Bitcoin is a Zero-Sum Game - Long-term interest bearing instruments viable?

[Realpra]

You know talking about economy I realized that deflating currencies might actually be more Keynesian than Keynesian policies today:

If the entire economy starts shrinking due to a massive crisis the normally deflating currency would either deflate less or even loose value. This would then create a system-wide incentive to invest in solving the crisis, leading to a wave of capital!

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[Adrian-x]

...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?

Not sure what you mean. The value of the Bitcoin economy is created by the usefulness of the technology.

The size of the Bitcoin economy is small in comparison to the total value of all the Bitcoins.
IE. The total value of all goods and services in an economy = all the money  in the economy.
Now I have the current value of all the Bitcoins in circulation.

But if I convert all the Bitcoins to USD I could possibly buy more than 50 times the total goods and services in the Bitcoin economy.

Yes Bitcoin has a huge value - it is potential value.

It is the demand (current consumption) that is driving up the price of Bitcoin. (Causing price deflation in the Bitcoin economy)
Not the productivity of the economy that is causing price deflation in the Bitcoin economy at the moment.

At this point in time it looks to me that the wealth in the Bitcoin economy is created by "consumption" of Bitcoins , not the "production" of them.

If Bitcoin is the currency, the inherent deflation in the Bitcoin economy is sending the wrong signals to stimulate growth.

[annette786]

I just wanted to point out as "food for thought" that Bitcoins are a fixed issue currency.   This means is can not be expanded at this point beyond the initial 21 million projected coins.   I believe we have some people that have not really applied this to how they think about Bitcoins.   It is very interesting to see any long-term interest bearing arrangements that are marketed.   

If I agree to accept your coins and pay you an interest, that means regardless if my business idea I use creditors funds for is profitable, I still need to continually go into the market to not only cover principle but also the interest.  This becomes increasingly difficult with Bitcoins.  Like the title says, its a zero-sum game, to get Bitcoins, someone needs to sell Bitcoins.   As the supply gets more and more concentrated that will cause the nominal price of a Bitcoin to increase.    Even through Bitcoins are a useful exchange unit, I believe more people are actually "saving" Bitcoins as a store of wealth.   

This is why I question any long-term interest bearing arrangement or instrument that is not paying out in USD (or other currency) with the OPTION to get paid in BTC at the current spot price to remove the exchange risk from the person running the investment operations. 


What do you think about this perspective?
 

OP-- Haven't read all the posts... but you are simply referring to the time value of money.  Economics 101.  Bitcoin, cash, pez dispensers... it doesn't matter.  In BTCs case, if the exchange liquidity is tight, it might drive up interest rate.  The market will sort that out soon enough.

[justusranvier]

At the moment the act of lending is heavily subsidized by central banks. The mechanisms for doing that don't exist in Bitcoin so the subsidies also will not exist, so lending will be less common even without taking the deflation into account.

[Adrian-x]

When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases.  That price change conveys information about, e.g., the growth rate of the overall economy.  In contrast, when you allow a central bank or other authority to set "stable prices" as a goal by printing money to counteract the natural process of deflation, you've effectively introduced price controls on money. Those price controls (like all price controls) interfere with the signalling and rationing functions that prices are supposed to perform.  Because printing money keeps the "price" of money artificially low, the effect is to encourage money's overconsumption and thus overconsumption in general. 

Beautifully said.  +1

I agree with the sentiments expressed this is why I love the idea of a Bitcoin economy.
Please help me digest the paradox I see in the Bitcoin ecosystem:

When you allow deflation to occur, the "price" of money (i.e., the amount of goods and services that must be exchanged to "buy" a particular amount of currency) increases. 

The goods and services that must be exchanged to "buy" a particular amount of "Bitcoin" has increased about 100% in 3 months (by definition, deflation has occurred) 

That price change conveys information about, e.g., the growth rate of the overall economy.

The price change would signal that the Bitcoin economy has grown over 100% in 3 months.
* the Bitcoin economy by the definition of economy has not grown that much. (can't give evidence just a hunch I imagine Silk Road is over 50% of the economy)
** the cost of money by definition has increases.   

 The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.

The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.

As we have a functioning market I conclude the current cost of Bitcoin's is unsustainable and we should see inflation (or a big correction down) in the cost of Bitcoin's, a market reaction to the growth rate of the overall economy.

[Etlase2]

The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.

The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.

This is the nature of a currency-like commodity. The commodity is always going to interfere with the function of the currency.

[Dalkore]

The demand is mostly from people wanting a savings medium that isn't being debased and speculation of price appreciation based on other people realizing this and wanting to get in now to enjoy the speculation.   The more people save in Bitcoins, the tighter the supply becomes and the drives prices even more.  It is self-supporting, you will see sell-offs when people want to "lock-in" gains at certain prices points.  Most likely they will reinvest them later on once the corrections is completed and that will start the cycle again.  

Mining was the best investment initially because it gave you the lowest cost of acquiring Bitcoins.  With ASICs coming online, that will not be the case unless you took the gains from your previous mining investment and upgrade to keep up with the innovation of technology.  Now trading the markets or creating attractive businesses for people to invest in will be the next step in the cycle.

[Adrian-x]

The demand is mostly from people wanting a savings medium that isn't being debased and speculation of price appreciation based on other people realizing this and wanting to get in now to enjoy the speculation.   The more people save in Bitcoins, the tighter the supply becomes and the drives prices even more.  It is self-supporting, you will see sell-offs when people want to "lock-in" gains at certain prices points.  Most likely they will reinvest them later on once the corrections is completed and that will start the cycle again.

I Agree this is what is happening.[/quote]  

Mining was the best investment initially because it gave you the lowest cost of acquiring Bitcoins.  With ASICs coming online, that will not be the case unless you took the gains from your previous mining investment and upgrade to keep up with the innovation of technology.  Now trading the markets or creating attractive businesses for people to invest in will be the next step in the cycle.

Now trading the markets is all good and well if there is an economic base, if you are just trading up all the time demand will catch up with you and you will be holding a bunch of nothing if there is no economy to support it.

My concern is "creating attractive businesses for people to invest in will be the next step in the cycle" is discouraged by the nature of deflation. (you get your benefit by saving during deflation not investing) 


But what are people saving for is there is nothing in the economy to spend it on except the demand created by the traders who are always trading up.

[justusranvier]

But what are people saving for is there is nothing in the economy to spend it on except the demand created by the traders who are always trading up.

Traders don't care about economics or long-term viability - they just care about not being the last bagholder.

[Adrian-x]

The price of Bitcoin's is not being driven by the output of the economy. But more accurately it is the demand for Bitcoin (or more appropriately the push from fiat by the actions of central banks all over the world) that is driving up the cost of Bitcoin.

The result is that the price change is not conveying correct information about the growth rate of the overall Bitcoin economy.

This is the nature of a currency-like commodity. The commodity is always going to interfere with the function of the currency.

Sure if I use a commodity money eg. rice as money, it has 2 functions 1 as food (a comodity) and 2 as money easily traded for anything I want because of its inherent value.

The value of rice as money is somewhat susceptible to drought, the resulting supply and demand I understand ( and agree with you) will interfere with the function as a currency.(I see how this problem is managed by the market)  

the question is Bitcoin a commodity based money?

LOL....
Ok here is one way to resolve the problem.  The commodity that backs Bitcoin is the idea that a free market, frictionless, fixed currency economy is possible.

No that brings me back to a real commodity, can eat rise, I can only use Bitcoin to trade, and I can't trade without an economy. The result inflation to encourage investment.  

[Adrian-x]

But what are people saving for is there is nothing in the economy to spend it on except the demand created by the traders who are always trading up.

Traders don't care about economics or long-term viability - they just care about not being the last bagholder.

That is what I think too this is probably the bases for the ponzi criticisms that Bitcoin some times receives

[Etlase2]

I did say commodity-like, and gold is often considered a commodity, though it has very little practical use. The commodity of bitcoin is how much value can I make by not using it? Rather silly, if you ask me.

[Adrian-x]

I did say commodity-like, and gold is often considered a commodity, though it has very little practical use. The commodity of bitcoin is how much value can I make by not using it? Rather silly, if you ask me.

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 
Gold is a bit odd agreed, but if you make something out of gold it will never erode or tarnish there is value when you amortise the usefulness of a gold cup over eternity.

[justusranvier]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

[Dalkore]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

Absolutely speculative but here is the rub, they are right.  A non-debased savings medium (wealth reserve asset) is in high demand with all the quantitative easing (money printing) and now actual debasing (tungsten filled gold bars).  People are desperately trying to hold on to value.  They tried real estate, we saw how that turned out.   Tried food and energy futures, no one like $4 a loaf bread & gas.  This might be the next place where we see serious money enter the market and calculate the the Bitcoin is highly undervalued and not leveraged.

[bitcoinbear]

...
If you believe that wealth and prosperity result from consumption, you will hate Bitcoin. If, on the other hand, you believe that wealth and prosperity result from production, you will love Bitcoin.

Many will argue, "but you can't have production without consumption" and this is nonsense. I can go produce things without there being a buyer. Yet, I cannot consume things without there being a seller. Consumption is the effect - the result of - production, though unfortunately we live in a world in which people have come to believe the opposite.

@evoorhees
Is it paradoxical that the value of the Bitcoin economy is created by the consumption of Bitcoins?

Bitcoins are not consumed, they are just traded form one person to another. The value of the bitcoin economy lies in the ability of the bitcoins to be transfered in trade for other goods or services.

[Adrian-x]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence.

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

Absolutely speculative but here is the rub, they are right.  A non-debased savings medium (wealth reserve asset) is in high demand with all the quantitative easing (money printing) and now actual debasing (tungsten filled gold bars).  People are desperately trying to hold on to value.  They tried real estate, we saw how that turned out.   Tried food and energy futures, no one like $4 a loaf bread & gas.  This might be the next place where we see serious money enter the market and calculate the the Bitcoin is highly undervalued and not leveraged.

Yes your are describing the benefits, the end goal, but without the economy base there is nothing to trade, just like I can't eat gold, I can't eat Bitcoin.

[Adrian-x]

It is silly but my concern is that is driving Bitcoin demand, I haven't identified the counter evidence. 

I did some rough back-of-the-envelope calculations recently that suggests that speculation has driven the exchange rate about an order of magnitude higher than it "should" be based on the amount of Bitcoin commerce.

Assuming buying habits approximately equal to those in the larger economy and no speculative premium an exchange rate of $10 implies $1 billion/year in commerce but the available evidence suggests an actual amount between $10-100 million. That means speculative premium is a large factor in the exchange rate, perhaps as much as 90% of it.

So is it correct to assume that if the speculative aspect grows disproportionately to the economy, the market will correct, or else it will fail to grow (as a result of deflation)?

[justusranvier]

So is it correct to assume that if the speculative aspect grows disproportionately to the economy, the market will correct, or else it will fail to grow (as a result of deflation)?

It's not really possible to predict one way or the other.

A dislocation somewhere in the non-Bitcoin economy could cause money to come flooding in (or out...) of Bitcoin. It's also possible for BitPay to sign up enough merchants and get sufficient trade flowing to backfill the missing commerce before there's a correction.

[finkleshnorts]

Why would I invest in said business with my money to make 2% per year, when I could just keep the money in my pocket and make a certain 3% per year?

Because 5% > 3%. If you are earning a sum of 2% in a currency that increases in value by 3%, you reap the benefits of both.