Deflation and Bitcoin, the last word on this forum

[afterburner229]

Jun 20, 2011

http://bitcoincharts.com/markets/

Difficulty   877227
Estimated   1138980 in 985 blks

"MtGox": text not found

***Exchange #1 in bitcoin world has been attacked***

http://bitcoinx.com/profit/index.php

Net profit first time frame: -32.15 USD (time frame = 3 months),

***mining has reached totally unprofitable***

-------------------------------

If not to mine & not to trade @ exchanges, what to do with bitcoins?!

I PREDICTED IT a month ago. Nobody listened to me.

BITCOIN has SEVERE CONCEPT & DESIGN ERRORS.

[Synaesthesia]

MtGox attack - yeah it was bad. But just one attack. And has nothing to do with the design or concept of bitcoin.

Mining difficulty increase - well no shit. Saw that one coming with a glance at the difficulty chart 2 weeks again. It's built into the way bitcoin is made.

Let's see what the value of BTC are in a month's time.

[afterburner229]

MtGox attack - yeah it was bad. But just one attack. And has nothing to do with the design or concept of bitcoin.

Mining difficulty increase - well no shit. Saw that one coming with a glance at the difficulty chart 2 weeks again. It's built into the way bitcoin is made.

Let's see what the value of BTC are in a month's time.

But just one attack?! Btcex.com was attacked earlier in May. Mining pools are permanently doing tiny pilfering, while distributing BTC per workers. Mining is unprofitable at time interval = 3 months! Just 1 month ago.. it was VERY VERY profitable.

In a perfect design,
- any attack is impossible
- exchange-to-trade relations are formalized to work under condition of total distrust
- miners are normalized to be profitable single, without pools, for years
- transactions are designed to pass in soft real time guarantee
- clients are designed to invite a third party to make dealings under condition of total distrust each other

IT IS POSSIBLE, although difficult.

[TierNolan]

If you take a look at http://en.wikipedia.org/wiki/Equation_of_exchange, you can see the identity that "money supply" * "velocity of money" equals "price level" * "transactions". To keep the price level (and the value of the currency) stable money supply should increase with the number of transactions, assuming that the velocity of money stays the same.

This would allow deflation to be calculated from the block chain?  The equation is

MV = PQ

M = money supply (= 50*block count)
V = velocity (assumed constant?)
P = price level
Q = quantity (assumed equal to number of transactions?)

P = (50*blocks)/(number of transactions in the last 3 months*)

I don't think that would work very well.  Someone who spammed transactions could effectively push the P value down causing fake inflation.

Maybe a better formula would be

P = (50*blocks)*(median transaction size)/(total transferred)

This is still potentially a problem, if everyone sent 2 transactions instead of 1 for a month, then it would give a result of 100% inflation.

Another option would be to only include transactions that pay at least 1% of their value in fees, but again not really that solid.

Anyway, ideally, there would be a deflation multiplier that any client could calculate.  This wouldn't affect the bitcoins themselves, it would just be a well defined way to convert bitcoin values into a stable value. 

You could agree to pay someone 1 "stable-bitcoin" per month and the effect would be that you pay 1, 0.98, 0.96, 0.941 .... every month (assuming the deflator was 2% per month). 

The idea would be to make it easier for people to think in bitcoins.  Currently, people would have to keep recomputing "fair" prices on a month by month basis.  At least with current fiat currencies, you only need to do that on a year by year basis.

People who have bitcoins in their wallet would see their stable-bitcoin totals increase by 2% per month (or whatever).

Finally, I don't think it is a good idea to compress all deflation discussions into one thread.  Pretending that a problem doesn't exist doesn't make it go away.

*:  The time period could be defined using number of difficulty updates or something.

[TierNolan]

It occurs to me that the need to re-scale the min transaction fee is an example of "menu costs".

This is one of the issues with having a deflating (or inflating) currency.  You need to keep updating the costs for the things you are selling (updating your "menu").

[MoonShadow]

It occurs to me that the need to re-scale the min transaction fee is an example of "menu costs".

This is one of the issues with having a deflating (or inflating) currency.  You need to keep updating the costs for the things you are selling (updating your "menu").

This effect will slow down as the currency matures.

[netrin]

The 21 Million will never be reached. It will never run out. We will simply drift over a few decimals.

Bitcoins (Satoshis) are integers, so unless all client implementations agree (not to fork and) to floating point (or rather retro-integer expansion), the 'division' is a bit shift: 50 * 01000 .. 00100 .. 00010 .. 00001 .. 00000

Code:

int64 GetBlockValue(int nHeight, int64 nFees) {
    int64 nSubsidy = 50 * COIN;
    // Subsidy is cut in half every 4 years
    nSubsidy >>= (nHeight / 210000);
    return nSubsidy + nFees;
}

I'm not an economist, but it seems to me, many people are confusing the terms inflation and money supply. While one is a function of the other, it is the function itself and its management that the different schools argue about.

The bitcoin money supply is inflating (infinitely on the first day) and less than 50% today. However the number of participants is also inflating, but at a faster rate. Thus on balance the number of bitcoins that can be obtained in exchange for most goods and currencies are deflating and will continue to do so as long as the number of participants increases. But unlike a ponzi/pyramid scheme, new participants are not paying earlier participants, only increasingly demanding a relatively decreasing supply.

There are 6.6 Mbtc today and about 3 Mbtc more next year. So, roughly 35% this year, 25% next, and (after 1.5 Mbtc per year), less than 10%, until the money supply inflation is negligible (back of napkin math).

While eventually we may want a stable currency, deflation is a necessary bootstrap. If bitcoins were stable, few would buy today in expectation for the future. And few of us would have heard about bitcoins if it inflated even a basis point per year. It is *ONLY* because I think that bitcoins will be very useful in the future that I'm willing to bet on it today.

People who think the early miners have an unfair advantage seem not to have considered whether anyone would purchase the coins today if it were not deflationary. Bitcoins are no more a ponzi/pyramid scheme than any other great but risky idea or service whose price increases with popularity, such as concert tickets or the dating game. Any limited resource with expanding demand will deflate. We may not like the House of Saud, but our ideologies have not reduced our consumption of deflationary oil. Is carbon trading a pyramid scheme?

[Aristotle]

There has been a huge amount of tatter by the masses about how bitcoin is deflationary, how it's the next satan, and will end the world etc

I propose to you the new Bitcoin logo:

http://i1022.photobucket.com/albums/af345/OneBadMamaJama_2010/bitcoinLogoPlain.png

[ShadowOfHarbringer]

There has been a huge amount of tatter by the masses about how bitcoin is deflationary, how it's the next satan, and will end the world etc

I propose to you the new Bitcoin logo:

[image]

Actually, If something can be called a mark of the beast, then it is the crappy fiat currencies with their bank-controlled, crysis-causing & credit-powered baloon economy.
Today's monetary system is completely sick. It does not support wise investments, but only mindless spending.

Bitcoin is the cure.

[DrYe5]

So who here thinks that BitCoin is going to 'die' just because some people out there want it to? How about torrent file sharing? How about .onion? How about drugs? How about murder? How about the US dollar?

How about gCoin or iCoin. Game over bits.

With Chuck Schumer calling bitcoin "money laundering", I wouldn't bet for it. All google needs to do is hook a currency into it's payment system or apple into itunes.

[MoonShadow]

So who here thinks that BitCoin is going to 'die' just because some people out there want it to? How about torrent file sharing? How about .onion? How about drugs? How about murder? How about the US dollar?

How about gCoin or iCoin. Game over bits.

With Chuck Schumer calling bitcoin "money laundering", I wouldn't bet for it. All google needs to do is hook a currency into it's payment system or apple into itunes.

Good luck with that.

[jtimon]

So who here thinks that BitCoin is going to 'die' just because some people out there want it to? How about torrent file sharing? How about .onion? How about drugs? How about murder? How about the US dollar?

How about gCoin or iCoin. Game over bits.

With Chuck Schumer calling bitcoin "money laundering", I wouldn't bet for it. All google needs to do is hook a currency into it's payment system or apple into itunes.

Or facebook credits, but then we replace bernanke with google. I don't think it's a good idea.
About apple...after watching some videos from the last google IO, I would short apple if I knew how to do it. I don't believe they're going to make the iphone compatible with arduino.
Sorry for the offtopic.

[Grant]

Eureka! 

I just came to realize something i was wrong about all the way since i invested in bitcoin. Contrary to what i always thought, Bitcoin is not deflationary! And the reason is, there is no mechanism in place to reduce money supply there's only a mechanism to supply new bitcoins, and that is a natural growth pattern (found anywhere else), see the image below:



The price so far looks more like the C (exponential) line, but it should eventually turn first into B (linear), to finally settle as A (natural, which is also the rate of coins that are to be issued).
There has been and seems to continue to be a hoarding practice going on (which supports itself because public awareness of bitcoin is growing and with it incentive to buy to hold increases both of which have been growing exponentially in a self-fulfilled cycle), however at some point when this initial growth boost slows down and awareness has reached its peak, the investment pattern will change. The only thing that could allow this pattern of exponential price growth to continue is if the code was changed to something that would decrease money supply (or create deflation).

That's measuring the price of bitcoin inflation-adjusted. Adjusting for inflation (which always will grow exponentially) the price may seem exponential, and this may create the illusion (which i also had) that bitcoin is deflationary when it isn't.

[MoonShadow]

Adjusting for inflation (which always will grow exponentially) the price may seem exponential, and this may create the illusion (which i also had) that bitcoin is deflationary when it isn't.

Congrats on your induction into the higher order of forum membership.  I've been trying to dispell the myth that Bitcoin is deflationary for some time.

[cunicula]

Who thinks what about Deflation

There are two schools of thought on deflation and inflation.
Keynesian economics, which favors government intervention and money supply inflation. This not surprisingly is the most popular school of thought with world governments (if someone told you to just print money and spend it you'd like them too).

This school not only supports inflation, but believes it to be essential to growth.

Then there is the Austrian school, which is is for a free market, against government intervention, and generally think inflation is bad and deflation is good. Again unsurprisingly these people are not popular in government circles around the world.

Nefario, there are two main schools of thought on inflation in economics (Keynesian vs. Real Business Cycle). The 'Austrian School' is a fringe group associated with radical libertarians, which is almost completely ignored in academia. Universities typically classify Austrian economics as a 'heterodox approach', i.e. very far from the mainstream. Given that this heading is meant to be a public face of bitcoin's position on deflation, I think it is unwise to mention the Austrian school.

Perhaps it would be better to just say 1) the effects of inflation and deflation are controversial in macroeconomics 2) the real value of bitcoin-denominated exchange is minuscule compared to that denominated in government-issued currencies. And, accordingly, that any macroeconomic effects associated with bitcoin's introduction will be negligible in magnitude.

[jtimon]

Eureka! 

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.
Anyway, with a free monetary market, I think competing currencies would be used for trade thus reducing the value of bitcoin and its price deflation. That's why I'm not worried about deflation anymore. I came to this conclusion thanks to a thread called "On hoarding".

*Other people (not me) are concerned with the monetary deflation caused by the loss of wallets.

Of course, this two things apply after the initial monetary inflation needed to bootstrap the currency. There's nothing that can be done to stop the price deflation caused by new people entering the system.

[MoonShadow]

Eureka! 

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really belive that this has to be stated.

[jtimon]

Eureka! 

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.

[netrin]

Perhaps it would be better to just say 1) the effects of inflation and deflation are controversial in macroeconomics...

Only because previous to 1971 there has been no historical precedent whereby every government on the planet actively increase the global money supply irrespective of production. We have no empirical evidence to say what will happen. But only a deaf, blind, and dumb man would not be a bit concerned.

[MoonShadow]

Eureka! 

I think people is concerned with price deflation and not with monetary deflation. As you say, bitcoin doesn't have monetary deflation*.
To have price deflation with a stable monetary base, you assume you're going to have economic growth. If a price deflation caused only by growth is good or bad for the economy is to be proven in my opinion. But "deflation is good because everything becomes cheaper" is not an statement that I can agree with.

By definition, if the economy is actually growing, then the price deflation must logically be a reflection of good tidings.

I can't really believe that this has to be stated.

A reflection, yes. Growth causes (with a fixed monetary base) deflation, that we agree. But what is to be proven is that it causes a further economic development or if it can cause (without a previous inflationary boom, just caused by real economic growth) a recession.
Many people assume that if the price deflation is caused just by growth, it is harmless.

If the price deflation is a product of economic growth, than it's logically impossible for there to be a recession caused by the same.  And if a recession were to occur for other reasons, thatn price deflation could not proceed uninterupted.  This, of course, is all relative to the economic activity represented by the movement of bitcoin, and that is such an insignificant amount overall that the US economy (or any other) could easily return to a reccession while the bitcoin economy is still in massive growth.  But for clarity, let me restate the issue.  If the bitcoin economy is growing, then it can't be in recession.  If the monetary base is maintained (it's not, bitcoin is still inflationary) it's impossible for price deflation to occur as a direct result of growth while such an economy is in recession.  A recession is, by definition, the opposite of growth.

Understand?