Deflation and Bitcoin, the last word on this forum

[Suggester]

This is your stance. Then you relay to the trade history on MtGox to maintain that stance. Yet that same trade history shows that since mid April, pretty much since the price spiked above $2, that MtGox has been experience a 30d volume consistently within 900,000 to 1 Million BTC, and now the price is on its way beyond $15. The 30d expected inflation through mining is anywhere between 200,000 and 300,000 BTC. This means that on a month and half span, about 1.5 millions "old" BTCs have changed hands (without accounting for the freshly mined coins in that period), which is over 1/4th of the total "old" BTC supply. According to your hoarding theory, this is impossible. Now I suggest you reflect on your stance.

It's not impossible. Hoarding doesn't mean "nobody exchanges coins". It simply means that in case coins were exchanged, there's a high probability that the buyer is buying for the sole purpose of later profiting. And the seller is selling because he either needs money immediately or he's afraid the price will drop and had enough profit, so he exits the market safely. By the way those two reasons are exactly why I plan to liquidate some of my own coins soon.

I never denied there were real transactions either, but I said there would be more of those if the price was stable. People won't have to worry about spending coins because they're afraid the price would spike soon after they spend them, nor would they worry about a price drop after earning a coin so they won't have to rush and liquidate them. What exactly is your problem with a stable price system?

Well then I hope you learn that an economy is not proportional to the number of transactions.

Would replacing "number" with "volume" make you happy? You people got nothing to say to address the real issue so you worry about silly definitions. I'm still waiting for a decent rebuttal against my proposal.

[Findeton]

I never denied there were real transactions either, but I said there would be more of those if the price was stable. People won't have to worry about spending coins because they're afraid the price would spike soon after they spend them, nor would they worry about a price drop after earning a coin so they won't have to rush and liquidate them. What exactly is your problem with a stable price system?

I actually think that it will stabilize when the number of people using it stabilizes for a long time. Perhaps that will happen after some bubble bursts.

[goatpig]

It's not impossible. Hoarding doesn't mean "nobody exchanges coins". It simply means that in case coins were exchanged, there's a high probability that the buyer is buying for the sole purpose of later profiting. And the seller is selling because he either needs money immediately or he's afraid the price will drop and had enough profit, so he exits the market safely. By the way those two reasons are exactly why I plan to liquidate some of my own coins soon.

This example was to show you, with data to support it, that the behavior you're expecting in a deflationary market just isn't happening.

I never denied there were real transactions either, but I said there would be more of those if the price was stable. People won't have to worry about spending coins because they're afraid the price would spike soon after they spend them, nor would they worry about a price drop after earning a coin so they won't have to rush and liquidate them.

Why exactly do you want more transactions as the unique result from an economic model as opposed to natural market levels. Are you trying to say people won't buy food, lodging, clothes, transportation, energy and god knows what else because they're on a deflationary currency? If your only goal is to increase transaction volume, regardless of actual wealth changing hands, are you arguing the point that transaction fees aren't enough to maintain high difficulty? You didn't seem to argue that way from your previous posts.

What exactly is your problem with a stable price system?

Besides that it is unfeasible and no one would use such currency? Nothing. What I don't understand is why you're coming in a thread stating that deflation is a feature of Bitcoin and start arguing against it. If you have something against deflation, I suggest you run your own block chain with your own rules, code is there and all. Also, run your own forums while you're at it.

[Suggester]

I actually think that it will stabilize when the number of people using it stabilizes for a long time. Perhaps that will happen after some bubble bursts.

And perhaps it will never happen. Given that the number of computer and internet users hasn't "stabilized" until now and is not expected to stabilize in the foreseeable future, what makes think the number of bitcoin users will stabilize anytime soon, if ever? And even if it stabilizes, we still have the 19% deflation problem!

This example was to show you, with data to support it, that the behavior you're expecting in a deflationary market just isn't happening.

And I explained that what I "expected" wasn't a lack of transactions. It's about the purpose of those transactions. And even if all those transactions were genuinely for consumption (which is impossible because consumption doesn't increase the price ten-fold in a month), why isn't a stable currency a better idea anyway?

Are you trying to say people won't buy food, lodging, clothes, transportation, energy and god knows what else because they're on a deflationary currency?

No, but they won't buy those things using a deflationary currency. They will simply use another medium while saving the deflationary currency under the mattress for a rainy day (or until they feel the price might drop soon and exit the market safely, only to sell the money to a new hoarder)

Why exactly do you want more transactions as the unique result from an economic model as opposed to natural market levels.

Because the "natural" market levels is based on perpetual built-in deflation. That's a natural pyramid scheme not a natural stable medium of exchange.

Besides that it is unfeasible and no one would use such currency? Nothing.

Elaborate please.

[Findeton]

I actually think that it will stabilize when the number of people using it stabilizes for a long time. Perhaps that will happen after some bubble bursts.

And perhaps it will never happen. Given that the number of computer and internet users hasn't "stabilized" until now and is not expected to stabilize in the foreseeable future, what makes think the number of bitcoin users will stabilize anytime soon, if ever? And even if it stabilizes, we still have the 19% deflation problem!

I don't see the 19% deflation as a problem.

[goatpig]

And I explained that what I "expected" wasn't a lack of transactions. It's about the purpose of those transactions. And even if all those transactions were genuinely for consumption (which is impossible because consumption doesn't increase the price ten-fold in a month), why isn't a stable currency a better idea anyway?

Sure it can. With a deflationary currency the supply is fixed so only the demand defines price. Whether people buy $300 worth of BTC to hold on it or to purchase a ps3 from a BTC vendor, it's still $300 worth of value entering the economy.

No, but they won't buy those things using a deflationary currency. They will simply use another medium while saving the deflationary currency under the mattress for a rainy day (or until they feel the price might drop soon and exit the market safely, only to sell the money to a new hoarder)

If BTC turns into a currency, what will be the need to hold inflationary fiat? Anyway you look at it, fiat will lose value, so you're better off using that BTC directly. You're presenting this as if spending BTC only holds disadvantages. Holding fiat is far worse, so logically you'll end up using that BTC, whether you buy into the USD or directly spend it at BTC vendors.

If BTC remains a store of value, then it is the exact same as buying into some gold. Are you saying that's bad for the economy too?

And I explained that what I "expected" wasn't a lack of transactions. It's about the purpose of those transactions. And even if all those transactions were genuinely for consumption (which is impossible because consumption doesn't increase the price ten-fold in a month), why isn't a stable currency a better idea anyway?

If the MtGox data can't make my point, then gold surely will. Your model is that hoarders will hoards, selling under no circumstances unless force to by an adverse conjecture of events. Gold is the actual hoarder haven, yet it's easy to get into that market. So apparently hoarders aren't hoarding as hard as you wish them to.

Because the "natural" market levels is based on perpetual built-in deflation. That's a natural pyramid scheme not a natural stable medium of exchange.

Pyramid schemes require fraud, there is none here. The expectation that price will rise and you'll make a profit off of your hoard is reached by your own logic, not someone trying to pawn you some worthless goods pretending you'll get to sell them for 10 times the value. The fact that you think people hoard BTC proves that you expect the rise in value, so there's no fraud here.

Elaborate please.

Not in this thread. This is off topic. Make a thread about it, present the merits of your system, and I'll offer you my arguments against it in return.

[bitcool]

Cryptocurrency gives you a powerful tool, instead of incessant arguments, why not use it to experiment and seek out the truth:
  http://forum.bitcoin.org/index.php?topic=57.msg166412#msg166412
Vote with your feet, and your GPUs

[bitcool]

This is an argument between these two theories of economics, not bitcoin. At best bitcoin could be thought of as a modern experiment in deflation.

+1. btw. I am interested to see any interview you give to reporters (employed or unemployed).

[Horace Kent]

deflation is purely a problem of credit expansion happening to rapidly


disinflation is what we enjoy we purchase a new computer............cheaper price, and still better technology.

as long as bitcoin isn't levered up to insane levels.....it cannot be deflationary.

[skysurfer808]

Bitcoin's deflationary nature is a natural corrective to Fiat's inflationary one.  What we are going to see with BTC is a grand experiment between two competing economic philosophies.  I am a happy supporter of Bitcoin.  Regarding inflation vs deflation, I have lived through a hyper-inflation in the former Soviet Union and find current events eerily similar.  If asked to choose between inflation vs deflation, I would choose deflation...though not on the scale of the original Great Depression.  Deflation is actually better for society because it encourages thrift and strengthens the ties of a culture.  Inflation has its place, and certainly is popular among governments, but cultures which value money and use it carefully always seem to do better then those who throw it away.

For a simplified but entertaining view between the two competing economic schools, I recommend the following two Youtube videos.

http://www.youtube.com/watch?v=d0nERTFo-Sk
Keynes VS Hayak Round 1

http://www.youtube.com/watch?v=GTQnarzmTOc
Keynes Vs Hayak Round 2

Skysurfer808

[Findeton]

Bitcoin's deflationary nature is a natural corrective to Fiat's inflationary one.  What we are going to see with BTC is a grand experiment between two competing economic philosophies.  I am a happy supporter of Bitcoin.  Regarding inflation vs deflation, I have lived through a hyper-inflation in the former Soviet Union and find current events eerily similar.  If asked to choose between inflation vs deflation, I would choose deflation...though not on the scale of the original Great Depression.  Deflation is actually better for society because it encourages thrift and strengthens the ties of a culture.  Inflation has its place, and certainly is popular among governments, but cultures which value money and use it carefully always seem to do better then those who throw it away.

For a simplified but entertaining view between the two competing economic schools, I recommend the following two Youtube videos.

http://www.youtube.com/watch?v=d0nERTFo-Sk
Keynes VS Hayak Round 1

http://www.youtube.com/watch?v=GTQnarzmTOc
Keynes Vs Hayak Round 2

Skysurfer808

Deflation is a good thing. If everything is paid in BTC, then everything will be 20% cheaper than today in a year. If you can buy things in other currencies, then you can use bitcoins as gold: a store of value, and correlate prices with the most used currency.

[jtimon]

Bitcoin's deflationary nature is a natural corrective to Fiat's inflationary one.  What we are going to see with BTC is a grand experiment between two competing economic philosophies.  I am a happy supporter of Bitcoin.  Regarding inflation vs deflation, I have lived through a hyper-inflation in the former Soviet Union and find current events eerily similar.  If asked to choose between inflation vs deflation, I would choose deflation...though not on the scale of the original Great Depression.  Deflation is actually better for society because it encourages thrift and strengthens the ties of a culture.  Inflation has its place, and certainly is popular among governments, but cultures which value money and use it carefully always seem to do better then those who throw it away.

For a simplified but entertaining view between the two competing economic schools, I recommend the following two Youtube videos.

http://www.youtube.com/watch?v=d0nERTFo-Sk
Keynes VS Hayaek Round 1

http://www.youtube.com/watch?v=GTQnarzmTOc
Keynes Vs Hayaek Round 2

Skysurfer808

Deflation is a good thing. If everything is paid in BTC, then everything will be 20% cheaper than today in a year. If you can buy things in other currencies, then you can use bitcoins as gold: a store of value, and correlate prices with the most used currency.

The videos are cool, but deflation isn't a good thing. Come on, if we could choose, it's a no brainer: we would choose stable prices. The question is that printing to counter deflation is very often worse than the deflation itself.
Is deflation a good thing for everybody?
Should central banks be burning bills instead of printing them and we would be happier because everything is cheaper?
It's just like saying that printing is good because there's more money for everybody: nonsense.

[Nefario]

This is an argument between these two theories of economics, not bitcoin. At best bitcoin could be thought of as a modern experiment in deflation.

+1. btw. I am interested to see any interview you give to reporters (employed or unemployed).

I don't think it went well ( I could be wrong ).

But again I want to emphasise that the issue is between two schools of economics, and it's not something that's really should involve bitcoin.

Simply because you must choose either inflationary or deflationary as it is impossible to have a currency grow at the same rate as the economy (how do you know exactly how much an economy is growing without overseeing everything?).

If you want an inflationary bitcoin that has no limits nothing is stopping you, the source is there, and the set limit is (AFAIK) only a small part of the code, please go ahead and have your inflationary bitcoin.

All other currencies are inflationary, so whats wrong with having one that isn't?

But again I say, this is between the differing schools of economics, not something the bitcoin project should be bothered with.
Nefario.

[Justsomeforumuser]

I think currently it's down to "If I can now only mine a third of what I could 2 weeks ago due to difficulty going up thanks to all the greedy mongrels building farms, I at least want my BTC be worth something when I sell it".

So people hold back until the price reaches a level where it becomes rewarding again.

And on the side of the farmers that are trying to exploit this properly, they wait until price crosses back above the threshold where their profit margin becomes positive again.

Thus at prices below these levels offers disappear, the market becomes illiquid, and we "pop" higher like we did.

[Findeton]

And on the side of the farmers that are trying to exploit this properly, they wait until price crosses back above the threshold where their profit margin becomes positive again.

Thus at prices below these levels offers disappear, the market becomes illiquid, and we "pop" higher like we did.

That's true, but that's not what's happening right now. Mining is profitable compared to electricity costs. It's just that with this kind of deflation, it's more profitable to invest in buying bitcoins than in buying mining equipment.

[bitcoinBull]

Nicely written Nefario.  Concise and to the point.

The other reason I see the whole deflationary issue as a big distraction is because it conflates Macroeconomics with Microeconomics.  Deflation is a concern when running an entire national economy.  That bitcoin is deflationary might be a relevant concern if the discussion is about the future ability of bitcoin to displace national currencies.

But currently, bitcoin is still a Microeconomy.  As a microeconomy, its economic health is dominated by the microeconomic principles of supply and demand.

This is also related to the argument that without more merchant accepting bitcoin, it is doomed to failure.  That argument is nonsense.  As long as bitcoin remains liquid, and can still be traded for dollars etc., it will be successful.  The ability to purchase goods with bitcoin directly may be a little more convenient, but it is not necessary in the least.

[alexk]

Stable prices are important for a new currency to be accepted widely as a tender, which means a new currency should have a stable value. The reason for this is, that money is not only used as a medium of exchange or storage of purchasing power, but also to measure the value of goods and services. Deflation might not be a problem in this context if it is only a few percent, but it gets difficult to compare the value of things when deflation gets too high.

Currently, the supply of bitcoins is increasing, and it will keep increasing asymptotically until 21 million bitcoins are reached. This means, bitcoins would have an approximately stable value if the bitcoin economy would also be increasing asymptotically and stop growing when 21 million bitcoins are reached. The way I see it is, that the bitcoin economy is growing much faster than the money supply which leads to higher and higher prices for bitcoins, one can verify that by taking a look at mtgox. Also I think it's impractical for the bitcoin economy to stop growing when 21 million bitcoins are reached.

My suggestion for keeping the value of bitcoins stable is to change the number of bitcoins generated per block dynamically and link it to some average of the number of transactions that took place.

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.

A great thing about bitcoins is, that the  number of transactions can be calculated exactly from the solved blocks and i believe, also the velocity of money (please correct me if i'm wrong). Traditionally, to use the equation of exchange economists had to use the crude approximation that "price level" * "transactions" equals GDP. This means, that supply of bitcoins can be adjusted exactly to the demand of bitcoins, which in turn means that bitcoins could be the first currency completely free of inflation or deflation, in other words have an absolutely stable value.

I'm looking for people which share a similar interest in bitcoins. Please PM me.


alexk

[Findeton]

Stable prices are important for a new currency to be accepted widely as a tender, which means a new currency should have a stable value. The reason for this is, that money is not only used as a medium of exchange or storage of purchasing power, but also to measure the value of goods and services. Deflation might not be a problem in this context if it is only a few percent, but it gets difficult to compare the value of things when deflation gets too high.

Currently, the supply of bitcoins is increasing, and it will keep increasing asymptotically until 21 million bitcoins are reached. This means, bitcoins would have an approximately stable value if the bitcoin economy would also be increasing asymptotically and stop growing when 21 million bitcoins are reached. The way I see it is, that the bitcoin economy is growing much faster than the money supply which leads to higher and higher prices for bitcoins, one can verify that by taking a look at mtgox. Also I think it's impractical for the bitcoin economy to stop growing when 21 million bitcoins are reached.

My suggestion for keeping the value of bitcoins stable is to change the number of bitcoins generated per block dynamically and link it to some average of the number of transactions that took place.

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.

A great thing about bitcoins is, that the  number of transactions can be calculated exactly from the solved blocks and i believe, also the velocity of money (please correct me if i'm wrong). Traditionally, to use the equation of exchange economists had to use the crude approximation that "price level" * "transactions" equals GDP. This means, that supply of bitcoins can be adjusted exactly to the demand of bitcoins, which in turn means that bitcoins could be the first currency completely free of inflation or deflation, in other words have an absolutely stable value.

I'm looking for people which share a similar interest in bitcoins. Please PM me.
alexk

You are either new or joking. It looks like it's the former.

[alexk]

You are either new or joking. It looks like it's the former.

Yes, i'm new in this forum. I don't know why you get the impression that i'm joking.


alexk

[Findeton]

You are either new or joking. It looks like it's the former.

Yes, i'm new in this forum. I don't know why you get the impression that i'm joking.


alexk

No, we are not going to change bitcoin protocol just because you arrived. All those things you've talked about have been discussed over and over. You should either accept built-in deflation or leave bitcoin economy, that's my advice.