitute for, not an addendum to, the money supply, redeemable in a fixed amount of specie.

Contrary to popular thinking, money is not supposed to be an abstract unit of account, nor is it imputed with value through some other good, but is, itself, a valuable commodity. Paper money should function much like that of a check, which does not add to the supply of money, but is a stand-in for cash.

This is what Bitcoins does. But it is better than gold because of how divisible it is.

Bitcoins durability comes from the electricity, hardware, software, and its divisibilty  come from the decimal places on the computer much like gold.

the problem is a lack of savings. Encouraging consumption and penalizing saving, which is what inflation does, is the antithesis of what we should be doing. Producers need to consume in order to sustain production. Encouraging everybody to run off and spend their cash balances only lengthens the process of production. Our problem is more like over consumption, which leads to capital decumulation and erodes savings. It was once widely understood that people cannot borrow in excess of available capital, since credit is the trading of future wealth for current wealth.


http://www.american-partisan.com/cols/2003/anderson/qtr2/0422.htm

Bittertea, where did you go?  I have answered every one of the criticisms you threw at my definition, so far I have defined hoarding, distinguished it from saving (and distinguished it from speculation, too, which was not even required), and done so in a way that is measurable outside of personal preference (using a generally accepted statistical test of significance for the amount of acquisition as well as the expectation of price increase).  Do you have anything else to throw at it?  If you don't want to pay, don't sweat, but at this point I am curious as to whether you concede or have some other angle to attack my definition. 

"Holding an asset expecting an increase in value more than the statistical norm" is a definition of speculation, not hoarding. By this definition I could hold one gun or one bitcoin, expecting the value to skyrocket, and I would be hoarding. Do you agree with this?

As I stated above, speculation requires a significant risk of loss, per the dictionary definition.  Hoarding does not.  I can expect an increase in value more than the statistical norm for a non-risky asset, like guns or liquor as discussed above, and be hoarding, but not speculating.  I also proposed that hoarding incorporates a statistically abnormal amount of acquisition, so holding one gun or one bitcoin would likely not qualify as well. 

So, is this your definition?

The acquisition of a statistically abnormal amount of a resource, due to a belief that the resource will gain a statistically abnormal amount of value in the future.

My problem is that "statistically abnormal" is subjective.

What is a "statistically abnormal" amount of bitcoins, and what is a "statistically abnormal" expectation of value?

He sent you off to search for argyle paint.  I think his point was that it was impossible, not that you needed to try to split your hairs more finely.

I probably should just stick with the term "significant", as abnormal is probably not technically correct.  I am not a statistician, but if you google "statistically significant increase in price", you will see that this is a commonly used term in research.  My definition incorporates the notion that the hoarder expects that prices will increase significantly.  Statistical significance can also be used to measure divergence from the mean in population samples (like whether a particular person's holdings of bitcoins are significantly greater than the average holder).  I can go research how statisticians document statistical significance and report back, but why?  Is there anything in my definition that does not meet your criteria?  

I think that was his point, but it's clearly not impossible.  There is a definable economic difference between saving and hoarding, as one other poster has acknowledged, and as even BitterTea appeared to acknowledge above at one point.  It hinges on both the amount of assets accumulated (hoarding requires a significant amount of accumulation, saving does not) as well as the expectation of price increases (hoarding requires an expectation of significant price increases for the accumulated asset, saving does not). 

Except that you haven't removed the personal preference part.  You've merely moved it from the individual to the group.

How so?  My definition, and the distinction between saving and hoarding, is completely agnostic about personal preferences, whether anybody has a personal preference for the asset being saved or hoarded is of no consequence.  What was asked for was an economic definition that distinguishes between the two, this has been accomplished.  According to the definition proposed, all that matters is expectation of future value increase and divergence from the mean in amount of acquisition.  As I stated above, I could hoard guns and liquor in anticipation of the apocalypse, and have absolutely no preference for either.  

It's because you're defining hoarding based on the preference of others. If nobody prefers to own guns, but I do, then I own a statistically significant number of guns.

It's essentially saying that nobody should own more than the average number of something. Completely and utterly subjective.

are you asking for a theory of value that doesn't rely on preferences?  that's pants on head retarded.

I do not see where I suggested that nobody should own more than the average number of something?  The definition I proposed is completely objective.  It has nothing to do with whether anybody prefers to own the asset in question, only whether they acquire significant amounts of it and expect significant price increases.  The definition simply distinguishes between hoarding and saving without regards to personal preferences, by focusing on other attributes of the acquisition. 

Example: I may have a personal preference for collecting rare earth metals, and I accumulate an average amount of them and also believe they will maintain price stability, my accumulation of rare earth metals is an example of saving, not hoarding under the definition.  But if I have a personal preference for rare earth metals and I accumulate a significant amount of them and expect the price to increase significantly because of scarcity or catastrophe, under the definition I proposed this is hoarding.  So the distinction is without regards to my personal preference for rare earth metals, or any asset.  It is rather an objective test that looks at actions and expectations, not preferences.  I can prefer something and acquire an average amount, or not prefer something and acquire a significant amount.  The definition I proposed looks not at personal preference but rather the objective factors noted.

Except that the objective factors you are looking at are such things as the number of standard deviations away from the average personal preferences of society.  You have taken your own personal preferences out of your system, but only by including everyone else's.

Except the factors don't look at personal preferences at all. 

Expectation of significant price increases certainly has nothing to do with preference.

And as to the first point, simply because preference might be correlated with amount of acquisition does not mean the two are measuring the same thing.

As the examples given above show, I may have little or no personal preference for an item, and accumulate a significant amount of it because of my expectation for future price increases, or tremendous personal preference for it, and accumulate an average amount of it because of an expectation of future price stability. 

The definition I gave is agnostic with respect to group or personal preference, although it may be correlated with it.  I am more likely to acquire significant amounts of things I personally prefer, but not guaranteed to, as is society as a whole. 

The definition is measuring two objective measures, the expectation of future price increases and the amount of acquisition, not the preference of the acquirer or of the society, which could be all over the map and diverge from personal (or collective) preferences. 

The task was to come up with a definition of hoarding that did not "rely on personal preference and is demonstrably different than 'saving'".   Task accomplished, no? 

I'm pretty sure you've defined all of the terms as statistic deviations away from the group average.

Post your complete theory in one place, just for clarity.

No, the distinction between saving and hoarding does not rely on statistic deviations away from the group average under the definition I proposed.  

It has to do with deviations away from the historical price averages.  

A hoarder accumulates because they expect price to increase significantly.  

A saver does not accumulate because they expect price to increase significantly over time.  Rather, a saver saves to preserve an asset for future use, and possibly to benefit from appreciation in the asset (but again, does not expect significant price increases, as defined statistically).    

Another element of hoarding (but one that does not necessarily distinguish it from saving) is that the hoarder accumulates a significant amount of the asset.  You can argue that this definition relies on personal preference but this is not the case.  You do not have to have a preference for the asset in order to hoard, you merely need to accumulate a significant amount of it, and do so because you expect that the price will increase significantly.  Measuring the deviation from the mean also does not mean the definition relies on society's collective preferences, society's average level of acquisition could be based on factors other than the collective preference of individuals for the asset, people could be accumulating ugly smelly icky pond goo, because they believe that it is a store of value.  One person could be accumulating a significant amount of ugly smelly icky pond goo, expecting that it will not merely be a store of value in the future, but actually increase in value significantly, i.e., the person could be hoarding.  

Personal preferences for an asset be correlated with the level of accumulation, but they are different measures.  The definition's reliance on level of accumulation is entirely agnostic as to people's preferences for the asset (or society's).  

The definition distinguishes saving from hoarding in an objective manner that does not rely on personal preference.  It looks at two objective measures that can both be analyzed using statistical tools (price increase expectation and level of accumulation).  

I hope people don't find this discussion too insanely technical or boring, I actually think it's pretty interesting, I had never thought about the distinctions between hoarding, speculating, and saving until today.  I do think, though, that I have met the task set forth.  Although I definitely would like to hear if anyone has any other arguments against what I proposed?

I think I found the problem.  You think that personal preference means what someone says about a good.  This is incorrect.  The preference is what they actually do.

In your goo example, if someone finds goo disgusting, but also feels that it is a store of value, then the accumulation by that individual is an expression of their personal preference for a store of value, in spite of their dislike of the goo.  Trade is, in fact, the only objective way to measure preferences.

I think this is a stretch.  The task was to find an economic definition that didn't rely on personal preference.  I proposed one that looked at expectation of significant price increases and significant accumulation, as opposed to saving which has an expectation of non-significant price increases.  To say this relies on "personal preferences" is only true if personal preferences encompass everything in the entire world, including economic predictions and warehouse inventory.  If a company accumulates more goo than another company, can you say that is somehow based on personal preferences?  Only in bizarro-world. 

If you are correct, the request for a definition was just a trick to show that personal preferences accompany everything in the world.  I think a more reasonable reading of the purpose for the request was to try to discredit the concept of hoarding as a descriptive term, saying that it was just a pejorative for saving.  I think what I have shown is that hoarding is not without merit as a descriptive term, and is not just a pejorative for "saving that I don't like" or "saving that society finds distasteful".  It is actually a distinct economic category that can be defined objectively, by looking at price expectations and extent of accumulation.  A plain reading of the request and my answers will reveal that this is the case. 

But that's just it.  Economics is the study of personal preferences, either in small (micro) or large (macro) scales.  Personal preferences are how people make value decisions, which they express through trades.

Also, I should point out that no one else in the entire world would ever come up with your definition of hoarding, and you've really only twisted "saving that society finds distasteful" to "saving that society finds statistically abnormal".

I think it was a trick.

I suppose it was a trick in that I didn't expect anyone to come up with a satisfactory answer. It wasn't a trick in the sense that I thought it was a self contradictory question or it was impossible to answer.

There is a lot of talk of hoarding, especially revolving around the concept of deflation. The idea is that if the purchasing power of a currency is rising, people will hoard it instead of spending it, as if the only correct way to use money is to spend it. Hoarding, or saving as I prefer to call it, is merely the action an individual takes when they prefer a liquid cash balance as oppose to less liquid investments. When people refer to saving as hoarding, to me what they are saying is that the person is saving an excessive amount. Again, excessive is completely subjective.

I feel like the definition that you presented was carefully crafted to exclude things that you do not consider "excessive", but does not fit the normal use of the word. That is why I do not feel obligated to pay you the bounty.

In that case, I think I should get it for coming up with the only qualitative difference between saving and hoarding cash.  :)

Then again, my answer falls apart when applied to commodities other than cash, as they all must.

I like hoarding, and I think it's a good thing. Imagine if an Ebenezer Scrooge like actor stages a giant feast. More people would starve to death because the price of food had skyrocketed and the amount of food had dropped. Gold coins might buy food but being rich in gold doesn't mean you can magically make more food than there is. I'm often angered by this myth.

Still, I do consider there to be differences between "saving" and "hoarding", perhaps just because I read something about a bounty.
I'll assume (because I haven't read the entire thread) that by "saving" no one is talking about investing, "savings and loan" style deals.

Saving is holding with a target purchase in mind.
Hoarding is holding with a target value in mind.

If I save my money, I'm holding to buy say, a motorcycle. Once I have enough, I buy the motorcycle.
I might "save" a bag of potato chips for a party. I don't care what the later price of potato chips is.
When I "save" I most likely expect what I hold not to devalue, though. This is not a necessity in saving.

If I hoard my money I'm holding to make a profit.
I might "hoard" a bag of potato chips expecting a boom in the price of potato chips.
I use the bag of potato chips as a store of value, as opposed to a future use of potato chips.
When I "hoard" I expect what I hold to appreciate in value. I gamble that the price will increase.

Another key difference is that when I purchase my potato chips to "save" them for later, I am not going to be acting in reverse of the mechanism with which I got them. I am not purchasing them to allow someone else to purchase them later. If I hoard them that's exactly what I am doing. An exception to this is money which by it's nature is a liquid asset. The only way to get money is to provide goods or services, and the only purpose to save money is to pay for goods or services. The difference here is of again saving money for an goal (even if unknown now, like a possible future medical bill) vs hoarding money for an appreciation in value.

I think hoarding/gouging are good things. They are natural and efficient mechanisms for managing a shortage, and gauging accurate prices.

Hoarding was an unintended consequence of GPU mining that raised the difficulty factor against CPU mining. Unless more people get GPUs, the majority of bitcoins will be in the hands of a few people. Bitcoin will die unless they are spread around. It is up to the bitcoin holders to develop a means of getting bitcoins into the hands of others or all interest will be lost in them. No one else cares enough about bitcoins to do this for them.

The initial distribution of bitcoins probably doesn't matter (https://secure.wikimedia.org/wikipedia/en/wiki/Coase_theorem).

That said, I believe the early users were able to generate tens of thousands of bitcoins on CPUs; GPU mining did not come until late 2010. Currently the difficulty is so high that even with a high end graphics card, you cannot generate a significant number of bitcoins (compared to what was generated by CPUs earlier).

"It is up to the bitcoin holders to develop a means of getting bitcoins into the hands of others or all interest will be lost in them."

Yeah, like changing the Drupal 7 Commerce module natively support BTC, and creating a wiki on how to set up a website to sell goods for Bitcions.  Heck, an amazon like website that holds many storefronts would be super nice, too!  Nudge nudge.

Hoarding and saving are just building up of capital for future investment. The problem with fiat currencies today is they discourage saving of investment capital, so everyone spends everything--even money they don't have in the form of credit. This is the crux of a consumer driven economy.

This is also the crux of a hyperinflation economy, where business owners cannot even buy half a can of paint for a work site, because in one week the can of paint will have doubled in price. Everything must be bought and used that day.

If everything can be bought and used 10 years from now, this would be a sign of a healthy economy that can invest in big, long-term projects, like cancer research, dam building, etc.

I think we're not that far off.  I think we both see hoarding as similar to saving, but different in degree.  I don't think there's anything wrong with hoarding, and I don't think the definition I proposed implies that there is anything wrong with hoarding.  As several posters have noted, hoarding can serve as a value to society, as the profit motive rewards people who recognize trends or future developments and accumulate/preserve the appropriate resources for later distribution. 

The definition I proposed simply offers an objective way to tell whether someone is accumulating a significant amount of something for a particular purpose (expected significant increase in prices).  What are normal uses of the word that my definition does not fit?  Accumulating liquor and guns for an apocalypse would seem to fit, hoarding bitcoins with the anticipation of significant profits would seem to fit, putting 10% of my weekly paycheck in a CD would seem not to fit (and would be considered saving, which I think comports with the generally accepted use of the word)?  What does my definition exclude that should be included?  Again, I'm not looking for the bounty, just interested in pursuing the discussion at this point.

I still disagree, but since I worded the challenge poorly I sent you 5 BTC.

Maybe this is more in line with my intention:

What makes saving good but hoarding bad?

Hoarding is somewhat inefficient but more efficient than alternatives. People just get upset with hoarders because they drive the price up, often profit from the price going up, and don't contribute anything but storage or market adjustment for that profit. It's pretty much the same envy that drives some people to have an emotional issue with concept of early adopters/initial investors who get something for nothing (in said people's minds), and everyone else who follows their lead is left to diminishing returns.

There's nothing bad with hoarding but that's the problem people have with it. If it isn't flat envy of wealth it's envy of foresight. There is also the irrational fear that hoarders can somehow take everything and leave nothing, and the concept people learn at a young age that it's rude not to actively share what you own.

"Saving" money isn't quite hoarding, even when you aren't investing it because [see my earlier post]

People don't have a problem with saving because you aren't strictly profiting from it. You weren't actively pursuing profit, merely a wait, or a critical price [edited from "gain" because I don't proofread my messages for thought process artefacts]. The same irrational people often dislike the opposite side of the coin as well, which is to borrow the money for something instead of saving it, because they see everything from only one side. Borrowing money means you increase the overall cost (for the borrower) and therefore it's a worse deal than saving. These ideas are irrational but pervasive.

Cool, thanks!  I'm going to hoardsavespeculate with that...

And thanks for the interesting question.  I was looking at some economic texts today and they define hoarding with some convoluted formulas that if I had more time it would probably be fun to try to decipher. 

I'm curious as to where the assumption that "hoarding" is objectively and quantifiably different than "savings" originates from.  Could you identify those sources?

Sure.  Here are four sources I found today on google books:

http://books.google.com/books?id=UGq6vlIm5TUC&pg=PA189&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=4&ved=0CEcQ6AEwAw#v=onepage&q=definition%20of%20hoarding&f=false (http://books.google.com/books?id=UGq6vlIm5TUC&pg=PA189&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=4&ved=0CEcQ6AEwAw#v=onepage&q=definition%20of%20hoarding&f=false)

http://books.google.com/books?id=8mbgqf0squcC&pg=PA203&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=8&ved=0CFkQ6AEwBw#v=onepage&q=definition%20of%20hoarding&f=false (http://books.google.com/books?id=8mbgqf0squcC&pg=PA203&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=8&ved=0CFkQ6AEwBw#v=onepage&q=definition%20of%20hoarding&f=false)

http://books.google.com/books?id=e4QiEMmZcLwC&pg=PA192&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=6&ved=0CE8Q6AEwBQ#v=onepage&q=definition%20of%20hoarding&f=false (http://books.google.com/books?id=e4QiEMmZcLwC&pg=PA192&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=6&ved=0CE8Q6AEwBQ#v=onepage&q=definition%20of%20hoarding&f=false)

http://books.google.com/books?id=8_xMAAAAMAAJ&q=definition+of+hoarding&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=7&ved=0CFQQ6AEwBg (http://books.google.com/books?id=8_xMAAAAMAAJ&q=definition+of+hoarding&dq=definition+of+hoarding&hl=en&ei=J6XmTcaHKOHe0QGm0-ySCw&sa=X&oi=book_result&ct=result&resnum=7&ved=0CFQQ6AEwBg)

Thanks, you should of just pointed me to http://lmgtfy.com/?q=definition+of+hoarding :)

Seriously though, is this the literature where you specifically draw your assumptions from?  Perhaps I should of been more clear, if you believe that hoarding is quantifiably, objectively different from savings, where did you learn this?

I looked over those sources and I can only conclude that there is no difference in their terminology between hoarding and saving. One source defines it as a variable that effects velocity of money, or "idle deposits", which could obviously be said of savings.

The first source looks promising, but only alludes to definitions of hoarding, the closest thing to a definition was "actual holding of cash".  Please correct me if am missing something though. 

No, I just found these today and haven't looked at them in depth but from the looks of it the definition I proposed is not what these authors are referring to.

I think your analysis is sound, but your solution would burst the bitcoin-bubble: The success of bitcoin is largely due to early adopters speculating on deflation. If monetary policy is changed to open-end bitcoin generation, an enormous inflation will set in immediately, collapsing the whole project.

What I think will happen: When bitcoin-mining gets less and less profitable, some mining-guilds will switch to block reweaving, double spending bitcoins instead of mining. This will happen more and more often, weakening faith in the currency, and collapsing the system.

The whole project doesn't have a future, but have fun while it lasts!

You're entitled to your opinion. I'll buy your bitcoins at $5/each before the bubble bursts though.

(paging Kiba to the bubble, Kiba to the bubble)

Any pool that engaged in double spending would quickly see it's users switch to a different pool.  The largest pool is only about 1/3 of the total hashing power.  Non-pooled mining altogether is around 1/4 of all hashing power.  Double spends are nearly impossible after a few confirmations unless all the pool operators work together.  Why would they do that when they are making a lot of BTC, and doing so could only lower the value of their income?

Just read this article by Adam Cohen titled Is the cryptocurrency Bitcoin a good idea? http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea/answer/Adam-Cohen-2 (http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea/answer/Adam-Cohen-2)

Though his third and fourth raised points are overly pessimistic, he strongly addresses the early adopters bonus and the perpetual deflation as the first and second "severe problems". I'm glad the same points were raised by an independent economist.

I'm also beginning to notice a trend in the ongoing discussion here: Most new comers (folks with a small number of posts) support my suggestions, while most "early adopters" don't. There can't be any mischievous intentions here, right?

Just in case there was, I'm reminding the early adopters that the proposed system will not take any of their profits away. It will simply freeze the coin's value at the point which it's at once the implementation begins. But contrary to having people like Cohen (rightfully) doubting the sincerity of the project which Satoshi et al made thousands if not millions of dollars in profits for "taking an early risk", the new system will be much more trustworthy as it will be fair to all with a stable exchange price.

No more speculation, no more incentives to hoard/save, and no more unwarranted profits (or losses). You can casually keep a few hundred coins in your virtual wallet without worrying about a price crash. And you can casually spend them without pulling your hair out when the price doubles the week after. How on earth does the current system beat the proposed one?

regarding: http://www.quora.com/Is-the-cryptocurrency-Bitcoin-a-good-idea/answer/Adam-Cohen-2


"Fortunately, it's such an obviously flawed system that it will probably never grow to a point where it causes any ill-effects,or even impact, to world economies."
Obviously  ::)

"No matter what your reasoning, Bitcoin is a ridiculous idea that will not accomplish what you want."
Or maybe it will.

This guy clearly believes he is an expert about economics; yet he is writing a blog about a currency, not an economy. His argument about a "central bank" fails. Where is this "central bank?" America? Germany? Switzerland? The fact is, there is no workable banking system anywhere. That's why the world is financed by dodgy credit default swaps, derivatives, naked short-sells, and other financial jalopies. Bitcoin may not be perfect, but as long as it is reasonably secure, convenient, and available, it will thrive. The naysayers and demagogs can ad hominem and make all the strawmen arguments they want, but unless they show good evidence that bitcoin fails after two years, they can get get in the game or get out of the way.

BTW, I have only known about BTC a couple weeks and have not yet seen any valid case presented against BTC. I am open to evidence, not just opinion.

You read the initial post right? It's against the limited supply system, not Bitcoin in general.

https://mtgox.com/trade/history
Nuff said? :)

Feel free to start your fork anytime.  This experiment is ours.

+1

I don't particularly believe that this would be successful, but i will surely watch the development with interest.

Perhaps even many forks should be created - inflata-coin, superdeflata-coin, stuff-coin, alter-coin - so we can experiment & test which one will be more successful than others.

People save with the incentive that they will profit, otherwise there would be no saving. It seems to me to be a little disingenuous to suggest people save altruistically and hoard selfishly.

There was no such intended implication, I did not suggest that saving is altruistic or that hoarding is selfish.  Later I acknowledged that the term "windfall" was probably not as precise as "significant price increases".  Savers do not generally anticipate significant price increases, although you are correct that they do have a profit incentive.  They just do not anticipate their profits will deviate significantly from historical averages generally.  Hoarding, on the other hand, generally entails an expectation that profits will be significant, for the reasons I noted above.  I do not think hoarding is any more selfish or altruistic than saving.  As many have noted, hoarded serves an important function for the market. 

The problem with "hording" is that the term has a commonly understood negative connotation, whether we would agree with your benign definition or not. 

Hi, I will repost this here as the previous thread has been closed by the admin for unkown reasons / probably a lot of "deflation" posts which was not intended.
I believe 2 things are imperative

1) controlled growth of the supply as suggested by "Suggester"
2) Making credit available and facilitating savings through an interest free credit/savings exchange. This will prevent "hoarding". Instead of "hoarding" the BC could be lent out to others without interest. The lender will be compensated by credit points, which allows him to get a bigger credit from future savers.


-----------------------------------------------------------------------------------------------------------------------------------------------------------------
Bitcoins had quite a frenzy about them recently, being mentioned in mass media and their value increasing. However, they will die out even without governments etc. Intervening or clamping them down. Let me explain:

Bitcoins are not money. They are a (perfect) medium of exchange. Their properties are similar to gold: scarce (finite amount), divisible, stable, low volume / easy transport, secure. So they only fulfil two properties of money: exchange and storage of value. But they lack CREDIT.

Fiat however, is born out of credit (each dollar/euro/... cash or deposit is mirrored by an equal amount of debt). The next is zero. Money is debt. The debt money (fiat) arises from property rights: somebody needs cash so he will pledge his property against a loan. The bank demands interest for giving up her property right on the money (a compensation for not being able to use the money, NOT because of the credit risk). Fiat systems thus have inherent interest in debt contracts. This interest has not yet been created, in order to have the interest paid back, new money must be perpetually created. Obviously, over the course of many years, the fiat system leads to an unequal distribution of net worth, as people owning property earn interest and people needing money pay interest.
The advantage, however, of the fiat system is Credit: only Credit enables economic trade, investment etc. Everybody who started their own business or wanted to buy a house knows that.

But credit comes into place with property rights – the only conundrum is the interest which is inherent to it. If we could remove the interest, we could go towards more equilibrium and a more stable and sustainable economy.

Without credit, we would live in a mere barter society. That’s what the bitcoin world is at the moment – a bartering club.

Unless bit coins allow CREDIT, they will just be a scarce barter medium and will end in an awful way:
Due to their scarcity (and the relatively huge amount of fiat in circulation), a bubble is already building: many people buy bitcoins without the intention of even use them for barter. Easy to see, as mtgox a “exchange” is the biggest bitcoin accepting site. They are now valued at ten dollar, with about 8 million in circulation. I would not be surprised if they go to 100 dollars due to their scarcity and similar properties to gold. They are a highly deflationary medium.

Eventually, the bubble will burst however, as people suddenly find themselves on the selling side and convert their bitcoins into physical goods or fiat. (the velocity of money rises, everybody wants to get rid of them, prices of goods relatively rise, the currency plummets). This would lead to a sad end to a nice experiment. Just like with Tulipmania, Dot Com Bubble etc. People would lose a lot of fiat and staying away from alternative currencies for a long time.

So what can be done to avoid it?

1)   Bitcoins should not be completely scarce. A finite amount of bitcoins makes them highly deflationary. Similar to gold, a controlled mining should be allowed even after the intended stop, so their availability grows with usage

2)   Credit needs to be allowed and facilitated: As we don’t want to have another fiat experiment, bitcoins would be ideal to try true interest free credit:  please take a look at the following interest free credit/banking model which could be easily setup for Bitcoins
http://jak.aventus.nu/download/Uppsatser/MARK_BURTON_DISSERTATION_2.pdf
http://www.feasta.org/documents/review2/carrie2.htm

Thoughts / critique / discussion welcome!
Guy

Well in this case I would say that hoarders seem to be more knowledgeable than savers.

Also there is nothing stopping people from lending their bitcoins out for credit.

SuggesterCoin

any coin will do.

Bitcoin has a controlled rate of growth.  That's it's primary feature.  It's so well controlled, I can predict with high accuracy what the monetary base will be years in advance, and never be off on my timing by more than +-.5%.  Does any fiat currency in current use have such a record?


Go ahead.  There is no reason that you or anyone else interested in such a bitcoin bank can't start one, but nor is there any need to incorporate credit lending into the Bitcoin protocol itself.


So does gold.  Credit is a feature provided by institutions, not the medium of exchange.


Be careful what you wish for.

Why is it so hard to believe that these "problems" are taken into account in the price of bitcoins. Why does everybody assume that the speculators are wrong? The increase in the price of bitcoin is not credit driven, nor even inflation driven. There is no reason for there to be a cluster of errors specifically in bitcoins. There are no policies favorable to buying bitcoins in place by the government. Nobody is giving out massive loans to people who aren't good debtors in order to buy bitcoins. All the reasons for a bubble are absent in bitcoin.

Let them assume what they wish. In the end, we'll be the wealthy ones.

You're not supposed to say that explicitly, Atlas. You're supposed to pretend that "deflation is fine" or that "it will all balance out in the end". You've just broken every Ponzi rule by declaring your sinister intentions out loud.

That would be true, if this were a ponzi scheme.

Supporters of the current design lose the debate either way. If the price..
1. Keeps rising forever, then it's a Ponzi scheme which will collapse at some point.
2. Keeps rising sharply then falling sharply forever, then it's an unstable currency subject to severe manipulation and speculation.

I'm still begging for one argument against my proposed stable-price system.

What he is expressing is his strong feeling that Bitcoin will succeed. He is saying "we'll be the wealthy ones as opposed to the others who did not invest". This is not at the expense of any individual, as others who buy at higher prices are doing so because they value the Bitcoin concept. It is in fact a valuable service to take risk by buying now to sell at a higher price later, when it is seen as less risky.

I understand that. And my question was: How is this supposed to end? Will the price keep rising forever or not? Think well before answering because you lose both ways.

You do realize that 1 & 2 are the same exact scenario, just stated differently, right?  And both of them are also internally illogical.

Perhaps you shouldn't be investing in anything.

3. Rises to a point of equilibrium, and is used as an easily stored and transmitted gold-like asset. Over time, the purchasing power of Bitcoin will increase at a rate equal to the rate of the growth of it's economy. People will accept that even though their paycheck may be decreasing denominated in bitcoin, the amount of goods and services they can buy stays the same or increases. In addition, massive amounts of debt are no longer needed, as people can easily defer consumption and save, which benefits them in the future and provides the necessary capital for investment in infrastructure.

By 1 I meant a hoped perpetual deflation scenario. By 2 I meant a perpetual bumpy-price scenario. Neither of them is illogical, one of them is inevitable.

Don't worry, I'm not investing. I'm hoarding.

Really? So for instance its user base increase between 2017 and 2018 is supposed to be only 1.5% simply because the increase in bitcoins would be about 1.5% during the same period? That's nonsense. The natural human population growth exceeds that figure. Millions of people would have joined the internet for the first time and learned of bitcoin by then. And what about by 2025, when the new bitcoins produced would be almost nill? Should the Bitcoin economy's growth hault by then so that the purchasing power of Bitcoin increases at a rate equal to the rate of the growth of its economy?

And what exactly would their incentive be for spending a currency which gains 20%+ of real annual interest when they can spend fiat instead and hoard that currency year after year only to be given to a new hoarder? Bitcoin's limited supply model is any hoarder's wet dream come true: Ridiculously high interest money coming out of thin air. Who the heck would wanna spend this unless he's trying to escape an eminent price collapse?

"In 2009, the estimated annual growth rate was 1.1%."
- http://en.wikipedia.org/wiki/Population_growth (http://en.wikipedia.org/wiki/Population_growth)

http://en.wikipedia.org/wiki/File:World_population_increase_history.svg

According to Austrian Theory. Mainstream economics has a different explanation of what causes bubbles, and it happens in a community of people who think prices can only go up.

You're looking at newly born babies sir. Those don't use bitcoin. You should look at the natural increase of eligible users.

To some extent, there is truth in what both of you say.  Government policies, excessive debt-financed purchases, etc., are not necessary for a speculative bubble to emerge.  On the other hand, there may be some truth to the argument that a Bitcoin bubble is "less" likely to exist or crash hard if it is not debt-financed.  If the Bitcoin "bubble" just represents a lot of reasonable speculation (lets say 100,000 people all put $1,000 of their assets, without using debt financing) into Bitcoins on the hopes of higher prices, the "bubble" or "price increase" or whatever you want to call it may be more sustainable and may not end as badly as it would if people are buying with debt, for obvious reasons.  

I feel compelled to respond to creighto's remark here.

People in general, me included, have a difficult time believing that out of the ashes of the recent economic collapse (the RE market collapse as well as the Madoff-like, greed based ponzi schemes) something as awesome, beautiful and as powerful could arise as the result of the efforts of a single, or perhaps and more likely, a group of technically/economically minded/skilled individuals.

The automatic, default response to anything novel and revolutionary, is at first, denial and ultimately, acceptance while pretending nothing new ever happened.

A perfect example of the emotional/psychological/thought/belief-based roller coaster that we all go through when faced with something so big and so 'surreal' is captured in this just as awesome, beautiful and powerful quote as BitCoin is, by William James:


Now, I've personally known a few people in my time who have achieved something revolutionary, not because they had any idea how to do it when they set out to do it, but because they all had the following things in common at the level of whom they were being:

1) an intention to create something Good (Good here is defined according to my Judeo-Christian belief system)

2) a complete surrender of their personal philosophy/worldview/doctrine in lieu of another's philosophy/worldview/doctrine. They answered their God-given Calling.

3) they executed and finished it

Steve Jobs... is one of these people.  Bill Gates... is another one of these people. In my view, Satoshi, whom as far as I am concerned at this point in time might as well be Keyser Söze, is one of these people as well.

I choose to create a personal relationship with Satoshi by starting with a $100 USD investment into BTCs, much in the same way I have created a personal relationship with Steve Jobs by owning a MBP, or Akio Toyoda, by owning two Toyota vehicles, mine and my wife's.

My trust in BitCoin, vis-a-vis, Satoshi, is 100%. I risk getting screwed over by BitCoin/Satoshi. Upon reading the whitepaper, I am confident that Satoshi's intentions are noble, despite any imperfections BitCoin's heuristics may have.

My suggestion to everyone here is to trust Satoshi until he cannot be trusted any longer.  I know this doesn't sound "revolutionary", but in fact, all of these skeptics and naysayers are actually PRETENDING to know that Satoshi is a scammer, and thus BitCoin is a scam. Fact is - they don't know anymore than I know that he is genuine. They want to peek around the corner of time when the only way to find out is to play the game. If indeed he turns out to be a scammer, the people with the highest levels of greed today risk getting screwed the most anyway. The other ones can shrug off the loss. One thing I am certain of, if Satoshi is proven to be a scammer, he will be no more, much like Bin Laden, or Ratko Mladic.

Barring any serious technical analysis of Satoshi's BitCoin heuristics/algorithm that can prove it logically unstable or easily defraudable by a large entity with much time/cash to spend on a systematic attack toward this purpose, I welcome you to the new world currency - BitCoin.

Dive in, the water's just fine (for now!)  8)

I have no idea what you're talking about now, but your original statement was about the rate of human population growth and was promptly disproven.

(UN medium scenario projects a max global population of somewhere between 9-10 billion at the year 2050-2070 and then decreasing)

That point is so trivial we shouldn't be arguing about it. I was simply telling you to reflect upon the natural increase of eligible bitcoin users rather than the sheer increase in population which is based on newly-born babies.


Bitcoin's rate of generation will continue to decline beyond 1.1% reaching practically 0% long before 2050 if that makes you happy. Add to that that its user base grows much faster than that of human population, eligible or total. To cut it short: Deflation is inevitable.

I can't say I understand what point that you were trying to make, but I can say for certain that not all people react in the above generality.  I am an INTP, it's not in my personality makeup to reject new data lightly, nor to take much stock in the opinions of others.

I just want to add one more inquiry to my previous characterization of BitCoin -

the value add of having a decentralized currency does not come without some other, less visible/obvious costs.

Namely, all the good, bad and ugly stuff that human beings are able to do with centralized currency, will still be possible with BitCoin, once the gold/BitCoin fever is over and the currency is used en masse.

Thus, I assert that BitCoin is NOT a solution to the ethical/moral problems that arise in society. After all, the first thing one will do with an anonymous currency that can be sent to anyone in the world is abuse it for immoral purposes. By 'immoral', I am using my personal Judeo-Christian belief system here, which has been around for 4000 years or thereabouts, BC and AD combined. Apparently, some of this has already been done.

The cost of being able to transfer currency at will, to anyone and anywhere in the world, is an apparent shift/increase in responsibility from the group (e.g. "centralized") to the individual.

Now, the question is - if responsibility to make "bad" (e.g. self-destructive or destructive to others) decisions is given via means of BitCoin - will that eventually result in the massive corruption of the whole, e.g. the few or one bad apple will spoil the whole good bunch?

Or, does personal responsibility eventually, once all the "bad bunches" have been eliminated by self-destruction or mutual-destruction, result in increased responsibility for all people combined?

I know there is no easy answer to this type of ethical inquiry - however, I want people to beware that NOTHING comes without a COST - not necessarily a MONETARY one at that, and that eventually, "scary" or "pleasant" as it might be, we ALL get exactly what we are asking for. Whether we like what we get or not, in the end, is open to debate.

I am not denigrating or putting down BitCoin by any stretch of the imagination, merely adding some _human_ perspective to it and the kind of problems it will solve as well as create at the same time as a result of this transfer of responsibility.

Suggester has been wrong for 18 months, why should we believe anything will change?

It must suck knowing that you could have been a pizza delivery boy just once in your life, see 2 pizza for 10,000 BTC, and you would be well ahead right now.

These grapes are getting too sour to even look at, can someone close this thread already?

Just a reminder of how "wrong" I've been for 18 months:
http://s2.postimage.org/249eg65t0/price.jpg (http://postimage.org/image/249eg65t0/)

Doesn't look like perpetual deflation. Doesn't look like a crazy horse. Doesn't look like a speculators' den. Doesn't look like a nerve-wrecker with each single transaction. No, It's a perfectly sensible stable currency with a promising future.

Do not take this as an ad hominem - just think about it before you have the 'automatic' (emotional) response - but what kind of a personality "does not take much stock in the opinions of others"? A trusting or distrusting one?

Pretending that we do not use emotions, in addition to data/logic/facts when making decisions, is, in my view, deadly.

At the core of who we are, we're driven by our emotions as well as reason. What is the incentive for my dad, who is 64, and never interacted with computers his entire life nor does he intend to, to trust BitCoin over the dollars in his pocket? It will definitely not be an in-depth analysis of BitCoin. It will be my word or other people or authority he trusts to make the decision.

Does your personality get an MD degree before you go to a doctor because you do not take much stock in the doctor's opinion?

Either you are playing devil's advocate here, or perhaps you are very young .... Again, not to berate you, but I am a little surprised you do not see the point.

So you are heavily invested and quite wealthy from all your gains then? If you predicted this so perfectly why haven't you profited, altruism?

What happens next sooth-sayer?

If it were a matter of pretending, I would agree.  I did not have any emotional attactment to Bitcoin or it's success when I learned about it.  I had no opinion about it until I understood it.  But once I understood it, I had an opinion. 


Do you understand what I am referring to when I say I'm an INTP?  I'm just about an unemotional in my decision making processes as is likely possible.  I am not driven by emotion, it has taken me decades just to fake it well.


This is likely true for most people, but by this point he will be using Bitcoin because that's what other people trust, not because he trusts what other people say.


Sans the license to practice, almost a yes.


I am neither playing, nor am I particularly young.  Do you regularly see those who hold opinions other than your own to be inmature or inexperienced in your own mind?  If your point was that emotion plays a a role in how people view Bitcoin, I think you were being too vague, but I still would say, so what?  The vast majority of people don't understand how fiat currency works, and don't care.  They only know that everyone else uses it.  Bitcoin takes over as those who care to know, switch; and are followed by those who don't care to know.

Wow... I am impressed .... You remind me of Mr. Data from Star Trek, cold, unemotional, calculating and driven.... by the love of the BitCoin!

I wish you the best of luck in your pursuit.

Creighto, the whole Jung personality game is just as notable and credible as astrology. I hope you know that.

Carl Gustav Jung also said "The most terrifying thing is to accept oneself completely".... I hope he knows that one too.

I like Jung now. A never-ending curiosity for oneself and others can prove to be quite a virtue. Actually, it's a foundation most relationships lack. One should not neglect it in the relationship with oneself.

Good food for thought.

I voted no, for a few reasons.

1. The current model is not flawed.  There is nothing wrong with price deflation, since if you need to buy things, you need to buy them instead of hoarding all of your bitcoin.  Bitcoin is unlike a Ponzi scheme in that the _true_ non-bubble price of a Bitcoin won't go to zero if the cryptography underlying Bitcoin is sound.  There always be someone interested in taking your Bitcoins.

Of course, the best defense against a price drop (even in the face of the "doomsday scenario" of the government shutting down all exchanges) is a healthy exchange of bitcoins for real goods and services, not just other currency.

2. Even if it was mildly flawed, there should never be a precedent of changing the rules.  If the rules change, the result should not be called "Bitcoin".

I'd also like to refute the whole "OMG early adopters are making a fortune!" argument: for an early adopter to maximize their profits from hoarding while the price rises, they would have to never lose faith in Bitcoin.  As soon as they do, they sell, and then they're at the same level as newcomers.

If you have a better economic model, why bother messing with the existing bitcoin? As it has been said many times: create your own block chain.

In all seriousness, this is not just a shut-you-up one liner. For the first time in history, people can actually experiment with different monetary economic models. Back in history, when people chose seashell, metals or paper as money, most of the money characteristics was pretty much set by nature, or the nature of government. They didn't have the luxury defining the characters of their money and then enforcing it via electronic circuitry.

Now with this concept of cryptocurrency, money systems based on different models can co-exist: inflacoin, deflacoin, constcoin. People have options to choose whatever they like the most. It will be interesting to see how Gresham's law (http://en.wikipedia.org/wiki/Gresham's_law) works in this environment.

One possible outcome is there will be no clear winner, or, winner/loser change over time. At a time like we are living now, after decades of inflationary monetary  policy worldwide, I would guess deflacoin, aka bitcoin, has more appeal to (more and more) people.

Beautifully said. It sounds to me like you are powerfully related to other people. As a result of being powerfully related to your fellow human beings - whether through therapy, healing of trauma, faith or all of the above- you got to know who you are.  That's something that a BitCoin can't buy.... and one can be only transformed into such a human being... by a certain higher power which most people do not beleive exists.

I wish more people were like you. The good does indeed survive!

I join this.

I think it is very important and quite interesting that we experiment to find the best workin currency model (or perhaps find some ways to improve current model).
Maybe it would be beneficial for BTC users for 2, 3 or more separate systems to exist simultaneously.

Although this should be done through a fork, not forcing changes on the current chain. The market will decide the rest. If there really is a demand for "StuffCoin", "Inflatacoin", "SuperDeflataCoin" etc, then market will preserve them and they will live their own lives.

So Suggester: please go start your own chain. Seriously.

There are three aspects that the current Bitcoin system and Suggester's solution share and which you wouldn't like to have in a currency:

1. A Bitcoin's current value is determined by the currently socially necessary labour time to produce one bitcoin.
This means that Bitcoin is a digital currency money (https://secure.wikimedia.org/wikipedia/en/wiki/Currency_money). In the current model the value changes by 19% p.a. on average. But Suggester's model shares the same flaw. Although Bitcoin would not be deflationary anymore, the value still depends on commodities like hardware and electricity. Money can't be created as needed, but has to be produced with commodities. This implies …

2. Money supply is severely restricted.
Bitcoin is only a Ponzi/pyramid scheme without any use besides speculation. You cannot create money as it is needed. There would be no banks, no credits, no interest rates. This system can never work in a growing capitalist economy. It can't measure the value of the produced goods because there can never be enough Bitcoins.

3. A huge part of the economy serves only the mining of Bitcoins.
Since Bitcoins are produced only with electricity and computing, a great part of capital (means of production and labour) has to be expended on the production of the society's money. This is economically and ecologically insane, to put it politely! Even under Suggester's model an economy could only grow as the Bitcoin mining industry grows. Just imagine nearly every worker working for an electricity/Bitcoin mining company. This industry would invest all its profits in Bitcoin mining and draw capital from all other industries. Soon there would not be any other industry than Bitcoin mining and related industries.

All these fundamental problems exist in both the current model and Suggester's model. That's why I suggest to drop this Bitcoin Ponzi scheme altogether.

You can't measure the value of produced goods period.


Gold is a perpetually deflationary currency. When is that going to collapse down to it's industrial use value?

You have it backwards. The time to mine one bitcoin is determined by the difficulty level, and the difficulty level is approximately determined by 1) the value of Bitcoins, 2) the number of Bitcoin users, and 3) the level of "mining enthusiasm".

The value of one bitcoin is determined by people's beliefs in what goods and services they can get for that bitcoin in the future.


How can you be sure there's enough USD or Euros?  If central banks determine there's not "enough" of their currency, they issue more and the value of each one is diluted -- inflation. (http://en.wikipedia.org/wiki/Inflation)

Credit is entirely possible, as are banks.  You don't need a fiat currency for those.  We had both credit and banks when currencies were backed by precious metals.

Here is my litmus test for Bitcoin: are Bitcoins being exchanged for real goods and services (not mining paraphernalia)? If so, then it's not a Ponzi/Pyramid scheme.



I think you greatly over-estimate the need for mining.  It seems to me that most of the mining going on is driven by enthusiasm, and is happening at a loss.  When the enthusiasm passes, the only mining will be done by people making a profit, and so there will be much more real economic activity in proportion to mining activity.

Well, then Bitcoin is completely useless. How would I buy anything if the money does not measure the value of goods? Measuring value is one of the functions of money.
Gold is neither a currency nor is it deflationary. According to this chart (http://www.inflationdata.com/inflation/images/charts/Gold/Gold_inflation_chart.htm) it seems inflationary and volatile. The peak price of 1980 was $2251 in 2010 dollars. Today the gold price is $1533 in 2011 dollars. The price will drop as mining gets improved and new deposits are discovered. There is no way back. Mining technology constantly improves and the amount of mined gold grows.

Hi all,

I've only just heard about Bitcoin last week, and have been reading through this thread today.

It's funny to see Suggester's predictions from a year and a half ago come true, and it's going to be even funnier to see when a couple of people decide to cash out, then investors see the price drop a bit, then everyone decides to get out while they can and then entire system implodes...  :)

I thought about getting some Bitcoins a couple of days ago to start playing with them as I was interested in the concept, but after seeing how volatile they are and watching them go up 70% in the last 4 days, I wouldn't touch them with a ten foot pole, because the chances are that they'll go down 70% by next week, or more likely drop way past whatever their "true" value is, but who knows what that is at the moment.

Good luck guys. For those with a lot of coins, I hope you get out before the crash...

The value of a bitcoin is the value of the means of production (hardware, network connection) that is transferred to the bitcoin + the value of the used electricity + the value of the necessary labour (some people must be paid to manage the servers etc.). With this formula you can calculate the value (in dollars, euros, …) of a coin which is produced today. Speculation makes the price fluctuate around this value.
Not necessarily. If the value of the issued money equals the newly produced value, the value of one unit of money does not change. I don't want to defend our banking system. I only say that Bitcoin can't succeed in achieving a constant value of money (Bitcoin is deflationary) because with Bitcoin nobody can create money when needed.
Can you explain how? You need to create money "out of nothing" to grant a loan. In fact, debt is the source of money. Otherwise a bank could only give the money it has and only give it once. That would be pointless.

It's not my estimate. It is estimated that mining will continue until 2033. All Bitcoin owners (and thus the miners) definitely don't loose because of the annual increase in value of 19%. If the Bitcoin community grows this rate is even much bigger. Mining will continue as long as there are Bitcoins to mine or until the big crash comes.

Of course Bitcoins are experimental and rather new - if you are looking for some low-risk investment then look elsewhere. On the other hand, most people seem to expect Bitcoin to either be hugely successful or fail completely. In the latter case the "real value" will eventually be zero of course but in the former, it is greatly undervalued right now.

If you think Bitcoin is worth at least something in the long run, then investing a bit in them is probably a good idea - even if you think the current price is too high.

No, you don't need to create new money to make a loan.  You can loan money that you already have.

Isn't every bitcoin bought a bitcoin sold?  (Except for the minute 50 btc / 10 minutes added to the system?)  Monthly turnover of bitcoin in existence is more than 5x that of gold in existence, and thats only at the major exchange - excluding trades for goods/services.  Can that be called hoarding or fluid exchange?  And maybe it is not popular in all the nations of the world - but some still prefer in having a surplus instead of a deficit and working towards a reserve (saving, hoarding or what else you would like to call that) instead of a shortage (bankruptcy, hunger, devastation, or what else you would like to call that).  Haven't some nations funded other nations inflation (/shortage) by foreign direct investment in the currency because some currencies were believed to be world currencies?  If that trend should reverse - wouldn't it mean devastation (even to a lesser degree for some of the former foreign direct investor countries as well)?

Then so are US Dollars. Somehow they are still useful for exchange. By definition the value of a good is more than the dollars I exchange for them, otherwise I wouldn't exchange them. How much more is it valued? No one knows, because we can't measure that through action.


LOL, as if the fluctuations of the price of gold in USD is a reflection the inflation or deflation of Gold and not the USD at the end of the 1970's. Also LOL using a peak in the data as your basis for inflation. Tell me, Has global warming also stopped since 1998?

Edit: There is no definition of deflationary that you can use that will make gold inflationary and Bitcoin deflationary (just in case you were going to try to use the real definition of deflation e.g. a decrease in the money supply)

Who mentioned anything about Bitcoins being an investment. I want to use them for what they are meant to be used for, an alternative to mainstream fiat currencies with which to buy and sell goods and services. No one is going to be doing that until things settle down, be that with Bitcoins being worth $0.20 or $200, or who knows where.

Sure, currencies can be used as an investment tool, but that's not their primary purpose. Today their value gone up 20%. Seriously. How can you use something like that trade. If you owe someone the equivalent of US$100 in the morning, by the afternoon you owe them US$120.

I'll come back whenever things have settled down and buy in at US$0.20 a Bitcoin or US$200 a Bitcoin, I won't care which, it's just a number. As long as it's worth roughly the same amount a week later I'll be happy.

As long as a merchant converts on the fly to his currency of supply - he is not exposed to the markets.



If bitcoin is a rapidly appreciating asset, can you not afford to lend your bitcoin for currency at negative rates in exchange for currency?  In other words, if you expect a 10% appreciation in bitcoin's value over the loan/exchange (to be exchanged back after a certain period) term against some currency, wouldn't it still be worth your while to lend it out at -5% bitcoin interest, and still get a real return expressed in the currency that you gauge the appreciation of bitcoin against?



Because bitcoin's supply is fairly fixed, it becomes a demand side balance act.  As long as demand is increasing or goods/services/other is offered for exchange with bitcoin, bitcoin will show greater value in the equation.  If demand is decreasing or goods/services/other available for exchange with bitcoin is decreasing, bitcoin will show a decrease in value in the equation.

An ecommerce site can simply peg their fiat currency prices into a script that uses the 24 hour volume weighted average price from bitcoinwatch.com, and the script update the bitcoin prices each morning.  Yes, the exchange prices are very volitile as of late, but they were between 5 and 7 cents for months at one point.  The bitcoin rallies go in fits, this one will level off like the rest.


You can't really owe anyone anything in Bitcoin yet.  There is no credit system.  You pay the price when you order it, just like you would if you were ordering from anywhere else; using paypal or a credit card.  If the price changes before the product arrives, that is neither your problem nor your gain.  The bitcoins are in the possession of the vendor within an hour, and they can choose to sell them on the exchanges immediately if they wish.



If we ever see 20 cents again, the system has failed.  I predict that it'll settle down soon around $25 per, and stay between $20- and $30 for a couple months before it shoots to $100 in the fall or winter.

We shall see how good I am at this.

Yes, for every successful trade the must be, by defintion, a seller and a buyer.  This is true whether the bitcoin is being traded for US $, Euros, carrots or alpaca socks.  Even the block reward can honestly be considered a trade, of sorts, as there is a definable amount of hashing power (or electricity if you prefer) that had to have been contributed to the security of the system for that block to have been found.  From a certain perspective, all 21 M bitcoin can be considered to exist, it's just going to take some time for the algorithim to pay it out in trade for calculations.

There is no free lunch in bitcoin, not even for the miners.  Every transaction and reward in bitcoin represents value in motion; otherwise it wouldn't move.

There's no problem with money being created with commodities. After all, milk is created with cows and grain is created with other grain and fertilizers. On the contrary, the problem occurs when we don't have a stable anchor to which we can tie our money to. Central banks use government powers including interest rates and money supply for that purpose, but what does Bitcoin use? That's right, mainly electricity. I'm simply proposing holding the amount of required electricity to generate X amount of coins constant.

That's not in my proposed system. In my proposed system your money doesn't gain value over time (nor does it lose value, for that matter). Therefore you have no reason to hoard nor a reason to squander. You'll just spend as you normally see fit without worrying the money's value will jump up and down in a crazy unpredictable manner.

That's exactly the beauty of my proposal: The amount of money produced actually depends on the amount of electricity sacrificed. Under the current system, the same bitcoin created a year ago costing a couple of cents is the same bitcoin produced today costing (tens of dollars?). That's insane. It doesn't make any sense. And it causes the price graph to appear like you saw in my first post because that same one bitcoin progressively gets more expensive to produce. As far as the ecological and global effect is concerned, I think you're overestimating its impact. You're better off banning video games for that matter.


Although I disagreed with your ideas I feel obliged to congratulate you. Believe it or not, you're just about the first person in this thread to actually try coming up with counter arguments instead of crying Burn him at the stake!

Fixing bitcoin to electricity prices would create the unnecessary tension of supply/demand of electricity mismatch with supply/demand for unregulated free currency. You would waste untold energy fighting two vastly different markets. Suggestercoin credits that could always be redeemed for a fixed quantity of kW.hr electricity are a viable market option but only if trade freely with bitcoin.

You could use the Open Transaction platform to issue Suggestercoin electric credits yourself. People could trade in a truly anonymous exchange then. But how would you guarantee that they could be redeemed for electricity?

https://github.com/FellowTraveler/Open-Transactions/wiki

https://github.com/FellowTraveler/Moneychanger/wiki

How would you define a Ponzi/pyramid scheme?

If counter trade for Bitcoins is Q = goods/services/other available for countertrade with Bitcoins,

and Number of Bitcoins in existence is M = number of Bitcoins in existence

and the velocity with which Bitcoins in existence M is traded for Q = V

and the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins = P (with increase/decrease in P giving the systems inflation/deflation)

then in accordance with the equation of exchange ( http://en.wikipedia.org/wiki/Equation_of_exchange ), this equation needs to be satisfied in all instances:

M x V = P x Q

Thus, for inflation/deflation benchmark level P = M x V / Q,

and approximated to:

%Pchange = (%Mchange) + (%Vchange) - (%Qchange)

so if %Mchange is fairly constant or very close to zero (only 50btc generated every 10 minutes)  -> take as 0%
and assume %Vchange remains constant (liquidity remains unchanged) not to complicate matters in this relationship  -> take as 0%

what remains of the above equation of exchange in relation to %change is:

%Pchange = -(%Qchange)

The above is telling us that there are an inverse relationship between %Pchange and %Qchange
This means that if Q (goods/services/other offered for exchange with bitcoins) increases drastically, there is a resulting equally drastic decrease in P.

If %Pchange is a very large negative number (or in other words P is decreasing drastically, or in other words the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins is decreasing drastically) you have deflation of the system.

If %Pchange is a very large positive number (or in other words P is increasing drastically, or in other words the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins is rising drastically) you have inflation of the system.

So if you want to have inflation or stabilization of the benchmark level giving a ratio of all goods/services/other's system valuation in relation to Bitcoins, you will need to decrease or stop/stabilize any new goods/services/other available for exchange with Bitcoins.

That's the equation of exchange.

Very good! Someone else knows about the equation of exchange! You might want to take a look at my post regarding this:
http://forum.bitcoin.org/index.php?topic=11627.msg167838#msg167838 (http://forum.bitcoin.org/index.php?topic=11627.msg167838#msg167838)

The equation of exchange, as you state it (MxV = PxQ) is not a real identity though. Only the classical form of the equation of exchange (MxV = PxT) is a real identity, meaning it always has to be fulfilled. T is the number of transactions that took place in a certain period. This number is hard to estimate with a "classical" currency, that's the reason for substituting T with Q, but this is only a crude approximation.

I think with bitcoins though, you can now calculate the number of transactions exactly from the previous solved block. Please correct me if i'm wrong about this.

The result you derive from the equation of exchange is also correct, but it is impractical, since noone can control the number of transactions/number of goods available for bitcoins. I derive a different result:

Given P = M x V / T

under the assumption that V = constant (a pretty good approximation to reality, otherwise, maybe this can also be calculated from a solved block, can someone please comment on this?)

the money supply needs to increase and decrease with the number of transactions that take place in a certain period, to guarantee a stable price level.

Since the difficulty at which blocks are solved is already being changed dynamically, i think it's not hard to also change the number of bitcoins that are created per block, dynamically. If it is possible to calculate the number of transactions and the velocity of money from a solved block exactly, then there is the possibility to have the first currency being completely free of inflation and deflation, in other words being absolutely stable in value.

I am looking for people willing to create a possible bitcoin alternative with a stable value. Please PM me.


alexk

w.r.t. what exactly?

Thank you for your reply, this is a very good question. It is difficult to give an answer to this, but i'll try.

Short answer 1:
It would be absolutely stable in value in comparison to the theoretically optimal value standard. So find me a good that's absolutely stable in value, w.r.t. that good it would be stable in value. This good does not exist, but gold was used as a value standard when currencies were linked to it, it can be considered a good that is fairly stable in value. So, if you really want a good it would be stable to in comparison, it would be gold, approximately.

Short answer 2:
Since you adjust the money supply to the demand dynamically, supply and demand will always be in balance, so simple economics tell it will always have the same value. "w.r.t. what exactly" is the wrong question in this context, since all other goods will now be measured in this new currency/value standard, instead of the other way round.


Long answer:
During the gold standard, gold was the value standard and money was the medium of exchange. Central banks gave the guarantee, that everyone can, at any time, exchange his currency holdings into gold. This guaranteed that the value of money was linked to the value of gold, that's why gold is called "value standard" here.
Suppose that the central bank overestimated money demand and increased money supply too much. People would then start to exchange currency into gold more, which would force the central bank to limit money supply to protect their gold holdings. If the central bank underestimated money supply people would start to exchange gold into currency, thus giving the central bank an indicator to increase money supply.

Since the gold standard does not exist anymore there is no value standard anymore. Instead, money is both medium of exchange and value standard in our current monetary system. Central banks try to keep the value of money stable by looking at the price level as an indicator for inflation, in other words, they try to stabilize the purchasing power of money, which is an approximation to the value of money, but not necessarily the same.

The central bank is not independent of the government in most political systems, so there is a conflict of interest: The government is usually the biggest debtor in an economy, so it has an incentive to devaluate its debt by starting inflation. Governments then usually try to hide inflation by changing the definitions of the cpi (the indicator for inflation), see e.g. http://www.wnd.com/?pageId=59409 (http://www.wnd.com/?pageId=59409) or google some more on this.


With Bitcoins, I see the great opportunity to create a currency that's both value standard and medium of exchange, but, unlike other currencies, you can adjust the supply dynamically to the demand exactly, since the number of transactions and the velocity of money can be calculated exactly. This would result in a currency that's a perfect value standard. Money supply can not be manipulated by governments, since it is coded into the system. Savors had more incentive to save, since their currency holdings would not be devaluated by inflation, giving more and cheaper capital for investments, giving the possibility of more economic growth.

I welcome everyone to work with me together to create an alternative crypto-currency, if the bitcoin community does not want to change its money supply system.


alexk

Without the introduction of any assumptions, the Equation of Exchange is a tautology ( http://en.wikipedia.org/wiki/Tautology_%28logic%29 ) like it is stated in http://en.wikipedia.org/wiki/Equation_of_exchange . Equations always need to be fulfilled - that's why they are called equations!  On the left, (M=Total quantity of bitcoins in exchange) x (V=Total number of times the quantity of bitcoin in exchange is exchanged in a certain time period) should equal the right, (Q=Total quantity of goods/services/other exchanged for bitcoin in exchange in a certain time period) x (P = Value relationship between M and Q, giving rise to a rate of exchange, inflation/deflation in the rate of exchange)



Is it equitable to have a system where you reward some arbitrarily issuer during deflationary periods with more bitcoins, and inversely punish subsequently all bitcoin holders by debasing their existing holding during inflationary periods?  Will you be able to withdraw bitcoins during an inflationary period to keep your M constant in your system? Are you only going to ask the arbitrary issuing parties from the deflationary period to return their bitcoins when an inflationary period arrives, or are you going to give to some in a deflationary period and take from all in an inflationary period? When goods/services/other offered for exchange with bitcoins decreases (inflationary bitcoin system) - all the holders of bitcoins will have to bear the brunt of the decrease in the value relationship (rate of exchange = P = Value relationship between bitcoin and goods/services/other available for exchange with bitcoin).  The holder of bitcoin makes the decision whether he would offer more bitcoin available for exchange, thus influencing M (M = bitcoins available for exchange).  Thus holders of bitcoins should be rewarded/punished as more or less goods/services/other are offered for exchange with bitcoins available for exchange.  Bitcoin already adjusts the Equation of Exchange dynamically - and does not reward some arbitrary issuer under deflationary circumstances - and punish all bitcoin holders under inflationary circumstances.  Coin generators are incentivised by network difficulty changes in combination with their reward (for securing the network) based on P (value relationship of bitcoin to other) to increase/decrease their share of supply to the network difficulty - bringing balance in network difficulty based on the Equation of Exchange's balanced P.  Every coin generator has another profitable decision point on this, depending on his cost/profit/future expectation structure.  Your system is doomed for failure - as it will reward a non-holding issuer (imagine that in the sense of company shares, I'm a holder of shares but someone else dilutes my value by issuing more shares not to us holders - but to himself!!) during deflationary periods and punish existing holders during inflationary periods (imagine that in the sense of company shares, now that the shares are less valued - the other person who is issuing shares in deflationary periods are not un-issuing shares now that we have an inflationary period and all holders of shares now get devalued shares!!)  Deflation/Inflation is necessary as a measurement of how much bitcoin is valued.  If you feel uncomfortable with deflation/inflation (of bitcoin, shares, pigs, gold, etc.), don't be a holder of them - if you still want to use them in trade - trade for them and minimize your risk by minimizing your exposure risk period by exchanging on the fly.  Ultimately the holder of bitcoin is taking the risk, and should be rewarded or punished by uptake or flight of exchangeable goods/services/other from the bitcoin system.

If you do not want to invest in Bitcoin by being a Bitcoin holder and having the subsequently reward/risk on your investment (free market capitalism),

but still want to use it as a medium of exchange and reduce your exposure to its reward/risk (deflation/inflation) - there is a simple solution - exchange it immediately after you received it in exchange, back to your medium of choice (on the fly, programmatically if you prefer).

With regards to hoarding - as long as people have needs and only other people can fulfill in that need and they have some medium of exchange, wouldn't they use that medium of exchange to fulfill in that need?  Isn't nearly 5x more bitcoin exchanged than gold due to its ease of exchange?

With regards to early adopters - wouldn't people adopting now, again be viewed as early adopters in a year as well?  If you valued something when no one else did, didn't you satisfied the equation of exchange at your time of adoption?  Again aren't you exposed to possible reward/risk (deflation/inflation) from your point of adoption?

alexk, how are you going to measure the demand for money?

Hint: its impossible.


Offtopic:

This is how central banks promised they would opperate, its not how they actually operated.

Doesn't Bitcoin automatically adjust the medium of exchange by fairly fixing the bitcoin supply (limiting the quantity of the medium of exchange but making it infinitely divisible - very similar to gold divisible down to the molecular/atom level), and making it nearly infinitely divisable, and rewarding/punishing a holder during deflation/inflation when tradeable goods,service,other increases/decreases in relation to tradeable bitcoins?  Isn't a balanced Equation of Exchange achieved without addition/removal of bitcoins, due to the above?  Is gold a physical accounting record and bitcoin a digital accounting record?

Yes, but that was not the question. The question was: how do you mesure the demand for money?

Says the guy who thought billionaires held all their assets in cash.

Note: see post above for explanation of Equation of Exchange symbols,

Doesn't the free market measure bitcoin's demand in %P, by finding a balance between bitcoin supply available for exchange (M), and goods/services/other available for exchange with demanded bitcoins (Q)?

Isn't MtGox' previous expired 24h (%Pchange)24h: BTC = 14.29 LRUS$ Open, BTC = 18.89LRUS$ Close, giving (%Pchange)24h-4Jun2011 = -32.1903% (smaller than zero value indicates deflation of bitcoin against LRUS$)?

Isn't current 24h %Mchange for total btc system 50 btc x 6 x 24 = 7,200 BTC divided by 6,439,500 BTC in existence ( http://bitcoinwatch.com/ ) = 0.1118% = (%Mchange)24h ?

so, if

M x V = P x Q

by approximation, (with % indicating percentage change in ... ),

%M + %V = %P + %Q

assume %V = 0% gives

%M = %P + %Q

%M - %P = %Q

to have %P = 0% (zero inflation / deflation):

(-%P + %M)_{representing %M in your system where %P=0%} + (-%P +%P)_{representing %P in your system of %P=0%} = %Q

reduces to,

(-%P + %M)_{representing %M in your system of %P=0%} + (0%)_{representing %P in your system of %P=0%} = %Q

%M's representation in your system where you would prefer %P=0%  will equate to (-%P + %M), so in order to have %P = 0, wouldn't you have to adjusted the number of bitcoins with a total of (-%P + %M) for a given %Q?

So for yesterday's %P of -32.1903% (smaller than zero value indicates bitcoin deflation against LRUS$), in a system of zero inflation/deflation against LRUS$ with %P set to 0%, wouldn't you have had to adjust the number of bitcoins by ((-32.1903%) + 0.1118%) = 32.0785% ?  Would you have issued 6,439,500 BTC x 32.0785 % = 2,065,695.0075 BTC to keep %P = 0% ? Who would issue it, and receive it to be exchanged for the given %Q?  If %P were positive (indicating inflation of bitcoin against LRUS$ on MtGox), from whom would you collect the bitcoins to destroy to keep %P = 0% for a given %Q?

Where are you getting this calculation from?

If I suspect correctly you are trying to keep the price of bitcoins nominally stable in dollars (I can not be sure until you tell me where you get that number). Why would you want to keep bitcoins nominally in line with the dollar? And more important, how does that answer my question?

PS: The M*V = P *Q equation is wrong, but I am accepting for the sake of argument.

its in the message posted that you are commenting on:


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it was a comment addressing this issue, and your comment on it being impossible to measure the demand for medium of exchange:


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Let's say in a village there are 100 eggs everyday on the market (M=100 eggs).  Chickens are traded the most on this market and is used as a medium of exchange.  Each of these eggs changes hands 2 times on average everyday (V=2 times/day).

On the entire village market, on day 1 and 2 only oranges are traded for eggs.

1:  On day 1, 50 oranges are traded for M1=100 eggs in the morning and in the afternoon all M1=100 eggs are traded for 50 apples.  Apples do not generally exchange easily for oranges directly normally in this market, as sometimes there are goats, chickens, cows, etc. as well - but we take a simple day for example.  Thus for day 1, Q1=[(50 oranges + 50 apples)].  Thus P1=[(50 oranges + 50 apples) per 100 eggs].  V1=2 times/day as eggs changed hands twice on this day.

2:  On day 2, 100 oranges are traded for M2=100 eggs in the morning and in the afternoon all M2=100 eggs are traded for 100 apples.  Another simple trading day taken as an example to simplify matters.  Thus for day 2, Q2 = (100 oranges + 100 apples) = [2 x (50 oranges + 50 apples)].  Thus P2=(100 oranges + 100 apples) per 100 eggs = [2 x (50 oranges + 50 apples) per 100 eggs].  V2=2 times/day as eggs changed hands twice on this day.

So, change from day 1 to day 2 is (%... indicates % change in ...):

%M = (M2 - M1) / M1 = {100 eggs - 100 eggs} / 100 eggs = 0%
%V = (V2 - V1) / V1 = {(2 times/day) - (2 times/day)} / {2 times/day} = 0%
-%P = (P2 - P1) / P1 = {[2 x (50 oranges + 50 apples) per 100 eggs] - [(50 oranges + 50 apples) per 100 eggs]} / {[(50 oranges + 50 apples) per 100 eggs]}
 %Q = (Q2 - Q1) / Q1 = {[2 x (50 oranges + 50 apples)] - [(50 oranges + 50 apples)]} / {[(50 oranges + 50 apples)]}

So if M x V = P x Q, and
%M + %V = %P + %Q, then

0% + 0% = -{[2 x (50 oranges + 50 apples) per 100 eggs] - [(50 oranges + 50 apples) per 100 eggs]} / {[(50 oranges + 50 apples) per 100 eggs]} + {[2 x (50 oranges + 50 apples)] - [(50 oranges + 50 apples)]} / {[(50 oranges + 50 apples)]}

Is this true? Simplifying for a = oranges, b = apples, c = eggs, gives:

0% = -{[2 x (50a + 50b) / 100c] - [(50a + 50b) / 100c]} / {[(50a + 50b) / 100c]} + {[2 x (50a + 50b)] - [50a + 50b]} / {[50a + 50b]}

or

{[2 x (50a + 50b) / 100c] - [(50a + 50b) / 100c]} / {[(50a + 50b) / 100c]} = {[2 x (50a + 50b)] - [50a + 50b]} / {[50a + 50b]}

simplifying,

{[(50a + 50b) / 100c]} / {[(50a + 50b) / 100c]} = {[50a + 50b]} / {[50a + 50b]}

simplifying,

1 = 1

resubstitute a = oranges, b = apples, c = eggs, if you like.  1 still remains 1.

So if you say 1 = 1 is wrong, I can't convince you otherwise.  You may complicate the example to test it for more complicated scenarios, but I tried to keep it simple.

While it's easy to find a party willing to receive the proceeds of seigniorage, how do you propose to diminish the monetary base in inflationary times ? A tax perhaps, so that besides loosing value, the money you hold are automatically taxed by the system ? Basically, rewarding those responsible for inflation (debtors) and punishing savers ? I think this would quickly lead to an inflationary spiral where everybody wants to get out of that pesky currency that looses value by the minute.

The only way to achieve what you are proposing would be if the receivers of seigniorage are committed to defend the currency during inflation, by selling for bitcoins the assets bough during expansion. I think it's fair to say that will never happen, so the best we can hope is for a non-deflationary currency, that could lose value at any moment if the market decides to abandon it.

PS: I'd very weary of using the equation of exchange without fully understanding what's being exchanged: the "goods" are MtGox dollars, for which there's no intrinsic demand inside the Bitcoin economy, and the price index is purely artificial, driven by the speculation that someday the economy will exchange other things besides dollars.

PPS: what you are seeing in the block-chain is not the velocity of money, but rather an artifact of how the system operates. There's no basis to use that for macroeconomic purposes since it would be easy to manipulate the apparent velocity for example by moving my BTC 1.000.000 from one wallet to another, all day long. If you don't trust the goverment published CPI, the only valid estimator of inflation is the price in bitcoins of one alpaca sock.

PPPS: let's agree not to call the current Bitcoin block chain a ponzi scheme, because it enrages the locals and is not exactly true. It's a speculative mania, where everybody is holding the inflated asset and nobody is yet getting rich (because if they were, the price would crash). When it does finally pop we can call it a ponzi scheme where there will be widespread evidence of early 'investors' cashing out early at the expense of later ones.

Can we then call the housing bubble, the dot com bubble, the commodities bubble, and wall street crashes of 1928 and 1987, social security and public debt ponzi schemes as well?  Capitalist ponzi schemes? Doesn't some rate of exchange crash (suddenly inflates) because it was overvalued - and a sudden revaluation happens?

Would MtGox dollars be traded at all in the Bitcoin economy if there were no "intrinsic" demand for it?  Doesn't the equation of exchange apply to any definable ecosystem where exchange happens, also with regards to the rate of exchange discovery happening on MtGox between bitcoin and LRUS$?  Isn't the %P (change in rate of exchange discovery) reflected in most trades of goods/services/other offered in exchange for Bitcoin here https://en.bitcoin.it/wiki/Trade ?  Also total bitcoins exchanged in past 24h at MtGox is 23,417.37BTC.  Total bitcoins sent over bitcoin network in past 24h in total is 468,263.71 BTC.  Total bitcoins in existence is 6,440,750 BTC.  (Source http://www.bitcoinwatch.com/ )

We could and in fact some people do. But as I've said, they are pushing the boundary of the definition. Going 'full ponzi' requires malicious intent and a clear setup where early depositors are sure to win and later ones are sure to loose.
When an asset bubble bursts the exists are random: it's perfectly possible for someone to go in at 15$/BTC, exit at 20$/BTC, and make a handsome profit, while someone who bought at 0.0005 will see all his imaginary wealth vanish because of bad timing. However there would be some amount of 'ponziing' going on (profiting on the expense of another), bubbles are zero sum by definition.
An example that comes to mind is Madoff's fund: you could sell at any time you wanted in profit, just like with Bitcoin, yet when it crashed people widely called it a ponzi scheme because of it's intent. In Bitcoin's case, I leave that to the reader.

[quote author=cloud9 link=topic=57.msg171509#msg171509 date=1307294917it was a comment addressing this issue, and your comment on it being impossible to measure the demand for medium of exchange:

[/quote]

But you are not mesuring the demand for money (bitcoins), you are just keeping bitcoin nominally in line with dollars.

Again, how do you measure the demand for money?

PS: In the example you have eliminated the currency. The problem with that equation is that it does not take into account the changes in the valuation of the currency. But I dont want to discuss about the equation. I want you to answer how do you measure the demand for money.

Don't you risk bitcoin becoming inflationary instead of deflationary, no matter at which stage you adopt to hold some of the bitcoins issued at that stage?  And isn't capitalism = profiting on the expense of the losing counter party?  Why are there a pyramid with the all-seeing eye on top of it on the 1US$ dollar bill - and written "In God we trust" next to it?  Didn't everything not add up in Madoff's case because you got fraudulent promises instead of the underlying investment you were promised and were under the impression that you are investing in?  Are you promised anything more than a right to a share of the bitcoins in existence when you opt to hold some bitcoins at a certain value of exchange?  When the value of exchange changes in your favor or against your favor don't you have a profit or a loss to show on the value of your share of issued bitcoins?  Wouldn't it be up to each individual to decide whether bitcoin's properties of enabling fluid exchange over vast or small distances quite instantly and securely warrant / does not warrant a risk for profit / loss to be taken?  If this bitcoin venture, or any capitalist business venture, turned out successful at the value of exchange where you convinced yourself to opt in and proved to be profitable, or if it proves not to be so due to unforeseeable / uncontrollable circumstances or future events - isn't the responsibility on yourself and your financial advisor (whom you reimburse for their services) to do a due diligence evaluation of your options, risk profile, what you can afford to loose, etc., etc.?