Bitcoin Forum

There is one, at least, participant in this forum that is concerned with hoarding of BC, please allow me to explain why this is not an issue, not because it will not have negative effects if it does, but more likely it will not occur.

What we must keep in mind is there is yet a coherent value model for BC, when I first got here many were assuming cost equals value, which simply is not true, I have said it time and time again, value is not based on cost, but rather on the demand for a commodity, right now there is little to no demand for BC.  There may be in the future, but that is speculative and is related to a few factors which relate to the general utility of BC as a medium of exchange.

BC as a commodity has no value without a commodity that may be exchanged for BC, there is no other use for BC than a medium of exchange.  Commodities with an inherent value have an ordinal utility within themselves, that is, they have an industrial, commercial or consumer use, you cannot compare BC to land capital, other capital or commercial goods because of this fact.

The other way a commodity can retain value is through government fiat, that is legal tender laws, basically by the forced use of particular monies, these monies retain their utility because other options are illegal and the basic coercive threat maintains their usage.

BC does not fall within either group of commodity, its value is determined by its ability to out-compete its substitutes, it must therefore be used as a medium of exchange for goods in order to have a value.

Hoarding is deleterious to the ability of BC to out-compete its substitutes, as it will raise relative prices in BC and the exchange rate to other currencies, while other currencies will not be incurring the same price explosion.  As opposed to legal tenders, there being no government fiat coercing utility people will abandon BC if the substitutes are more beneficial.  In the end, the hoarder who keeps BC as an investment in the future value of BC gambles with his money.  If he does not use them, sell them or lend them to someone who will use them at interest and just pulls them from the market the lacking availability of BC will diminish the value as there is no other use than as a medium of exchange.  The increase in price, $ purchasing value, coupled with a stable commodity price structure, of BC will be an indicator to the wily entrepreneur that something is wrong, and these people will stop using BC first.  This will start a chain reaction that will give the illusion of the desired result in the "stock" market numbers, the same boom in $ value of BC without corresponding increase in production available to be traded in BC is a business cycle bubble.  If the hoarder at this point does not cash out immediately, which is relatively difficult, he will be holding BC in the bust, and therefore lose out.

This is also leaving out the whole world of whether it is more profitable to a "hoarder" to lend his BC at interest to producers, invest in productive business himself as a shareholder or to use them in the market for consumer goods than it is to just sit on anonymous internet blips that have no value inherent to themselves...

Lending at interest
I know there are people who like to boo and hiss usury, but it is a natural market phenomenon based on  production, charging above the natural interest rate is a side effect of time preference, get over the communist propaganda please.

If I were to be a hoarder, let us say I have control of 60% of all BC, and have no intention to use them, why would I not lend them at interest?  If there is a market demand for BC, and I have BC, it makes no sense that I would not take advantage of the market demand, it is like saying that a producer has no impetus to sell his products, when he can just sit on them indefinitely.  Why does the stereo manufacturer sell stereos?  If he produces $1000 stereos, by the hoarding logic, holding them instead of selling them will make him wealthier and increase the value of his stereos this is not the case for stereos, nor BC.

No, lending is more practical than holding BC in the hopes for increased value.  Predatory interest rates will be curtailed by the free nature of the market, as anyone can lend BC so long as they have a surplus of BC beyond their usage, there will be large amounts of competition in this field, which will lower lending interest rates.

Investment
If I am holding 60% of all BC, why does in not make sense to invest in businesses?  If I believe that there is a good business, even if they are not looking for shareholders, why would I not want to attempt to purchase a minority share of that business and receive a dividend based on their profits?  In the long run, I would benefit more buy purchasing 1% of a business than not at all, not only because of the real gains in BC over time, but because the value of BC will increase when there is more products available in BC, there will be more demand for the very bitcoins in my coffers, a net gain at the natural interest rate.

Spending
Is the argument that I will sit upon my digital throne, resting atop my digital blips?  Would I be enjoying some superiority because I am wealthier in BC than others?  If this image is just silly to you, well you are correct, if you still at this point believe hoarding is a good idea, this is exactly what you are claiming.  If I have 60% of all BC, what is the point, how do I benefit from my majority stock of BC if I do not acquire consumer goods with them, or sell them to people who will?

The hoarding mentality can only be directed at BC that is not being used, which at this stage of BC can be all of us who hold any, as there is not very much that can be bought through BC.  However as the BC marketplace fills with goods and services, we will see a decrease in nominal prices and an increase in the BC/$ ratio.  This will only occur if people are spending BC, if they are holding them businesses will not accept BC when they can accept any other media of exchange.

If BC's value is based on exchanging them for goods, how exactly is the hoarder protecting his BC's value if he does not allow them to be exchanged?  Any way you slice it, exchanging BC for goods and services is how BC has value, hoarding them negates this and therefore negates the purpose of hoarding...

I am sorry to say to the developers of BC that this may not be the finished product, they may go through many trials before a viable economy is derived from a counter-economic currency, we should persevere to make this one work, but keep in mind it is a learning experience and it may fail...

This post is right on the money.

I am checking the bitcoin forums to get myself familiarized with the thing and not ask question that have alredy been asking, and I have to say this is by far the best post I have read so far.

Everybody should read this.

"If I were to be a hoarder, let us say I have control of 60% of all BC, and have no intention to use them, why would I not lend them at interest? "



what you have overlooked is that if you are hoarding 60% of BC and lending them out at significant +ve rates of interest it would be almost impossible for your borrower to find the BC required to repay the principal of your loan plus the interest, so you wouldn't lend, because you would not be able to find a borrower worthy enough.

That is the problem with hoarding.

Why can't the borrower sell services to the lender? OTOH, other people can borrow from the lender and the borrower can sell services to them. Any debt can eventually be paid off as the money cycles through.

I think it would be very useful for those who think hoarding could ultimately be profitable for the hoarder should at least try to read this article:

http://en.wikipedia.org/wiki/Nelson_Bunker_Hunt (http://en.wikipedia.org/wiki/Nelson_Bunker_Hunt)

Also, read the associated links to sources used to create this article.  Basically, this guy tried to "corner" the silver market and ended up buying up a substantial fraction of the world's silver reserves.  Ultimately, he and his brother both ended up losing billions of dollars when the market finally collapsed.

I completely agree with the original poster's sentiments on this issue, and hoarding bitcoins is ultimately self-defeating for the reasons given and many more.  Particularly at this stage of the game, it is to the advantage of everybody to spend bitcoins and push them out into the market place to offer liquidity.

There is also the danger of losing bitcoins through calamities happening to your computer or wallet.  Yes, that can be recovered (for the most part), but it can be a problem that at the moment only makes it worse for the hoarder than it is for the rest of the network.

the inflation/deflation and hoarding vs spending and austrian vs keynsian debate is eternal and to be honest rather tedious.

in simple terms, consider a set of scales. on one side is money and on the other is everything else.

http://upload.wikimedia.org/wikipedia/commons/thumb/c/ce/Balanced_scales.svg/400px-Balanced_scales.svg.png

now to those who prefer perpetually deflation currency: you get this
http://pea.petersburg.k12.va.us/modules/groups/homepagefiles/cms/944086/Image/unbalanced-scales.png

and for the keynesians: this

http://upload.wikimedia.org/wikipedia/commons/b/b0/Unbalanced_scales-too-far-right.png

note that for the last two I could swap the pictures and you would still not be able to tell the difference between a monetary system that 'targets' deflation and one that 'targets' inflation. Both are unbalanced and both are as wrong as the other.

unless both the quantity and circulation of money is in balance with the real economy it will end badly. the unbalanced scale views of money whether keynsian or austrian are both simply products of extreme ideology both of which are incompatible with what people actually need and want from their money.

in the end money is only used to settle debts so fundamentally debt/credit is what needs to be balanced and the means of clearing between them (money) is a means to an end (balanced clearance of debts and somothing of deferred consumption), not an end in itself.

So I suggest focus on debt dynamics first (e.g. ripplepay) and then determine what form(s) of money help lubricate that clearing process.

Are you confusing monetary deflation with price deflation? Because Bitcoin is neither inflationary nor deflationary, in a monetary sense (once most of the coins have been created; for now it is somewhat inflationary). At the most, you can say it is mildly deflationary from loss of coins, but it is too early to tell how much of an impact that will have. If it is predictable, then interest rates can take that into account.

As a footnote, the Austrians is not one of monetary deflation in normal times nor as a proscribed policy. Their position is that credit bubbles should be allowed to bust, but money should otherwise be honest and stable; that is, neither inflationary nor deflationary.

Money can't be neutral. It's like saying oils are dishonest for being inflationary. The correct view is that the free market should determine the amount of money that is available.

all fixed quantity money schemes must be deflationary by definition under conditions of economic growth.

"The correct view is that the free market should determine the amount of money that is available."

I agree. Which is why money can't and won't be shackled to any given commodity, whether bitcoins or gold or seashells.

price deflation and monetary deflation are equivalent when viewed from the point of view of the scales that weigh money against everything else, which is all that most people care about. The same applies to monetary inflation and price inflation.

suggester is correct when he describes a deflating money supply as a bubble - its a bubble in money. Likewise inflation is a bubble in assets. A bubble is a bubble.

The narrative that suggests that if you cause the scales to tilt full swing in one particular direction or another then everything will be well is a delusion whether it is peddled by austrians or keynsians.

That much should be obvious to anyone except an austrian or keynsian fanatic.

An Austrian would consider many types of deflation a good thing, but it doesn't mean that they consider all inflation a bad thing.

a bubble is a bubble. bubbling money will soon destroy itself the same way bubbling assets come to a sticky end.

P2P credit, cryptocurrency and so on are supposed to be decentralising forces that act to dampen bubbles in money or assets, which is why it is always a shame to see these initiatives corrupted by bubble-thinking.

the idea of perpetually divisible, deflating bitcoins is bubble thinking - being the polar oppositie of the recent bubbles doesn't alter that.

[Edit: the hard coded coin limit embedded in the bitcoin concept is a clear example of centralisation. The centralisation is determined by fiat at the beginning and then embedded into the code]

Satoshi cannot decide what clients people get to use. It's not centralization. It's a universal consensus.

I also agree that the correct view is that the free market should determine it. However, I am curious how you can see price deflation and monetary deflation as equivalent. Do you want to explain why this is, and how you arrived at this conclusion? Furthermore, I'm not clear on how you see monetary stability a bad thing, and you are implying that it is.

It's my experience that someone throwing around phrases like "fanatic" has already made up his own ideas in his mind. Still, we can try to have a reasonable discourse :)

Ive been selling online for a few years so Ive got some war wounds from different payment processors. Ive been using bitcoins to trade for a little while now and as far as I can tell it is the best payment method I've come across.The fact it allows a more personal relationship with your customer rather than a monolithic entity you need to deal with that takes large fees for little effort is the strongest point in its favor.I dont know if this makes me a fanatic or not. :D

I would say if your mind is frozen and you cant see the other side of the coin it can end up blinding your vision.Im no expert on economics so I prefer to let the market decide what is best without any distortion to market signals.This allows you to make better decisions.Bitcoins are purely market driven.

if you presume that price deflation is OK and monetary deflation is bad, presumably you'd also hold that monetary inflation is bad and price inflation is OK?

The issue y'all are discussing around but not addressing is the issue of how much money needs to be available?  The market will always adjust the exchange rate to reflect changes in the supply and demand of money... up or down.  Rothbard went over this 30 years ago, and it's pretty simple.  Economic growth does not necessarily imply an increase in the demand for money, it's a fallacy to assume that.  It is the need to move money physical distances which eventually caused the demise of the gold coin standard.

If there is not enough of a given currency at any moment to clear a market something else will arise to temporarily allay the shortfall... credit money.  This is a market-driven process.  If the currency is nearly-infinitely divisible, like bitcoins and unlike physical gold, then this issue is obviated fairly quickly by allowing the exchange rate to rise resulting in smaller units of currency being transacted.  Monetary deflation and price deflation are not equivalent in any way, and they cannot be conflated (which is what scepticus is attempting to do).  One is a cause and the other is a potential effect.  They may be linked in a causal way but they cannot be substituted for one another.  All discussion which does this is nonsensical noise.

Commodity money bears with it the opportunity cost of its creation which is the natural brake on its generation.  It is not, as the Monetarists (ie. Friedmanites) would argue wasted capital in the service of producing that which confers no net good (one of Mises' definitions of money... the commodity whose production confers no net economic good)  It is providing that which the market demands... more money. 

If Bitcoin were to be successful enough to warrant greater fungibility than the current 8 orders of magnitude, then I'll happily cross that potential market bottle-neck when it arises.  This is would be an example of extreme price deflation without any necessitating monetary deflation.

The hoarding argument is the oldest Monetarist/Keynesian shibboleth in the book. It's nonsense.  You can't eat money.  Humans have time-preferential needs which require they be met.  Keynes' deflationary sprial is a silly reductio ab adsurdum argument in which he assumes people will hoard their money to the point of self-immolation. 

Nonsense.  The truth is, like everything else, once the price moves low enough people will see the arbitrage and use their money to satisfy their needs. 

The only long-term issue I can see is the attrition rate of lost Bitcoins at the end of the deployment cycle due to lost wallet files.  But, given that we have nearly 17 orders of magnitude of resolution baked into the system, I don't see how that is really much of a practical concern. 

No, I wouldn't, because general price inflation without monetary inflation means that society as a whole is getting poorer and worse off. There might not be anything immoral with the situation on the face of it (unlike monetary inflation as practiced), but it is not desirable.

Thank you. He might not be making the conflation intentionally; after all, the discussion is conflated when we learn and study about economics in school. Many people are simply not aware that they are talking about two different things. I admit that I've tripped over this many times in the past, myself.

The point is, the bitcoin user base isn't fixed - the number of coins need to grow with the user base. If it doesn't then you are increasing the value of the coins already held by existing users. Therefore, the more popular bitcoins become, the more valuable each coin will get.

You're very welcome.
It is an easy trap to fall into.  It's one of the most powerful lessons taught by the Austrians.  It's also completely orthogonal to the dominant economic policies and teachings. 

It's also completely wrong.

You've given a value statement, but you haven't explained why the number of coins needs to grow with the user base; what's the reason behind it? What bad things will happen if things are not changed in the way that you suggest? How do you suggest implementing this? How do you decide how much every new user should get?

"Therefore, the more popular bitcoins become, the more valuable each coin will get."

Which is what simple supply & demand would dictate. Let me give my own value statement in the form of a question, in return: What would happen to the purchasing power of all existing gold users if we could somehow conjure up a 400oz bar of gold out of thin air and give it to every citizen who immigrated to North America?

I recommend you read these threads for further info:

http://bitcointalk.org/index.php?topic=376.0
http://bitcointalk.org/index.php?topic=382.0
http://bitcointalk.org/index.php?topic=57.0

And here is some further reading:

http://blog.mises.org/6828/the-principle-of-sound-money/
http://mises.org/Community/blogs/lilburne/archive/2009/06/19/224252.aspx

If 10 people on an island have a gold coin each and only use these to trade with, what happens when an 11th person arrives on the island? Will the value of the gold coins increase, decrease or stay the same?

Consider the same example where they don't have to trade in gold. Would the 11th person try to use an alternative money?

You either take the approach that you're going to have competing, fixed quantity monies, or you try to let a single currency flex with the user base. Sure, you can have competing currencies (indeed, should). However, if you can use a money which can be flexible to the user base, it makes life easier. I'd suggest reading Hayek's Denationalisation of Money (http://www.iea.org.uk/record.jsp?type=book&ID=431).

I've read plenty of Austrian theory, thanks, and agree with much of it. Most of the ideas are better than what we have to put up with now, but we have a chance to make a better system than using simple commodity money.

Additionally, we are starting from a point of obscurity - hardly anyone has heard of or use Bitcoins. Do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? If you limit supply prematurely in 10 years, it would have just as terminal an affect as if you did it now.

Why are you asking the question? What does the answer tell us? I can't read your mind, so I don't know why you think that an expansionary supply is good and a fixed supply is bad.


Surely he can exchange his labour in return for gold or whatever else he needs?



You have yet to tell us why what you are proposing would be a better system, and what is wrong with the system as it is.

You've given a value statement, but you haven't explained why the number of coins needs to grow with the user base; what's the reason behind it? What bad things will happen if things are not changed in the way that you suggest? How do you suggest implementing this? How do you decide how much every new user should get?




I believe that if Bitcoins become popular and are being used 10 years from now, their quality of stability will add, rather than detract, to their attractiveness. There is no guarantee that this will happen, but, independent of all other factors, monetary stability is a plus.

It's a simple question - do you think the value of the gold coins increase, decrease or stay the same? Once you give the forum an answer, then we can take the next step together.


How about if another 9 people joined the 11th man on the island, each without any gold. There are now 20 people, each in competition for 10 gold coins, which only the original 10 owned. What has happened to the value of the coins? There are two options and a bunch of shades of grey in between:

1. Demand for the gold coins doubles, meaning that the owners can exchange their coins for twice as much labour/stuff.
or
2. The new 10 guys will use something else instead of gold, such as silver, seashells or whatever.

In scenario 1, you have made the original 10 people very wealthy, simply because they were on the island first. In scenario 2, gold has been displaced as the only currency, with an alternative being used by the new islanders.

You may say 'and? what's your point?' The point is that you either end up with the early adopters gaining disproportionately, just for being in the right place at the right time. Alternatively, you end up with numerous currencies, which have to be exchanged to do business - it also becomes more confusing for the layman, to have lots of different monies, with different (and likely fluctuating) exchange rates.

Would it not simply be better to design a currency which ebbs and flows with the user base? This negates the need (although doesn't rule out) for lots of competing currencies. It also means that new comers to the island can at least mine their own (gold in this example) coins, to give them a more even starting point.

I don't know how many more ways I can explain the same thing, so I hope this outlines the options and outlines my point.


I'd like a system where I have to deal with as few currencies as possible. I'd like to be able to see the price of something this year and know it will be roughly (external factors, like oil/energy, famine excluded) the same price in several years from now. This would help me plan and prepare for the future. It also helps businesses do the same.

What will happen if things aren't done this way? You may end up with a bubble (ponzi style) or you may just end up with many currencies. Neither is ideal, for the reasons I outline above.

How do I plan on implementing this? Coin minting rates could adjust to the number of active nodes in the swarm - the bigger the swarm, the more coins could be minted. There may be more nuanced ways of doing this, but I'm most concerned with the theory; getting the theory wrong may doom the technology needlessly (it's great tech, IMO). If everyone agrees on a theory, then more thought can be pushed into the implementation of it.

How do you decide how much every new user should get? If each node can mint new coins at the same rate as the founder users, then the number of coins should grow as the user base does. Early adopters would still have an advantage, as they will have had more time to accumulate coins, but it gives new entrants a better chance - it has more balance. It is very much like how the current Bitcoin base is growing, but with a more dynamic approach and with no hard limit.


I'll repeat this question, as it's important: do you think Bitcoins would become popular if the supply was already fixed and no more minting could occur? I will assume you will say no (please let us know), but this will contradict your position - if you are going to fix the supply, it will have a similar (although less extreme) effect whether you do it now or in the future.

The point is, we all want monetary stability. By not increasing the supply with the user base, this will not be achieved though - that's my whole point.

Something along these lines has been suggested by several different people so far.  I am fairly certain it is extremely foreign to Satoshi's vision for bitcoins.  Also a breaking update to the client.

Are none of the people who have suggested this change coders?  Because it shouldn't be too difficult to modify the code for bitcoins and create freedomcoins or whatever you want to call it.

I do have a question on this issue:  If increasing the user base should also correspondingly increase the monetary supply, how to you propose that the new coins are allocated for new users?  What is the criteria for a "new user" and how does that apply to "old users"?  Should a corresponding reduction in the monetary supply happen when somebody leaves the system?  How should those coins be removed to keep inflation or deflation from happening?

I can understand that the purpose of increasing the monetary supply is to stabilize the economy so prices stay mostly fixed (more or less) over time provided new participants in the system have roughly the same initial stack of currency.

On a practical level, however, the distribution of the initial set of "coins" in any new currency is always going to be fraught with problems and some people will feel cheated and others given a little bit too generously.  Any allocation system for the initial set of coins has its problems.  So why do you think Bitcoins is necessarily more evil than other systems?  Other than simply handing each new participant to Bitcoins with a certain amount of coins in the beginning, I can't think of another system that at least tries to equally distribute the coins more "fairly".

Giving each new user a fixed number of coins doesn't really solve many problems and in fact creates a whole bunch of new ones in its place.  I need not go into details because I hope most intelligent people can figure out the flaws of a network-based approach that presumes to give each new user some money equally... and it is something many on-line games already have to grapple with all of the time.

I'm not really interested in beating around the bush. I'm still waiting for you to tell me why your proposed solution is better than the current system in place, and how it will avoid pitfalls such as distortions through inflation.


So the extra islanders exchange their labour in return for goods, and prices drop; again, what is the issue here? Are you proposing we just grab what belongs to the current islanders and give it to the newcomers? There's nothing wrong with the newcomers satisfying their demand by performing labour in exchange for other goods of value.


You need to explain it in more than just "It's my hunch that this would be better. It would be better, no?". Couldn't you back it up with a bit more than "I think this is better because it feels better"? How do you propose actually implementing such a system, and how does it lead to a more efficient market and more total wealth?


Why not implement both systems and let the customer decide? You say you don't like competing currencies, but competition is the only way that the weak ideas get weeded out and the strong ideas survive. Competition is how the customer is better served! There's no need for a monopoly or a winner-take-all, not even for Bitcoin ;)


I made the point earlier on that the coins must be distributed in some fashion. If we were to fix the supply now, who would have the rest of the coins? Maybe we should have fixed it at 0 coins? Obviously, when you start from a base of 0, you do need to have some inflation to bring the system into existence. This type of inflation is based on resources expended to create the system and there is not necessarily much profit in doing so, since it takes real resources to be done. We can argue the different ways we can create the system, and I don't mind doing so; I don't claim that the current way is perfect, though I do think it's a heck of a lot better than monopolizing the means of creation.

The current way gives plenty of time for new users to help create the currency, thus encouraging adoption. It helps prevent scenarios such as the first 100 forum members grab 100 of the coins, thus other users don't see any point in buying coins since there isn't much of a market for them, and they can't generate them themselves. The whole point of coin generation is to get around this chicken & egg problem and function as a demand generator, to help grow the network. This is why we don't fix the supply now, but we fix it once the demand to trade for Bitcoins far exceeds the demand to generate them, because a whole ecosystem has grown up around the currency.

Eventually, though, once the market reaches critical mass -- and Bitcoin is far from there right now, but is doing better than any other similar idea that I've seen -- once it reaches a point where market supply and demand is self-sustaining, then there is much less of a need to seed the network in this fashion, as it is now able to stand on its own. Once the initial supply is large enough that Bitcoin is able to perform all of the functions of money adequately, then there is no further need to expand it beyond that point, other than perhaps a precision increase for future proofing.

I'm not going to get chance to reply properly until this evening, but just want to say a few quick things.

I'm very much pro-currency competition - I'm a huge fan of Hayek's Denationalisation of Money. If Bitcoins stay as they are, I fear they will lose out to other currencies, which will do a better job as 'money'. If you read the aforementioned, you will see that Hayek thinks that the best monies may track a basket of goods - to keep the price roughly constant. That could best target of all, but without formulating a way to measure and maintain this, keeping a rough handle on supply vs demand for a currency is the next ideal. In short, I'm all for competition, but avoiding obvious limitations would help prevent a new currency quickly becoming obsolete... if we want to see Bitcoins thrive, rather than one of its successors, then we would be wise to consider this.

As I've said before, there is nothing wrong with Bitcoins becoming a digital commodity, but I don't believe this will be the best, most stable money. There is much scope for competition to prove this too. I think we all agree that we want stable money though, right?

P.S. I am a software engineer, with a passion for economics. If I had more free time, I would consider developing some friendly competition. I have few too many plates spinning as it is though!

I think we just need to be clearer on the differences between price deflation and monetary deflation. The first is a good thing, the second is not. Many of the issues that you raise are actually issues that occur under the second, not the first.

I certainly don't mind if someone implements a commodity currency that tracks a basket of goods; indeed, I believe a more resilient digital economy will come about if people use more than one currency. The trouble lies in exchanging said currency for the basket of goods, which is the advantage of something like Bitcoin.


Haha, I know the feeling. I hope I don't seem like I'm trying to come down hard on you, because I'm not, but I want to be sure that we're actually arguing over the same thing so that I can properly respond to you. Not only in my opinion, but substantiated by many bodies of works, the most stable money is one that avoids both monetary deflation and monetary inflation. This is achieved both by having currency competition (so that good money can be chosen over bad) and by having sound money whose supply remains stable, in order to not redistribute the pie. When both factors are in place, it will be difficult to have a huge inflationary credit run up that then leads to a huge deflationary bust. You need exogenous forces such as legal tender to really make that happen.

If you were to say that Bitcoin's slight monetary deflation is a slight problem, I'd agree with you. Until we find a better solution, though, I think we can deal with it by ensuring robust replication and backup solutions.

Price deflation, however, is not a problem. We need to be very clear on the differences between the two before we can continue the debate, because I feel you're linking the two when they shouldn't be linked.

It's the monetary deflation I am concerned about here, not fluctuations (or deflation) in price indexes.

One way to demonstrate this is using the Quantity Theory Of Money. It has it's limitations, but over the long run, it has been proved correct time and time again. Specifically, T in the below:

M V_T = P T

http://en.wikipedia.org/wiki/Quantity_theory_of_money (http://en.wikipedia.org/wiki/Quantity_theory_of_money)

"T is an index of the real value of aggregate transactions." - If the number of Bitcoin user base (essentially, the size of the Bitcoin economy) grows, this value will increase. If everything else remains the same, it means that P ("the price level.") will likely decrease. Considering that the Bitcoin user base could expand massively, this is a concern.

While there aren't many articles on this, likely because there hasn't been a situation where it occurs, I found this: http://www.economics.utoronto.ca/munro5/QUANTHR2.htm (http://www.economics.utoronto.ca/munro5/QUANTHR2.htm) (although it is using a modified formula):


* Where credit is part of M in this case, I presume, so it will grow with demand. Bolding is mine.

As large population fluctuations, under the remit of a single, national currency are relatively rare. Famine gives us some examples, but there are arguments for prices increasing due to a decimated work force. IMO, it's probably a combination of both, but the amount of money per capita must be a consideration. As the volume of transactions in the Bitcoin economy may grow rapidly (due to the growing user base), we will have an even more extreme case on our hands.

If all prices are decreasing, just because money is becoming scarce, this isn't good deflation. This isn't because of technological advances, efficiencies and such, it is just because there is less money per capita over time.

EDIT: P.S. No worries with the arguing - as long as it remains cool and calm, it will help us arrive at the right answer, hopefully! :)

[One last thing: tracking a basket of commodities need not mean backing - the supply of money could just be adjusted to attempt to maintain the overall price level. While this is focusing on price inflation/deflation, it would attempt to keep the overall price level stable - to keep the currency as neutral as possible. Ultimately, it may be a better way of trying to do the same thing as above, albeit more complex. Tracking CPI/RPI is something different, as items in these indexes are changed (manipulated?) frequently.

The problem with tracking the prices of anything as that it is susceptible to changes in liquidity preferences (ie. propensity to hoard). Maybe a well 'managed' currency, in a world of competing denationalised currencies, would do well as the best (most stable) money. In our Bitcoin economy we probably should only concern ourselves with the broad strokes (ie. Quantity of Money, per capita), but future competition may go further (and attempt to create something more stable).]

Who's money are you going to destroy? Wouldn't the way to get the money to destroy be to sell the basket of goods?

At the risk of going OT (should probably have its own thread, if it warrants consideration), natural wastage (lost coins) will place the currency in a natural state of mild deflation, if everything else is equal (ie. the size of the Bitcoin economy - the number of Bitcoin users - remained the same etc). You could destroy money through part of the transaction fee being paid into the void (ie. a portion of the fee is just destroyed, rather than being given to the processing node).

Whether these techniques would be agile enough, I don't know. In a predominantly credit based economy, interest rates are more important in the short term. The Bitcoin economy would likely be quite different though. Of course there is nothing to stop a currency being backed by commodities, and it may be more stable too. I'm just throwing some ideas out there about a commodity basket really.

If it's worth debating, we can create a thread on it.

First lets establish some facts and look at things a different way.   

1) There are (CURRENTLY) only 23,000,000 bit coins.  Most are held in a virtual account and used to purchase processing power to keep the system going for the next 100 years.  Identical to a VERY RICH MAN paying out his living expenses slowly with gold from his vault.   

 Think of these 23,000,000 as shares in a company we call "the economy" which generates profit in terms of real goods and services.  If the company is successful it "pays dividends" each "owner" gets more goods and services. 

2) Each of us owns a percent of the total coins that we traded real value to get. 
3) Monetary inflation (increasing the coin count beyond 23,000,000) steals ownership from those who have coins and GIVES IT to someone else.  Everyone still owns a percent of a whole.  SO WHO IS THIS SOMEONE and WHY THEM?

4) Monetary deflation (lost coins) results in the "purchasing power or percent ownership" of those coins being redistributed to all other owners.  Thus lost coins is good for all coin holders but the individual who lost the coins.  VALUE is not destroyed by coins being lost because there are still just as many goods and services in the economy.

5) If you "must" increase the money supply then it should be done according to a "stock split" where each user is given 2 for 1 or  1.05 for 1 ever year.  Net result is that everyones "percent ownership" stays the same and you achieve "price stability".   But the economic effect would be the same as price deflation under a fixed money supply.  There is a natural mental flaw that most people (and monkeys) suffer from where the perception of 4 pennies as being better than 1 nickel seems to make sense, combined with the physiological impact of taking a nominal pay cut even though it entitles you to more goods and services than before.


The #1 question that monetary inflationists must answer is by what moral ground can any individual or group choose to reallocate shares of wealth?   If you create new coins "from nothing" who gets the goods that are purchased with those new coins? 

Monetary deflation is only a problem in a banking system where new money is created from credit and the math requires an increasing number of loans to pay interest or else someone must default.   It is perfectly stable when money is not debt and its existence does not depend upon paying someone interest.

In order to fall far enough to break your neck, you need something to propel you up that high in the first place. Fractional reserve + legal tender + money inflation is a good way of doing that, but credit based on real savings in a free market would find it much harder to do so. The people so scared of monetary deflation forget that a great inflationary expansion must occur before there can be a deflation!

Nice summary. Worth discussing but I'm still not buying it.

As an aside, I think there are a lot of mixed metaphors and final paragraph doesn't follow in anyway from the previous paragraphs.

Note: I think it is 21,000,000. But agreed, there is a virtual account which the blocks are being debited from.

However for your metaphor, who is this very rich man? Why is he the ONLY one with money when we start the system? Why does this guy get to decide what the price for OUR services are? That doesn't seem very market based to me?

My metaphor twist is important because I want to show that the way blocks are trickled out is really a sociological trick.

If you believe in a fixed currency, the trickle out system should really bother you. It is by definition and design "monetary inflation". Obviously, the first person who received 50 BTC had all the value. That made him the second very rich man. However, according to your rules, if the second block was generated by someone else, 1/2 of the second rich mans values was taken away and given to a third now rich man.

By your very own terms, who is this very rich man, that he can choose to reallocate shares of wealth arbitrarily?

The only rational way to answer this question is to say, he's the very rich man! He gets to make the rules of his game. If you don't like the rules of his game you don't have to play with him. Therefore, by common agreement among all who choose to play the very rich mans game, there exists at least one moral reason for an individual or group to reassign other people's wealth. So you have given a first affirmative answer to your #1 question. I'll suppose you are asserting that there exist no OTHER moral reason.

Now, let's look at a different but more consistent metaphor that could have been used to boot the system, if you were a real austrian purest.

Suppose the rich man said, I'm dying. You 21 closest friends of mine get all my BTC. Take care of it and trade it with the world. He then gave each person 1,000,000 BTC.

Now you have the same logical stable state as you will have in "100 years" in your given example. It just gets here sooner. But the benefit is, you don't have to compromise on your most important value. Now there exists no group or individual who can reassign other people's wealth. Ideologically it is a perfect system.


I think you can give me a dozen reasons why my pure system will fail. I'll give only one to advance the argument.

1) Why on earth outside of the initial 21 now very rich men, would anyone else choose to use the system? Who are those 21 guys to make all the rules for all time? Why do they get to be the initial rich people and not me? What did they contribute that I am not contributing?

This inductive logic holds for any fixed commodity fiat money system.

I would guess there are roughly 21,000,000 motown records which were pressed in 1966. Why not use them as your fixed commodity? They are already "fairly distributed" among the initial population.

Or perhaps you could use the roughly 21,000,000 Playboy magazines that were printed in 1957. Those are "fairly distributed" as well. Well if you decide men should be most of the initial rich people.

In that case we could all decide that if you happen to have a 1966 motown record or a 1957 Playboy, you get a starting bitcoin.

After that every bit of your logic still holds. They don't even have to all be redeemed at once. You could redeem them for bitcoins as you stumbled across them (like finding gold!)


This is where the sociological trick comes in. Everyone here who is normally an austrian but tolerates the trickle in system does so for one reason. They want to be one of the initial rich people. To get something for nothing is very motivating.


So the #1 question I have for you is, as the chances of being awarded blocks goes down. Why on earth is anyone going to want to play the silly game invented by you people who happened to stumble upon easy BTC first?

After all, Knightmb has 10% of all the exiting BTC. He probably bought and generated them for less than $1,000 at the time. If I decide to trade some commodity worth $10,000 I would likely end up with less than half of his stash.

He put in $1,000 and I put in $10,000 a couple of months later. He is more than twice as rich as me. If someone tries to trade $100,000 worth of commodities for BTC a few months after me, is he going to be half as rich as me and a quarter as rich as knightmb?

That seems like a poor game for him to play.

Why does one cares about the relative wealth of another individuals versus our own, especially in a system where people can mutually gain from exchanges? If anything, one should be concerned about one's own absolute wealth over time, not one's relative wealth to another.

Are you kidding?

In a market based society there is only relative wealth. Bill Gate is not rich because he has 40 billion dollars. He is rich because we all don't have 40 billion dollars. If we did all did the "average" house would cost 100 billion dollars and we'd all still have mortgages.

Nonsense. I have a house, a computer, fancy operating system, foods, medication and the like. Compared to the kings of old, I have more absolute wealth in many area you can measure.

Hah!  While I was typing this, Kiba said essentially the same thing...

We are all rich because we have computers and the Internet and Wikipedia and other wonders the world has never seen before.

There is absolute wealth.  We are healthier and wealthier and live longer than any previous generation, and that's a wonderful thing.

Sometimes you forget how wealthy you are relative to some of the poorer areas of the world.To someone living in somalia you would look like Bill Gates  :)

You absolutely have more bitcoins, but less gold than the kings of old.

But seriously, four guys discover the bitcoin system they all have $10,000 they want to trade for bitcoins, but they aren't sure about the system.

The first guy says what the fuck and trades his $1,000 for 200,000 BTC
The second guy decides a month later and trades his $1,000 but gets only 20,000 BTC.
The third guy is a little slower but says WFT a month later and trades $1,000 but gets only 2,000 BTC.

The fourth guy gets on twitter and says, "Screw bitcoin, it's a pyramid scheme. I'm trading for ฿ and spending them on Thai hookers. That's the way I want to be fucked!"

No one sees that as in obvious danger?

No danger there because it is not a pyramid scheme.   It simply means that people want BTC more than USD.  If that were not true then the ratio would not have changed.  It simply means that the early adopters recognized value before the late adopters.  This is the market auto-correcting. 

Isn't the 'problem' you are describing the problem with ANY monetary system?

Re-read the whole thread. I found lots of wisdom in it, and this unanswered question. So I'll go first in answering it.

No. I don't think Bitcoins would become popular if the supply of bitcoins was already fixed and no more minting was occuring.

Does anyone disagree? Because bitcoin's dreaded monetary inflation is trivial to stop right now.

Yes, I think bit coins would become popular even without mining because the supply of bit coins *is* fixed even now.  They are just contractually obligated to future block generation.

The creator of a currency initially owns 100% of said currency.  That is true with bitcoins as well. 

To add value to a bit coin requires CPU time and this costs money.  Thus, the creator of the currency is choosing to reward those who contribute with "shares" of his currency stock and thus early adopters are speculating on the future value by *investing* in bitcoin stock.  He could have found an investor who would accept payment in this bitcoin and provide a server farm to bootstrap the system and then allowed 3rd parties to run their own servers and everyone compete on transaction costs alone.   

I think it was a smart decision to pay people to provide the bootstrapping CPU time. 

So the question you have to ask yourself is, what other "means" could a creator of a bitcoin like system use to encourage adoption?   He could have auctioned the entire stock into existence and let speculators estimate the potential value of such an anonymous fixed supply currency.   These investors would then be motivated to see the currency adopted as it increases the value of their shares of the investment.  Some may choose to sub out compute farms, others may offer anonymous services and exchange systems.  In fact, it may have been better to auction it off because that would give more people incentive to see bitcoins grow.  I suppose investors could still buy bitcoins as they are generated. 

So one way to look at it is that the supply is fixed and the creator chose to reward "stock" based upon compute time instead of money.  A perfectly valid approach, but it is not the mining that makes bitcoin popular.   

I suspect that the porn-industry could take this technology to enable their customers to be more anonymous by having them by BTC from them and once bought allowing them to trade among themselves and others.  Thus, it is not the mining that makes BTC valuable or popular. 

I obviously disagree, but it is a point that can only be proven empirically.


Your point is well made, but I want to suggest that talking about bitcoins as "stock" is risky semantically. There are lots of agencies that investigate fraud in such areas. It is common for scammers to tout their schemes as "shares" in an "investment opportunity". Metaphors show intention. It is intention that gets people locked up. I know you don't think of this as a scam. But it is wise not to share terminology with scammers.

If there was a bitcoin company and its goal was to make money by providing a service. And it sold shares that inherently increased in value based upon profit from customer's paying the company for that service. Then you could call justifiably call it stock. But you can't form a company whose business is SOLELY to sell the company's stock. And tout that if you buy the stock early, the people who come later will want to pay you more for that stock because it is a limited commodity.

Trust me. Doing that is "a bad thing." :-)


It was a brilliant decision! I've said that in another thread.

But sometimes brilliant bootstrapping decisions can lead to hamstrung growth decisions. We disagree about this, but the truth will eventually play out empirically.


I wrote on this in this post, but it got buried by a flippant comment about relative wealth. I would appreciate some comment on it.
http://bitcointalk.org/index.php?topic=75.msg7603#msg7603


I think the porn-industry could find value here. However, for that to benefit the bitcoin system as a whole, there needs to be something the porn-industry could spend their new BTC on BESIDES dollars. Maybe hosting. Maybe an associates program that pays for referrals in BTC. Then coins would be in the hands of more people in exchange for actual services rendered. More coin holders opens more possibilities for people to sell random commodities for BTC. That would create a real BTC economy of both coins and commodities/services circulating.

If the majority of people just buy BTC for dollars, then spend them anonymously on porn, and the porn industry sells the coins back for dollars; then you have "a money transfer service" which cries out for the regulators to attack.

Wealth is often defined as the ability to give. Bill Gates certainly understand this with his Foundation.
Wealth is ok as long as what is given is not taken from someone in need or from someone in the future.
It seems to me that today's wealth is partly borrowed from future generations.

Going back to the "hoarding" topic imho hoarding cannot be lethal for the BTC economy because bitcoins can be used as a meta-currency.
The value of bitcoins in this use case stems from the merits of the bitcoin network as a transaction processing network.
Goods can be sold in state currency with bitcoins being used just as a transaction vehicle (converted in real time at each end of the transaction).
Transaction fees over the bitcoin network can be competitive compared to card schemes.

not sure if this one helps http://www.bitcoinmonitor.com/

Not sure why this thread was bumped, but for those interested, I have proposed a system that unwittingly incorporated some of the ideas in this thread and I am trying to promote discussion.

https://bitcointalk.org/index.php?topic=44682.0

Based around a constant cost to produce (not simply giving money away to latecomers by reducing the value to earlycomers) and the destruction of currency via transaction fees, I believe it addresses many of the issues brought up in this thread.

Here's my stance on Hoarding...

For bitcoin to have any value, you have to be able to spend them. If everyone is hoarding, no one is earning coins through the sale of goods and services. If merchants aren't making enough to justify using bitcoins then why would other merchants get on board? And with less merchants means less ways of spending your coins.. You don't make stupid business decisions on purpose normally so if people know there's no point, then they wont bother. If they don't bother then bitcoin goes nowhere, existing merchants will eventually get out since they're just wasting their time and bitcoin wont go anywhere.

People hoard because they want to make money. To make money, the value has to go up. If there's no reason to buy them then they wont be sold and the price wont go up.

Bitcoins can't keep on raising in value simply because everyone wants to make a quick buck... Not quite sure how anyone could get the idea that it'll just keep on going up just because "we want it to"?

Where can I spend my bitcoins ? I do not gamble, I'm not a drug addict. I'm a cheap ass. There is not a lot of good deals in bitcoin stores.

When I sell something in classified ads. I mention that I accept to trade in bitcoins but we are not legion.

Bumping/Necroing one of the best threads in the history of this forum.  Recommended reading