Bitcoin Forum

Guys...time to make a better economic FAQ.

This is the starting list...

Objections/Concerns

1. Does Bitcoins violate the Mises Regression Theorem?

http://bitcointalk.org/index.php?topic=583.0 (If somebody wants to summarize it, that would be great.)

2. Is the bitcoin economy safe from inflation?

3. Are Bitcoin legal tender?(Do people really ask this?)

4. What if bitcoin economy is deflating and everybody is hoarding? Would that lead to a collapse?



Update 1: Added more questions. Feel free to provide answer.
update 2: Clarify questions.

The other questions I have seen being discussed here are

Is Bitcoin inflation proof

Are Bitcoins legal tender

What happens if someone has 1,234,567 BTC and won't sell any at any price?

/sarcasm

But seriously, something on the ridiculousness of worrying about hording. And the absurdity of worrying that your coins are going to be worth too much. These are common worries because we all live in the world of "spend it all quick it's losing value".

Hoarding is worth discussing but by no means is it rediculous.

If you are living in a world with price inflation then a key thing to teach your children about is the magic of banking with compound interest. The last thing you want is a long term piggybank.

In a world with pre-planned monotonic price deflation, the equivalent magic is called hoarding.

Woah, I didn't say hoarding was ridiculous. If you value your coins more than the highest offer of goods, services, or other currency, by all means you should keep them. But worrying that "Bitcoin is going to collapse because everyone is going to hold all their coins no matter what because they are absolutely guaranteed to increase in value." is ridiculous.

Fair enough! :-)

However it is still a frequently asked question.

Coming up with an answer that is better than "it's ridiculous" will probably be required. (unfortunately..)

For sure. 

I added a few questions, but nobody wrote a full answer to the questions yet.

I don't know how to answer these questions. Perhaps others have similar problems.

2. What does "Inflation proof" mean?
3. What is "legal tender"?
4. I don't understand what this question is asking. If the bitcoin economy is deflating and everybody is hoarding.
 then: The bitcoin economy is deflating and everybody is hoarding.

I clarified some of the questions.

You seem to have reworded some questions but I don't think they are any clearer.
Sorry.

The best answer I can give to any of these questions is:
"Maybe"

Perhaps you'd be better off using the search function to find the threads where these issues have been discussed and deriving the questions from the answers provided.

What is Legal Tender?
http://en.wikipedia.org/wiki/Legal_tender (http://en.wikipedia.org/wiki/Legal_tender)
"Legal tender or forced tender is an offered payment that, by law, cannot be refused in settlement of a debt, and have the debt remain in force."

Short Answer:
No.

I understand all the questions. I am just not sure how to make clearer for you.

1. No. <-- That is the shorted summary of the well laid argument in that thread.
2. No. If people decide they don't want to sell their goods for bitcoins, prices will likely inflate on the goods that do trade. It's a sell your coins while they are still worth something situation.
3. No. Explained previously.
4. No. Hoarding doesn't lead to collapse.

If prices monotonically deflate, hoarding leads to wealth in exactly the same way as the interest from loaning money to a bank leads to wealth. The more coins you hoard the larger the summation of benefits from each coin buying more. The math is simple. It is equivalent to saying if you loan $10 in a bank you get twice as much interest as loaning $5.

the consequence of 2 is that bitcoins NEED other currency to survive. The economy grows and people need the media to exchange the goods. The bitcoin inflation is only possible when less goods are presented on bitcoin-goods market. This does not mean there are less goods to exchange, it means bitcoin-goods market must get smaller => other currency is needed to exchange growing goods.

I don't understand your point. I don't think you made it.

Bitcoins would work just as well as a national fiat currency with no other alternatives.

There would generally be price deflation over time as the amount of external commodity value increased against the constant number of bitcoins.

However if there was a war and lots of people were killed. The external commodity value would likely decrease and there would be a spike in inflation.

There could also be other spikes as people who were hoarding decided to trade their bitcoins.

if you did not understand it does not mean there is no point. The point is extremely simple: in the case of deflation the market will die. The deflation is the internal property of the bitcoins, because the amount of coins is limited. The only way to avoid this is to keep the market small. But it does not mean the amount of goods is going to be less in time. The goods will be exchanged using the other currency, that's it. So, to be stable, the bitcoins need other currency. Easy.


I think the expectations that the aliens will come from the outer space also need to be taken into account in order to build bitcoin economic model.  ;D


The wise behavior in deflation stage is to hoard as much as you can. But it kills the economy.

I agree with the first statement. I also happen to agree with the second statement (others here don't).

But I don't think anything you wrote supports the second statement. "keep the market small" is ill defined. The market had been growing and the value of coins is increasing. You didn't explain when this becomes bad.



I was only pointing out that "safe from inflation" isn't a constant. In my mind it shouldn't even be a goal for bitcoin. However others seem to think this is a feature.

I posted in another thread about inflation, deflation and lending. Check my history if you are interested.

I guess the people who sells their services or goods for BC do it just for fun. I do not think the role of BC in their busyness is serious.

BTW, if you'll check the statistic on https://www.bitcoinmarket.com/ (https://www.bitcoinmarket.com/) you'll see the value of deals with BCs is permanently decreasing. It is too early to make any conclusions, but... I guess it would be nice if the people who do their business with BC publish here their statistic: how many deals they make in BCs in a month i.e. Just to analyse the activity. If there are no much deals with BCs (especially comparing to the deals using the real money) a service provider can ask any price in BCs, it would not affect  his busyness much.

Economic deflation mean that people are creating so much goods, that it effectively outstrip the demand. The price of computers has been deflating for a while, but it means bigger markets over time. People don't buy computers every year, but it become more attractive to do so every year.

Hoarding will means that you keep hoarding until you see an attractive price and buy. Effectively, hoarding is determined by your time preference. If you hoard more, you could get more at a later date, but then you won't buy anything to satisfy your needs, for now.

An extreme economic deflation will only mean our time preference will stretch, but it does not mean that our time preference can be stretch to infinity. We need food and we will buy food.

Are you saying volume is decreasing?

The number of BTC traded on that exchange is decreasing. Assuming the $ is worth about what it was last month, the value of BTC traded is not really decreasing.

And there is another market with increasing numbers of BTC traded.

Yep, I heard this argumentation already. Here, on the forum :)
Just explain me why anybody would buy something to produce something to get profit (a typical business scenario) if he can just keep the money in BCs and get the same or higher profit out of deflation?

PS. We'll see how it works. According to my view BC is an experimental currency, it will show it's potential in practice. I'm just passing the worries of others who know the economy better then me :)

Than the economy will shrink until it become profitable to produce again.

The main reason a merchant will not hoard is cash flow.It doesnt matter if you are exchanging bitcoins for bitcoins but if you need to purchase goods in other currencies you continually have to convert bitcoins back to your currency of choice unless you have an endless supply of cash on hand.  :)

That's exactly what I am talking about! I just put my opinion here that BCs need other currency in order to have the ability to shrink BC economy when needed :)

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