Why bitcoin is doomed: I can't couterfeit them

[hashman]

https://quantiger.wordpress.com/2012/06/29/why-bitcoin-is-doomed/

tl;dr :
Suppose I have 10 bitcoins.  If I want to loan you money, I have to actually give these coins to you! 
Where's the profit in that?  Ridiculous.   

Note to quantiger:  you can still defraud investors.  Happy now?     

haha! [/captain haddock]
reposted here for the lulz

[1715059992]

1715059992

[1715059992]

1715059992

[1715059992]

1715059992

[1715059992]

1715059992

[1715059992]

1715059992

[1715059992]

1715059992

[firefop]

https://quantiger.wordpress.com/2012/06/29/why-bitcoin-is-doomed/

tl;dr :
Suppose I have 10 bitcoins.  If I want to loan you money, I have to actually give these coins to you! 
Where's the profit in that?  Ridiculous.   

Note to quantiger:  you can still defraud investors.  Happy now?     

haha! [/captain haddock]
reposted here for the lulz

Isn't it sad that how 'experts' don't understand basic economics?

[hazek]

Isn't it sad that how 'experts' don't understand basic economics?

You can't blame them really, they were never taught how to think logically and rationally.

[herzmeister]

It's true that in a perfect monetary system the money supply is linked 1:1 to the GDP.

But this concept is incompatible with an incorruptible Cryptocurrency.

I still believe though that Bitcoin won't be the only currency in the future, there'll be many different systems for different purposes in parallel (precious metals, local currencies, LETS, Ripple, privately issued ones, business-to-business clearance etc), and this will make such discussions obsolete.

[justusranvier]

Nobody remembers what capital formation means any more - they are so accustomed to central planning via credit allocation that the idea that business expansion can be funded by allowing producers to retain their profits is completely alien to most economists.

[Evolvex]

I still believe though that Bitcoin won't be the only currency in the future, there'll be many different systems for different purposes in parallel (precious metals, local currencies, LETS, Ripple, privately issued ones, business-to-business clearance etc), and this will make such discussions obsolete.

I'm with you on that dude, even if bitcoin fails, I think the concept that it has brought to the table will carry on, I think its basically going to turn what everyone things about money on its head - about time these "symbols" of wealth had a new shake up, its been a while.

[Come-from-Beyond]

"There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. If you cannot enlarge the money supply to account for new value then when ever something new appears, the price of everything must go down to account for it."

This sounds sane.

[DublinBrian]

The Fed is the biggest employer of economists in the world. 22,000 employees, mostly economists and statisticians. Anyone who does not support the inflation doctrine is not eligible to work there.

Moreover, any school that doesnt teach the "Inflation is good, deflation is bad" doctrine will not have any of their graduates gain employment at the Fed. So as a result, no schools or universities are willing to teach the truth.

The "deflation is bad" doctrine is a religion. A church that has power over its congregants minds. The blog author is a member of this church. His religion is about to be swept away by a reformation.

[JoelKatz]

https://quantiger.wordpress.com/2012/06/29/why-bitcoin-is-doomed/

tl;dr :
Suppose I have 10 bitcoins.  If I want to loan you money, I have to actually give these coins to you!  
Where's the profit in that?  Ridiculous.    

But that's not true. I can equally well just note in my own ledger that you have 10 bitcoins in a demand account without giving you any actual bitcoins. If the scenarios envisioned in that article ever happened (and I don't think they will, but let's assume it) then people would just do exactly that, using demand notes denominated in bitcoins to inflate the money supply.

[hazek]

"There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. If you cannot enlarge the money supply to account for new value then when ever something new appears, the price of everything must go down to account for it."

This sounds sane.

It does and here's how that happens in Bitcoin: move the decimal point one to the right and BAM you just increased the supply of bitcoins by 10 times!

[Fjordbit]

The Fed is the biggest employer of economists in the world. 22,000 employees, mostly economists and statisticians. Anyone who does not support the inflation doctrine is not eligible to work there.

Moreover, any school that doesnt teach the "Inflation is good, deflation is bad" doctrine will not have any of their graduates gain employment at the Fed. So as a result, no schools or universities are willing to teach the truth.

The "deflation is bad" doctrine is a religion. A church that has power over its congregants minds. The blog author is a member of this church. His religion is about to be swept away by a reformation.

Deflation is generally bad for a constant growth paradigm. If future dollars are worth more, then it reduces motivation to lend and invest. At the same time, it also makes it harder for debtors to repay their debts as their income streams are reducing. The net effect is that economic growth is hampered.

However, this just begs the question that constant growth is a good paradigm. I submit that it is not and instead what we need is an economy at equilibrium. Constant expansion has lead to us using up the resources of the planet and possibly already has us on a trajectory that will result in wide spread famine and loss. Part of the problem is the expansionary money system that makes it appear that we can just add new aspects to the economy without negative effects. An economy at equilibrium that readjusts when new real innovations are introduced is better equipped to handle the issues of a world with a finite limit of power input, finite water supply, and other resource limitations.

[firefop]

The Fed is the biggest employer of economists in the world. 22,000 employees, mostly economists and statisticians. Anyone who does not support the inflation doctrine is not eligible to work there.

Moreover, any school that doesnt teach the "Inflation is good, deflation is bad" doctrine will not have any of their graduates gain employment at the Fed. So as a result, no schools or universities are willing to teach the truth.

The "deflation is bad" doctrine is a religion. A church that has power over its congregants minds. The blog author is a member of this church. His religion is about to be swept away by a reformation.

Deflation is bad only in a fractional reserve (debt based system). The concept that all goods must have monetary backing to hold value is stupid in the extreme. Really the amount of the money supply only matters up to a point because it circulates. That's the purpose of it. As bitcoin deflates (and it should as it slowly begins to replace less reliable currencies) we'll see exactly the opposite of what the 'economists' fear. This is less hoarding. As the value of a bitcoin increases, the markets will show more stability over the long term and this will lead to people needed to hold less btc to meet their personal financial goals - freeing that coin up for riskier investments (the excess will become wealth and be treated accordingly).

Then we'll see trickle down economics really working on a large scale.

[JoelKatz]

If future dollars are worth more, then it reduces motivation to lend and invest.

Not all lending and investing are good. We recently had a global economic collapse due to overly-incentivized lending and investing.

At the same time, it also makes it harder for debtors to repay their debts as their income streams are reducing. The net effect is that economic growth is hampered.

Their income streams aren't reducing. They are reducing when denominated in the deflating currency, but their real value is not reducing.

However, this just begs the question that constant growth is a good paradigm. I submit that it is not and instead what we need is an economy at equilibrium. Constant expansion has lead to us using up the resources of the planet and possibly already has us on a trajectory that will result in wide spread famine and loss. Part of the problem is the expansionary money system that makes it appear that we can just add new aspects to the economy without negative effects. An economy at equilibrium that readjusts when new real innovations are introduced is better equipped to handle the issues of a world with a finite limit of power input, finite water supply, and other resource limitations.

I don't agree. Resource limitations are fictional. If you don't see why, ask yourself this question -- was Uranium a resource in 1790? If not, then resources are not fixed and constant expansion includes resource expansion. If so, then the entire universe is a resource.

[Come-from-Beyond]

"There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. If you cannot enlarge the money supply to account for new value then when ever something new appears, the price of everything must go down to account for it."

This sounds sane.

It does and here's how that happens in Bitcoin: move the decimal point one to the right and BAM you just increased the supply of bitcoins by 10 times!

I disagree. The same happens with stock split. If u had 100 shares after 10x split u would have 1000 of them. Moving decimal point in Bitcoin helps only to use amounts less than 1 satoshi, it doesn't increase Bitcoin's supply.

[FreeMoney]

Here is my rebuttal:
He tries to present a thought experiment with his quant coins, but completely fails to grasp some of the fundamental problems of the system he's defending.

1) He is the "authoritarian dictator" in that scenario. He has a special monopoly on the right to acquire wealth without earning it, while everyone else has to face the 'reality' of working hard and the risk of going bust. This is just Feudalism in disguise.

2) It's very easy for the system to be unstable, whereby he gradually acquires more and more wealth. It seems that no matter what he does, he, as the central bank, cannot lose. Combine that with greed and other human weaknesses, it's extremely tempting for central banks and bankers to corrupt the system. The so-called "boom bust cycle" is a colossal fraud designed to enrich banks.

3) He doesn't actually present any arguments as to why deflation is bad. Population growth is not good enough. There is more than one way to double the number of coins in circulation: you can mint them, or you can cut them in half.

And FOUR, the point that obliterates and renders his entire article null and void...
Bitcoin's decentralised, open-source nature actually does allow money supply expansion! The caveat is that the expansion will only occur organically. I.e.: if there's a sufficient profit motive for people to FORK the damn project! This solution is staring him and all the other sceptics in the face and they still don't get it. Likewise, if Bitcoin-compatible parallel currencies fall out of favour due to some depression, the market exchange rate will take care of that automatically.

He's got all the money and is pretending a reasonable goal is to get more money. It's just not reasonable at all. This dictator ought be happily lending out the money at a loss to get new stuff. Beyond that, he can get paid back amply even in money terms by buying stuff when it's ready, getting paid back and buying more stuff.

There is so much strange about his system that it doesn't isolate the variable he's trying to criticize.

[hazek]

"There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. If you cannot enlarge the money supply to account for new value then when ever something new appears, the price of everything must go down to account for it."

This sounds sane.

It does and here's how that happens in Bitcoin: move the decimal point one to the right and BAM you just increased the supply of bitcoins by 10 times!

I disagree. The same happens with stock split. If u had 100 shares after 10x split u would have 1000 of them. Moving decimal point in Bitcoin helps only to use amounts less than 1 satoshi, it doesn't increase Bitcoin's supply.

I don't understand. In your analogy you say I start with 100 shares, and then I have 1000 shares and yet you say this is not an increase in supply? What is this then?

[JoelKatz]

I don't understand. In your analogy you say I start with 100 shares, and then I have 1000 shares and yet you say this is not an increase in supply? What is this then?

It is not an increase in the total value, but of course printing more money or lending out money doesn't increase the total value either. What bothers them is that this isn't any value that they can appropriate, because it's shared by all currency holders equally. In their view, printing more money and giving it to everyone is bad, but printing more money and giving it to banks to lend out is good, because lending is good. And giving it to governments to spend is good because government spending is good.

What they really want to do is punish saving, which they slander by calling it "hoarding". This is really the broken window fallacy writ large. Saving is actually producing. To "save money", you must earn it and do nothing else.

It's true that in a perfect monetary system the money supply is linked 1:1 to the GDP.

This presumes that there is one fixed ideal balance between saving (deferring consumption) and investing (consuming now). A monetary system whose value was determined by the market such that it tended to deflate when saving makes more economic sense and inflate when investing makes more economic sense would make more economic sense overall.

[MoonShadow]

It's true that in a perfect monetary system the money supply is linked 1:1 to the GDP.

But this concept is incompatible with an incorruptible Cryptocurrency.

I still believe though that Bitcoin won't be the only currency in the future, there'll be many different systems for different purposes in parallel (precious metals, local currencies, LETS, Ripple, privately issued ones, business-to-business clearance etc), and this will make such discussions obsolete.

The very metric we call Gross Domestic Product has no practical meaning in the bitcoin economy.  Gross Global Economy would, but doesn't tell you anything useful.

[Etlase2]

It's true that in a perfect monetary system the money supply is linked 1:1 to the GDP.

But this concept is incompatible with an incorruptible Cryptocurrency.

I disagree. See signature.

[Come-from-Beyond]

I disagree. The same happens with stock split. If u had 100 shares after 10x split u would have 1000 of them. Moving decimal point in Bitcoin helps only to use amounts less than 1 satoshi, it doesn't increase Bitcoin's supply.

I don't understand. In your analogy you say I start with 100 shares, and then I have 1000 shares and yet you say this is not an increase in supply? What is this then?

It's similar to using "micro" and "nano". If every bitcoin was a coin with "1 BTC" printed on it, then we would have 21'000'000 such coins. If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins. Increase in supply would be if we added more coins to those 21 million ones.

[justusranvier]

Deflation is associated with depression because depressions always happen after an bubble created by the mass emission of unbacked credit, with all the resource misallocation this entails.

When all the bad debt eventually defaults the result is deflation while the effective monetary supply shrinks.

Blaming deflation for the pain experienced during depressions is a case of blaiming the symptom - it's like blaming the fact that you stopped drinking for causing your hangover instead of blaming the excessive drinking. There's nothing wrong with the natural deflation caused by increasing productivity in an economy with a fixed currency supply. The problem is speculative bubbles caused by excessive credit.

[Etlase2]

Deflation is associated with depression because depressions always happen after an bubble created by the mass emission of unbacked credit, with all the resource misallocation this entails.

What do you think would happen if, for example, Satoshi actually does control 1-2 million BTC and starts a banking empire? (I'm asking your opinion, not giving a leading question.)

[hazek]

I disagree. The same happens with stock split. If u had 100 shares after 10x split u would have 1000 of them. Moving decimal point in Bitcoin helps only to use amounts less than 1 satoshi, it doesn't increase Bitcoin's supply.

I don't understand. In your analogy you say I start with 100 shares, and then I have 1000 shares and yet you say this is not an increase in supply? What is this then?

It's similar to using "micro" and "nano". If every bitcoin was a coin with "1 BTC" printed on it, then we would have 21'000'000 such coins. If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins. Increase in supply would be if we added more coins to those 21 million ones.

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

[hazek]

I don't understand. In your analogy you say I start with 100 shares, and then I have 1000 shares and yet you say this is not an increase in supply? What is this then?

It is not an increase in the total value, but of course printing more money or lending out money doesn't increase the total value either. What bothers them is that this isn't any value that they can appropriate, because it's shared by all currency holders equally. In their view, printing more money and giving it to everyone is bad, but printing more money and giving it to banks to lend out is good, because lending is good. And giving it to governments to spend is good because government spending is good.

What they really want to do is punish saving, which they slander by calling it "hoarding". This is really the broken window fallacy writ large. Saving is actually producing. To "save money", you must earn it and do nothing else.

Nicely said. Btw I knew that already I'm just having fun pointing out the stupid stuff Come-from-Beyond writes by pretending I'm clueless 

[justusranvier]

What do you think would happen if, for example, Satoshi actually does control 1-2 million BTC and starts a banking empire?

I don't know what that means. What's he actually going to do with his bitcoins?

[Etlase2]

I don't know what that means. What's he actually going to do with his bitcoins?

Banks usually lend money.

[streblo]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

[makomk]

It is not an increase in the total value, but of course printing more money or lending out money doesn't increase the total value either. What bothers them is that this isn't any value that they can appropriate, because it's shared by all currency holders equally.

Okay, so you're saying that the thing that bothers them is that people who want to invest money in new businesses can't "appropriate" value from other currency holders who just sit on their money because any increase the size of the economy resulting from their investments is shared by all currency holders equally? Because that's what the blog post seems to be complaining about, and it does seem like it'd not work out terribly well.

[Come-from-Beyond]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

[JoelKatz]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

You're absolutely right, if the economy is already growing so fast that no investment is better than just leaving things the way they are, then investment will, and should be, discouraged. Not all investment is good. Bad investments steer resources from more productive uses to less productive uses.

[hazek]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

Are you sure you linked the right page? Because what you linked seems to indicate it's you who is wrong:

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25.

In this example the supply of shares doubled and the price of each share accordingly halved. This perfectly mirrors my post in your quote, does it not?

[JoelKatz]

Okay, so you're saying that the thing that bothers them is that people who want to invest money in new businesses can't "appropriate" value from other currency holders who just sit on their money

No, not at all. It's not the investors who appropriate the value, it's government and bankers who do that. Government prints more money. Bankers create money by loaning it out. (Of course, some bankers are also investors, but it's in their capacity as bankers that they appropriate the value.)

because any increase the size of the economy resulting from their investments is shared by all currency holders equally?

That always happens. If I grow the economy, all stakeholders benefit equally. That's not the issue. It's about whether you can penalize people who refuse to consume on the misguided theory that consumption produces value.

Because that's what the blog post seems to be complaining about, and it does seem like it'd not work out terribly well.

That's not a problem even if you agree with it. So long as you don't have a coercively-enforced monetary policy, people can always grow the currency by circulating debt instruments.

[streblo]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

You're absolutely right, if the economy is already growing so fast that no investment is better than just leaving things the way they are, then investment will, and should be, discouraged. Not all investment is good. Bad investments steer resources from more productive uses to less productive uses.

I agree that this negative-feedback is good and works well during an expanding economy. Essentially, a bubble is prevented.

Instead, suppose the economy is contracting for whatever reason, perhaps a natural disaster or a lack of good ideas. Due to the economy contracting, the demand for goods is lowered and, hence, prices go down. When prices go down, the rate of deflation increases, thus exacerbating the situation. Is this not the case?

[hazek]

Here's a problem I see with deflation that I haven't seen a good answer for, perhaps someone could enlighten me.

When the risk-adjusted real interest rate of an economy falls below the rate of deflation, what incentive is there to loan? If you say none, then this leads to higher rates of deflation, which mean more deflation and hence the proverbial deflationary spiral. With inflationary prices, even if the real interest rate is negative, there is still an incentive to give loans (or using a bank via CDs/time-deposits/savings-accounts, etc). Thanks

You're absolutely right, if the economy is already growing so fast that no investment is better than just leaving things the way they are, then investment will, and should be, discouraged. Not all investment is good. Bad investments steer resources from more productive uses to less productive uses.

I agree that this negative-feedback is good and works well during an expanding economy. Essentially, a bubble is prevented.

Instead, suppose the economy is contracting for whatever reason, perhaps a natural disaster or a lack of good ideas. Due to the economy contracting, the demand for goods is lowered and, hence, prices go down. When prices go down, the rate of deflation increases, thus exacerbating the situation. Is this not the case?

But that's a good thing. If the economy is contracting for whatever reason, perhaps a natural disaster, then you want people to save more in order to more comfortably weather the storm. In such a case you want the non essential jobs to be lost and more essential jobs gained.

For example, right now the FED is trying to reinflate a bubble when even though it would be a crushing blow to the economy what we really need is to stop inflating and start restructuring the unproductive sectors that are wasting misallocated resources and free those up for the productive part of the economy. A lot of jobs would be lost, a lot of wealth would get destroyed through debt liquidation but hey at least we'd get to the bottom and to a sound foundation for renewed growth again.

[streblo]

But that's a good thing. If the economy is contracting for whatever reason, perhaps a natural disaster, then you want people to save more in order to more comfortably weather the storm. In such a case you want the non essential jobs to be lost and more essential jobs gained.

I would think you would want people investing (as opposed to saving/sitting-on-money) to rebuild back to the equilibrium established previous to the economic contraction.

For example, right now the FED is trying to reinflate a bubble when even though it would be a crushing blow to the economy what we really need is to stop inflating and start restructuring the unproductive sectors that are wasting misallocated resources and free those up for the productive part of the economy. A lot of jobs would be lost, a lot of wealth would get destroyed through debt liquidation but hey at least we'd get to the bottom and to a sound foundation for renewed growth again.

Isn't that what was tried at the beginning the great depression, which lead to its longevity? The countries which bounce back fastest were the ones which dropped the gold standard the soonest.

Thank you hazek and joel for your helpful, informative replies. I want to believe a an economy can be run on a fixed amount of money, but I'm having trouble getting past this. Cheers

[hazek]

Hey that's ok. You've learned a theory of how the economy works and you're having a hard time letting go, it happens. Maybe it will be easier for you to believe what we're telling you is actually how reality works once Bitcoin turns out to be the best thing yet for an economy a few decades from now.  

[julz]

I want to believe a an economy can be run on a fixed amount of money, but I'm having trouble getting past this.

I find it a little strange that this subject comes up as a point against Bitcoin, as it is surely only an issue in the rather unlikely scenario that an *entire economy* is running on Bitcoin.
Surely most people see Bitcoin as something that will somehow slot in amongst other currencies rather than something that will take over the world?

Anyway - my take is that even if an entire economy were running on bitcoin, the divisibility could *in effect* allow expansion and contraction of money supply as necessary, simply through price adjustments.  The counter to this argument is that prices, and particularly wages can be 'sticky'.
(The unions will need to do a bit of rethinking - and base their negotiations on some metric of maintaining spending-power per week for example. Well I guess they already do, but they'll have to be transparent and rigorous in their calculations to overcome people's psychological distaste for a 'smaller' paypacket)

In a computerised age where recalculating & repricing is relatively trivial, (along with adjustments to people's expectations of 'my wage must go up' etc)  - it should surely be the case that such a highly divisible system would be the fairest  way of keeping the effective money-supply in sync with economic activity, all through the mechanisms of supply & demand without intervention required.

[Dabs]

By year 2013 there will be about 11 million bitcoins, about half of the maximum, which will be reached by year 2100+.
By year 2020 there will be about 18 million bitcoins, almost close to 90% of all possible bitcoins.

There will be another 80 to 120 years after that of very slow growth or increase in the amount of bitcoins.

The value of the bitcoins is another matter. Right now it is about $10 per bitcoin.

Also, we have about 8 billion people on this planet. Not everyone is going to use bitcoins for the same reason not everyone has every other government denominated currency except what they use regularly in their home country. The biggest ones would be the US Dollar and the Euro.

We can estimate the population of an imaginary country that uses bitcoin at maybe a maximum of 1 billion people, and probably not even that. Maybe it's closer to 10 million individuals, within the next few years. Right now, the numbers are probably close to 100,000 people, as in people, not addresses, maybe even less.

On average, everyone of those 100,000 people would have about 100 bitcoins each, on average. Some people will have more, some people will have less.

I don't know what the value of the bitcoin will be against the dollar or whatever currency by next year, but I do know it will be higher than it is today.

Bitcoin is not doomed, but it will not completely replace other currencies, for the same reason not everyone trades on the biggest ones. Depends on where you live.

[streblo]

Hey that's ok. You've learned a theory of how the economy works and you're having a hard time letting go, it happens. Maybe it will be easier for you to believe what we're telling you is actually how reality works once Bitcoin turns out to be the best thing yet for an economy a few decades from now.  

For all intents and purposes, the deflationary problem with gold and bitcoin is the same. And divisibility isn't really a factor, unless you consider it to add to price stickiness.  My questions are more general than being specific to just Bitcoin. Also, I think a few decades from now Bitcoin (if it still exists) will have so many hardforks it won't be recognizable.

I want to believe a an economy can be run on a fixed amount of money, but I'm having trouble getting past this.

I find it a little strange that this subject comes up as a point against Bitcoin, as it is surely only an issue in the rather unlikely scenario that an *entire economy* is running on Bitcoin.
Surely most people see Bitcoin as something that will somehow slot in amongst other currencies rather than something that will take over the world?

Yes, I agree. So it is somewhat a hypothetical exercise. This deflation thing always comes up and has always bothered me. For the next decade, bitcoin supply is highly inflationary, with a decade of moderate bitcoin supply inflation after that, so, once again, discussing this money supply is irrelevant to the present (insofar as future expectations can't affect the present).

[grondilu]

Just red this piece of crap.  What a troll.


« And yet, these very same designers of BitCoin are part of the segment of society that creates new utility value. Engineers dream up things that never existed before and bring them into the world. There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. »

Duh...yeah...  with prices!   Jeez.

Wealth is created, prices fall.  So we know wealth has been created and we can even measure it with falling prices.  That's what money is about: measuring the value of things.   In a world with X apples, the price of an apple is twice the price as in a world with 2*X apples.   And in a world where there is more wealth, things look cheaper.  Because people are richer, because there is more wealth.  What's so hard to get, seriously?

[stochastic]

https://quantiger.wordpress.com/2012/06/29/why-bitcoin-is-doomed/

tl;dr :
Suppose I have 10 bitcoins.  If I want to loan you money, I have to actually give these coins to you! 
Where's the profit in that?  Ridiculous.   

Note to quantiger:  you can still defraud investors.  Happy now?     

haha! [/captain haddock]
reposted here for the lulz

Let’s create a game to understand this better. In my game there are 100 QuantCoins and I am the angel investor who holds them all. There are ten players. I loan out 10 QuantCoins to each player and charge 10% interest, and I take a 50% equity position in each player. All players must either pay off their loans, with interest, after 20 rounds of the game or go bankrupt and I collect whatever money they have left. Only if they pay off their loan do they get to keep half of what they made.

Tell me where the players that pay off their interest get the money from. Obviously, everyone can’t pay their interest for the simple reason that the game has been designed to demand 110 total QuantCoins out of a system containing only 100 coins.

This is the best rebuttal in the comments to the inflation argument:

Could you use a QuantCoin example where the person doing the 100 QC investment doesn’t own all the coins in the system (aka realism)? If there were only $100 in existence and I get back $110 after another $10 is printed, the value of the $110 now is exactly the same as the value of the $100 then, no? Printing the extra $10 didn’t create more value, as I understand it.

[Rassah]

I really love the “Bitcoin will die because it will be valued too much” theories! I mean, look at gold. It’s very deflationary, so it’s doomed too!

Regarding his $100 example. That is true if all he did was sit on the money paid back to him. If, instead, his borrowers paid him back $1 at a time, and he went out and spent that money for something else, that $1 would get recirculated back into the economy, he would own that something else, AND that $1 would eventually make it back to him as a loan repayment, again. In the end, he would have received a total of $110, though not all of that money would have been in his bank at the same time. Also, the value of everything he owns and bought would be worth $110 using pre-loan exchange rates.
Is that about right?

[Come-from-Beyond]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

Are you sure you linked the right page? Because what you linked seems to indicate it's you who is wrong:

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25.

In this example the supply of shares doubled and the price of each share accordingly halved. This perfectly mirrors my post in your quote, does it not?

Well... I think [my "supply" of bitcoins] != [ur "supply" of them]. If there are 90% of bitcoins mined (10% in supply) then after a split there are still 10% in supply. At extremum when all bitcoins in someone's hand splitting doesn't create bitcoins somewhere else.

[hazek]

Wait what?

If we decided to split Bitcoin 10x times then we would have "10 BTC" printed on the same (21'000'000) quantity of coins.

WTF, you aren't making any sense. If we split a 1BTC coin 10x times, don't we then get 0.1BTC printed on 21'000'000 * 10 coins giving us 10 * 21'000'000 more coins to work with now?  

U r wrong. Read http://en.wikipedia.org/wiki/Stock_split. Replace "share" with "bitcoin".

Are you sure you linked the right page? Because what you linked seems to indicate it's you who is wrong:

Take, for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25.

In this example the supply of shares doubled and the price of each share accordingly halved. This perfectly mirrors my post in your quote, does it not?

Well... I think [my "supply" of bitcoins] != [ur "supply" of them]. If there are 90% of bitcoins mined (10% in supply) then after a split there are still 10% in supply. At extremum when all bitcoins in someone's hand splitting doesn't create bitcoins somewhere else.

You, you know what I think? I think [your "supply" of bitcoins] == [trolling].

Let's refresh our memory what we are really talking about for a second:

"There are reasons why the money supply needs to be something that can enlarge. Creation of new value, new products, new capabilities that never existed before is one of them.  When new value appears it must be accounted for somehow. If you cannot enlarge the money supply to account for new value then when ever something new appears, the price of everything must go down to account for it."

This sounds sane.

This is how new value is accounted for in bitcoins by moving the decimal point to the right:
First by doing so you get 10 times more coins each worth ten times less than the original coin. And when the new value is added and then PRICED in these new coins, their purchasing power raises. If item x required 1 old bitcoin and now after the split required 10 bitcoins with the new value added this might change to a PRICE of 5 new bitcoins. In other words value is added the only way it can possibly get added - through a revaluation.

The SAME THING HAPPENS if you inflate(increase) the supply by creating new money instead of splitting the old. Then too a revaluation happens but in this case instead of holders of currency having their purchasing power increased, which is what really matters and not the number of coins one has, their purchasing power stays the same or decreases if more money was created than value added. But the newly added dollars now also have the same value or purchasing power, where did that come from? It came directly from holders of the currency before it was inflated. In this case if item x cost 10 dollars before inflating after the revaluation it now still costs 10 dollars or maybe a bit more AND someone else new that before the increase of supply didn't have any purchasing power now also has 10 dollars to spend. The revaluation in this case happened where the newly created dollars went from being nothing to being worth exactly the same as the old ones meaning the purchasing power of 10 new dollars increased from 0 to being able to buy item x.


Voila, value or rather purchasing power added in both cases. In the first I as the holder of bitcoins am the one that gets it, in the second the money printers get it.

[DublinBrian]

Tell me where the players that pay off their interest get the money from. Obviously, everyone can’t pay their interest for the simple reason that the game has been designed to demand 110 total QuantCoins out of a system containing only 100 coins.

The blogger is a fool. It is perfectly possible for a debt + interest of 110 coins to be paid out of a total money supply of 100 coins.

Every month a debtor pays monthly interest to the lender. This is the lending banks revenue stream. Out of that revenue the lender pays their staff wages, salaries, operating costs, utilities, rents, taxes, dividends etc. They spend that money out into the economy where it can be earned again by the debtor to pay next months interest.

In theory the debtor could actually earn the same banknote with the same serial number, that he used to service his loan the previous month.

[Come-from-Beyond]

You, you know what I think? I think [your "supply" of bitcoins] == [trolling].

Ok. Never mind then.

[hazek]

You, you know what I think? I think [your "supply" of bitcoins] == [trolling].

Ok. Never mind then.

I did write the reasons why I think so which it appears you aren't even willing to address. So it's not like I'm ad homineming you.

[Chang Hum]

The problem with this article is that it's undermined by it's title. The author's argument would have a lot more credibility if it was titled "why Bitcoin is doomed at failing to replace the current monetary system". However the author chooses to intellectualize an argument based on what he defines as the ultimate goal or purpose of Bitcoin and doesn't elaborate that he is countering the crazy idea a few have of Bitcoin taking over the world until his blog comments.

I thought it was a well written, interesting piece from someone that clearly understands economics as much as someone can, but as the above the title undermines the argument IMO.

As Joel Katz pointed out in his blog comment

"Bitcoin is a system for securely storing and transferring value. Without limits, delays, high fees or borders. Anyone can use it, no documents to sign. You can make a transfer or receive one any time, anywhere and from/to anywhere in the world. Location makes no difference, as long as you have internet connection.
Bitcoin can potentially remove middlemen from the money transfer and storage equation completely. Aside from the other cryptocurrencies that popped up in Bitcoin’s wake, There’s nothing else out there that I’m aware of that even comes close."

[Etlase2]

Voila, value or rather purchasing power added in both cases. In the first I as the holder of bitcoins am the one that gets it, in the second the money printers get it.

While your argument is correct, it leaves out some subtleties. Let's say in the bitcoin scenario the value of a bitcoin has increased solely because of increased value in the economy, and this value is 10%.

If person X has 10,000 bitcoins, he now effectively has 11,000 bitcoins, a real increase worth 1,000 (original) bitcoins in value.
If person Y has 100 bitcoins, he now effectively has 110 bitcoins, a real increase worth 10 bitcoins in value.

While this may be slightly more fair than the way fiat works (this is not necessarily true because of the issues of employment when it comes to deflation; factoring in deflation into the economy is still upsetting to the economy and probably more so than inflation), it still isn't that much different. It is not the people producing the new value that benefit, it is those that have control of the wealth in currency (banks mostly). And if it is money from the banks that is being lent to produce this new wealth, it is doubly advantageous for the banks because not only do they get the lion's share of the new wealth, but they also earn interest on it. A situation that is remarkably similar to fiat.

But the worst part is that Bitcoin doesn't know if new value has been added to the economy or if the velocity of money has reduced (equation of exchange). It has no way of knowing, and the wealthy can spend/loan less to make it seem like new value has entered into the economy, when in reality it is just manipulation of the supply. So while no new value has entered the system, person X still has 11,000 effective bitcoins and person Y has 110 effective bitcoins, but 1,000 bitcoins buys a lot more existing value than 10. And once those 1,000 effective bitcoins get into the economy and increases the velocity of money, person X has more real world value than he traded for in bitcoins.

[Etlase2]

You left out some subtleties yourself. Of course you're entitled to your opinion that the economy has grown by 10%, but I say that it has only grown by 5%. Who is correct? This goes back to my comment about using a representative "basket of goods" to judge growth. Why should your particular method of judging economic growth take into account items that I think should carry less weight (just for the sake of this example)? And why should we trust some secretive authority to make "official" rulings on economic growth, which invariably try to justify inflation?

Relax, brother. It is obviously unrealistic to tie this to an exact real-world scenario, but I am giving a similar parable to the person I quoted. You are derailing that.

But let's say that the growth appears to be real because some guy just manufactured a large number of widgets. How do we measure this growth? By the profit he makes, denominated in the currency we're about to alter? By the retail price of the widgets? It's nonsensical! And if that's not bad enough, we can muddy the waters even more by discussing the opportunity cost of the time and resources he spent making widgets. We could argue that there was never any growth per se. He simply spent some effort converting one resource into another kind of resource. And if he hadn't made widgets, he could have made quibblets instead.

This is all completely irrelevant to the example I provided.

And neither does anyone else. Observer bias is the rule of the day.

This is where you are exceptionally wrong. Those manipulating the economy know precisely what is happening, and how best to take advantage of it. See the ENTIRE HISTORY OF MONEY.

[markm]

Unlike fiat, bitcoin is freely copyable - free open source.

So unlike fiat, with bitcoin anyone who produces a bunch of widgets could also produce a bunch of widgetcoins, fully compatible with bitcoin handling systems merely by choosing a different port number to connect to for each such currency whose daemon you want to talk to for a particular transaction.

Thus any time a whole bunch of new value is created, a whole bunch of new currency can also be created, and like the new goods its issuer offers in exchange for it it is plainly something new; it is not snuck out of other people's purses nor does it sneak extra, un-earned value into the purses of the hoarders of the older varieties of coin.

Canadian Tire, Walmart, Macdonalds, and such are probably in a good position to issue new coins, but wait, do they actually create new goods? Maybe having the retailers issue currency is just yet another usurping, a step closer to the actual producers maybe than the banks but still, maybe it should be the factories that issue the new coins? Hmmm...

-MarkM-

[grondilu]

Unlike fiat, bitcoin is freely copyable - free open source.

So unlike fiat, with bitcoin anyone who produces a bunch of widgets could also produce a bunch of widgetcoins, fully compatible with bitcoin handling systems merely by choosing a different port number to connect to for each such currency whose daemon you want to talk to for a particular transaction.

Thus any time a whole bunch of new value is created, a whole bunch of new currency can also be created, and like the new goods its issuer offers in exchange for it it is plainly something new; it is not snuck out of other people's purses nor does it sneak extra, un-earned value into the purses of the hoarders of the older varieties of coin.

Canadian Tire, Walmart, Macdonalds, and such are probably in a good position to issue new coins, but wait, do they actually create new goods? Maybe having the retailers issue currency is just yet another usurping, a step closer to the actual producers maybe than the banks but still, maybe it should be the factories that issue the new coins? Hmmm...

True.

If there really is a need for more monetary signs, they will appear as secondary currencies.  And the market will give them their appropriate price.

Just like silver and copper coins were used during the gold standard.

[VogueBlackheart]

I actaully poked around Quantiger's blog for a little while, read most of the posts. He's interesting in some places, sensitive to nuance at times. Though the utterly facile examples (Beanie Babies are the best analogy you can come up with for bitcoins? Really?) raised some red flags, his claims to being peer-review published in economics and exasperation with the 'uneducated' led me to really think hard on what I might be missing...

But yeah, inevitable conclusion: The guy does not understand money.

[firefop]

I'm still not convinced that the 21mil bitcoins would ever need to be expanded.

We'd be talking about ~1,666,666 USD per bitcoin before we'd even have to consider moving the decimal place.