Deflation and Bitcoin, the last word on this forum

[MtRev]

I just don't see why this is such a big deal. When the price drops, buy some more, when the price rises, sell for profit and keep doing it. Who cares if its deflation or not, either way you make money from it.

[thomiel]

My point: Bitcoin is rather subject to speculation than being anything else -- speculation in the possibility that it can be a major money transfer system in the future trusted by millions of people, in which case your hoarded BTCs will sky-rocket. That is the only value bitcoin is built upon right now (apart from the nerdy fun of the whole concept). The question is: how can it become a major money transfer system, or in other words: a currency? If it fails in doing so, your coins are lost (on the long run -- but defenitely before you are dead). I was going to point out that it lacks a mechanism that supports sane inflation.

Let me ask back: Looking at any well working currency system on the world, why is it that it's seems not possible to afford not to imply a decent inflation rate?

To help you understand: What would you do, if you knew, 10% of the bitcoins in your wallet would vanish each year and you are not able to use rate changes to speculate & compensate because the rates are stable? You would rather spend your bitcoins than seeing it vaporize, wouldn't you? Maybe in operations to get more bitcoins back than you have spent. So only your spending and working with the money avoids the economy from depression, because you create use value, so wealth in the society is maintained. Of course, it's better to increase the overall amount of money (thus equalizing the difference between hoarders and exchangers) rather than to take away money from hoarders. Inflation is an incentive to work, not to hoard. And work holds society together. Get the picture?

[MtRev]

What if BitCoin was created by Google Inc.?  Would you still think BitCoin would die out in our life time? You're right, it is what we make of it, but I think it's too early to tell the future of BitCoin. It really looks like people love the concept of bitCoin and how it works. I mean look at eGold, they never got as popular as BitCoin and they were backed by the value of actual gold. And yet, BitCoin is making noise all over the media, way more coverage then eGold when their data center got robbed.

Even google making an online wallet for BitCoin. They also believe this is going to be the next big thing, otherwise they wouldn't even spend time on it. I'm not saying anything that google touches will turn to gold, but they do have a good track record.  Digital currency may very well be the way of the future.

[serchanto]

My point: Bitcoin is rather subject to speculation than being anything else -- speculation in the possibility that it can be a major money transfer system in the future trusted by millions of people, in which case your hoarded BTCs will sky-rocket. That is the only value bitcoin is built upon right now (apart from the nerdy fun of the whole concept). The question is: how can it become a major money transfer system, or in other words: a currency? If it fails in doing so, your coins are lost (on the long run -- but defenitely before you are dead). I was going to point out that it lacks a mechanism that supports sane inflation.

Let me ask back: Looking at any well working currency system on the world, why is it that it's seems not possible to afford not to imply a decent inflation rate?

To help you understand: What would you do, if you knew, 10% of the bitcoins in your wallet would vanish each year and you are not able to use rate changes to speculate & compensate because the rates are stable? You would rather spend your bitcoins than seeing it vaporize, wouldn't you? Maybe in operations to get more bitcoins back than you have spent. So only your spending and working with the money avoids the economy from depression, because you create use value, so wealth in the society is maintained. Of course, it's better to increase the overall amount of money (thus equalizing the difference between hoarders and exchangers) rather than to take away money from hoarders. Inflation is an incentive to work, not to hoard. And work holds society together. Get the picture?

There are certain benefits to inflation, no doubt.  However, BTC was designed the way it was designed, namely, to only have limited amount of it, period.  That's one of the things that some people value about it (and others don't).  Having the properties that it has (decentralization, limited amount, relative anonymity, etc) it's become an asset class of its own.  Some people value real estate, some value dollars, some value euros, some gold, etc.  Some like the properties of bitcoin.  I am willing to bet that the majority of people like all of them combined, hence, these asset classes can and do co-exist.  No one is stopping anyone else from creating an inflating, decentralized coin, let's call it IDCoin.    I imagine IDCoin and Bitcoin would complement one another quite nicely, as long as they are both decentralized I'm OK with both.

[thomiel]

MtRev: Agreed. But you just addressed the both values bitcoin currently possesses: the conceptual one for nerds and the one for speculators -- maybe both of them multiplied to explain the impact. How and if it's going to lift off depends on decisions made by the community (or on behalf of the community by the development team). Evolution does not care about the feelings of some speculators and miners. Question remains: How do we make more of it?

PS/OT: Google & p2p? You are kidding!

[TierNolan]

I think people underestimate "menu costs".

It is hard for people to "think in bitcoins" for a currency that deflates at the rate that bitcoins are deflating. 

The number in the price should represent value rather than amount of the underlying asset.

You could still have bitcoins themselves deflating, but be able to give prices in "reference coins" or something.

If you pay 10 reference coins, your client would automatically show the bitcoins total and would actually send the bitcoins.

If you left your wallet alone, then the number of reference coins would increase over time.

Having bitcoins be the gold standard rather than the currency itself seems like a reasonable compromise.

[JoelKatz]

Without inflation, people don't invest.

That's simply incorrect. Inflation neither incentivizes nor disincentivizes investment. The mistake comes from ignoring the fact that the expected future performance of a commodity or currency is built into its current price.

For example, say we all knew that Neutronium would sell for $5,000/oz next year. And say you had some Neutronium. Would you wait to sell it? There would be no point, because the price of Neutronium today would immediately be bid up to close to $5,000/oz. So the future value of Neutronium would not detract from your willingness to sell the Neutronium today versus holding it to wait for its value to increase.

If Neutronium was going to increase in value and you had some, you could sell the right to hold the Neutronium as it increases for its fair market value. Or you could hold the Neutronium and get its fair market value. Either way, you get the same thing. So the expected future high price is no reason not to sell the Neutronium today.

The same applies with bitcoins. If we all know their value is going to increase, then the today price will include the value of that increase. If you want that increase in the future, you can just wait. But if you want it now, you can sell/invest. If you hold bitcoins, you will get their increase in value, but you could get that today by selling them. You lose any additional advantage of investing.

Holding currency has precisely the same disadvantage in either an inflationary or a deflationary economy -- you lose the additional value a wise investment could bring.

[TierNolan]

Holding currency has precisely the same disadvantage in either an inflationary or a deflationary economy -- you lose the additional value a wise investment could bring.

Right, in the long run, bitcoins should increase at the average market rate of return.  That assumes efficient markets, which if things are stable will be reasonable.  There isn't enough liquidity and also people aren't sure it will work.

[JoelKatz]

Holding currency has precisely the same disadvantage in either an inflationary or a deflationary economy -- you lose the additional value a wise investment could bring.

Right, in the long run, bitcoins should increase at the average market rate of return.  That assumes efficient markets, which if things are stable will be reasonable.  There isn't enough liquidity and also people aren't sure it will work.

Exactly. One of the main factors influencing the price of bitcoins today is people's uncertainty about how stable the bitcoin system will prove to be over time. Even if you think a cryptocurrency is a sure thing, it may not be bitcoin.

The deflation is meaningless. Predictable inflation and predictable deflation just get priced in.

[MoonShadow]

The deflation is meaningless. Predictable inflation and predictable deflation just get priced in.

This is true, but the highly predictable nature of Bitcoin (it's not deflationary) is an attractor for early adopters and long term speculators.

[thomiel]

Without inflation, people don't invest.

That's simply incorrect. Inflation neither incentivizes nor disincentivizes investment.

Hmm. I think we live on different planets then.

Not investing has two big benefit for hoarders: No risk to lose the invested money. No work involved to care about how the money is used.

[JoelKatz]

Without inflation, people don't invest.

That's simply incorrect. Inflation neither incentivizes nor disincentivizes investment.

Hmm. I think we live on different planets then.

Not investing has two big benefit for hoarders: No risk to lose the invested money. No work involved to care about how the money is used.

Right, but that works the same whether the currency inflates or deflates. In either case, if you don't invest you don't have to work to care about how the money is used and you have no risk to lose the money. If you do invest, you have the potential for a better rate of return and you have risk.

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

[MoonShadow]

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

[serchanto]

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

[MoonShadow]

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

[serchanto]

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

[MoonShadow]

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

Changes in the general prices are symtoms, not the causes, of deflation and inflation.  In the case of Bitcoin's high inflation rate, that symtom is overwelmed by other factors.  Words have specific meanings within certain contexts, and withing the context of Economics deflation and inflation only have meaning at all in relation to the decrease and increase in the monetary base.  There is no other way to define them with any useful precision.

[serchanto]

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

Changes in the general prices are symtoms, not the causes, of deflation and inflation.  In the case of Bitcoin's high inflation rate, that symtom is overwelmed by other factors.  Words have specific meanings within certain contexts, and withing the context of Economics deflation and inflation only have meaning at all in relation to the decrease and increase in the monetary base.  There is no other way to define them with any useful precision.

Change is price is neither a symptom nor a cause of inflation/deflation.  It'd the definition of both.  Increase in price = inflation.  Decrease in price = deflation.  That's the definition of these two concepts, regardless of context.  When prices of goods denominated in BTC fall (i.e. it takes fewer BTCs to buy something) deflation occurs. 

[MoonShadow]

The argument that deflation is bad because it disincentivizes investment is like arguing that theft is good because it motivates people to work harder to feed themselves.

Amen to that, but Bitcoin isn't deflationary.  It is very inflationary at present, and will taper off to a very stable amount.  The only reason so many people believe it to be deflationary is because the Bitcoin economy is growing as such a greater pace than the monetary base.

As more people assign value to bitcoin (recognize it as something worth having) it will have no other choice but to deflate.  Imagine that 100 people thought BTC is something worth having and they had 21M of it to go around.  Now imagine that 7 billion people find it worth having with the same 21M of bitcoins to go around.  Wouldn't you agree that BTC would be worth a lot more in the second case?  This is what will happen as more and more people get involved.

That's not deflation, that's the law of supply and demand.  Inflation and deflation are economic terms that directly describe the increase or decrease of the monetary base, respectively.

I would disagree with this definition.   Deflation is the reduction of the general level of prices in an economy, it has nothing to do with the base of BTC, just how much things cost in BTC.  So, if the base stays the same (21M BTC) and a widget goes down in price from 1BTC to 0.1BTC because more people find value in BTC, we have deflation.

Changes in the general prices are symtoms, not the causes, of deflation and inflation.  In the case of Bitcoin's high inflation rate, that symtom is overwelmed by other factors.  Words have specific meanings within certain contexts, and withing the context of Economics deflation and inflation only have meaning at all in relation to the decrease and increase in the monetary base.  There is no other way to define them with any useful precision.

Change is price is neither a symptom nor a cause of inflation/deflation.  It'd the definition of both.  Increase in price = inflation.  Decrease in price = deflation.  That's the definition of these two concepts, regardless of context.  When prices of goods denominated in BTC fall (i.e. it takes fewer BTCs to buy something) deflation occurs. 

<sigh>

Please take some time and read an Economics textbook.  The definition that the news media presents is not the Economic definition.

[cunicula]

Change is price is neither a symptom nor a cause of inflation/deflation.  It'd the definition of both.  Increase in price = inflation.  Decrease in price = deflation.  That's the definition of these two concepts, regardless of context.  When prices of goods denominated in BTC fall (i.e. it takes fewer BTCs to buy something) deflation occurs. 

Correct. This is the textbook definition of inflation.