Bitcoin Forum

OK - I can't stand it anymore. I have to let you guys know why I think bitcoin price increases are just getting started. I think my logic is best described in this IM conversation I had with my best friend:

Friend: So what is the economic reasoning why this stuff should become super-valuable?
Me: Well, there's this: http://www.google.com/search?tbm=isch&q=drug+money
Me: That will probably always be a big part of it, because it has all the advantages of cash plus a lot more
Me: The main reason though, which I haven't told anybody except my wife, and that only briefly, is that it is the perfect commodity for trading stocks, bonds, commodities, options, etc.
Me: It won't be legal, but I guarantee it will happen
Me: There are TRILLIONS of dollars in those markets
Me: But only 21 million bitcoins
Me: You get some percentage of that moving to bitcoins, and the math is easy
Me: Plus, of those 21 million bitcoins, most of them aren't for sale
Me: So if billions of dollars of ANYTHING moves into bitcoins, their value will be much, much more than billions of dollars
Me: Depending on how you do the math, you can come up with some pretty absurd future values
Friend: Why would someone start trading in stocks/bonds/com mod,
Friend: In a currency that may magor-inflate?
Me: Well, there are some trades you just can't make right now.
Me: For instance, there are no futures or options for many smaller stocks
Me: Remember when I was interested in penny stocks? One of the biggest problems with trading them is that there are never enough short-borrows available, so even though you KNOW a stock is going to crash, you can't profit from it
Me: Also, there is always insider trading. That's why this stuff won't be legal
Me: I know my stock is going to crash because I spent all the money on hookers and blow, so I short it on the bitcoin black market
Me: Completely untraceable insider trading profits
Me: I'm confident that billions of dollars are going to move into digital currencies like bitcoin. The main risk I see is that a different digital currency will take it's place. That would make bitcoins much less valuable, if not worthless
Me: Bitcoin price instability is one of the biggest reasons this sort of thing will be hard to do, but there is a solution for that as well
Me: You can "short" bitcoin to equal the amount of bitcoins you are holding, so that you are neutral to any bitcoin price swings. You can do something like that with only a small amount of bitcoins using options

Note for posterity: current bitcoin price is in the $5-$6 range after a big run-up.

I think it is appropriate that this is my hundredth post :)

Edit: Since this thread is now my signature, I want to include my official bitcoin predictions I made in another thread before starting this one:

Edit 8/11/2011: My proposal for "the ticker and the hole" is quite possibly the way this will happen: https://bitcointalk.org/index.php?topic=36453.0

Edit 4/2/2013: I now have much more sophisticated ideas about how bitcoin will achieve stability (see my signature). Bitcoin cleared $100 yesterday, and I'm reviving this thread in which in 2011 I predicted wild growth ahead before even the first bitcoin bubble. Note that the arguments above are no less valid today!

Interesting theory indeed...

So essentially, big-time investors would use bitcoins to make insider trades, and that's what would make bitcoins worth a bunch of money?  Doesn't that mean bad news for corporate America?  As in, any big-wig could ruin a company while cashing in on it at the same time?

While I am excited by the prospect of bitcoins being worth more money down the line, I don't want to see abuse of the stock system.  That could mean an entire economic collapse if enough top executives decided to do something like this and ruin enough companies.

Insider trading is a good thing for the bitcoin economy because it means accurate information about companies are flowing into the economy.

It also means that people who can manipulate a company in a bad way for their own gain has an easier way of doing so.

I am all for accurate and transparent information, but there are good reasons that insider trading is outlawed.

Not just big investors. Have you ever tried to trade stocks? It is a royal pain to get set up (they want to know everything about you), then you pay several dollars MINIMUM for each trade, and then if you are lucky enough to profit, the government taxes you.

Bitcoin solves all of those "problems".

I also don't like insider trading. I just know that like the drug money, it is inevitable. And I plan to profit from the resulting increase in bitcoin prices.

Good point about the fees.

I've always wondered why someone didn't create an online stock exchange that was made "for the little guy".  A place that pretty much just accepts any legitimate company that wants to go public, and allows anyone to trade with just a small percentage fee.  All done through a web interface with no stock broker middleman.  Sounds like a good idea to me...

I know Ubitex is attempting to head that direction.  It's not intuitive to use through the command line interface though, and most people "wouldn't get it".  Something with a GUI and a simple way to buy/sell could go like hotcakes in exactly the way you describe.  The hardest part would be getting some decent companies to register with the exchange.

You never need any companies to register with a new exchange. You just need a way to speculate on existing companies. IE I bet the price will rise, you bet it will fall.

The most important thing missing from bitcoin right now is a way to create transactions that are dependent on an external variable (like what a certain stock does tomorrow).

The second most important thing missing is a way to advertise that anonymous person A wishes to bet on such a possibly-illegal external variable.

Stock trading in a separate bitcoin black market would definitely affect the real markets, because real traders will see a price difference between the real markets and the black market - if google is trading at $1 on the black market, they will buy google on the black market while shorting Google on the real market, then they will collect the difference. This kind of risk-free profit is called "arbitrage".

Ok, makes sense regarding speculation.  I'm not terribly knowledgeable on stock exchanges, and I obviously still have things to learn.  :)

That's what a speculative exchange would solve though, right?  As long as you thought the price would drop, and someone else thought the price wouldn't, then you can go ahead and "make the bet" about it.

I want what he's smoking  ;D

Interesting, so you're thinking something along the lines of an Intrade for bitcoin that could effectively substitute for shares of a company stock. I hadn't thought of that. Definitely could work, but we seem a ways off from something like that.

Yes, but think bigger. If I can place a wager based on any external variable, I can not only speculate on stocks, I can also speculate on sporting events, political races, and anything else that people want to bet on. All I need is a counterparty to take the other side of the bet, a trusted mediator to hold the money, and a way to advertise my bet so that my counterparty can find me (and so I can see other people's advertised bets).

This could literally be as simple as:

1) A few trusted forum members offer to hold money for any bet and dispense it to the winner
2) Some people start advertising bets (and who is holding the money) in some public place that can't be easily censored or taken down (i.e. TOR or Freenet)
3) Counterparty finds bet they want to take, sends their money to the mediator
4) Mediator dispenses winnings according to the advertised terms of the bet

Not much needs to be built that doesn't exist already.

Also, you're definitely right about the drug money. Although I know the community doesn't like to trumpet this potential...

"A report said the global drug trade generated an estimated US$321.6 billion in 2005."

http://en.wikipedia.org/wiki/Illegal_drug_trade

1% of this market would easily put BTC/USD into the hundreds of dollars, maybe surpass a thousand.

Didn't someone just announce a website to do exactly that with bitcoins a few days ago?

Please post a link. I think maybe you are talking about the bitcoin stock exchange?

I glanced at that site. Looked like they were going to start a stock exchange where companies register and are traded in bitcoins. That may be a good idea, but it is not at all what I am imagining.

You're imagining a predictions market almost exactly like Intrade, except it will allow all predictions including company-specific (something Intrade does not allow). I think it's a good idea.

Yeah its called BetFair

we just need a BetFair for bitcoin ... anybody can be the book and anybody can be the punter.

Ah - I thought InTrade was just another stock trading platform.

Yes, that is exactly what I am talking about, EXCEPT it has to be decentralized somehow (like the informal system using mediators I described above) or hosted anonymously (like the silk road).

Regardless of HOW it happens, the important thing is that it WILL happen. Whether it happens with bitcoins or some other e-currency is anybody's guess. Still, I ain't selling MY bitcoins :)

Oh, and by the way, there is a huge first-mover advantage to the first system set up to do this. Once people are trading somewhere, it can be very hard to start a competitor (think of ebay's 9% fees versus all those free auction sites).

And . . . go!

Good reason to think so if you ask me.  I think though considering the very small size of the bitcoin economy, how well it seems to work and the lack of any good competing service that the legitimate business could have just as much value to offer.  The really big one in my eyes is what happens when an online retailer like Amazon realizes how much money they can save not paying Visa MasterCard for every transaction.  I suspect that so long as no fatal flaw is found online stores will gradually notice and accept the coins starting with the small stores we see now and progressing slowly upward as larger operations realize the potential savings.  This is also what really needs to happen to keep bitcoin from being a legislative target.  Visa/MC/PP are big, but if enough people are making money in bitcoins the greed will keep it safe from big brother.

Imagine what would happen if Amazon were to offer a 1% discount for using bitcoins, and just .5% of it's $36billion revenue started to come from bitcoins.

Or it could be a market along the lines of an insider information market ... like the CIA might be interested in trading secrets upon ... (really?, yep) or industrial espionage or really dirty political secrets are traded .. like a morph of wikileaks and bitcoin

impatiently waiting for billions of something to move into bitcoin

One of the important concepts of a predictions market is that it incentivizes the sharing of information. This can be used maliciously or benevolently, but in my opinion, sharing information is a net benefit. Imagine if there was a predictions contract stating that a large scale terrorist attack would be attempted in September of 2001. Game theory comes into play here, all you need is one person with knowledge of the attack to defect and cash in by buying the contract. The price would rise, and information would be gained by the community that could be used to prevent the attempt from succeeding.

Very good point. And if you were such a terrorist, wouldn't you rather cash out in a completely untraceable anonymous currency?

99.9% of the time when people are speculating that such-and-such asset might be worth an absurdly large value, the price spikes (like bitcoins are), but then reality sets in and the price settles back down (you can learn all about how this happens with penny stocks from Timothy Sykes).

Most of the time, the boosters of the asset have their heads in the clouds and are ignoring important key facts.

With bitcoins, I keep running the numbers, and I keep calculating absurd values for what bitcoins could easily be worth someday. But everybody on the forum who suggests that these values might really happen seem to be nutzo government haters who only keep dollar bills for toilet paper.

I keep wondering: am I the only sane person who thinks this could actually be massively successful without requiring a doomsday scenario?

The idea of a totally anonymous decentralized currency immune from government shut-down seemed pretty far-fetched to me a few months ago. What stops the same principles from allowing anonymous prediction markets?

We should engage in a predictions contract regarding this.  :)

I will if I can find it.  It wasn't the bitcoin stock exchange.  It was definitely along the lines of what you are describing - basically, contract betting.

I guess I don't quite understand how this works.  If someone bought a contract saying it would happen, because they had knowledge of such an attack, then why would they release the information about the attack before it happened, foiling the plans of the attack and losing the bet?  What am I missing here?

It would not be Osama Bin Laden that would bet on it, but his housekeeper who overheard the plan. She would bet big on a terrorist attack happening, because she doesn't care about Jihad and she sees a way to make some easy money.

There is a good chance her bet would NOT foil the attack, because she would not give specific enough information, but her employer would definitely not be pleased if he found out she was doing this. The CIA on the other hand, would be pleased to have some intel on when an attack might be happening.

Even if the terrorist did bet on he'd be warning us. And even if he pulls it off anyway, he only wins money that people bet. Winning a bet would probably be the least bad thing the guy did in the day.

The bet is on the attempt, not the successful execution (in this hypothetical). Imagine the contract states a payout of $10 if the prediction is determined to be 'true'. It pays out $0 if the contract is determined to be 'false'. Therefore, a price of $5 is essentially telling the world that the market believes there is a 50% chance an attack will be attempted. If you know for a fact that an attempt will occur to a confidence of 99.9999% probability, then you stand to make a LOT of money by buying as many contracts as possible, therefore raising the price to $9.99. This effectively tells the world that 'the market' believes there is a 99.9% chance an attack will occur. Of course, it is a double edged sword. It also means a person can gain from buying the contract first, THEN having someone else orchestrate an attack, in order to profit.

Yeah, know a good market where I can find such a contract? Or derivative upon the derivative perhaps n^3?

That reminds me of another IM conversation I had with . . . somebody else:

him: on December 21 2012  is the day everyone will become aware.
me: aware of what?
him: UFO's are here, and always have been.
me: Interesting prediction
him: I don't think its a prediction.
him: its pretty well set in stone.
him: no pun intended
me: Do you think that on December 22nd 2012, I will believe that "UFO's are here, and always have been."?
him: I would bet my life on it.
me: Wow. Forget betting your life. I wish there was a way to bet money on it.
him: I guess we'll have to bet on December 20th.
him: 2012

I sure hope there is a predictions market running by then.

A fool and his money...

Interestingly enough, I just came across this one Intrade:

http://www.intrade.com/v4/markets/contract/?contractId=745538

Ahhh, that's the missing piece of the puzzle - the bet is on the attempt, not on it suceeding!

I realize that one could also bet on an attack succeeding, but they wouldn't want to give away ANY details about it if that were the case.  Maybe, "A terrorist attack on November 13th, 2011 in America".  It wouldn't give away enough information to stop whatever would happen, but would be specific enough to place a bet on.

Of course, anyone who bets on something like that with the knowledge that human lives will most likely be lost if they do not give the information out to the proper individuals is a sick person indeed...

Intrade has a new look. Wonder when they'll get a new currency ;)

Why would mobile phone users use an alien currency when they could use their native currency tied to their pre-existing checking account? (keeping in mind the average consumer dosen't care much about anonymity or ending the fed)

 For years there's been speculation that cellphones could replace debit/credit cards but it still hasn't taken off.

ok so i realize this is my first post, but I was ( and am still trying to figure out why i don't have a has rate appear on my bitcoin program)
but why not set up something based off of current market information that's used everyday for real stock exchange to trade "virtual stocks" online. they could have the same volume listed and go for the same price, only difference is you wouldnt actually own a piece of the comapny. the value of these stocks would be given the same way value of the bitcoin is given, by confidence in the trades themselves. idk just a thought.

http://en.wikipedia.org/wiki/Bucket_shop_%28stock_market%29

Because other people whom those people want to deal with are already using Bitcoin.

try ubitex.org.  pretty easy to me.

we do have a stock exchange:  GLBSE and we have stock to trade Ubitex and Dishwara

And that is awesome, but as I mentioned earlier, this is very different from an anonymous predictions exchange.

Consider the uses:
  - I could bet that bitcoin won't be on the front page of the new york times this year. Somebody at NYT with the power to make it happen could take the other side.
  - I could bet that a certain Libyan dictator won't be assassinated. His housekeeper could take the other side.
  - I could bet that a thousand shaved monkeys with bitcoin tattoos won't invade the white house lawn

You get the picture. Obviously an assassination market could lead to some very bad things, but that would be unavoidable in a decentralized unregulated market.

If Google starts using BTC as currency for the Android market, it's likely that a good part of the forum users here will have the money to buy a new PC, car or house depending on how early they entered. ;)

Seriously. If this goes onto a global scale, which is still very unlikely but could happen, well. It depends where you end up. You see it as something barely notable, like Kenya? GDP $65.95 billion. Or something the techies know and feel, like South Korea? GDP $1.467 trillion?

If macroscopic financial trading shifts to Bitcoin, we can't even estimate prices reasonably, other than wildly guessing when mBTC beats the USD. (Which will happen in any non-failure scenario soon enough because of heavy USD inflation.)

But we're not there yet. Not in users, usability, support, hell I still believe the protocol is not stable after minting. The hype is nice and all, but there's A LOT to be fixed still. Hyping price jumps are nice but only do so much, we need this thing polished, used in more real trading, and designed fit for real market sizes. Prices are either just getting started or they'll just drop again if nobody overcomes current weaknesses. That top-or-flop question is much more interesting than estimating some later price within some scenario.

You are quite right about usability, but usability will get better really fast as more developers get interested.

As for the protocol, if there is a weak point there we are all doomed, but I personally think that anything like that would have been exploited by now.

That's a long story. From what I can tell, the transaction fee system doesn't do what it should and has parameters coded into the protocol currently that might have to be changed later. I believe this can be solved, but certainly not as simply as most believe. If you care, see this thread, and also the one linked from there:

http://bitcointalk.org/index.php?topic=6576.0 (http://bitcointalk.org/index.php?topic=6576.0)

I get this feeling Bitcoin development is a little heavy on the hacker side right now, and a little fuzzy on design and dynamics. Seriously, the whole transaction fee system, I don't really see where it's going. It's as if every difficult part has been "solved" by adding a free parameter. Where the costs go, who fixes the values in the end -- it's not finished. But we already have millions of dollars in there from people who certainly have differing opinions on this stuff. This can get dangerous.

I too have considered posting comments questioning the viability of bitcoin, just so that prices would fall and I could buy some more.

Instead, I started this thread so I could sit back and watch the early adopters get filthy rich. Maybe one of them will send me a tip someday :)

@dacoinminster, i believe you keep making the same analytical mistake, which is to be estimating the size of a 'market' and assuming that that size directs the fundamental value of a bitcoin. in the way you seem to want to be analyzing the fundamental value of a bitcoin, the proper measure is instead the demand for a bitcoin in equilibrium.

as a test, consider: what would prevent the scenario you describe (which is unlikely anyway for all sorts of reasons, and is actually not novel with you; there were discussions about it months ago) from being done with bitcoins that are at a tenth of their present value? a hundred? ten times? a hundred times? you're telling a story about fundamental value that is entirely orthogonal to fundamental value. it would be like saying that the price of hard disks has to increase because of all the new bandwidth devoted to youtube and bittorrent.

the fatwallet discussion gets this right, at least in concept. http://www.fatwallet.com/forums/finance/1090435/m15946753/#m15946753. you can plug in whatever figures you want to that kind of analysis, but at least it gives a good way to think about it.

as to the specifics of what you're saying, bitcoin is probably not anonymous enough to achieve it, and it's not clear there's enough demand for it. pretty anonymous betting and bookmaking institutions exist in most developed countries outside the united states, and they haven't taken over the economy or caused those countries' currencies to skyrocket. the fees for more mainstream transactions are already not very high, and most large traders don't care much about anonymity (or even the pseudonymity bitcoin provides).

the more typical story of bitcoin as a potentially useful payment system for goods and service is both more compelling and more realistic.

I just did the math on this and I actually think It's unlikely.

1) davidonpda estimated (http://bitcointalk.org/index.php?topic=1320.0) that satoshi could have on the order of 1.5 million bitcoins.  That's 30% of outstanding bitcoins, but it will decrease to 7%. 

2) It seems unlikely that anyone would, or even could buy a 30% stake in bitcoin today. At today's rates that would cost something like $50 million... and that's if you could get liquidity at that price point.  I'm not sure you could buy 1.5 million bitcoins at any price.

3) For satoshi's 7% stake in a 21m bitcoin supply to make him a trillionaire, the bitcoin economy needs to be worth $14 trillion total. That's the entire US GDP.  The only way for that to happen is if bitcoin becomes the standard currency for an economy the size of the US, Europe, China, or everyone else combined.

But I suppose given inflation of the dollar, we'll all bit USD trillionaires someday. :)

The bitcoin economy spans the globe and it's very possible that the bitcoin economy is so efficient that it reaches 14 trillion dollars in output anyway.

In addition to needing Bitcoin to dominate the currency world he would have to turn down buying mansions and yachts and space travel when he was a mere billionaire in order to preserve his stash in full.

If Satoshi had designed bitcoins to stop at 21 billion, instead of 21 million, bitcoins would be worth 1000x less. If that's what you are saying about whether this is possible with cheaper bitcoins, then I agree with that part.

The equation I use is two parts:

1) How many USD are going to try to go into bitcoins?
2) What percentage of bitcoins are not for sale at any price (in the near term)?

The facts that I see driving stock traders towards bitcoins are as follows:
1) Cost per trade could theoretically be pennies instead of dollars (order 100x cheaper per trade)
2) Possibility to trade in ways that don't currently exist (like betting against stocks that have no shares available for short-borrowing, and have no options or futures contracts being traded - there are a huge number of little stocks that fit this description)
3) Possibility to trade anonymously (can you explain why you believe bitcoin is not anonymous enough for this?)
4) If designed correctly, there would be no central server which can be shut down to stop the trading activity
5) Ability to design and publish my own bet, on any security I want, and wait for somebody to take me up on it

Perhaps I haven't looked hard enough, but I haven't been able to find anyplace in the U.S. or outside the U.S. which offers even one of these advantages.

No matter what assumptions I make, the number of USD going into bitcoins always works out to be "at least a few billion USD". I doubt if half of the bitcoins in the world could be bought up, no matter how high the price goes, at least not in the near term.

It may be a long time before somebody becomes a trillionaire because of their bitcoin holdings, but I believe that bitcoins are more likely to bring about the world's first trillionaire than any other economic force I can think of.

for your five-point list:

(1) why would fees be lower? there is nothing about the dollar that requires stock brokers in the us to charge $4.99.

(2) there still needs to be a bet-taker.  see (5).

(3) large amounts can easily be traced in bitcoin; even smaller amounts can be if users aren't careful. it takes quite a bit of effort to elude detection. plausible deniability is easier than avoiding all information leaks, but my sense of the parameters of your market was that you were imagining the latter would be more important than the former for bettors.

(4) that's true, but nearly all bets are already legal in many places. the only ones that aren't are horrific or at least very controversial, like assassination markets, and it's implausible to think those will involve trillions of dollars anytime soon.

(5) proposition betting is legal in the uk, and there are many, many bookmakers. it's stifled in the us because of gambling laws, but prediction markets in general are nothing new. bitcoin doesn't change that or even particularly make them harder to detect. (the biggest operational difficulty illegal bookmakers face is not currently 'how can people get us money and how can we return it?')

in general, most money doesn't even demand such markets, for basically the simple reason that you hit diminishing returns very quickly. you don't see large us hedge funds today moving money to the uk or elsewhere in order to engage in proposition bets with each other.

Unk is essentially correct that Bitcoin does not change anything with regards to many of the points brought up by dacoinminister.

For small stocks, it is tough enough to find liquidity for a basic buy/sell in the market, let alone some option trade.  To the extent you could just post a bid/ask on ANY trade anywhere, this might help, but I am not sure why this is related to Bitcoin itself.

The bigger point, and this is where I agree with daconminister, is anonymity.  If you can make bets on stocks without anyone knowing that it was you who actually made the bet, then you can make trades based on inside information without an issue.  This is the key.

And dacoinminister is right that to the extent there is a price differential between the two markets then an arbitrageur will step in and correct the mispricing.  This, and all of the other "black market" uses of Bitcoin, is why there is real VALUE in Bitcoin.

There is a reason, however, that Bitcoins will never reach the value that dacoinminister is talking about.  And that's because huge value accrues to early adopters.  Not only does huge value accrue to early adopters, it will CONTINUE to accrue to early adopters through deflation, because there is a limit on the number of Bitcoins that will ever be issued.  Competing with Bitcoin, however, is free.  You can create a new, comparable system, at any time, without cost (just adoption costs).  So if there is BILLIONS of dollars in value held by the originators of Bitcoins, then someone else has billions of dollars in incentives to create a new system... and to create a system where value does not consistently accrue to original holders through inflation.

The solution to this will be someone else creating a system where new coins are created as the economy grows, thereby maintaining price stability and eliminating deflation pushing value onto the original currency holders. 

It's amazing how people resist posting for so long, when they have so much to share!

Personally, I would never use the system you suggest. I have to wonder how much value Bitcoin has simply because it does not grow beyond a certain limit.

there's actually something interesting in what he said, which is that the main block chain has little special value as the foundation for a payments system. it's the bitcoin technology that provides that value. in the steady state, the competitive advantage of the main block chain over others is just in the hashing power that backs it, and that matters only to the extent your threat model cares about it (in view of, for example, your concern about double-spending and other security issues during the short term, if you plan on moving out of the currency immediately).

the more i read and post, the more i become convinced that bitcoin stands or falls as a payment system, and the rest -- including investment, speculation, and even storage of value in the main block chain -- is just noise. with respect to storing value, bitcoin doesn't do what other currencies (and precious metals) don't. you can't suddenly lock in value in a way that avoids what economists call the speculative 'beauty contest' game, and you can't hedge perfectly against future events.

of course you can't; that problem is beyond the scope of currency. if i want to save money 'perfectly', i need to answer the question 'what will i be spending it on?' and hedge accordingly. the 'perfect savings' problem is one of contract and investment, not currency. currency and precious metals (dollars, gold, bitcoin, etc.) substitute for investment only because people think they know what other people are going to value these instruments at in the future, but in almost all cases that's a speculative zero-sum exercise. the average currency trader loses money, and that won't be different for bitcoin.

It is interesting. I would suggest that the main block chain also has first mover advantage. Also, the properties of this specific block chain might also be valuable to some.

Of course, Bitcoin probably won't do any of the things that it wasn't designed to do, unless it's by accident. I would suggest that anyone who wants to store value spread their wealth. Bitcoin is potentially a better store of value than many other currencies though. What's important in savings is that you value and can use your savings for the rest of your life (or beyond if you are concerned about your offspring).

Rezin777:  In regards to being able to use the savings, unk made the point that if no one else wants to accept the currency in which you saved then they are not savings at all.  Bitcoin does not solve that problem.  I believe that one of the primary reasons Bitcoin will be constrained, and as a result supplanted in the future, is that there is a hard constraint on the number of coins in existence, which accrues massive value to the original holders or originators of the currency if the currency does in fact grow in terms of total GDP.  As a result, to the extent you are saving by putting your capital into Bitcoins, you are taking a very real risk of an alternative currency and a resulting lack of demand for Bitcoins.

Perhaps there is some value in Bitcoins because there is demand from people who want a currency with an absolute constraint, but I believe this will ultimately limit the acceptance of the currency and create significant incentives for alternatives.

The only way you will have price stability in this currency, and as a result a currency that will gain widespread acceptance, is if you have the amount of currency fluctuate with the size of the economy which the currency represents.  If I can be confident that socks that cost 1 Bitcoin now will cost 1 Bitcoin, or 1.02 Bitcoins, next year, then I will much happier to hold that currency.  Otherwise the level of speculation inherent in holding the currency will limit widespread use. 

Whether it is Bitcoin or someone else, the fundamental concept that you can have a currency that is untraceable is here to stay and is going to change the world.  Given you can replicate the technology with a new chain at any time, however, a chain that allows for price stability will be the one that is ultimately accepted. 

There is at least a few more tricks up the sleeve to guarantee fully anonymous transactions based upon the bitcoin p2p verified coin transaction network. Just add another layer like Open Transactions ....

.... the not fully anonymous argument is conditional and a red herring ... it should be not fully anonymous YET ... if its crypto arms race they want ....

You're right, it doesn't. But it comes closer than other currencies. It makes more sense to save in a deflationary currency than an inflationary currency.

Price stability? I can give any logical reasons why such a thing should exist.

well, it's not so much 'should exist' as 'something that people want and try to make happen'. for example, if i want to buy a house in brighton when i retire, i can save for that in pounds, but that isn't the optimal way of being sure i can get the house. i could save in bitcoins, but that's better than pounds only if i expect the value of bitcoins to track the value of the houses i might want to buy more than the pound does. same for gold, silver, oil, etc.

shares in an investment company that owns real-estate, localised as nearly as possible to brighton, would be better than all of those assuming i can find one that i trust to do what i want them to do. so we're measuring the monitoring/transaction costs of owning the company's shares against the 'tracking error' of the currencies, given my individual savings objectives.

it may be that bitcoin seems attractive as a value store only because fiat currencies seem so poor at it currently, but that's partly due to our particular moment in history and partly due to the particular group of activists that are influencing the discussion about bitcoin. the moment in history might change, though, and not everyone shares the political ideology of the early adopters. i still think bitcoin's role in payments is far more innovative than its role as a value store, speaking very broadly.

you once asked me about my 'theme' in forum discussions. i think this discussion has helped me to figure it out. it's as follows: if you're excited about bitcoin because you think of it as a get-rich-quick scheme and are hoping the value of a bitcoin will appreciate and solve all your financial problems, you're probably excited for the wrong reasons (or at least reasons i disagree with). instead, bitcoin is exciting for other sorts of reasons.

Bitcoin seems attractive if you understand inflation is theft and most fiat currencies are being inflated. Do you agree inflation is theft from those who hold the currency being inflated? This is true regardless of your political ideals.

I completely agree that if you are excited about Bitcoin as a get-rich-scheme, you are excited for the wrong reasons.

inflation is a decentralised phenomenon, even if it has a centralised cause in the expansion of the money supply by a central bank. i don't think it's easy to say whether it's 'theft' unless you look at what happens to the money being created (if that's the only reason for inflation; milton friedman is not necessarily right about that). as a trivial example, it couldn't possibly be theft if the money were given back proportionally to holders of the currency!

and even if it does steal from currency holders long-term, nobody's required to hold currency long-term. i'm trying to stay away from deeply political discussions, but i'm frankly puzzled at the anger toward fiat currencies. if you don't like them, don't use them. it would be like experiencing anger at google when their stock falls. 'those bastards at google - they're wasting my money paying employees too much.' if someone thinks that, they shouldn't hold google stock. the same is true for dollars, euros, and pounds. the government does 'coerce', but not in this respect.

indeed, inflation helps you if you don't want to hold 'fiat currency' and are only required to convert back to it on days when taxes are due. the government isn't forcing employers to pay anyone in fiat currency. people direct their anger at the government, but what they really seem not to like are simply social norms about who uses which kind of money. their anger on this score shouldn't be with the government but with the people they personally do business with.

Yes, but that certainly isn't the case. Or do you have an example of where it is?


I'm not angry at the currency, I agree that would be silly. I'm angry at the people who enforce it simply because of where I was born. "If you don't like them don't use them" is a great argument if there weren't penalties for not using them. I'm trying to avoid a political discussion myself, and I avoid fiat currencies where possible, but you simply can't live your life without being forced to use them in some way, shape, or form. If I try to buy products, at my current geographical location, without paying taxes on those products, I would be guilty of tax evasion.


Please, give me an example. You yourself recently gave me examples of how a business is required to report its inventory for tax purposes. Besides that, how does one continue to own property without paying the property tax?

my point is just that having to pay taxes in dollars doesn't expose you to the inflation risk of holding dollars, except if there's hyperinflation on the day (or in the hours) after you convert it and before you pay it to inland revenue. and that's far-fetched at present.

the government forces dollars to pass through your hands, but dollar-inflation doesn't harm you if you choose not to hang onto the dollars.

having to use dollars for other purposes, or choosing to hang onto it for longer, isn't at the behest of the government. it's at the behest of your trading partners, or it's an investment decision of your own. else bitcoin (and gold) wouldn't even be a possibility.

to be sure, i think the government at least potentially deserves anger when it tells people 'you can't hold gold', as the us government has done in the past. that is a meaningful restriction of financial liberty. maybe it has good reasons, maybe it doesn't, but it's definitely an imposition.

telling someone they have to pay their taxes in dollars is not the same kind of imposition, and it doesn't directly expose anyone to inflation risk. and so far as i know, dollars are not required for any other purpose, except perhaps that you must accept them for the payment of debts (and even then you can move out of dollars trivially as soon as the debt is paid).

i hold only the dollars, pounds, and bitcoins that i want to hold. no more, no less.

If you are born somewhere that happens to be inside the borders of the U.S.A. and you want to live your life where you were born, and you want to own property to facilitate that, you must hold FRNs. You must pay property tax in FRN or your property will be taken away from you. If you've worked your whole life and want to retire on your savings, a portion of your savings must be in FRN or you risk losing your property. Suggesting that you can trade whatever you've put your savings into for FRN is not a valid argument because you are suggesting that you can convert whatever you have saved for FRN, which may not be the case.

i don't disagree, but my point is that you are still not required to hold them long-term and are still not subject to inflation for doing so, if that is all you use dollars for.

at worst, you are being subject to transaction costs for the conversions, and for almost all investments except for real property, those transaction costs are relatively minor. (and i believe some localities let you pay property taxes in advance using a trust.)

i'm not sure what else is plausible or even possible. someone has to pay the transaction costs. why shouldn't it be the taxpayer? (if it were the government, that would just be reflected in higher tax rates.)

if you don't support taxes at all, that's a separate matter, but my point is just that the requirement that you pay taxes in dollars doesn't subject you to inflation.

You are wrong about Bitcoin not making illegal bookmakers harder to detect.

Illegal bookmakers, particularly in the United States, could operate over the Internet if they use Bitcoins, which they cannot do with USD, because banks and credit card companies would freeze their assets and help the government prosecute them. Using Bitcoin, they can purchase anonymous, offshore VPS hosting. There are a few VPS services that accept Bitcoin and don't attempt to verify your identity. The VPS would run a Web server and bitcoind. The site can be administered entirely through a Tor proxy, depriving the ISP of the bookmaker's genuine IP address.

Users would place their bets through the Web site, after funding an in-site account with Bitcoins. This would allow the bookmaker to control fraud against himself. Bettors would be forced to trust the bookmaker, just like users of UK's Betfair.

(The bookmaker could also run his site as a Tor Hidden Service, but that would limit potential customers to hackers who can figure out how to get Tor to work.)

Authorities would be unable to apprehend the bookmaker because they would never be able to track him down. Even if the offshore ISP cooperated, they wouldn't have enough information to nail him.

While such a business wouldn't "take over the economy", its market cap would be larger than the current market cap of Bitcoin. That means an increase in the price of the coins.

Inflation is theft from existing holders of a currency, or a tax on them.  It's a gift to those who are borrowers, so long as it is unexpected (they have fixed obligations that they need to repay in the future and so inflation helps them out).  

Deflation is theft from those who are "short" the currency (those who need to purchase the currency in the future in order to satisfy future obligations), or a tax on them.  

Either way, price instability is taking from one group or another.  Sure, as a saver it is great to have a currency that will appreciate in the future (prices will decline), but the problem with that is that people don't want to spend a currency that is depreciating.  They want to hold onto it.  And people don't want to participate in a currency where a bunch of first movers have a massive advantage because of their original position.  That limits the total size of the economy in the future, which also limits the amount of potential appreciation in the currency (because the price of the currency is essentially Price/Quantity = Money Supply * Velocity of Money).  

Either way I see a fundamental problem in the currency in that initial holders get unfairly rewarded and there is always deflation in the system to the extent the quantity of goods being traded grows.  I understand people making the point that the initial holders are not unfairly rewarded in that they did something, but the fact is that people can always replicate the same system with a new chain at any time.  If there is too much value accrued to early adopters no one will want to use the current chain.  

There is a fundamental need for a currency like this.  I see two major issues, however:

a.  Lack of expansion of the monetary base means there is price instability in the system in the form that penalizes new entrants.  Therefore, this discourages new entrants.  New entrants can avoid the system (there is no coercive force behind it); and

b.  The value upon expansion of the monetary base accrues based on computing power, where that computing power is not necessarily needed to actually perform legitimate work but is rather there in order to set some kind of threshold (a level of "pain" in order to determine who gets the new money).  If that computing power was actually required in order to process the transactions, rather than to solve problems at an ever-higher level of difficulty, then I could see this sticking.  But that is not the case.  

I thought a bit about the issues that I noted in my last post.  Kept me from sleeping, actually. 

Essentially, you want to keep the monetary base expanding in order to try to maintain price stability.  The best way to do this is to expand the monetary base at a rate that is equivalent to the increase in the value of transactions.  We know that Nominal GDP is equal to the Monetary Base * Velocity of Money, and that therefore if we increase the Monetary Base (holding velocity constant), then we increase Nominal GDP; whether or not prices stay the same with that change is dependent on whether or not Real GDP also went up.  So if we want pricing to remain consistent, then if we can hold Velocity of Money constant we just need to increase the Monetary Base in line with any increases in Real GDP.  That means for Bitcoin that you need a way to determine the total value of the the market at any one time and increase the limit on Bitcoins as that market value grows. 

What's the best way to do that?  I'm not sure, but that's fundamentally what you would want to do. 

Okay, so if our monetary base is expanding, who gets the value of that expansion?  If we say it just always accrues to the guys with the fastest computers, then that means all capital created goes to reward people who just buy faster computers.  While there is a value in the incentive you are creating to have more computing power on the network, and therefore greater security, you create two problems: 

1.  All cash passes through the hands of people who mine the coins.  If you want to create a currency that everyone the world over can actually use, is it really fair that 100% of all of the original monetary base must at some point be owned by people who just have computing power sitting there doing calculations that only serve a limited purpose?  Not really. 

2.  If those people save, rather than spend, their cash, then the creation did not help anyone anyways.  And if they are not spending it, then you have a problem with how cash is entering the market.  You can end up with a deflation problem anyways. 

There is, however, a simple solution to both of these problems if the network has achieved scale.  Instead of distributing the new cash that needs to be created only to data miners, distribute it first as transaction cost rebates.  Instead of rewarding people for sitting and using their computing power, you are now rewarding people who are using their coins in transactions.  People who are providers of liquidity in the market get a rebate on their transaction costs for their efforts (with the rebate always less than the transaction cost itself).  This limits your monetary base growth to the value of your transaction costs, which may not be sufficient to maintain price stability, but it's better than having all of the value merely go to computing power.

Fundamentally, in my opinion, the problems I noted need to be solved for this to become a real currency with global usage.  It will not do so if it is a currency set up for deflation where massive value accrues to the first movers, because there is insufficient incentive for people to participate in your network rather than set up a new one once the value accrued to first movers is too high. 

Still it appears contradictory in terms. Supposedly a republic exists by the will of its people, and the government of such nation is thus, by all means, at the service of that people. I presume you agree that holding on inflationary money in the long term is detrimental. This then begs the question as to why an entity sanctioned by the people to care for the people's good figured it should make it more complicated for those who empower it to give it the very substance that empowers it. It doesn't make any sense, from both ends. I hope this wasn't too political.

I have a hard time understanding price stability and why we want it. As I understand it, price stability is a relatively stable price of consumer goods over a certain period of time. How stable does the price have to be and how long does it have to remain stable? I don't see how you can have stability in something that isn't centrally controlled. Also, if supply and demand fluctuate (which they do), how can prices be constant? Instead of trying to achieve price stability shouldn't we be trying to achieve prices that accurately reflect supply and demand? And is this something that we can do better than market forces can do on their own.

Basically it seems to me that you want to control the uncontrollable. You ask what is the best way to do that? What I'm concerned about is if someone has the ability to do that, what is preventing them from abusing that power? Also, you would have to convince me that price stability is more beneficial than market forces setting the price. If there is a major drought and a large percentage of wheat supplies are destroyed, why should we expect the price of wheat to remain stable? The only way to keep stability in such a situation is to have a store of wheat.

I also think your definition of theft by deflation is ludicrous. If you don't have any of the deflationary currency, you are not part of the economy. If you later become part of that economy by purchasing the deflationary currency, the people who already had the currency are not taking value from you.

aha! exactly the same thing is true of inflationary currencies (in reverse). if you don't hold them, you don't experience inflation.

I agree. Anyone who holds inflationary currency is taking a risk. Again, the inflationary FRN is the only form of payment the U.S. government accepts for taxes. If you don't pay taxes, you will be punished. I suppose one has to spend the rest of his life selling goods (or whatever else) for FRN (and probably paying taxes again!) if he wants to avoid holding the inflationary money and not be punished. What fun.

And you find it odd that this system angers people?

i'm afraid i still just don't see the logic of the complaint. if i'm paid $100,000 a year, have $50,000 of expenses, and owe $20,000 in us taxes, i can take the remaining $30,000 and invest it how i'd like. if i invest it elsewhere, dollar inflation doesn't hurt me as an investor. and the capital-gain-realization rules mean i don't have to pay any taxes on (many kinds of) investments until i choose to sell them.

even if i'm not paid in dollars, the 'tax' requirement doesn't meaningfully subject my investments to inflation. if i'm paid in gold, i just have to convert some to dollars to pay us taxes. i can complain that it's expensive to convert gold into dollars (though it isn't), but dollar-inflation still isn't affecting me unless i choose to let it by screwing up the timing of my conversions. (indeed, dollar-inflation helps me because my $X taxes will seem lower after inflation, so i benefit because i was paid in gold.)

again, i don't see any way around the proposition that regardless of 'legal tender' and 'tax' rules, dollar-inflation hurts you only if you choose to let it, or if your business circumstances require you to let it. either way, the government isn't forcing you to experience the harms of any of the inflationary currencies that exist. thus my puzzlement at the misplaced anger.

You are wrong for several reasons.

1)  You invest in something that holds value with inflation.  You get taxed on capital gains on this.  If you invest in something that gains value above inflation,  you are taxed far more than the actual gains.

2)  Inflation benefits the first people who get new money at the expense of people who already have money.  The earlier you are to receive the money, the more you benefit than those at the bottom of the chain.  The top of the chain is the politically connected (not you).  Think about the BTC economy.  Suppose no one is trading in and out and there is a constant set of people in it all producing a certain amount that's constant year to year.  Each time someone mines a block of 50, they get the spending power of 50 BTC immediately.  Everyone else is 50/total number of coins * their coins poorer.  The economy has not grown, but the money supply has.  We accept this with Bitcoins because it will not happen forever, mining the 50 coins was not cheap and not really done for free, and it is useful in tracking transactions.  When a politician can create money from thin air, or a bank can, it is those who are connected who benefit and it is done without cost.

You are being screwed no matter what you do, it's just a matter of how badly.  Unless you are politically connected, then counterfeiting is the greatest thing ever for you.

You aren't the average person. Making wise investments is not as easy as you make it out to be or everyone would do it. It's not the wise investor that inflation hurts. It's the average Joe that likes to put some money away for a rainy day. Most people are paid in fiat currency, spend in fiat currency, and save in fiat currency.

Inflation hurts the average person in other ways that we haven't discussed, and I'm certain you understand them without having me explain them to you. tomcollins already gave another example.

I agree, to get angry is the incorrect response. Fix your own finances so that it doesn't affect you. This takes time, knowledge, and money to achieve.

Even if you are a wise investor, you get hurt.  Just not as much.  Unless you are a wise and connected investor.

Well put. Price stability is an unachievable, undesirable myth of modern central-planned fiat monetary protagonists.

Prices of basic commodities need to be allowed to fluctuate to send pricing information signals to producers to back-off or ramp-up production (supply and demand), or else you end up with horrible gluts and shortages (waste and famine) that only a communist regime could love.

When I refer to price stability, I do not mean that all prices should remain stable.  I mean that, in general, prices should not fluctuate without a change in the underlying supply and demand of the item. 

No one (that I know of) targets price stability in regards to individual items.  It is price stability in regards to a broad basket of goods that is a reasonable target.  Without changes in productivity, that is a reasonable expectation.  In a closed economy, without international trade, it would be reasonable to expect the price of goods to remain relatively consistent on a broad basis.  Of course that could not be said for each individual good.  Without the price signals of the market, there would be no supply and demand signalling process.  But should the broad price index swing wildly in one direction or another without changes in productive capacity?  No.  If it does, that means there is likely a currency problem, not a general economic problem. 

Obviously my original explanation was insufficient, given it was interpreted as suggesting that an economy with centralized price controls and fixed pricing of individual goods is optimal.  The truth is far from that; however, to the extent the broad price index moves wildly without changes in productive capacity, that signals that there is a change in the value of the CURRENCY ITSELF that is occurring, rather than changes in the actual value of goods.  A stable currency, relative to the total productivity of the economy, is a reasonable target. 

General price stabability will come with a mature market size.  Once enough of the public has already discovered Bitcoin that new discoveries become increasingly uncommon, or simply a smaller share of the economy due to a very large user base being relatively unaffected by new users coming in, then the value of a bitcoin will achieve a relative stabability to that of any other "small" currency traded on Forex.

It Bitcoin accepts that it must be limited in economic size in order to achieve price stability (which is fundamentally true), then Bitcoin will not survive.

Hopefully everyone accepts the fundamental basis for why the Bitcoin economy would have to remain limited in size in order to have broad price stability.  For this once again we go back to a limited money supply only allowing for price stability to the extent the quantity of goods traded remains the same.  Without growth in the money supply, growth in the economy will lead to deflation.  Deflation discourages new entrants into the market.  So with the money supply fixed, price stability can only be achieved with a fixed GDP.

Why does that mean Bitcoin will not survive?  Because there is a strong need for what Bitcoin provides, which is anonymity, near-costless transfers, the ability to transcend borders, freedom from forfeiture, etc.  With the cost of entering the Bitcoin economy high because of the limited money supply, people will figure out how to take the idea and create an alternative that does not have these issues.  If that occurs, then people will tend to use this new system rather than Bitcoins, and at some point the market penetration of Bitcoins will be such that their value will decline, and you will see inflation, rather than deflation, in Bitcoins until they are worthless. 

Either the Bitcoin money supply needs to be able to grow with the Bitcoin economy, such that there can be price stability with growing GDP, or Bitcoin will be supplanted by a similar technology that deals with this issue and as a result Bitcoins will become worthless. 

I think it is a statistical fact that if you allow individual prices to fluctuate naturally (you seem to be okay with this) then it is unlikely that the general price "target" (whatever that is) will also fluctuate, just less so. There is no proof that "general price stability" is achievable or desirable either. The demand for money and goods fluctuates, get used to it.

Just let it be, the control freaks can't leave well alone. The free market works. Find something else to do maybe ....

To the extent general price stability cannot be achieved when there are no severe shocks to a system then there is a currency problem.  If the relative price of goods to one another is consistent, but the price in terms of the currency is not, then there is a currency problem. 

Price stability is not a valid goal.  Prices should go down as an economy grows and goods/services become more abundant.  If they didn't, and prices were artificially kept constant, then population would instead grow to match supply until some supply falters and there is no longer enough room on the petri dish for everyone.  And I think you know what happens then.

Your post doesn't make any sense.

How exactly is the cost of entering the Bitcoin economy determined by the USD/BTC exchange rate? Eventually, merchants adjust prices to reflect the exchange rate, so the cost of buying a Big Mac is more or less the same, whether you pay for it in BTC, USD, EUR, or gold doesn't make any difference.  


The costs of buying BTC are

a) Conversion costs - these are completely independent of exchange rate

b) Risks of your BTC losing value before you spend them - surely these are higher in an inflationary p2p currency??



How exactly would an inflationary p2p currency outcompete Bitcoin?  Any sane person who has the choice to put some of their cash savings into InflaCoin or Bitcoin, will always chose Bitcoin over InflaCoin, provided the two are equal in all other respects.  

This makes no sense. So people leave Bitcoin, won't this make bitcoins worth less? Tada, now it isn't deflationary and it works again.

Price stability is a crap goal anyway. I want more for less just like you. Companies thrive when they do more with less. You can make more if you can build more with less. You can get through hard times if you can do more with less. It is good to get more, make more, do more, for less time, effort, resources, money.

On how the cost of entering the Bitcoin economy is determined by the exchange rate

In order to answer this, let's think instead of what it would cost now to adopt the gold standard.  Adopting the gold standard would have a cost: There would be a requirement to back a certain amount of the money supply with gold.  This would mean that the price of gold, of course, would go up, because government would have to buy gold in order to back the currency.  There are about 5.3Bn ounces of mined gold (http://en.wikipedia.org/wiki/Gold).  US M2 is currently about USD9Tn (http://en.wikipedia.org/wiki/File:Components_of_US_Money_supply.svg).

Let's say the clearing price to cover the US money supply is going to be $6k per ounce (just random numbers here).  So if the US did not have any gold to begin with, they need to buy 1.5Bn ounces of gold.  The economic output of the economy stays the same.  Everything else stays the same, including the total assets and output of the economy, but $9Trn went to purchase gold (and the government taxed the people to get there).  A massive wealth transfer just occurred from everyone else in the economy to those who originally owned that gold.  Current US assets are ~$188Trn (http://rutledgecapital.com/2009/05/24/total-assets-of-the-us-economy-188-trillion-134xgdp/).  At a USD price of $1,500, those 1.5Bn ounces of gold represented 1.2% of economic assets.  Suddenly, instead of having 1.2% of economic assets, the original holders of that gold have 4.8% of economic assets in USD terms.  Total economic output remained the same, and yet there was a massive wealth transfer from one group to another because of the return to the gold standard. 

Okay, so what was the point of that lesson?  The point of that lesson is that one cost of adopting a currency (in the case above adopting a gold standard) is the wealth transfer that goes to the existing holders upon adoption.  Why?  Because total productive assets in the economy stayed the same and their share of those assets went up as a result of adoption. 

Now, if I'm forced to adopt the gold standard because my country goes out and purchases all that gold on my behalf, transferring all that wealth to other citizens, I cannot do much about that.  But if you ASKED me to voluntarily give up a few percent of my assets to other citizens merely because they held onto some shiny metal that wasn't going to produce anything and I did not actually want, there is no way I would do so. 

We can think about Bitcoins in the same way.  The cost of adoption for everyone is the amount of wealth that is transferred upon adoption, in terms of real productive assets, to those who participated in Bitcoin early.  If I am not going to be coerced into paying that, then I must do so voluntarily.  So I must believe that the value of doing so exceeds this cost.  There is supposedly someone who has 340k Bitcoins or so.  And yet the actual output of the economy stays the same.  His spending power must have come from somewhere (someone). 

So the costs of buying BTC are:

a.  Conversion costs;

b.  Risk of losing your purchasing power; and

c.  The wealth transfer embedded in the conversion to another currency.

Those must be weighed against the benefits, which I noted before.  The issue is, there is a way to get those benefits WITHOUT using BTC itself, because the only barrier to entry is the first mover advantage (acceptance of the currency).  So if the third cost becomes too high, someone can just abandon the system and create a competing system with similar properties.  And if that system provides all the same benefits WITHOUT the massive wealth transfer to early adopters, then people will use that instead. 

How would an inflationary currency outcompete a deflationary one?

To a certain extent, you answered the question yourself. 

First, if you want to HOLD cash, you would rather HOLD it in a deflationary currency.  But what if you want to spend it?  I don't want to SPEND my deflationary cash... I can buy more goods in the future if I just hold onto that cash now!  If everyone has the incentive to hoard, that leads to deflation and a decline in spending.  This limits economic growth; we know this from the real world.  Too much hoarding; not enough purchasing.  What will it do to Bitcoins?  Well, the real value of Bitcoins is not in the coin itself (it's just data), but rather in the fact that you can use them to buy real goods and services.  And if you don't want to use them because you would rather hoard them, then there isn't much value to them, is there?  Seems like a conundrum, but then you add competition to the mix.  Someone else comes out and offers the same concept of a digital currency that is untraceable, that cannot be seized, that crosses borders, but there is no deflation!  People spend their coins freely.  They don't have to worry about losing out because they are not long the currency.  And so everyone who wants to use an untraceable, seizure-proof, transnational currency switches to that one.  And no one wants your Bitcoins anymore.  And suddenly Bitcoin inflation is infinite, because there is no market for them.

Second, this new currency avoids the massive wealth transfer to early adopters (let's just say they have a solution for it; I don't know what the solution is).  So there is no cost of adoption of the currency?  And people will spend it freely?  And I don't have to worry about speculating when holding it because prices are relatively stable?  Count me in!

Third, it's tough to make loans in a deflationary currency, and as a result the money supply cannot grow through the fractional reserve process (it can theoretically, but I am saying in practice it will not).  Why is it tough to make loans?  Because you will only make loans that are risky enough to still require someone to pay you for lending.  If the currency is appreciating relative to goods (there is deflation) of 20% per year, then someone has to be a risk of greater than 20% in order for me to charge them interest.  Otherwise I'd rather just get my currency appreciation (deflation) earnings. 


Price stability, excluding changes in productivity, is a valid goal.  I don't think that price stability affects population growth or total world output.  Price stability, when excluding changes in productivity, is a monetary policy and currency issue. 

@Demandral

I reccommend that you do not put anything in to Bitcoin, and take the source code and try this.  If you are correct, then you could do very well for yourself.  If you are wrong, the rest of us will learn from your example.

Demandrel:

Yes, a wealth transfer occurs in Bitcoin, but with time this wealth transfer declines sharply, percetage wise, and tends to zero.    I don't understand why you say that there is an increasing wealth transfer. Perhaps in absolute numbers, but it's the per capita wealth transfer that matters.  Once Bitcoin has matured, deflation is likely to be only a few % a year, reflecting aggregate economic growth.  Is that small amount really enough to put off new users? Also, anyone who holds on to a fixed supply currency for long enough will eventually experience a reversal of wealth transfer, as long as the world economy keeps growing for ever, as it is likely to do, since there are no limits to productivity gains.  

The way I understand it, under Bitcoin there will be a few extremely wealthy early adopters.  Some of these will stop contributing productively to the economy, but still compete for products with all their wealth. This will drive up prices higher than they would have been under InflaCoin*.   But even these super rich will eventually run out of money if they just spend and never produce. The wealth transfer is not a permanent problem of Bitcoin, only a bootstrapping problem.  I'm not even sure if the wealth transfer is detrimental. Maybe one of those super rich early adopters will invest in some awesome new technology that will make all of us 10 times wealthier, who knows?  You are making the assumption that wealth is a static quantity.

Anyhow, under free market competition, it's not the always macroeconomically most optimal system that wins. It's the system that is most optimal for each individual (Bitcoin), not for the collective as a whole (InflaCoin).  
Bitcoin wins over InflaCoin, despite the wealth transfer, because a) merchants prefer to get paid in Bitcoin, and b) customers prefer to buy Bitcoin. Even if they intend to spend them immediately, InflaCoins offer no advantages over bitcoins. In the real world, you always need to store cash for some amount of time before you can spend it. InflaCoins would offer only disadvantages in this case.

Also, it's not clear to me at all how excessive savings would depress the economy. Savings allow people to make sounder investments, which are likely to offer higher returns.  A practical example I can think of is education:  In an economy where people are encouraged to save, more parents will be able to pay for their children's university education, but they may not have the newest gadgets at home. This will eventually lead to a more productive workforce that can afford more gadgets AND an education. And so on...
  

*InflaCoin is what I am calling an inflationary version of Bitcoin.

Creighto:

I have no need for the benefits provided by Bitcoin at the moment, and so regardless of the size of the "first adopter" wealth, I have no reason to take this kind of action myself.  My argument is essentially that I like the benefits offered by Bitcoin, but I think there are economic flaws that will limit adoption.  I would like those economic flaws to be resolved at some point because I think it could change the world for the better. 

Forever-D: 

Regarding the potential for a decline in the impact of the wealth transfer.  The higher the exchange rate USD/BTC, the greater the wealth transfer.  I mean aggregate transfer, not flow, although flow would also increase so long as adoption was growing.  Could you show me mathematically how this declines sharply over time and trends to zero?  I am not saying that you are necessarily wrong, but that does not make sense to me.  As per the gold example, if total assets in the US doubled, and M2 doubled as well, then you would need more gold, or higher-priced gold, in order to back the currency.  With double the M2 and the same finite supply of gold, I would expect the wealth transfer to actually be MORE severe, rather than less severe, because gold would have represented a smaller portion of total original assets.   

Is the small amount of deflation enough to put off new users?. Given the value accrues to people holding the existing currency, and the currency can be avoided, and the benefits of the currency can be replicated, I think this, and the wealth transfer, will be a sufficient put-off.  This could be limited if the effective money supply could grow because of fractional reserve lending, but with deflation this seems unlikely to me. 

On the wealth of early adopters.  The wealth transfer is a permanent problem under Bitcoin, especially if deflation continues.  The total amount of loss to deflation, and therefore everyone who adopted before the next person, continues to grow. 

Maybe one of those super rich early adopters will invest in some awesome new technology?  Sure, that's possible.  But the wealth they have was not CREATED by their investment in Bitcoin, but was rather just a wealth transfer.  The productive output of the real economy stayed the same.  So you are merely shifting wealth between people, not creating wealth, unless you argue that the service itself, being extremely valuable, is what they are being paid for.  But I am arguing against that because it is replicable.  I am not making the assumption that wealth is static, but I am assuming that Bitcoin itself is not affecting wealth.

On what people will prefer.  If InflaCoin worked as I suggested, whereby the total amount grew with the size of the economy, then people would prefer InflaCoin to Bitcoin.  Why?  People prefer to spend and earn in a relatively stable currency.  Customers would not prefer to buy in Bitcoins, because they would not want to make purchases; they would rather hold onto their coins.  People also will prefer to save in a stable currency.  Earnings from deflation must come at the expense of someone (as a saver), as must earnings from inflation (as a borrower).  Saving in a stable currency where you earn return for actually lending your savings to people, rather than just holding onto it yourself, is preferable.  I do not want to have to speculate on changes in currency value when I just want to buy and sell things.  Yes, I have to speculate on the change in relative value between goods or services (such as the value of my labour versus the value of a cheeseburger), but I do not want to have to speculate on currency changes on top of that. 

Generally I am not a huge fan of the paradox of thrift concept, because most of the time an increase in savings by one group represents an increase in loanable funds to another group.  So long as the market is efficient and there is loan demand, this should not cause a problem.  Where no one wants to borrow because there is a significant minimum rate because of deflation, however, I think the paradox of thrift has greater validity.  Where people are just going to hold the "cash" themselves, this becomes an issue. 

1. I still can't see how newcomers pay any price for getting into the new BTC economy. This is markedly different from adopting a gold standard, since nobody is forcing anybody to back anything by anything or to buy anything. It is true that the early adopters gain, but who loses? Maybe the people who hold $, EUR, etc., because their value should (slightly) decrease. But this effect should be minimal and would occur just the same with InflaCoin.

2. One problem that I can see with the huge rally in prices that so many of us are expecting: At current BTC prices, about $50,000 a day are given away in mined coins. Were 1 BTC to cost $7000, this would be $50,000,000 every day. Mining is profitable until that much money is burnt every day in electricity and other mining costs.

2.a) It will take a while until that much money can be burnt - especially since unfortunately it does not pay for normal users to just mine on their CPU. So I think it will take a while for the BTC/$ price to rise.

2.b) Do we really need to burn $50,000,000 every day on electricity? Is there a plausible scenario where this "protection cost" is spent in something else, like buying special hashing devices for every user (or, preferably, not at all)? IMHO these are the real social costs of bitcoin. Has anyone tried calculating (bounding) comparable social costs for other currencies (banks, military ...) per unit? I have no idea if this is a bargain (which would be a great argument for bitcoin) or a terrible waste.

tubro, good point about the protection cost.

Bitcoins really have no initial "printing" cost, as traditional currency does.  USD costs approximately $0.096/bill, regardless of denomination.  So, taking that into consideration, let's look at bitcoins.

If we WERE using $50,000/day in electricity (which isn't possible at the moment, but I agree, could be a possibility down the road if BTC value and mining difficulty were to even out), then it would be costing approximately $0.001 per $1 USD worth of bitcoin to protect the currency.  Or, put another way, it would cost 0.001 BTC per 1 BTC to protect the currency.

At that rate, it would only take 96 days to "catch up" to the cost of printing a single dollar.

Again, I don't believe that our collective electrical costs are anywhere close to $50,000/day... I would guess around $10,000, based on a slightly higher average electrical rate than my own.  So say it is $10,000.  That still means just 480 days to catch up to the cost of printing a $1 bill instead.  And I am certain that most bills stay in circulation much longer than a year or two.

So I would agree, it does seem like a terrible waste compared to printing USD at least.  I do not see any practical fix to this though - hashing and securing the network takes power, and there's just no way around that.

They need people to protect the vault, electricity to run the bank wiring system, somebody to transport the money, somebody to secure the money from counterfeiting, etc.

Bitcoin mining follows the most energy efficient or at least cost effective route to mining.

Some people seem to assume that having multiple "competing" (why not "co-operating"???) blockchain-based currencies would be a bad thing.

I do not really understand why it would be bad.

Aren't a lot of these people the very same "types" of people who are pro-free-market, even pro-competition? In almost any other commodity do not these same people argue that competition is good? If free market competition is good for {all|most} other commodities, why not for Bitcoin / cryptocurrencies / blockchain-based currencies???

Even though gold has a long history of use as currency, weren't silver and copper and maybe even bronze used a lot too?

Why wouldn't it make sense, as Bitcoins grow in value, to introduce new blockchains that we might even *hope* will trade at least initially at lower value, much as one might use a bunch of copper coins as a handy way to "divide" the value of gold coins?

-MarkM-

I don't think it's a bad thing at all.  We already have a competing currency: Namecoin. And I bet it won't be long until the anti-deflation crowd starts their own variable supply block chain.

What would be a bad thing though is a splitting fo the existing community into factions. One big chain is harder to attack by a Bitcoin antagonist than many small ones.

So where are the attackers going to spend their resources: attacking the big original chain or running around chasing an endless proliferation of decoy chains trying to find out which if any it actually anything more than a decoy?

A lot of small ones could be small enough that loss of their chain would not really be a problem since they all know what all the transactions and balances were anyway so can simply pour the same balances into yet another new chain...

The imagined "attackers" would probably do beter to start their own rival chain than to attack some other rival chain. So maybe it'd mostly come down to do we spend our resources trying to attack the original bitcoin or spend them on starting up our own rival. Why bother attacking rivals if you are powerful enough to do that surely you are powerful enough to rival them with one of your own?

I suppose one could put some of one's resources into one's own chain and some into attacking various rivals at random or something. But wouldn't having lots of them make for some lovely trading/arbitrage/exchange opportunities at least a few people who have piles of real bitcoins might get into, maybe some of them also having lots of processor power on hand they could throw into any "penny chain" (analogy to "penny stock") they are currently playing in?

-MarkM-

It is a bargain .... we have no idea how much waste is going into keeping the current corpse of a monetary system barely breathing. It is on the order of U$D trillions.

Seriously, someone solves a trillion dollar problem for a cost 6 orders of magnitude smaller at absolute most and there are still haters. Sheesh. It's like if I invented a teleporter that ran on one 9volt battery. EPA would probably shut me down. Much better to use 10,000,000 shipping containers I'm sure.

I know the thread has shifted topic slightly but I just thought I'd mention that I've emailed InTrade and suggested that they accept BTC as a currency option, made some good sound arguments about risk vs profitability and I suggest that anyone else who was previously decrying the lack of a BTC prediction market do the same. Their general-purpose email address is help@intrade.com but if anyone knows of a more appropriate one, please post it.  ;D

Hmmm. I should probably mention the bitcoin futures experiment I am running: http://forum.bitcoin.org/index.php?topic=10008.0

It isn't 'bad'. It's just that the value of bitcoin is it's difficulty and it's acceptance. A new incarnation won't have those things. Anyone coming in and deciding between Bitcoin and Bitcoin2 rationally chooses Bitcoin. Now if something totally different with new/different properties is created then maybe it has a chance.

The fact that so many bitcoin enthusiasts don't seem inclined to buy into alternative blockchains is actually a selling point for new chains in some cases.

For example part of the "point" in using chips in poker, or using various game-currencies in various games, is precisely to de-couple the value of them from "real money" so that players can decide for themselves how much they will use each of the colours of chips / types of game-currency to represent for the purpose of any "real money" agreements they might choose to make with each other regarding whether and how the disposition of such things in some game or other is to alter their "real money" positions.

I hope some of the game nations in the Freeciv Galactic Milieu will decide to use for their own blockchain-based currency a blockchain set up in some way that will allow them to open it right up to public "thick clients" and "miners" right from the start. (Such as by having no per block minting of coins just one lump sum of the total coins they will be issuing right in the genesis block ready for them to start issuing them.)

Partly this is because they can thus let other people do the blockchain building for them, partly it is because it eliminates the "but it is not fully universal person to person" objection to the private-net ones such as CDN and UKB, but largely because then we could maybe see actual blockchain-wars happen if some nations think it might be economical to try to double-spend and such on other nations' blockchains.

Some people pay real money in the course of playing games, so who knows, maybe some might "pay" real hashing too to try to gain an economic advantage compared to an opponent...

...I had thought to simply "simulate" such hashing wars by comparing the computer technology level and number of datacentres of each nation but hey maybe actual hashing wars could be more interesting and also maybe more pertinent to other blockchains as actual cases of "weak/cheap" blockchains attacking each other and being attacked by outsiders and so on.

Also if a chain has no per block minted coin rewards right from the start we can see right from the start how nice transaction fees look as rewards.

-MarkM- (World of Warcraft gold actually *tried* to decouple from "real money" didn't it and still often fails to do so?)

How do any coins come into existence?

Just got a response email from Intrade - and not the automated nameless kind either :)


Hope it pans out!

There is already at least one competing blockchain, namecoin.

Ostensibly, it is for providing a distributed database for DNS (domain name serving) name registration but as it a bitcoin clone (very little has been altered of the transaction behaviour of the code) then namecoins can be traded in much the same ways as bitcoins. The blockchain is 6690 odd blocks long and network difficulty is 1290. No gui client but namecoins can be traded using the CLI with namecoind.

Namecoin is to bitcoin somewhat as silver is to gold, since namecoin has more practical applications and uses (like silver) but can also be stored and traded like bitcoin, but is not purely for that purpose like bitcoin.

There may be other covert blockchains already in existence that will be revealed when the time is right ...

I was thinking of stopping by my stock broker's local branch and asking them what they thought of bitcoins (I expect them to have no clue what the are)

21 million per block for the first/genesis block and none thereafter could be one method.

-MarkM-

The best option for an alternative block chain currency is probably to fork off of the bitcoin blockchain (before whatever block #, it considers the same block as bitcoin does to be valid; afterwards it considers blocks meeting a different set of criteria to be valid (e.g. ones that enforce demurrage or that have a minimum block reward)) with all bitcoin balances at the point of the fork carrying over as balances in the new coin.  That pretty much guarantees some level of currency exchange over the first several post-fork blocks between the two coins: if the forked chain then offers a better BTC-denominated return for the miners then some miners will switch with a backup plan of coming back to bitcoin if the fork doesn't pan out.  If enough miners switch, then the new chain offers at least some appeal to actual users on that basis.

Of course, an alternative block chain currency that's more or less identical to bitcoin (just with a different set of early adopters) is almost certainly doomed to failure.

Apologies for the necromancy but I just got another reply from InTrade:


I of course chatted with him about Mt. Gox and its associated trade API.

Just thought I'd keep you all up to date  ;D

better told him about tradehill.

Necromancy?! This is my favorite thread! This thread will die when I do!

I did mention it of course, but as they're looking for automation and TradeHill's API isn't ready/published yet...

dacoinminster, finally I see that I am not crazy because our reasoning pretty much agrees: http://forum.bitcoin.org/index.php?topic=7715.msg167918#msg167918

I have not met _one_ person who agrees with this reasoning. They all say nothing and ignore what I just said. I guess it gets discarded by peoples bullshit filter quickly before they can intellectually evaluate it. It is too outrageous.

Yes, I haven't seen a good argument against this logic (although I personally put different numbers into the equation). No matter how you do the math though, the current price of a bitcoin seems laughably low.

What math?  Are you talking about guessing the 'proper' value of a bitcoin, based upon assumptions of the size of the (non-speculation based) Bitcoin economy?  Because it's a rediculous assertion that you, me or anyone can actually know what that is.  We can't even get a decent guess without first knowing how much trade goes on within such walled gardens as SilkRoad, OTC or BlackMarket.  Just looking at the volume of trade on those currency trading sites like MtGox doesn't tell you anything of usefullness, except that the market price is what the market price says that it is.

Not math specifically. Rather, the logic of my first post in this thread, which yields an equation you can plug numbers into.

I in no way assert that one can know the numbers to plug in with any precision. Rather, I assert that any reasonable guess at the numbers yields a per-bitcoin value orders of magnitude higher than current prices.

Ah, yes.  But those assumptions could take decades to come to fruition.  They have almost zero bearing on what the value of a bitcoin will be next week or next year.

I guess everyone will decide what time-frame they care about. I personally am expecting additional massive increases in bitcoin prices in the coming years, so I have no problem holding bitcoins through these fluctuations.

Exactly! I always say that short-term market fluctuations are entirely unpredictable. Daytrading bitcoin does not make sense to me. I intend to hold 5-10 years.

This video interview is great:

http://www.youtube.com/watch?v=ygoqDBfjimM

It's Bruce Wagner describing bitcoin, and he goes into detail on what bitcoins could be worth someday. He describes something similar to my logic from post #1.

(Warning, it's a LONG interview, but worth it).

Wow. I just read this thread (because of your siggy).

Nice discussion. Wow, you sure "talk" a lot with your friend there. How fast do you type that your friend doesn't have time to respond to each "send" ?   lol

He was on a smartphone, and I was on a keyboard :)

Nice.  Not fair, but nice. :)

I'm still waiting for bitcoin price increases to be started.  :D

You'll have to wait until monday. We are doing our traditional weekend droop.

Post #1 has been updated to include a link to this thread which is my current best guess on how commodity speculation will happen using bitcoin: http://forum.bitcoin.org/index.php?topic=31032.0

I may have missed part of the conversation, but it seems like you guys are making this too complicated. All you need to use BTC to make stock trades (or any securities for that matter_) is a bank that accepts BTC, offers numbered accounts, and will let you trade securities on any exchange. Once the BTC are in the account, you're off to the races. You don't need to worry about counter-parties -- the BTC would be converted to the local currency, and then you go long or short at will.

Mack

I think the complicated part is do it without the need of that bank or any centralized third party.

Did everyone hop aboard the crazy train before it departed?!!?

I made an extra 0.1 BTC out of the whole craziness.  Ok.. so in USD terms I'm down - but I'm just after any little increase I can get in my share of the BTC pie.
Hey.. it's a trivial amount - but for me it was faster (though more stressful!) than mining that 0.1 :P

I don't have the stomach for profiting on day trading I think. On the few occasions I feel confident enough in my predictions of a fall and get out of a few BTC .. I panic and get back in too soon.

hahaha. Made me laugh because of the recognition of familiarity.

Bitcoin cleared $100 yesterday, and I'm reviving this thread in which in 2011 I predicted wild growth ahead before even the first bitcoin bubble. Note that the arguments in the OP are no less valid today!

If BTC retains its unique properties, $100 will only be a blimp on the historical radar.

https://bitcointalk.org/index.php?topic=159237.0 (https://bitcointalk.org/index.php?topic=159237.0)

A brokerage hidden in TOR??

Holy smokes, it's starting!

[/quote]

sounds legit  ::)


yes, some latecomers did not have a chance to lose their shirts in the GLBSE