Bitcoin Forum

So it seems that the bitcoin userbase has made a decision about the currency vs. store-of-value dichotomy and has overwhelmingly chose the latter.

A recent thread (https://bitcointalk.org/index.php?topic=141815.0) in the speculation forum seems to suggest that the common practice for most is to buy and hold (read: hoard).

while this is fine and dandy, and everyone can do with their bits as they please, it might have some unexpected consequences for bitcoin as a whole. one of these is a decreasing appeal as a currency. let's talk about the idea of a deflationary spiral:

the bitcoin wiki has a nice page describing how bitcoin is 'immune' to such a disaster, the reasoning being "Bitcoins only deflate in value when the Bitcoin Economy is growing."

there is no question that bitcoin has undergone (or is continuing to undergo) a massive deflationary period. this comes as no surprise because demand is rising (http://www.google.com/trends/explore#q=buy%20bitcoins) and the total number of bitcoins, as everyone knows, is fixed.

let's talk about what isn't happening:

-it isn't about the block reward halving. everyone thought that that was already priced in, before it happened, in the rise from $5 to $10 in the early summer. i have reservations about whether or not that is really the case (the inflation rate decreasing by half doesn't mean that the value should double), but that aspect of the protocol must have been priced in already.

-it isn't about any major news either. the best candidate is the wordpress announcement, but the rally, again, started before and continued thereafter.

-it isn't about any new market opening up for bitcoin, either... the main drivers are still online gambling and the silk road.

-it also is not a bubble, as many have been saying. at the very least, we are not in bubble territory yet. there have been two large sell-offs that have let off a little steam while maintaining the upward momentum.

so what's going on? the bitcoin wiki swears that the bitcoin economy MUST BE GROWING in order for this massive deflation to occur. and the economy is growing, indeed, but which sector?

you see, just like the world economy, the 'financial' sector is about an order of magnitude larger than any real commerce. as evidence for this, i can point to that fact that more than 3/4 of the bitcoins that exist haven't moved much at all (http://arstechnica.com/tech-policy/2012/10/78-percent-of-bitcoin-currency-stashed-under-digital-mattress-study-finds/). this is troubling. if there are so many coins, where are the asks on mtgox? the answer: people are pulling them, skewing the supply, with the idea that hoarding will be very profitable as the slow and steady deflation pushes the price up, up, up.

this brings us back to a very important, and possibly dangerous, idea: the deflationary spiral. users are reluctant to sell their coins because of the idea of larger future worth (standard deflation), which causes them to hoard their coins which creates a feedback loop which increases the perceived value of the coins.

why is this dangerous? everyone knew deflation was built-in to bitcoin, anyway, right?

the problem is that if you are discouraged from spending your coins because you know they will be worth more in the future, the nash equilibrium is for everyone to hoard. this means no investments and subdued commerce. in other words, bitcoin turns into gold as we know it today. not a currency at all, but a store of value.

we are already seeing the effects of this. why invest in satoshidice shares when you'd be multiple times better off just holding onto the coins? even if you mean to purchase things with them and never convert to fiat, unless a large support economy exists the suppliers of the goods will have to convert to fiat to pay off their own costs. but the deflationary spiral disincentivizes the formation of this necessary support economy!

in other words, the bitcoin economy is growing. the "financial" sector is swelling like nothing we've seen before. and if it doesn't stop, we may never see bitcoin payment systems because they will simply not make sense.

even worse, the price as it stands today is much higher than it would be if 100% of the coins were in common trade. as it stands, less than 1/4 are. and now everyone is rushing to buy because they see the profits and protection of a deflationary store of value. so the game is to suck up as many coins as you can, and hold them forever? then what is the point? we've all been relying on the relative altruism of the early adopters and miners who are undoubtedly the owners of those large, quiet addresses. i'm rather afraid that some of them may be less altruistic than we believe.

i know that FUD is common when prices rise to unprecedented levels, but this is not speculation. this is a challenge to the economic fundamentals and goals of the project. i'm not saying that one of these big fish are going to cash out tomorrow, but as the price rises, the incentive for them to will only increase. is this a good direction for bitcoin?

edited for formatting

Are you suggesting that everyone, or at least the large holding early adopters, will not be altruistic enough to actually buy anything when their bitcoins are worth billions of dollars so they will spiral up to trillions of dollars and still they will be so greedy and un-altruistic that they still will not spend any so it will spiral up to megatrillions and they still will not spend, gloating over their megatrillions while refusing to spend a satoshi of it?

Whatever happened to the theory that actually some forms of greed might lead to spending at least some of one's riches?

-MarkM-

Not this again....

of course not. im suggesting that due to the effects of runaway deflation, there will be no support economy to make bitcoins economically wise to spend. as such, the only thing the big fish can do really is to 'cash out' -- to take profit, and to leave all these people who are busy sucking up the "cheap" $20 coins holding the bag.


i apologize if this has been covered already. i've been completely dumbfounded by the behavior of the price as a speculator recently, and decided to reassess the fundamentals. do you at least agree that this is bitcoin's first significant deflation event? i have read the bitcoin wiki's counterargument to why a deflationary spiral is not possible, and i am still not at ease. could you restore my confidence in traders' long-term awareness?

i understand that im not the first person to ever connect the dots between bitcoin and deflationary spirals. i also understand that the standard argument OHNOES BITCOIN IS GUNNA DIE CUZ DEFLATION is completely misinformed.

the threads you have linked fully exhaust the discussion regarding this matter in the general. i will edit the title to focus on the points i wanted to discuss:

Watching the first major deflationary event in the bitcoin economy, have your feelings changed about its future? Did everyone fully expect the price to quadruple in half a year?

Will this kind of price behavior change the perception of bitcoin either way regarding the currency vs. store-of-value dichotomy?

and

How do you feel about the fact that most coins have not moved? Did you expect this because of the deflationary nature of Bitcoin? Do any of the previous arguments about why people will NOT hoard make less sense in light of the data?

the point is, there is new data to discuss. i apologize if i did not make that clear in the OP.

Only 21 million ever.  We're still in price discovery mode and will be for quite some time.  We will either find some price well north of where we are now, or will be displaced by something better.  At that point maybe we can talk about inflationary or deflationary pressures.  Nobody knows about bitcoin now, and until most people have at least heard of it we can only guess what its value is.

As for failing to spend because price is rising, I don't find that to be an issue.  In fact, I spend more after a price rise, even if I expect it to continue.  I could be wrong about it continuing and then I would lose out.  If you have trouble letting go of bitcoins for goods, services, or other investments, maybe you should still be accumulating?  At some point you will feel you have enough bitcoins and be willing to spend some.

People can use Bitcoin as a store of value AND as a payment network at the same time.  If I want to pay with Bitcoin, I will buy Bitcoin with fiat and pay, without moving my Bitcoin investment.

I don't believe anyone will horde to the point they'll perish.  Eventually, you'll come up with a nice sum of coin and will want to put it to use; after all, why have wealth if it goes unused?

This price rise is good for bitcoin because merchant websites will see it is a strong currency and will be more tempted to accept it for goods. The hoarding/saving/investing is also healthy. The market needs to be trusted. Everyone will spend some of their hoarded bitcoins at some point in the future.

What is this first major deflationary event in the bitcoin economy that you're watching?
What kind of price behaviour is it, that will or will not change the perception of bitcoin either way regarding the currency vs. store-of-value dichotomy?

I really don't get it, I don't see any unusual price behaviour, nor deflationary event.


And for most of the coins not being moved, why would I care? All I care about is that it's possible for me to move them around, superfast, supereasy, supercheap.
I just don't care about what other people do with their coins, hoarding, spending, burning, it's their choice, not mine.

+1000.

Howard Hughes type scrooges are rare in this world because most people just want to have nice things. Hoarding does not go on forever because people know they'll get old and die.


Same goes for me.

Unless they believe the singularity is coming. I wonder what Kurzweil's thoughts on Bitcoin are.

Let's turn this argument upside down for a moment: if BTC price was doing nothing but falling for a month, people would be encouraged to spend their coins because they know they will be worth less in the future, so the nash equilibrium would be for everyone to spend. this means incredible amounts of investments and widespread commerce. in other words, bitcoin turns into fiat as we know it today. Not a store of value at all, but a real currency.

Does this make any sense?

Only products can buy products. The whole point of money is a medium of exchange between products (labor, food, TVs). Money has to be a store of value in order to be used later to buy a product. Currency is a structured form of money as it also needs to be a unit of account.

If the value of bitcoin kept falling it would be as popular as the Zimbabwean dollar, merchants would reject it.

What support economy does gold have? Yet it has risen continuously(in dollar terms only) for 12 years.

Unlike inflation, deflation of a currency cannot continue indefinitely.
If 1 bitcoin could buy the entire planet, i or anyone for that matter would cash out long before this point.

Did we expect the price to quadruple? If you've been hanging around these forums, many here are expecting a 10000x increase.

I was initially spooked by the suddenness of this rally without any news event until i thought about it logically, a single wallstreet banker alone could drive this rally with his pocket change, let alone a hedgefund managing billions.

Eventually there will come a price(much higher than today) when volatility will be akin to that of the major currencies.

what gmg is actually trying to say, is that your "nash equilibrium" assumption is wrong. holding or spending bitcoins is a mixed strategy. therefore, your feedback loop and whatnot assumptions are wrong and all conclusions.

Here's the problem with the 'hoarding' naysayers logic and it's another case of ignoring basic economics and mathematics all over again, in order for these 'hoarders' to make a profit from 'hoarding' Bitcoins they have to sell them otherwise all that happens is they have a bunch of worthless coins as everyone else stops playing along with their game and doesn't buy any of them. Adding to that people bitching about people who stash away Bitcoins are forgetting that you can break up Bitcoins into eight decimals as well so even if someone did somehow get there hands on several million Bitcoins and kept them from everyone ( which is extremely unlikely ) everyone else in theory could still trade with a few hundred 'full' Bitcoins in the market.

So enough with this bullshit logic, enough with ignoring mathematics and stop spamming topics about it, as for the comments about gold being a store of value? LOL! Gold and Silver were regularly used as an actual currency for hundreds if not thousands of years the only reason it has stopped recently is because banks have found it far more convenient to just print paper money and keep the Gold and Silver for themselves no one was the wiser until recently. Paper money is a fucking con, it isn't real, they were originally used as receipts for gold and silver, the real money was stolen a long time ago and digital currencies are just enabling us to take it back, with your questions about which sector is growing I suspect unless people volunteer the information to us we probably won't ever discover which sectors are growing because of course Bitcoin is mostly anonymous.

Sorry if the tone is a bit ranty but as people have pointed out there have been several topics about this and a lot of the time it's someone who doesn't understand the subject and writes bullshit as if it's a fact. >_<

No apology needed. This is a true dilemma with no immediate solution, I share your concerns.

The phenomenon of deflation in Austrian economics is a an automatic market managed correction and this is true  and fitting  solution to mis-allocated resources responsible for economic growth but wrongly used to argue the point you bring up.

The phenomenon is actually the "paradox of thrift" a Keynesian idea.

2 possible solutions (not advice but a personal opinion):

1) adjust the adoption curve to mimic that of gold (Bitcoin 2.0)
https://bitcointalk.org/index.php?topic=99928.msg1217724#msg1217724

Or

2) adjust your participation to fit the Bitcoin economic model.
https://bitcointalk.org/index.php?topic=141815.msg1512782#msg1512782

I am still very interested in understand how this will unfold
so please keep brainstorming.

Thanks for the concern.

Many times I asked myself:

How come this Satoshi guy invented such a stupid game that reward people with 50 coin for wasting some electricity do hash calculation and there are so many people become adicted to it?

Then after I discovered that FED are playing an even more stupid game called open market operation and all of the bankers are still adicted to it, I realized that Satoshi is a genius  ;D ;D

Boy am I glad that nothing can be done even if it were.  :D


As for your sophistry.. I just love Bitcoin and I also love my bitcoins, but unfortunately I can't eat them, I can't wear them and I can use them as clothes so eventually I will be forced to spend, no matter what game theory says is the smart move, I can survive holding bitcoins and so I will have to spend them. And that right there completely obliterates your delusional theory.


Btw I'd also challenge your assertions that we haven't had any good news.. We had plenty of good news: from wordpress announcement, to bitpay VC announcement, to their customer adoption announcement, to bitcoin-central announcement, to coinbase announcement, to satoshidice announcement, ect ect ect

We had immense progress and a huge amount of good news lately and you better believe we also had a huge increase in user base as evidenced by the volume coinbase is now reaching monthly or the records blockchain.info/mywallet is breaking..

"the economy will crash because it's growing too much!"

Price of bitcoin goes up because of real economic growth -> no one spends bitcoins because they'll be worth more. -> economy contracts because there is no commerce so price goes down. -> people spend their bitcoins because they'll be worth less -> [back to start]

This illustrates a control system with a negative feedback loop. This is inherently stable (control systems theory).

Deflationary spiral argument is complete bullshit invented to justify printing money to serve political ends. Deal with it.

I couldn't have said it better myself.

There are many currencies, even BTC is deflative by nature, some other inflative currency will work the opposite way, and act as a reference

+1 btw people need to eat

in the OP i talk about the effects of hoarding on the price right now, and how it may incentivize people with large holdings to trade bitcoins back for fiat in a realllly long game of hot potato instead of using them to purchase goods. this, again, is not the standard BITCOINZ GUNNA DIE CUZ DEFLATION. i talk about the bloating of the financial sector as opposed to growth in commerce, and how the bloating of the financial sector might hamper growth in commerce. if you're going to say the quoted above, post it in the other million threads debunking the hoarding forever myth.


skyrocketing demand (http://www.google.com/trends/explore#q=buy%20bitcoins) + limited supply = deflation. this is a textbook definition. this deflation is recognizable as a rate of change of price similar to price bubbles in the past, but fundamentally different (selloffs don't cause panics and are almost immediately absorbed by buying pressure, for one).

if you're trying to make a snide point about how you don't believe the present price action is due to deflation at all, then i'd appreciate that more open discussion. i think you know what i mean by price behavior: $5 -- > $25 in about 10 months.


if you didn't care at all about what other bitcoin users are doing you wouldn't be on bitcointalk discussing the economics of the system. i realize i hit a nerve when i mentioned deflationary spiral, but i'm seriously just trying to engage you guys in discussion here...

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realizing there are wayyy too many responses id like to make to quote everyone... i hope this is followable.
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gmg -- that actually does make sense because currency refers to money velocity. it is a vacuous truth, in a way.

solex -- stores of value and units of account can be conflated but are also very different concepts.

nagato -- gold doesn't have much of a support economy. it's difficult to purchase goods for gold. this is exactly the point, and why it is a good example of a medium that has shifted more towards store-of-value and less towards currency. do we want our bitcoins in vaults or do we want our bitcoins in a marketplace? also, if a single wall street banker is behind this (which unless he has a google search bot he most certainly isn't) then we are in sorry shape indeed. exploding demand + limited supply = significant deflation.

phatsphere -- there is at least one pure strategy nash, that is hoard. there are also many mixed strategies. this is true of many games but that is beyond the scope of this discussion.

lethn -- this is neither faulty mathematics nor economics. you're simplifying my argument to "EVRYONE HOARDZ FOREVER LAWLZ" but massive deflation even in the short term could set us up for a massive 'long squeeze'.

hazek -- this is not sophistry and please discuss this with me in a non-condescending way. the key here is that spending coins and selling them back for fiat produce two very different effects on the market.

asdf -- no systemic catastrophic failure, just perhaps a bunch of long squeezes. but your systems analysis is almost besides the point. how functional will bitcoin be as a currency if its growth is marked with such volatility so long after its widespread adoption? your step in the chain "economy contracts because there is no commerce so price goes down" reads a lot more tame than it would be -- not a gradual contraction but rather an extreme price correction. edited multiple times

---

TL;DR

i'm sorry the words deflationary spiral left a bad taste in your collective mouth. i actually come from an economically and mathematically informed background and would like to continue to hear your thoughts. if you guys don't think that the price behavior in the last 10 months is any cause for alarm, may i ask you why?

if you are holding significant amounts of bitcoins, please keep in mind that the market tends to minimize profits. the mechanism i'm presenting here is an eventual long squeeze.

if you don't care about what others do with their bitcoins, that is okay. but what others do with their bitcoins affects the value of your own and it might be wise to keep that in mind.

if you think that keynesian economics is merely an excuse for the powers that be to abuse the money supply, i am in full agreeance. but that belief in itself shouldn't be an excuse to develop an allergy to critiques of the Austrian school of economics.

I'm sorry this deflationary spiral issue left a "scar" on your mathematical brain but you're completely wrong on your assumptions. Free market will prove you that with enough time.

</thread>

you're stating things with certainty that you really don't have certain knowledge of. at least i'm stating my assumptions. may we discuss?

do you believe that:

a) the current rally is not a deflation event
b) these kinds of five-fold price increases will be commonplace and you'll be VERY VERY rich
or
c) you stopped reading my post three sentences in because it's obviously misguided fud and definitely not worth your time to deconstruct my argument.

if a) i beg to differ
if b) your assumptions are wrong as markets minimize such profits
and if c) why even come here at all? go throw your bits in the air around you and act smug elsewhere.

<thread>

What is your problem? You came on this board to raise an issue that doesn't exist, and which has been talked to death already. Saving (hoarding) is a natural market action when there is a certain confidence the price level will maintain. Given the built-in scarcity and the fact more people are willing to put their time and effort (money) into it then you have a steady price increase.

I'm not trying to be rude at all, only save you time, money and reputation. I don't think you go onto gold bulletin boards and tell people to stop stashing gold because they will experience some deflationary spirals. Get on with your life and start learning how markets really work.

http://www.goodreads.com/quotes/tag/free-market

Wow, they are very similar posts. But you went in to much greater detail than I did. I learned Silk Road and Gambling are the two major forms of BTC commerce though:)

Im still having trouble seeing the problem, maybe you can elaborate.

-Why cant Bitcoin be both a store of value and a currency?

-What is wrong with deflation?
Again your definition of deflation is referring to the Keynesian definition where prices are falling.
As far as im concerned, Bitcoin is still inflating and will then be stable in terms of money supply.
Deflation was never part of the design, save for people losing coins which should be minimal/0 by the time rewards reach 0.

i'm glad you think this issue doesn't exist so we can discuss our differing opinions. my problem is exactly your tone in this post. you don't mean to be rude but because you are so sure that you are correct you're hampering actual discussion by being dismissive (with comments like </thread>). one gets the same reaction going to a creationist forum and arguing for evolution. i'm trying desperately to explain that i'm not beating the deflationary spiral IN THE GENERAL dead horse, but rather reopening the discussion in light of the present price increase, which seems to me to be a deflation event. i'm not arguing against fundamentals of the free market, i'm not a keynesian, and i'm not stupid. please stop treating me as the above criteria. i mostly spend time in the speculation forum, and as such, the recent price behavior has brought some questions to my mind as it seems fundamentally different than any movement in the past two years. if you think otherwise, please elaborate.

tl;dr

the price increase looks like a deflation event, not a rally or a bubble. if you disagree with me here, please explicate.

how do you think users and markets are going to react to the 5x price increase? we haven't seen such a movement in such a short time frame in quite awhile.

thanks for taking me seriously.

bitcoin can, and has, for the majority of its lifetime, been both a store of value and a currency. the recent shift towards the former that i have perceived can be described as follows:

say you wanted to invest in shares of satoshidice. say your expected ROI is something like 50% yearly. if your expected ROI of simply holding bitcoins is 500% yearly, then it would not make economic sense to use bitcoins to purchase shares. it would make a lot more sense to use a currency that is not expected to appreciate in value more than 50%. however, even if bitcoin is expected to appreciate in value by only 45% yearly, it would still make more sense to purchase the shares with another currency, so you can get 50% returns on the shares in addition to the 45% returns on the value you have stored in bitcoins, instead of just the marginal increase of 5% yearly that you'd get from purchasing the shares with bitcoin.

example: (using imaginary currency whose value fluctuates negligibly 'stablecoin' or STC)

100 shares of satoshidice available for sale for 10 stablecoins.
at t=0, 1 stablecoin = 1 btc
satoshidice shares yield 20% ROI yearly
bitcoins appreciate 10% yearly

scenario 1:
seeing the good investment opportunity, you purchase 100 shares for 10 BTC at t=0 (remember that the BTCSTC rate is 1 at t=0)
at t=1 yr, you sell those shares for a net profit of equivalent value to 2 stablecoins (20% of 10 btc at t=0).

however, in scenario 2:
instead of purchasing shares with BTC, you purchase them with STC and keep your 10 BTC.
at t=1 yr, you sell the shares, and you also sell the BTC for a net profit of:
2 stablecoins (from above) + (1 [btc at t=0] = 1 STC) = the equivalent value of 3 STC

in other words, you lose out when you purchase shares with bitcoin because you are no longer holding the bitcoins, but only the shares. whereas in the second scenario you are holding both BTC and shares. and this is for an ROI for btc that's LOWER than that of the shares. the very fact that BTC has a non-negligible ROI creates the better economic strategy of using an alternate currency for investments, limiting its use in this respect.

---

for your other points, there isn't anything 'wrong' with deflation. that statement is rather malformed. further, it is true that there is a small inflation rate associated with btc right now. however, that is dwarfed by the large increase in demand. as the BTCUSD rate rises, the purchasing power of a btc increases compared to the proverbial basket of goods. this is the definition of deflation. there are two halves: supply and demand. the supply is inflated, and will eventually be stable, but the demand will increase until the price discovery phase is over. once this happens, deflation will stop.

in other words, the deflationary spiral i am describing is not a never-ending process that will end in the death of bitcoin, but rather a long phase of its growth that may exhibit a dangerous positive-feedback behavior that will have negative effects on the makeup of the bitcoin economy and commerce and its adoption as a currency.

Theres not many places outside the US where you can buy products for BTC. Exchanging coins for fiat and then buying things doesn't count.

If we return to a gold/bitcoin economy it will virtually kill off business growth and lead to massive unemployment etc. Mainly because companies will be unable to get financing.

You mean economy has never growed under gold standard?

Massive unemployment is caused by concentration of production into a few multinational corporations with the aid of technology advance, it is another topic. Apple do not need to finance, they hold tons of cash, while other similar companies still can not get financing since their market share is eaten by Apple

Anyway, FED will take care about that, none of BTC's business ;)

Sure, you are right that it does not make economic sense to invest in Bitcoin companies(using BTC) if you think that the currency will appreciate faster than the company. But people still invest in these companies, could they be out of their minds or just bad investors?
Its easy to forget that not everyone thinks alike. Some possible reasons why people are investing in Bitcoin Companies

1) They invested with the fiat they have (just buy btc for this purpose without touching your existing btc)
2) People don't believe BTC will appreciate faster than Satoshidice or that Satoshidice's growth will match and be parallel to the Bitcoin's adoption growth.
3) People are not sure if BTC will survive a superior crypto-currency or outlawing of the currency by nations. Yet Satoshidice offers dividends, something BTC does not, you could "cash out" every dividend if you were unsure of BTC's future. The truth is that we do not know what will happen 5 years down the road. Its easy to get carried away on the optimism on these forums that Bitcoin $100k is a sure thing that we do not see or refuse to acknowledge possible downside risks.

I have many friends in the IT sector whom ive asked whether they have heard of Bitcoin, i was surprised that most who had heard of it did not think much of it or associated it with virtual play money and brushed it off. I have a friend with very high IQ who thinks Keynesian economics is valid and that inflation induces growth by forcing people to invest instead of hoarding cash. Then again so do Economic Nobel Prize winners. I came to the conclusion that as smart as they are, they lack critical thought to question mainstream thought. They can absorb and understand all the intricacies and theories of Keynes but they lack the conviction to question if it makes sense.

Here in Singapore, ive observed that many of our top students and scholars are what i call Textbook smart. They can absorb anything you throw at them, but they can never think critically or be skeptical of the theories thrown their way because you don't score in exams by arguing with the textbook.

The point im trying to make is that as much the small group of existing Bitcoiner's see the benefits of Bitcoin, there is a very high chance that the rest of the world is not capable of doing so, thus making the $100k Bitcoin a pipe dream. After all these are the same people who voted in the very politicians who brought them their current plight.


Again you do not state how it is dangerous/negative.
Back before i heard of Bitcoin, i was less motivated to think of starting a business.
Id have to slog and take risks to earn ever depreciating currency, maybe ill just stick with my day job.
On the contrary(personally), the "deflationary" expectation for Bitcoin motivated me to think of ways to earn Bitcoin which led me to start my exchange. If i think that Bitcoin is going to the moon, would it not make sense for me to accquire/earn as many Bitcoins now? To earn, you have to serve/produce(ie start a business). The motivation to start a bitcoin business is very high for me if i know that any profits are going to grow in value.

Well said.

arepo, you are still pricing in dollars/some fiat, if you price in bitcoin, the equation may shift For example, ROI  of satoshidice should be in bitcoin terms, then no matter how much bitcoin deflate/inflate, your decsion will be investing if ROI is possitive. And Isn't stoshidice is bitcoin business that all income are denomiated in bitcoins. If satoshishare couldn't earn bitcoin in bitcoin terms, then it is not a bitcoin business model.

Assuming you only had 10 coins and you stayed with BTC for investing at the beginning of the year:
Net profit at 1 year is actually 3.2 stablecoins when you consider the BTC apprecation of 10% at the end of the year.


Assuming you only had 10 coins and you converted to STC for investing at the beginning of the year:
Your STC have been invested wisely at 20% ROI yielding you 2 extra STC in 1 yr, they would not have had the luxury of Bitcoin appreciation though...

The difference ends up being 2 STC when not investing in BTC, and 3.2 STC when investing in the BTC denominated stock.

So if you're going to buy stock, buy stock listed in BTC, not STC.

If you can't, but you know exactly what your ROI is going to be, like in this scenario, go ahead and convert because 20% is better than 10%

Regardless, your best gains are going to be from buying stock denominated in BTC...

So I suppose you could say hoarding BTC can be useless if you have something worthwhile to invest in...

Maybe that's what all these hoarders are waiting for?

twolifeinexile and thefiniteidea : I think you are missing his point. If Bitcoin's purchasing power goes up, you should expect to see a drop in the share price of Satoshi dice coupled with a drop in revenues in BTC. It is possible that you would suffer a loss on your investment in BTC terms. This should be further amplified as more competitors to SD come on board, whereas there does not yet appear to be any worthy competitor to BTC mainly because there isn't any real flaw in it and anything lacking can be built atop of Bitcoin as services(eg Facebook/email integration/etc..) and thus furthering the gap between BTC and any newcomer.

"this brings us back to a very important, and possibly dangerous, idea: the deflationary spiral. users are reluctant to sell their coins because of the idea of larger future worth (standard deflation), which causes them to hoard their coins which creates a feedback loop which increases the perceived value of the coins."

The question is: Who gets burned in the end?

Certainly not me, since im slowly selling my bitcoins, securing my gains in fiat.
Certainly not merchants who due to prices instability are converting into fiat instantly. They also dont seem to lose their customer base, since me and other people who are leaving the "hot potato game" love to buy stuff and have fun with it.

But

At whos expence we are buying those goods, services or fiat?

Hoarders? Naaaaaaah that cant be!

you're exactly right. the bagholders will be the hoarders who bank on the deflation for profit. there is a lot of greed in the air on the speculations sub. 'cashing out' i.e. purchasing things with your profits, is the smart thing to do. hoarding coins is like re-investing interest payments into a ponzi, except worse because it is a self-reinforcing behavior.

I do not see anything really unusual in current price action. This is what bitcoin was doing all along, except about one year break 2011/2012 due to market's temporarily insanity. LOL.

Sell and risk being left behind. Do you think all those who sold at 1$ ever had a chance to buy again at that price? Nope and before getting to 1$ it was at .30$. It is rather very typical not only for Bitcoin but for decent companies trading on stock market too. GOOG, APPL etc would be most recent examples. Sell GOOG for 120$ soon after IPO and you never see that price again, enjoy your 20% in a month profit and then kick yourself for missing on 6000% run over 6-8 years. Nothing new here.

My point is, that market simply punishes such disruptive behaviour, and promotes stabilisation. Losing large amount of money is one of strongest incentives NOT to repeat particular investing strategy. Im aware that bitcoin constantly attracts new people who dont get that they can harm themselfs by excessive hoardnig, but most of them will learn the lesson the hard way further or later.

Some people here argue against classic investing maxims.

"Let your profits run and cut your losses quickly."

You argue basically daytrading vs long terms investment.

Not if Satoshi Dice is listed in BTC.

If Satoshi Dice is listed in BTC, its price would go up or down based on its own merit, as most of the costs/revenues are in BTC.
Just because the purchasing power of BTC goes up doesn't automatically mean less people will gamble ;P
It just means that when they do, they risk more in terms of STC, but they are still risking the same BTC.

So BTC's purchasing power wouldn't be a factor when buying/selling stock denominated in BTC.

BTC's purchasing power would only be a factor when buying/selling STC (or stock denominated in STC as you would have to convert to STC).

I have exactly the same experience with my own friends, smart and not so smart. The nice thing about the free market, however, is that it works even if no one understands how.

If some people understand, they will be able to speculate and make a gain. The side effect of the (successful) speculation is just that the price will more quickly reach its destination.

The why this is "worse", it is self-reinforcing, then rational people would do it. I guess you are probably from a point of view of bitcoin economy development, but that is never the motive for most people here, they are just "rational economic person". And no one could /should try to control other people's motives.

Maybe bitcoin's destiny is a speculative virtual asset, not a virtual currency, maybe before becoming the virtual currency, it has to first become a virtual asset and now we are in this phase?

It is just a wishfully thinking if you believe bitcoin's road to currency would be smooth and easy.

this is probably </thread>. i'm just worried that the wave of new investors or whatever is behind this price action knows not what they do.

I read most of this thread and I had a lot to add, most of it I forgot. This is what I remember:

I've never fully understood how exactly a "deflationary event" works. The definition of deflation brought up ("increased demand + limited supply = lower prices of goods/services") makes sense. But what makes this a "deflationary event". It's just increased demand for the medium so value measured with it has a lower price. And how does "selloffs don't cause panics and are almost immediately absorbed by buying pressure, for one" follow from that. 2011 bubble was also increased demand + limited supply. Where's the difference?

Let's face it: Bitcoin doesn't really have an economy: silkroad et al just use bitcoin as a payment mechanism to transfer fiat from buyer to seller and satoshidice et al don't produce anything or "create value".

Bitcoin is indeed very much like gold. I would probably even like bitcoin if it didn't have the added feature of being useful for making payments (which gold is not). Bitcoin is unique in the sense that it has a limited supply yet can be used as a payment mechanism.

;tldr: I don't understand how "deflationary event/spiral" is a theory applicable to Bitcoin because Bitcoins unique combination of Store-of-wealth and payment functionality and also because of the lack of a real bitcoin economy.

arepo, if you want to discuss, can you answer the question(s) in the second paragraph?

what on earth is happening NOW.. why the crazy jump of 800% since about a year ago.. it's good.. but what seems to actually be driving the price up so fast lately..

You could also ask why on earth people were selling Bitcoin for 12% of its value a year ago.

I think no one here took into consideration major difference between bitcoin and fiat- fiat economy is closed by regulation and number of its "users" isn't growing much. Introducing new significant services into meatspace where fiat can be spent is hard. On the other side, btc economy is very open, there are many new people streaming in and some inevitably invent new ways for bitcoins to be spent, making large part of otherwise hoarded bitcoins circulate. So until bitcoin becomes widespread, I don't fear hoarders/deflation at all. The same incentive that drives hoarding, is also driving people who want to earn bitcoins from hoarders.

This may help you start answering the question. Add in some speculative games by professional traders:

First let me say that I didnt read all of the post, but that I agree with arepo, in fact I have really enjoyed most of his post. The problem that he is talking about relates first and foremost to price stability. I can tell from the responses that I did read that we don't have a lot of retail business owners commenting here. This price spike has pushed me right out of the market and has friends saying that they won't use it. I have a couple friends that were looking at buying and have said no way. "I feel like I am missing out on making a lot of money, but I just cant take that kind of risk" I would not even consider taking BTC as payment for my goods at this time. I simply can not take payments in a currency that is so volatile. This is the heart of the matter. If people are holding coins off the market it pushes up price and distorts the signals.  The only way for BTC to work is if it is used as money not a commodity. I find no reason what so ever to compare the two. BTC is 1's and 0's in the cloud with no intrinsic value what so ever.       

the problem is that there is little difference, but this time around, we see the effect bolded above. during the first bubble, the prices were not sustainable because the irrational bulls converted all of their fiat to btc and there reached a point where the influx suddenly stopped. this caused a panic and a huge correction, which left many, many bag-holders in its wake.

this time around, the influx of new buyers isn't slowing. people with little to no exposure of bitcoin are rushing to buy simply because the price has been going up, up, up. it's the same psychology, except the scale is much larger and the price is much higher for many more coins. smart money pulls its asks because it sees that the fundamentals are different this time around, and there won't be a huge crash. selloffs are immediately absorbed by new buyers who don't understand the risk of purchasing an asset whose price has made 500% gains in the last year.

this is going to lead perhaps not to a bubble as it did before, but a massive deflationary event that pushes the purchasing power of bitcoin far above its track for healthy growth (see the height above the SMAs that the price is at right now) and will inevitably lead to massive profit-taking, predatory speculation, and price volatility. many new investors who thought they were going to be rich will find themselves in the same position as those who bought coins at $30. the growth of the userbase is good and should be encouraged not by predatory speculative behavior where earlier adopters laugh as the new users line their pockets, but lower-risk lower-price-point profit-taking that won't introduce massive volatility into the market. the former will help the bitcoin community grow in the long run. the latter will hurt the adoption of btc in the short run.

in other words, it's short-sighted and introduces systemic risk into the community. this is an example of a nash equilibrium that leaves players worse off than if they played in a pre-coordinated manner, like the Prisoner's Dilemma. everyone would be better off if the price of the coins were growing but with less risk of suddenly crashing. at this point purchasing coins is again a very high-risk investment because users have decided to distribute risk amongst the entire userbase while they continue to play musical chairs.


don't let them fool you. traders will point to good news during rallies and bad news during sell-offs but the cause and effect is less clear. i say it's very straightforward, positive-feedback loop deflation.


thanks for the bump. the responses in this thread made me more worried than when i first made the post because of the unchecked bullish sentiment.

It is very clear to me what is happening and why it is bad for BTC. Everyone around here is wearing green colored glasses. We cant all get rich, markets dont work like that. This time is not different!! It is never different.

Oh how I yearn for the day far in the future when all of you with sophistry infatuated people will get your meeting with the cold hard reality and when this "Deflation is bad, mkay?!" idiocy will have been destroyed once and for all much like "Earth is the center of the universe, mkay?!" once upon a time was.

I really can't wait.

Yes, we can all get rich if we keep voluntarily assigning value to bitcoins in terms of goods and services we trade via Bitcoin network. If more and more people keep valuing their labor, fiat, or property in terms of bitcoins, the value of coins will keep rising. The opposite applies, too.

Foolish foolish fool you craaazzy fool. http://www.youtube.com/watch?v=pYaXFCFgMpA. A little sublime for you ass from sublime5447. With respect.

In my opinion, bubbles are not only natural in human history(Yes they occurred under a gold standard as well, though to a much lesser extreme), but also beneficial in the case of Bitcoin.

Because of the distribution model of Bitcoin, early adopters/miners of Bitcoin in 2009-early 2011 obtained a majority of the coins without having much use for them at that time. The first bubble was the only way to make them redistribute it either because of greed(on the way up) or fear(on the way down). I would never have been able to buy some coins in the single digits if the first bubble did not pop.

Without distribution of coins to a larger base, the price cannot reach stability. The more hands that hold Bitcoins, the lower the volatility will become. And the fear phase during bubble popping is the best time for large holders to redistribute

+1  That is a truly important observation.

i would expect a moderator to take discussion more seriously than this. i tried to address your point and present a more nuanced argument than 'deflation is bad'. in fact, i would easily disagree with that statement myself. look! we're in agreement!

if you actually took the time to read past the OP, you'd see i fear the long squeezes associated with too-fast growth driven by the new masses of uninformed speculators, not deflation.

you might as well be a republican screaming about how i hate america.

That's because your mind naturally appeals to authority and you haven't yet learned to restrain that appeal and listen to logic, reason and empirical evidence above else instead.

My role as a moderator should lend zero credibility to my posts. All my role is is an authority on which posts follow the rules of this forum and other things related to rules and operations of this forum (two sections only anyway), that's it. When my posts aren't about that, me being a moderator has absolutely no relevance. None what so ever. I'm just an ordinary poster like yourself and my post should be evaluated by everyone through the use of reason, logic and empirical evidence whether or not they make sense.


Believe it or not the issues you raised have been raised so many times already that I seriously doubt you bring anything new to the table and even if you do, you are wrong. Not from an economical perspective but from a technological and philosophical perspective. In case you didn't notice even if you have a valid concern and a valid proposal, Bitcoin's rules can't be changed. So if you think it has a flaw I suggest you take the open source code, modify it and start your own alt cryptocurrency: https://bitcointalk.org/index.php?board=67.0 Because other than that no matter what you say or how much sense you make, for better or for worse, Bitcoin is what Bitcoin is. Take it or leave it. It's up to you.

i would think it's rather because i would expect any poster, at all, to take this discussion more seriously. but having been shouted down and flamed for alternatively beating a dead horse and hating bitcoin, i've lost a little faith in the spirit of open discussion that moderators like yourself try to encourage.


again, it's not about the fundamentals of the bitcoin protocol, OR any fundamental problem with deflationary currency (https://bitcointalk.org/index.php?topic=142280.msg1531565#msg1531565). try again:


it's about bad behavior. we all agree that ponzi schemes are bad behavior. why is it so difficult to see why this, too, has a negative impact on the adoption of bitcoin? this is all i've been trying to say this entire thread.

http://mises.org/daily/6362/The-Deflationary-Spiral-Bogey

Because it makes zero sense: Hey people, we have a problem!! Many people will want to use Bitcoin so bitcoins are going to become very valuable therefor no one will want to use it!!!11

I mean, I don't know what more to say to this.

quote from the Porsche Cayman selling thread:


Maybe people just don't want a Porsche currently as badly as the politicians crying for the economy to revive would like?

Maybe we're currently still producing much more stuff than needed.

http://www.dupagemamas.com/wp-content/uploads/2010/03/TooManyToys.jpg


from above link:


Oh my god! It's harming the holy company sales. Quick, DO SOMETHING!

Do we want:

• constantly growing economy

or

• happy people

I think if we want the second option, the first one is not necessarily a way to achieve that. Maybe we should start thinking more fundamentally about what role "employment" plays or should play in our society.

I remember as a child I didn't understand why everybody was so keen to have employment. It seemed to suck to have a job. It was explained to me that it was about the money. Actually nowadays I think it's about security. People are afraid of not being able to live well and support a good life for their family.

In a "deflationary spiral", it's suddenly possible for people to actually save money. They might decide to work for 2 years and then take a break and see the world or spend more time with their loved-ones for a year or two. They will still buy food, shelter and airplane tickets and at the same time make room for someone else to earn some money.

I know people will probably call me naive and tell me it's more efficient to invest into one employee and suck the life out of him than to educate two of them.

I still think using "sound money" will change a lot of things in the minds of people and it's the way to go.

;tldr: "The economy must grow" <- I'm sick of that shit. In a deflationary spiral "the economy would grind to a halt" <- I seriously doubt that.

FTFY. you continue to respond to a point that i'm not making, and ignore the one that i am. i don't really know what more to say to this.

try again? reread the post i linked last. seriously. i don't even mention the words deflationary spiral. it's all about bad behavior. please, please, please put the effort in if you're going to post again. otherwise just don't bother.


i know the OP is about this. but the discussion has moved way past this dead horse. no one is arguing that the economy will grind to a halt... i didn't even say that in the OP. i referenced the mechanism of the deflationary spiral as a way to explain recent price rises. i feel it's also an example of predatory speculation, which will lead to newcomers having a bad time.

@OP
You are falling victim to a flawed logic: the deflationnnary spiral can only happen when people are using a single currency.
When they are several, competing currencies, why would the economy come to a halt because one of the currencies is emerging as more valuable than the others?
The deflationary spiral is a problem for a monopolisitic currency because all prices are denominated in this currency.
Also, the deflationary spiral is a problem for economists who advocate unlimited money supply growth and unsustainable development: if the money supply grows exponentially, they need more consumer spendings just to keep things afloat.

Bitcoin prices are always and will always be displayed alongside other denominations. If people see the euro price of a computer is stable while the bitcoin price is dropping, why on earth would they think that the computer is getting cheaper ?
People are not stupid: they will simply realize bitcoins are becoming more valable against the euro.
So people will not postpone their purchase of the computer based on future price expectations.
They will part with their savings (in bitcojns) only if they need the computer now.
Bitcoins are no different from an investment in a stock with high yield, high liquidity.
The asset underlying the value of the stock is an internet transaction processing network: the valuation can be measured against other transaction processing networks (check the stock price of Visa Inc). There will be no more than 21 million shares outstanding.
Who can reasonnably say that a high performance stock can trgigger a deflationnary spiral ? This is silly.
Bitcoins are not meant to replace other currencies: bitcoins welcome competition because bitcoins are made of a better design..

Then could you please explain to me what the intrinsic value of a rembrandt painting is because its worth $30millon dollar..??? That is only some paint on some paper isn't it??

Hm, this is a better example than the gold I usually bring up that seems to derail people or make them emotional to the point where the rational mind is being switched off.

Clearly famous paintings have moneyness also. It is a safe haven for saving, when money are worthless and other investiments risky.

Limiting the total supply of bitcoins was a stroke of genius from Satoshi.

• It provides an incentive for early adopters to mine the currency, thereby fueling it's adoption
• It will probably make Satoshi extremely rich, perhaps the wealthiest person to have ever lived on this planet
• It won't have a serious effect on the use of Bitcoin as a currency, since merchants can simply choose to have all incoming bitcoins automatically exchanged for fiat, thus limiting the volatility risk, and users of the currency can always choose to buy more bitcoins to replenish the ones they've used to buy stuff
• The most important reason of all: if the supply of bitcoins wasn't limited, there would remain a serious risk that an alternative currency would take over, since it could be a better store of value than the ever inflating Bitcoin

I agree. Well said nagato... well said.

If that's your largest worry, then you're better off investing in improving the Bitcoin infrastructure or providing a good/service.  You don't need to hoard Bitcoin to be part of the economy, be the casino and not the gambler, if you will.

What we see is nothing but  Gresham's law: http://en.wikipedia.org/wiki/Gresham's_law

People hoard good money and spend bad money.

This is deflationnary for BTC  but it does jeopardize its currency status.Eventually BTC will reach an equilibrium for its value. Similar things did happen historically at the moment when bimetallic standard were in place.

Furthermore, this has been addressed in many places by competent economists, and the people who start these kinds of threads are rarely familiar with the arguments against their ideas, and they never address them.  No homework has been done first.  People just show up and claim they are seeing something that nobody else is seeing, and then get upset and call names when noone agrees with them.  And my ignore list just grows.

This sums it up quite well for me.


how would an equilibrium be reached when the gold/silver ratio is fixed at an arbitrary value and the market disagrees? Can you point me to some such historical event?

In the wiki you have an introduction to bimetallism and some historical events: http://en.wikipedia.org/wiki/Bimetallism

Eventually the evolution was towards the gold standard in the XIXth century. When Gresham law acts, the equilibrium is reached by the non-circulation of the good money. The same may happen for BTC...and there is nothing wrong with this...A BTC would be like a 400oz gold ingot...

yes, you're right, nothing wrong with that.

Of course a BTC has better properties than a 400 oz gold ingot...it is divisible at no cost...and may be moved at no cost...and it is securely stored at no cost...

hazek's recaps of 'my argument' have consistently been strawmen. i'm convinced he doesn't even read what i write. there is some predatory speculation going on right now, and it's being fueled by the sentiment that bitcoin is supposed to go up, up, up. this kind of behavior scares me.

he snipped the quote in just the right place to make it look like i've been beating the same old deflationary spiral dead horse. and it makes me a little sad that you're assuming all of these things about me just because i've taken an unpopular opinion. it's dangerous to tend to think that people who disagree with you have rarely done their homework.

i also probably don't even disagree with you. deflationary currencies are perfectly fine, no fundamental problem about them. this thread was in response to the then 500%, now 600% growth in the price in the past 12 months. this is unprecedented since the early deflation rallies from pennies to dollars that led to the bubble.

to recap better, i'm trying to say: SOMETHING'S GOING ON. i have a negative feeling about it. if you have a positive feeling, please share here.

thanks :)

arepo, I have taken your concerns seriously and I thought about them and what others had to say here in this thread. I came - for myself - to the conclusion that your concerns do not have much substance.

I'm not blindly saying "all is good, enjoy the ride": there will be volatility, also to the downside.

I don't buy the "predatory speculation" explanation for the rally. Other simple fundamental reasons (like tons of people discovering bitcoin and businesses entering the game) seem more likely to me.

Neither do I think a "deflationary spiral" would happen or is a bad thing in general. I don't think it's currently applicable to bitcoin.

;tldr: people listened to you but noone got really scared.

Yes he is right, I didn't read practically anything he wrote but the above response sounds pretty much what I'd answer with if I had read it all.

The thing that most have a hard time grasping is that when I examine markets I always put ethics first. I.e. the individual having the ability to do whatever and if this means being clobbered in a manipulated market, then so be it because he will learn from it or go extinct and if he learns from it he will be better of next time. So I really don't care what monsters you can find in a market regulated strictly by consumption i.e. in a free market.

oh btw: thanks arepo for voicing your concerns. I really appreciate it.

It's probably not easy as a bear on these forums. Keep at it, we need the bears to keep us sane!

Bitcoin do have cost, and huge cost -- the ever increasing hashing power and that power need return....

Don't saw me down at the ankles if I'm wrong but isn't this just proof of the difficulty/price coupling?

We know for sure that if the price goes down the difficulty goes down (GPU miners stop mining)...

What if the price is decided by the miners that only sell to a high price point to be able to continue mining?!

If this is true, ASIC's will lower stabilize the price once they kick out GPU's because the electricity bill will be lower for miners.

What do you say?

Edit: I think the rush is ASIC fueled = raising the price to what it needs to be in order for ASIC to be barely profitable keeping the mining going...

Basically making this a reward drop + ASIC effect

I can't help it if you can't read properly.

--> Bitcoin is divisible at no cost, dividing gold has cost (split a krugerrand and try to sell it, you will then understand what I mean)

--> Bitcoin can be moved at no cost, transportation of gold has cost in security measures (see the recent gold repatriations...)

--> Bitcoin can be securely stored at no cost, gold needs vaults and expensive security measures.

On the other hand the cost of hashing will be largely covered by fees...which are much cheeper that any bank fee...

arepo, your deflation assessment is true in most parts. If Bitcoin someday does not have any benefits over other currencies or becomes the only actively used currency, I believe it will succumb into a deflationary spiral.

You, however, are way, way ahead of your time looking into signs about this happening today. BTC is nowhere close to being an established major form of trade, and before it gets there, BTC follows a completely different set of rules.

Also, the other *very* important point your assessment doesn't take into account is the benefits that Bitcoin has as a form of payment over other currencies. The anonymity, protection from hostile regulation, lack of fees and possibility of instant peer to peer global transactions make it very desirable to do trades with. As long as other forms of doing trade are less desirable / not viable for certain transactions, bitcoin will have parties interested in using it for transactions and will be widely adopted as a payment method. Even though the price of Bitcoins goes up due to scarcity, you still need to make transactions to consume or do business, and you tend to pick the form of trade most suitable for those actions whether or not holding the currency in question is also a good investment. This is easy to understand by thinking what you would do if you only had bitcoins and no other possession worth of any value.

Final point that I think you are missing is that it's extremely easy to create new cryptocurrencies. Should Bitcoin's value skyrocket so high up that trading with it doesn't make any sense, people start to move to another similar currency that is more hospitable for trading, because at some point the inertia of changing currencies becomes smaller than the difficulty of doing business in the current one. This in turn will put a downward pressure on BTC's value, and in the long run these two (or more) currencies will reach some sort of a balance.

Yep, we do. Cheers Arepo

I continue to hear this argument and don't understand the logic. It takes a significant amount of time, effort & more importantly infrastructure, to come close to competing with another currency. People will not start using ltc (or some other currency which does not have a significant advantage over the existing one) simply because btc is priced too high. There is simply to much friction stopping its adoption. The only reason btc is taking off now is because there are so many advantages to the existing currencies, it has nothing to do with the price.

Yes, yes and yes. It takes a lot of effort to compete with another currency. That's why there won't be a competitor to BTC in a long time. But if far into the future BTC is the only currency that we trade with, there will be demand for another competing currency. Should this happen, the relative costs of setting up a new digital currency are miniscule. This should be pretty obvious.

You should re-read my post, I never said that the price of BTC has anything to do with it's popularity right now. The price of BTC is just an arbitrary number, it only becomes relevant in the case I mentioned above, where BTC would be in an uncontrolled deflationary spiral.

got that right :P

but the appreciation is appreciated ;D

What is the percent of fees per block?  Tiny.  The vast majority of 'profit' in mining right now is the block reward, not fees.  As the block reward goes down, fees will need to climb.  You can argue that costs for mining will go down because hardware gets faster, but you'd be wrong.  Its the same reason the price of computers haven't really changed.  There's a certain cost to keeping the technology "current" and you can't get around that.

Not no cost.  There is always a cost to someone, although not necessarily to yourself.  Someone bears the cost.  Presently that is the miners.

If gold leads to no new investments why wasn't mankind still stuck in caves hoarding its gold for 6000 years ? After all why move out of the cave and into a house when your gold will be worth more tomorrow :P

Fees havent yet replaced the missing 25btc from the recent block halving.

When I first made this post, I had not even yet dreamed of $150 price swings in the bitcoin economy. My only hope is that the discussion helped others dream of just that this past week, and protect their money with stop orders and smart speculation. This is what happens when deflation gets out of hand. I hope that this correction helps return us to the new normal and we see healthy sustainable growth from here on out.

As I argued on page 1 until we have saturated adoption, a relatively even distribution, and a free market we will have volatility, if you don't like volatility you need to find a P2P crypto currency that distributes coins something similar to the rate of adoption. Volatility is a result of uneven distribution.

Stop orders and forced liquidations are a large part of what drove price down to $2.xx in 2011. But that's just part of it, I guess.

is it too soon for i told you so? ::)

Based on your argument, an "I told you so" would be fitting when we hit the utility value based on Bitcoins equivalent M1 to GDP - I estimate it would be somewhere between $2 and $20.

"I told you so" before that point might appear as if you are giving credit to the current price being the bottom based on your argument. 

I'm still bullish as it looks to me anything above $17 would suggest evidence that Bitcoin is being used as a store of wealth, and if that is the case it is all about confidence in the world in Fiat and the benefits Bitcoin has in being a finite P2P cryptocurrency and its first movers advantage.

The bottomed line is the Bitcoin economy won't grow at a viable pace if people are saving (Unfortunately this is a design oversight), and people will save while there is deflation, I'm no Keynesian but as discussed a lot in previous posts Bitcoin as a medium of exchange will suffer from the paradox of thrift. Bitcoin has properties that make it the new Digital gold, or a store of wealth, and it is here I think Bitcoin has great growth potential.   

As usual I think the intellectuals in the community are over analyzing what is clearly a (Sling Blade reference) "It ain't got no gas in it"

It's only being used as a store of value because -> Merchants at large don't take it.
Merchants don't take it because -> the currency risk associated with a volatile commodity with no instant means of transfer into the fiat of your choice.
There's no means to transfer it into the fiat of your choice instantly because -> IT GOES AGAINST THE PLAN MAN!!!

In the end for bitcoin to move through this growing pain and reach adolescence someone (possibly coinseter.com) will have to give merchants the security of knowing they can instantly exchange the bitcoins received into fiat in their bank to pay overhead. At least until it reaches adulthood and they can pay their expenses in bitcoin.

i don't think we've bottomed out yet. but we're definitely within the range of sustainable price again. we shed 80% of the value of one coin in 3 days. that's completely unprecedented. it was all just some stuff.

before this the largest collapse in value was after the June bubble, which collapsed by 90% over the course of months. the 'i told you so' is because this was very, very irresponsible and we brought it on ourselves. also because i got shouted down these past 3 months, when i was talking something like sense the whole time.

I don't think a panic driven by infrastructure issues should be called a bubble though. Bubbles pop because the groundswell behind some fad can't be sustained due to internal factors in the supply and demand curves.

This was a panic plain and simple. The second in several weeks that we have MtGox to thank for yet they still haven't fixed their massive trade lag. At the very least if they can't fix the lag they should code in stop-loss orders to ensure users won't have losses due to their server insufficiencies.

Oh so the ability to change bitcoins to dollars instantly ... If only we had some sort of "bit pay" system ... Oh wait ... So what was the problem again?

bitpay.com

and many other competitors in america and europe already.

I dont have any idea why I keep hearing this "volatility is bad for merchants" argument over and over again.

All the bashing on the hoarders...

that would've made the crash even harder. Wether that'd have been desireable I'm not sure.

Not to derail the thread, but who is/are the Europeans doing this?

What a bunch of bull you cant believe this right?

http://paymium.com/ among others (links I cant remember at the moment)

The problem with processors like bitpay is two-fold. First and foremost it's a third party risk as to the exchange rate fluctuations. By that I mean that this is a volatile market if I take a bicoin payment and the price drops 30% in a day I would potentially lose all my profits on items sold that day as the third party processor exchanged my payments for later deposit into my fiat account. Worse yet there is the chance that a processor could use their capital to "float" the payment to me at a lower exchange rate holding on to my bitcoins untill the market corrected and making a profit at my expense. Next there is the fact that avoiding processor fees is the whole reason to switch to bitcoin in the first place. If Visa and MC charge 2.5 to 4.5 percent depending on the card and the transaction and bitpay charges .99 as it's lowest rate what has the merchant really gained by switching? At that point his only gain is avoiding chargebacks from contested charges and fraud.

When I say the market needs the ability to transfer payments instantly I mean that I need to be able to (if I choose) transfer the overhead portion of my bitcoin income into fiat in my bank account at the exact rate I accepted it at. In other words John Q buys a desktop computer from me for 12 bitcoins and the exchange rate is $100 per at the moment of the sale I need to be able to rout his payment to my exchange account sell the 7 or 8 bitcoins to cover my expenses and have that money in an account that I can make payment to my supplier within the hour. I would want to have complete control of the remaining bitcoins that were my profit so that I could choose to liquidate them or save them for a better exchange rate. This type of control without a third party is the only way small businesses will see the upside.


As to the assumption that stop-loss orders firing automaticly would have made the crash worse than it was I think you're forgetting the fear factor. People don't panic if they know they will be able to sell their bitcoins at the rate they want to (or at least close to it, I'm sure there would have been some slippage) The reason for the crash was panic due to falling prices and more than a minute of lag all day. You have to remember the herd mentality of an exchange. One person getting scared and clamoring to sell will only spook the other investors if they are:  1) already afraid 2) convinced this person knows more than they do 3) fearful they won't be able to place their trade at their risk tolerance level once the frenzy starts. If you have a stop-loss set up you don't have to panic, if no one has to panic, the market doesn't have a panic-driven rush to sell.

Are you saying merchant have nothing to gain from cutting one of their expenses (one of the biggest in some trades) by 60-77%? That sounds like pretty big savings to me.

Cool, so we get to keep the increasing value of the currency as opposed to having the central banks siphon the value out of the dollars in my bank account? You feel more comfortable with the idea of your money losing value so you have to spend it right away?

The only reasons I'm not using my bitcoins thus far

A) I'm not being paid in bitcoins

B) Few are accepting them directly.

I'm not converting to fiat and back just to dip into my holdings. As soon as I can just do away with handling fiat and pay my rent in btc I shall do so.

When it takes off with gusto in 2014-2015, then I'll be using them as currency instead of just holding them

And they are not going to start accepting them.. they cant. It is not currency it is an asset but what kind of asset is it? 

An asset is something that generates value to the owner by some other method than speculation.  Bitcoin does not do that, it represents value that can be transfered, but cannot produce new value.  Bitcoin cannot ever be an "asset".

What about as a means of transferring money for less than a bank would charge?

That's savings, not new value, more commonly known as "income".  Of course, unless you're renting it out, real estate doesn't qualify as an 'asset' either; so this is another one of those economic terms that have a bit different common usage.  If you have a mortagage, your home is a 'liability' not an asset.

An asset is something that generates revenue, bitcoin does that. A stock is an asset and is speculative for the most part people invest in stocks for capital gain, but that is fine if you want to call it a commodity instead of an asset so long as you dont call it currency which it clearly is not.

Bitcoin does not generate revenue.  Bitcoin goes up and down in market value, that is quite different.


While a stock is often a speculative investment vehicle, stocks are (at the core) contractual evidence that you own a definable piece of a business venture; which (presumedly) exists to turn a profit.  It's the profit that makes the stock an asset, not it's speculative nature.


Nor is it a commodity, because it has no non-monetary utility.  No one desires to aquire bitcoins for their own sake, but to spend or sell them at a later date.  You can't really do anything else with them, at least not yet.  (Colored coins might change that analysis later)


Bitcoin is a currency, as I noted in the "bitcoin is not a currency" thread on several occasions.

Bullshit!

Just because you say it, does not make it so.  Challenge my reasoning, accept that I'm correct, or fade away.

The major effect deflation will have on BTC is price instability.