stabilizing bitcoin market

[DannyHamilton]

. . . Deflationary or static currency is actually a bad thing, economics 101 teaches that . . .

. . . You are really late to this conversation.  Take some time to read . . .

. . .So if I come in late to the conversation, I can't ask questions about the conversation? . . .

. . .If you aren't going to take the time to read and understand the conversation . . . No sense in wasting any more time here.

. . .Your right . . . I was not bothering to read . . . didn't answer one simple question I had . . . WHY ONLY 21 MILLION COINS? . . .

Your premise that I was responding to was that deflationary currency is a bad thing.  Until you can get past that, any explanation behind the choice of 21 million won't matter.  Why not 1 coin?  Why not 1 Googol?

A bitcoin is simply a denomination given a name.  If you prefer call it 2,100,000,000,000,000 Satoshis.  Get past the idea that deflation is bad and we can have a discussion about why the denomination chosen right now doesn't matter.

[rynmln]

WHY ONLY 21 MILLION COINS??

Ask Satoshi...

[Monster-Ant]

Get past the idea that deflation is bad and we can have a discussion about why the denomination chosen right now doesn't matter.

So, until I decide that deflation is bad (regardless of economics courses and studies that have resulted in educating me on how inflationary, stable, deflationary currency backed by precious metals, gross national product estimations, or other arcane methods of determining a monetary amounts value), I don't get a reason why there are only 21M BTC?

Are there any riddles I have to solve/research/change my answer to the "correct" answer before I'm allowed to ask questions regarding BTC to? Anything I should profess to believe or swear to before I can ask any other questions?

This is the newbie forum. I'm staying here until I get released where I can ask questions in relevant threads, unless someone points me at a relevant thread. (Which I am now 15 pages in and still reading)

The amount absolutely does matter. Because from the looks of it, what's actually going to happen is there will be a second currency that uses BTC as its backer, or there will be another commonly named amount to represent a microBTC, since only 21MBTC seems rather odd for a monetary unit that appears to have a goal of becoming a legitimate currency.

And a fixed number of a currency does NOT make it deflationary. If a currency can currently buy a single chicken now, but later it takes 2 of that currency to buy a chicken, despite the fact no more of that currency has been produced and a measurable amount has been lost due to various factors, it is STILL inflationary. Which is why whether or not BTC is inflationary/deflationary/based on chickens, doesn't matter. That's neither here nor there with my question.

I'm just wondering if Mr. Satoshi had any particular reason for choosing 21M BTC.

And how BTC could be a competitive currency without the numbers for everyone in the state of California to have one makes me wonder if 21M was based on limitations of the hash, the encryption/decryption software, or some other type of software limitation that appeared or actually was too difficult to overcome.

Twenty-One million just seems like a rather odd number to limit it too, and I was wondering if there was actually any reason given for the number.

[Lotus]

And a fixed number of a currency does NOT make it deflationary. If a currency can currently buy a single chicken now, but later it takes 2 of that currency to buy a chicken, despite the fact no more of that currency has been produced and a measurable amount has been lost due to various factors, it is STILL inflationary. Which is why whether or not BTC is inflationary/deflationary/based on chickens, doesn't matter. That's neither here nor there with my question.

Short answer is supply and demand. If you have the same number of coins but more chickens and people willing to buy them growing at the same rate, then the price (and not the value) will go down over time.

[PrimeDice]

that link answers your question

A 28 page, with links to economic studies I already have read about/studied/been tested on in economic classes, that already have basic fallacies right in the arguments.

So basically the reason why having only 21M bitcoins is good is in hopes that it is a deflationary currency. Except...

• 21M coins doesn't even cover the number of transactions done each day, much less the dollar amount of the transactions.
• 21M coins does even leave enough coins to cover the number of people who hold one or more bank accounts in the United States of America alone.
• 21M coins does NOT prevent inflation. Inflation does not happen just due to more money being printed (although that can be a contributing factor in the case of overprinting) but is a complex equation taking into account the amount of money on the market, the market value of each monetary unit, spending power of the monetary unit, and consumer/producer confidence in the monetary unit.
• The fixed number of coins, as well as the number of coins lost, deleted, vanished over time shows that a significant percentage of the 21M is gone forever with no way to put them back on the market.
• There appears no way to increase the amount of coins available for mining or replicate existing coins in order to offset losses due to entropic/market/criminal factors.
• The idea that money increases in value just by holding onto it increases the amount of hoarding and actually harms an economy as investment firms become merely storage (As seen at one point with the Frugger Banking System)

But all of that is beside the point.

What I want to know is:

WHY only 21M bitcoins? That doesn't even allow for 1 bitcoin per person. Sure, you can slice it up into smaller percentages, but if each bitcoin is worth, say, $10USD, the handling fee from the miners/hashers is $2USD, that means each bitcoin is only worth $8USD, and if I choose to purchase a single apple at $0.15, the amount of bitcoin traded in that transaction not only is ludicriously small, but now I have to pay $2.15 for that apple.

So WHY only 21MBTC? Why not an amount that makes it a viable currency rather than just an interesting economics experiment?

Bitcoins can be divided down.  The entire economy could operate of of a single Bitcoin, with the market reacting and charging small decimal numbers for a good.  In this case, the clients could be updated to simply move the decimal place over, make 1 milli Bitcoin the new 1 Bitcoin.

I don't understand it as well as some other people but the basic idea is, if the coins are divisible, why have 210 million Bitcoins if each one is worth 10x less.  There is no economic advantage to increasing the number of Bitcoins.

[DannyHamilton]

The amount absolutely does matter. Because from the looks of it, what's actually going to happen is there will be a second currency that uses BTC as its backer, or there will be another commonly named amount to represent a microBTC, since only 21MBTC seems rather odd for a monetary unit that appears to have a goal of becoming a legitimate currency . . . And how BTC could be a competitive currency without the numbers for everyone in the state of California to have one makes me wonder if 21M was based on limitations of the hash, the encryption/decryption software, or some other type of software limitation that appeared or actually was too difficult to overcome.

Twenty-One million just seems like a rather odd number to limit it too, and I was wondering if there was actually any reason given for the number.

The protocol stores the output value as an integer.  It doesn't actually store "bitcoins" as you recognize them, it represents the value as what is commonly referred to as a "Satoshi" (0.00000001 BTC) and stores it in a 64 bit integer.  So the limit is actually 2.1e+14 coins.  The client programs simply divide this number by 100,000,000 before displaying it to you so you can work with a smaller number.  Eventually people will probably be working with Milli-Bitcoin, or Micro-Bitcoin.  Why is this a problem?  If it becomes necessary, the coins can be split up further (though it would take a significant upgrade to the current client programs and miners).  A number had to be chosen.  Satoshi chose 21 million.  I haven't seen a reason yet, but I haven't gone looking for one either.  It just didn't seem to matter, given that the quantity of actual "coin" represented in the protocol is so large, and can be split up more if the need arises.

[Etlase2]

So WHY only 21MBTC? Why not an amount that makes it a viable currency rather than just an interesting economics experiment?

There's two main reasons, imo. The great majority of all bitcoins will be distributed within the creator's lifetime. By like 2024 >90% of all bitcoins will be distributed. So reason 1: It is a massive, pyramidal profit incentive. Bitcoin proponents cry freedom, when the reality is the biggest names around here want to enslave people to bitcoin in the same manner that central banks do now. It's never going to happen though because other cryptocurrencies will spring up, and people will just spend their depreciating fiat rather than the economy actually working around bitcoin. Lending is a terrible idea in a deflationary currency, you'd have to be really stupid to take a loan, so no one will, so no businesses will owe bitcoin loans and won't need to accept bitcoin currency or pay employees in bitcoins. Just isn't going to happen. So there won't be any new wealthy elite created, just perhaps a few million made whenever they decide to crash the market. Then it can keep happening again if people are dumb enough (which they generally are) as prosperous businesses acquire larger and larger sums and are able to manipulate the supply just as what happened with gold.

Gold was such a better currency if you ignore history.

If you aren't aware, check the block chain to see how the difficulty remained at precisely 1 for the first 1.6 million bitcoins. Whoever started mining at the beginning was the only person still mining over a year later.

Reason 2: It was the simplest way to safely distribute the currency. Satoshi could have gone with a more wave-like distribution scheme (or "ease-in, ease-out") to more widely distribute the currency, but either way having a limited supply protects the currency from advances in computing technology and so forth.

See my sig if you want to read a proposal for something completely different and probably manipulation-proof.


If you want the exact reason for 21MBTC, it is what the curve works out to be. Start with 50BTC every 10 minutes for 4 years, then 25, then 12.5, and so on and you come up with just under 21M. If he had started at 100BTC, it'd be 42M.

[DannyHamilton]

So WHY only 21MBTC? Why not an amount that makes it a viable currency rather than just an interesting economics experiment?

. . .
If you want the exact reason for 21MBTC, it is what the curve works out to be. Start with 50BTC every 10 minutes for 4 years, then 25, then 12.5, and so on and you come up with just under 21M. If he had started at 100BTC, it'd be 42M.

So perhaps a better question is why did he choose to start at 50 BTC (5,000,000,000 Satoshi) per block instead of some other number.  In the end it really doesn't matter.  The common unit of measure will change to adapt to the value.

[DonttreadonmeRP]

Ant you looking at it wrong. There are 2100000000000000.  Or 2.1 quintrillion "coins" possible. Or 350 billion for every man women and child on the planet earth. So really its why so many?

There is absoltly nothing about a decimal place that effects anything about bitcoins viabilty.

[TheDuke]

The 21 million limit is bitcoins bigges problem, and probably why it'll fail, IMHO.

1. The monetary supply can't expand. And no, you can't just move the comma to the left. If you divide 21 million into 210 million units of 0,1 bitcoins, you still won't get more bitcoins.nthe cake doesn't get any bigger, by people cutting it into ever smaller pieces.

2. It discourages trade, and BTCs adoption as an everyday currency. A very big group of BTC users (more than half probably) believe that Bitcoins have a very bright future, will replace/supplement fiat currencies and be worth a lot more in 5-10 years from now. As a consequence they hoard a big part of BTCs instead of spending them.

After all: If bitcoins in 2020 are going to replace just a few billion dollars worth of fiat currency, because of the 21M ceiling, it follows that one BTC is going to be worth hundreds, if not thousands of 2012 dollars in purchase power. What kind of fool would use every one of their bitcoins right now when theyre worth 8-12$ if they can hold on to them as an investment for ten years when they'll be worth thousands of 2012 dollars a piece.

When Satoshi designed the BTC protocol, I also don't think he predicted how fast the development in mining hw would be, nor what kind of people it would attract. (If he'd know for a fact the collective financial IQ level of the community and how gullible the community would be, I think it would be designed with more safeguards in place)

[DonttreadonmeRP]

The 21 million limit is bitcoins bigges problem, and probably why it'll fail, IMHO.

1. The monetary supply can't expand. And no, you can't just move the comma to the left. If you divide 21 million into 210 million units of 0,1 bitcoins, you still won't get more bitcoins.nthe cake doesn't get any bigger, by people cutting it into ever smaller pieces.

2. It discourages trade, and BTCs adoption as an everyday currency. A very big group of BTC users (more than half probably) believe that Bitcoins have a very bright future, will replace/supplement fiat currencies and be worth a lot more in 5-10 years from now. As a consequence they hoard a big part of BTCs instead of spending them.

After all: If bitcoins in 2020 are going to replace just a few billion dollars worth of fiat currency, because of the 21M ceiling, it follows that one BTC is going to be worth hundreds, if not thousands of 2012 dollars in purchase power. What kind of fool would use every one of their bitcoins right now when theyre worth 8-12$ if they can hold on to them as an investment for ten years when they'll be worth thousands of 2012 dollars a piece.

When Satoshi designed the BTC protocol, I also don't think he predicted how fast the development in mining hw would be, nor what kind of people it would attract. (If he'd know for a fact the collective financial IQ level of the community and how gullible the community would be, I think it would be designed with more safeguards in place)

Wow dude, no if there is any flaw in bitcoin this is not it. There is no cieling. It will never "max out"   One bitcoin can be worth a trillion dollars. Or 10 or 100 and its still divisible to a dollar "coin" "unit"

[lebing]

Explain to me, please, why everyone thinks that having a limited number of bitcoins, EVER, makes it somehow desirable.

Bitcoin will always be the crpytocurrency with 21M cap and set rate. If anyone wants something else (and a few do) they give it another name so as not to appear or be fraudsters. Bitcoin is what it is and a lot of people understand and trust it and desire it.

People don't desire the currencies with holes in their tanks nearly as much.

That still hasn't explained why having a set cap on your currency is such a good idea.

Even money backed by a gold standard has influx of new gold from mining as well as fluctuations on the gold market which can have drastic repercussions on the currency.

HOW and WHY is having a 21M cap and a set "mining" rate on bitcoins a desirable thing?

It's desirable for those holding the currency... This early adopter incentive is the absolute only way that a currency can hope to compete with the nation states currencies (given the risks one holding it assumes).

[Berend de Boer]

I don't get a reason why there are only 21M BTC?

The actual number (21 million) has a technical reason. Could have been any other number. But a fixed number is important, else no one would mine.

But note that BTC is infinitable dividable. I.e you have 0.1BTC, or 0.0001 BTC or 0.00000001BTC.

Gold is also finite. There's only so much on earth.

Having a fixed number doesn't matter. It simply mean you get slightly more stuff every year for the BTC you have saved.

[SuperHakka]

yo Monster, I hear yer. I too have given this much thought. I think I can frame the problem down to two directly opposing requirements/restrictions.

1. Bitcoins price to USD must stabilise to a small range in order for merchants and the general public to gain confidence. Visibility of value is key.
2. The amount of bitcoins never exceeds 21M.

The problem is that you can't reasonably satisfy both requirements without detrimental impact on bitcoin as a transaction system. For example, say that bitcoins stabilises at $100 per bitcoin. This means that the total value of bitcoins in the world can never exceed 2.1 billion dollars and this pile has to both act as a store of wealth for savers and also as money for everyday use. This is a tiny fraction of the global economy.

So the only way this is going to happen is that the price has to stabilize at a very high dollar price and very quickly in the next few years and this means an exponential bubble NEEDS to happen.

Course, I'm just a noob spouting so I could be wrong.

[Etlase2]

Instant transactions will likely have a huge impact on the world, its hard to know what kind of changes are possible.

And it's also something any cryptocurrency can do. This is the popular argument that "bitcoin will be a payment processor, not a currency." Why would anyone use a payment processor that has such a volatility risk when there are less volatile options? Bitpay is almost as expensive as paypal for low-volume, more expensive for any reasonable business volumes.

[Etlase2]

Really, mining? You mean to say that when 50% of all the money to ever be made will be made by December, that this will somehow bridge the gap in poorer countries? Yeah. Right.

Fictional means fake, btw.

[DonttreadonmeRP]

The 21 million limit is bitcoins bigges problem, and probably why it'll fail, IMHO.

1. The monetary supply can't expand. And no, you can't just move the comma to the left. If you divide 21 million into 210 million units of 0,1 bitcoins, you still won't get more bitcoins.nthe cake doesn't get any bigger, by people cutting it into ever smaller pieces.

2. It discourages trade, and BTCs adoption as an everyday currency. A very big group of BTC users (more than half probably) believe that Bitcoins have a very bright future, will replace/supplement fiat currencies and be worth a lot more in 5-10 years from now. As a consequence they hoard a big part of BTCs instead of spending them.

After all: If bitcoins in 2020 are going to replace just a few billion dollars worth of fiat currency, because of the 21M ceiling, it follows that one BTC is going to be worth hundreds, if not thousands of 2012 dollars in purchase power. What kind of fool would use every one of their bitcoins right now when theyre worth 8-12$ if they can hold on to them as an investment for ten years when they'll be worth thousands of 2012 dollars a piece.

When Satoshi designed the BTC protocol, I also don't think he predicted how fast the development in mining hw would be, nor what kind of people it would attract. (If he'd know for a fact the collective financial IQ level of the community and how gullible the community would be, I think it would be designed with more safeguards in place)

I reject your first premise. Price is best to climb slowly with no downturn. Why would a store owner be upset with his holdings being worth more? Prices can go down. People with coin can buy more. Ever poor people eith not much money. Every little bit of purchasing power help

This is exatly why the supply has to be slow. If it goes too fast it might crash again. As the price rises people will sell there coins slowly to get the most out of it. The "pie" gets bigger the more each coin is worth. Commerce will be stable as long as people don't crash the market. The deeper the market gets the more stable it will get.

[Monster-Ant]

Thank you all for the interesting information. For some intellectual masturbation I ran the numbers of bitcoins vs transactions made daily in the world via electronic means, adjusted upwards for population growth and internet accessibility, and chunked out 8.5% in wallet loss. The numbers made me cringe.

Even if BTC jumped to $15,000 a coin, how small the fraction would be to purchase something as necessary as a raw chicken became nerve wracking. It's down there where the possibility for floating point errors is no longer a maybe but a definite hazard.

I understand now why 21M was chosen, and why it's so virulently championed, and while I had thought of using all the hardware I just lucked into to mine, I see that the mining difficulty will double soon, meaning latecomers are even more shut out, so I'm not sure if it just might be more profitable to sell all that hardware and put a weight bench and stereo in my shop.

Thank you all for the patient explanation.

[Etlase2]

It's down there where the possibility for floating point errors is no longer a maybe but a definite hazard.

As you can probably tell I'm the furthest thing from a bitcoin apologist, but floating point errors are definitely not a hazard. BTC is wholly represented with integers, where 1 BTC is actually 100000000 "satoshis". Many people have suggested moving the decimal place in the user interface so that people don't feel bad about having millibtc. I believe the current UI actually does support it now as an option.

[Etlase2]

Cool. Now care to explain to us unenlightened commoners why deflation is a good thing because I'm kind of mystified how we used gold for thousands of years yet these superior currencies barely last a few decades.

I suppose you mean inflation?

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

This little empire that lasted for 500+ years used a form of fiat where coins were worth 10-20x the value of the metal.

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

This little empire used sticks of wood as currency for 700+ years. It only stopped because of the Rothschilds' involvement and the Bank of England in the 1700s.

Native Americans used wampum for who knows how long.

Many cultures used salt.

So fiat or inflationary currencies have been in use for probably as long as gold. The problem with modern fiat is that the ability to manipulate it was taken from the example of gold (central banks).