Bitcoin Forum

I’ve been thinking, how will it be possible for shares traded in a currency that has a limited supply to rise or even maintain their value? The more valuable bitcoins become, the less profit a company will be able to generate and the less valuable their assets will become (in bitcoins), so there should be a downward pressure on the price of its shares. An example:

Company A issues 1000 shares at 1 BTC each to buy some equipment that will generate 50 BTC in monthly profits. After a couple of months the price of bitcoins have doubled and so the company can only generate 25 BTC. Company B is born and issue 1000 shares at 0.5 BTC to buy the exact same equipment (which now only costs half the amount of bitcoins) and generate 25 BTC. Shareholders of company A start selling their stock to buy from company B since they can get double the amount of shares on a company that’s basically a clone of the previous. Finally the prices of A’s stock fall until they level out with B.

Is my logic terribly flawed somewhere?

Btw, if this holds true I’m not suggesting that just holding bitcoins would always be better than buying stock since even if your stock loses value you can still make more than your initial investment from dividends.

Just look at what electronics manufacturers do.  They have to deal with this problem all the time.  The idea that you just buy a fixed cost and that's it is highly unrealistic as well.  A lot of your costs would move with the value (electricity and labor get cheaper, etc...).  If the company does not spend all of its money initially and has reserves, they do just fine.

But if a company is making less revenue, then it's value probably drops.  Unless it was already anticipated and priced in.

You are right about costs going down as well but I'm not sure that it solves the problem. Let's say that all bitcoins have been mined and a very profitable private company makes a public offering. Where does the money to buy their stock come from? It can't come from newly created money like in fractional reserve systems, it has to necessarily come from what other people are already holding. Everyone's piece of the pie ends up getting smaller to leave room for the new player.

And what is the problem with that?

If a company cannot bring in more bitcoins than they spend they ought not be using up resources. They should be leaving them for others who have productive plans to use.

Currently we have a system where you need to buy something whether you know what you need or not, whether you know what is a good plan or not, whether you know what is valuable or not. Holding the currency should be a general bet on the whole economy. Using it should be a claim that you have a better than average idea.

You buy shares at 1 BTC but eventually they'll trade at 0.1, no matter how profitable and efficient the company is. As I said, you could possibly still end up making money from dividends but it would only be slightly more attractive than just holding the bitcoins in your wallet. Basically this (http://bitcointalk.org/index.php?topic=8115.0) will become harder and harder until it becomes impossible when no new BTC is mined.


I agree, not sure what this has to do with what I'm talking about though.

Sure, but you are not seeing the other side: the product that cost 1 BTC would then cost 0.1 BTC.

He has a point.

He's not talking about the buying and selling with the end consumer.  He's talking about encouraging investment in other companies.

Generally, value of a company can be determined by a price/earnings ratio.  If a company makes 10 BTC in a year, and it is valued at 100BTC, the P/E ratio is 10.  If the same company can only make 1 BTC the next year, because of deflation, then the value will likely drop from 100BTC to 10BTC.

That means, that every investor who invested in the company would lose money compared to just holding on to their bitcoins in the first place.

This is an inherent flaw with a deflationary currency, and one that there is no easy answer around, aside from not investing in companies in the first place.  Unless the value of the company can outpace the value of the bitcoin, there is no reason to invest in a company.  Less investment = less innovation = less economic activity.

Yes I know that the purchasing power stays roughly the same. Again, if I had just left alone that 1 BTC in my wallet instead of buying the shares I would have the same 1 BTC at the end instead of 0.1 (disregarding what one might possibly get from dividends obviously).

Why are you insisting that no company will ever be more profitable than the average of the growth of the bitcoin economy?

It'll be hard to tell which ones, but you don't have to. If you don't have an edge at resource allocation just leave it to other people.

You are not getting what I'm saying, maybe SgtSpike's post will make it more clear than mine.

Think of it like this, can stock denominated in BTC rise in value forever like normal stock can? (value meaning units of currency, NOT purchasing power).

I think i know what he's getting at.

An example:

Stock A is an extremely stable company that makes no losses, and also makes no gains ( i know no one would invest in it but it provides an example). It could be something like bottled water, which has a constant value at all times. Anyway we agree this value *never* changes, its completely constant.

BTCs however rise in value, so if you buy Stock A then its initial value in BTCs is say, 100. But as time progresses its BTC cost goes down, not because the company loses, we agree its perfectly constant, but BTC value goes up. So with enough time that company will be worth 50 BTCs..... but its *value* is still the same. It's the BTCs that have changed. So why bother investing in a company when you can just keep the BTCs? The company is a great inflation hedge, but a terrible deflation hedge.

Now lets take Stock B, Company B is a mildly profitable. But its profits do not outstrip the deflation of BTCS. So if you own 100 BTCs of Stock B, then after the same time as above, instead of being worth 50BTCs its worth 75BTCs. Its still profitable, the value *has* gone up because it is higher than constant value company A, but its still only 75BTCs. Once again... why bother investing in it when you could have just kept 100BTCs?

The only way for this to work is for Stock C, Company C is INSANELY profitable. They exclusively produce an antiaging serum and charge insane prices for it. Their stock actually goes up because profits outstrip deflation, 100 BTCs worth becomes 150 BTCs after the allotted time.

So, to answer the original poster... BTC based stocks have to outstrip the deflation rate in order for those stocks to be worthwhile. Store of value stocks, like Stock A, or mildly profitable stocks, like Stock B, are not worthwhile investments in a deflationary currency scenario. Both stocks however are worthwhile in an inflationary currency scenario.

If however BTCs become very stable, then the deflation rate might be low enough that its relatively easy to outrun deflation. I'm not sure if this will happen with bitcoin in particular though.

The flaw here is that the thinking is based on the idea that BTC will continue to rise in value so quickly. In the long run, BTC will deflate exactly at the speed the economy grows. So if the company you invest in grows more slowly than the economy in general (or not at all), then yes, it would have been better to just keep your BTC.

But this is true for dollars as well. If you invest in a company which grows more slowly than the stock market in general, you would have been better off investing in a basket of stocks from the whole market. If you had, you would have reaped the benefits of the stock market growth, instead of the puny growth of the company you invested in.

EXCEPT, we'll be losing BTC as people lose wallets, etc.  And that'll probably happen a lot faster than people anticipate, despite best laid plans.  That deflation won't be due to growth of the economy, so it must be taken in to consideration when making investment calculations.

I do see your point here though.  Difference being, holding on to bitcoins is kind of an "automatic" holding of the Dow Jones.  :)

Well...

One of the ideas of investing in stock is, as someone said, an inflation hedge. I don't see how that doesn't apply to Bitcoins. With fiat currency you want to generally invest in stocks since it's always getting inflated, but let's say the Fed announces a huge increase in their interest rate, would you want to get out of the market? Maybe you should. Now with Bitcoins, you should get into the stock market when you expect the economy to shrink. If I had bought some stock yesterday at $8.5/BTC, I would have made a killing today at $6.

Yes you could just keep a hold of your bitcoin, and hope that you can live off your hoard for the rest of your life. Certainly, with the level of appreciation we're seeing at the moment, a good stash of 10kBTC would in perhaps 2 years time make your life very comfortable.

But this exponential growth of the purchasing power of BTC will not last forever. At some point you will need to earn btc to replace your spent hoard. This can be done by purchasing shares of bitcoin denominated companies that pay dividends. No more will people buy shares in the hope they will just rise in value (as a hedge against inflation) but they will buy for the income stream they can earn from those shares.

Not sure the pace at which BTC rises in value is relevant. As long as the purchasing power of BTC goes up, the price in BTC of all assets will go down proportionally.


Yeah, that's all I'm saying. People will buy shares knowing that their value will decrease over time if they can be sure that they'll make up for it with income.

Someone said this is a flaw in a deflationary system since it becomes way harder to get capital for new projects. That's true but I think it may be more of a feature because you basically have to all but guarantee that the project will be profitable to attract investors. It is kinda like a system-wide protection against the business cycle since there shouldn't be malinvestments.

When your money is always dropping in value you have to invest it - use it or lose it. That kind of investment would go away in non inflationary system. But that investment was always poor investment: when people invest because they must, they won't invest in the best options. It won't be the ponderous long term investment which drives a healthy economy with small boom and bust cycles; instead it will be the frenzied day trading of Wall Street.

I would say that the amazing amount of poor investments being made today, such as that made into clearly failing mortgages, is due to printing press money and government meddling. I for one look forward to seeing what a truly free market could do instead. Imagine our prosperity when our best and brightest are putting their money into ideas which will actually work and lead to profit and truly new innovation, instead of running desperately in the financial instruments hamster wheel.

I bought a couple of shares over GLBSE on mining companies.

The reason is simple: They pay dividends. Unless I see a dramatical share decrease of value in USD (ie: suppose that BTC remained 8 USD while the company BTC value dropped to 0.1 of its original value), it is all profit.

In fact, I believe it will be profitable with BTC itself, as the company profits (it is a mining company... it will profit as fast as the market grows, at least for now).

The end result is that investments will be much more efficient, as people no longer HAVE to invest to keep the value of their savings locked in, so the only motive will be for people to invest will be good profit, not fear of losing their savings to inflation.

you're talking as if people have no way of diversifying away from their operational 'fiat' currencies to avoid inflation or achieve other investment goals. that's just not true. nobody is currently forced to invest in stocks to avoid inflation. people decide, to the extent they're making conscious decisions, that that is one effective way to do so. they choose others as well, such as real estate, diversified portfolios of commodities, and so forth.

being paid in a currency that experiences inflation or demurrage does not make investment decisions less rational, and no serious economist i've encountered thinks it does. there's no reason it should. because people are not forced to experience inflation in their long-term holdings currenly, bitcoin's strength is not that it lets people escape that fate. it provides an additional way of doing it, and hopefully that way turns out to be convenient for people.

now, as to the more specific question in this discussion: the reason to invest in a company, rather than merely to 'save' bitcoins, is to experience either bitcoin-denominated capital appreciation or an income stream in bitcoins. shares denominated in bitcoins could theoretically do both, just as shares denominated in 'fiat' do today. people are complicating the analysis by switching their frames of reference, accidentally, between 'fiat' currencies and bitcoin.

to see why the discussion here doesn't actually pose a problem for bitcoin-denominated investments, imagine if there were only bitcoins. i work and acquire a savings of 1000 of them, which is more than i need to pay for my current expenses. so i contemplate an investment decision to accommodate my future wants: i can put 200 of them in a company that i expect to grow. if i keep the 200 bitcoins, i'll still have 200 in the future. if the company grows, i expect it will be able to turn 200 into 205, through its income-producing activities. whether it pays that gain out as a dividend or simply impounds it into the share price is no more relevant to the fundamental economic picture in a bitcoin economy than it is today, nor is it relevant that in ten years after my contemplated investment, a bitcoin is expected to buy more than it currently does. the question is simply what risk i want to accept for what reward; i can have 200 at a 100% chance (except for the loss of my wallet), or more (and perhaps less) if i take some risk.

now, sure, the riskfree rate of return can influence my investment decisions, but the picture isn't fundamentally different from today in the way people are imagining. the proper comparison is between 'dollar savings + interest versus dollar-denominated investment' and 'deflationary bitcoin savings versus bitcoin-denominated investment'. there's no special complication for bitcoins here.

People are not forced to experience inflation as long as they invest, just like you say, but unlike you say this is exactly what makes the investment less rational. The constant pressure to invest somewhere, anywhere, especially as you can get free money from the government to do so (see the Fed's quantitative easing), must necessarily lead to more investment than the market would naturally desire.

but why do you think the presence of inflationary currencies encourages more investment (in, say, the stock market) than there would be without their existence as an option? i just don't follow the logic.

think of dollars as providing a convenient payments system in the united states (and a few other places) in exchange for the possibility of inflation, physical damage, and loss of value through counterfeit. why does that option as a store of value, however imperfect it is, encourage investment that would otherwise not be undertaken?

nothing forces the dollar's use as a long-term store of value. exactly the same thing is true of bitcoin.

It's simple math to figure out why an inflationary currency encourages more investment than a deflationary currency.

Think of it this way.  Assume the real estate market is doing well, and land value grows at a rate of 10% per year.  Also assume that we have a highly inflationary dollar, which inflates at a rate of 100% per year.

I have $100,000, with which I purchase a piece of land on January 1st, 2011.  At Dec 31st, 2011, the value of the land, in Jan 1st dollars, would be $110,000.  But since the dollar inflated 100% during the course of the year, my land is now worth $220,000.  Assuming I had held the money, I would still only have $100,000 at Dec 31st, and could now buy much less land than I could at the beginning of the year.  This is why an inflationary currency encourages investment - because asset values can match inflation rates, causing the asset holder to gain money.

Now think of a second example.  I have purchased the same land at the same price, and land values are still rising at 10% per year, but the currency DEFLATES at a rate of -50% per year.

At Dec 31st, the value of the land, in Jan 1st dollars, would be $110,000.  But since the dollar deflated 50% during the course of the year, my land is now worth only $55,000.  Assuming I had held the money, I would still have $100,000.  This is why a deflationary currency discourages investment - because asset values can match deflationary rates, causing the asset holder to lose money.

i think you're making a mistake right out of the gate by assuming there is 'an inflationary currency' or 'a deflationary currency'. instead, there are just different currencies, commodities, shares in companies, goods, services, real estate, etc.

they all compete as long-term stores of value.

that's already true before bitcoin. bitcoin simply adds a new option to the mix.

maybe what you mean is that a shift in network effects away from inflationary currencies as operational currencies will make it easier, practically or psychologically, for many people to store value by default. or something like that. but that's a rich, complicated, psychological, empirical point, and it's very difficult to decide if it's true or not.

I think I am NOT making a mistake by assuming there is an inflationary currency.  Aside from during recessions/depressions, every single currency in use in the world today is inflationary.  Many economists believe that a small amount of inflation is necessary for a healthy economy (in order to encourage purchase of consumer goods and investment, as I have already shown).  Whether that investment and purchasing is entirely necessary or not remains to be seen.  It may be possible for an economy to survive, just with less GDP, on a deflationary currency.

Bitcoins are deflationary, and there is no way around that.  That's what happens when you have a limited supply that slowly gets smaller (lost wallets, etc).

you've misunderstood me. what i was saying is that the mistake i believe you're making is to assume a currency rather than multiple ones. i'm not disputing that most present currencies are inflationary or that bitcoins are deflationary, but my point is that nobody has to use any of them as long-term stores of value.

if it helps, i can rephrase what i said to:  'i think you're making a mistake right out of the gate by assuming there is a single currency. instead, there are just different currencies, commodities, . . .'

another way to say it: when you own real estate, you're out of the dollar, bitcoins, francs, oil, and pork bellies (to the extent of your real-estate purchase). the dollar doesn't float into your real-estate purchase, even if that's what you bought it in. from your perspective as a real-estate holder, there isn't 'a' currency. there are just many possible currencies you can use once you sell it.

Taking all of your previous posts in context with this one, I see your point now.  You are saying, what is the difference between a "deflationary asset" (if you allow me to use that term) and a deflationary currency, as they could both be used to store wealth.

I think this kind of proves my point though.  If a deflationary currency is available to store wealth, then there will be less wealth storage in assets that help produce GDP.  Less wealth storage = less investment.  Even though there may be more investment overall, including investment in the deflationary currency, there will be less economical investment, or investment in companies and goods that promote the economy.  Investing in a currency doesn't help give people jobs or promote the exchange of money for goods and services, so such investments would be detrimental to GDP.

This is why most economists will tell you that a small amount of inflation is necessary for an economy to succeed.  Without it, a lack of investments in new projects and ideas will stifle the economy.

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.

Even independent economists will tell you the same thing.  And it just makes sense, really.  If you have less incentive to place your extra funds into investments, then fewer investments will be made.  With fewer investments come larger barriers to entry and startup costs that have to be paid by the company founder.  With fewer companies comes fewer jobs.

More investment does not mean better investment. Only endeavors that make people better off should be using resources.

A good currency is a guide for telling people what is creating wealth and what is not. 

More jobs is not necessarily a good thing. If there is a way to accomplish something with less work is that worse?

I think there should be exactly the number of jobs that people want. Currently we have mega distortions. People being forbidden from doing certain things and forced to do other things or pay a certain amount and not another. This results in the loss of jobs that people actually want which is tragic.

But the answer is to let people be free to work as they like or need to and not to do things like manipulate the currency so they are too poor to stop working.

Hard to argue with that reasoning... good thoughts.

Thanks. I know it's not standard stuff. It's always hard to think of the fundamentals of mainstream society being wrong.

I've been reading Bitcoin comments all over the web today and it's amazing to see how angrily some people dismiss it without even thinking. I love the idea that people will end up getting paid according to how open they were to figuring out that this will work.

Heh, I totally agree with how the stupid fiat system force people to invest into stupid things.

I am glad I found bitcoin, before that I was wondering where to stuff all my fiat money (currently devaluing 7% yearly... while government papers give 5% yearly interest rates...).

@SgtSpike: Doesn't that mean then that as investments decrease the number of goods and services provided will decrease in proportion to BitCoins. Therefore causing inflation until some equilibrium is achieved, though this process may be quite painful. Furthermore with FreeMoneys analysis, it seems to me the optimal thing would be the complete opposite of what Keynsians recommend, constant deflation. I understand in the USA in the 19th century they experience massive growth but with deflation on average.

Deflation isn't magic. It is not the case that deflation--->goodness all the time. One could cause dollar deflation by murdering people and lighting their money on fire. This would not be good. 

Deflation caused by a fixed money supply and ever increasing wealth and productivity is totally not a problem.

Deflation is an effect of a healthy economy, it does not make a healthy economy.

Well, you've a "terrible flaw" here:


If BTC has double the price then, unless company A still produces 50 BTC anyway, its shares will be down to 0.5. So investors in A wouldn't gain anything on the rally over B, and most likely would loose a lot, as within the selling rally the price would keep dropping at a fast pace.

So you discovered the problem with deflation...
It makes BTC good way to store value...
Terrible to invest with...

You don't want to borrow deflating currency...
Because you will have hard time paying back...
You don't want to lend deflating currency...
Because you will not receive all money back...

Buying stock=lending money in a way...
Everyone see this is bad idea...
Keep hoarding your bitcoins...
Lower risk and better payoff...

Adjusted for viable economy.

I understand that with a fixed monetary base the cause of deflation will be growth.
The money holders will gain an average of the total growth, but some investments would have a greater gain (while others would have a lower one).
But why must the money holders have that gain without financing the economy nor taking any risk?
Isn't it a positive externality?
The "service" they're providing is preventing the investments with the lower expected yields from happening, not necessarily the riskier ones. Note that without printing you can't say that there's not enough resources to end all projects.
Using the typical example of the houses, maybe there's bricks, workers and demand for building 4 houses, but only 3 are financed because the fourth one would have take the rent prices down making the housing market (in that village) less profitable than just holding the money.

You do realize that the outcome of company A's share price is the same right? You are confirming my conclusion.