The economic model behind Bitcoin is flawed

[deisik]

Bitcoin apologists and supporters often recklessly claim that a controlled supply with the 21 million coins cap is good and beats the shit out of fiat monies as well as cryptocurrencies that don't have a limit on the number of coins mined...

Why is there any question at all? It's in the code. You can't change that; it's a systematic part of the entirety of Bitcoin. Otherwise, inflation occurs and everything goes to crap, just like FIAT currencies. Well... it's just that people haven't noticed that things will get out of control with FIAT yet. That, or they're reliant on them.

They forget a few things, though

[bitcoinstudent19212]

What things do you think they forget?

In my mind deflationary currency is not inherently better or worse than inflationary currency, it just depends how able people are to adapt to the new way of doing things in the economy.

If people can shift focus away from wage increases, and realise that they are matching their purchasing power taking wage cuts then I dont think it is a problem...

[Snail2]

What things do you think they forget?

In my mind deflationary currency is not inherently better or worse than inflationary currency, it just depends how able people are to adapt to the new way of doing things in the economy.

If people can shift focus away from wage increases, and realise that they are matching their purchasing power taking wage cuts then I dont think it is a problem...

I think what they used to forget is temptation to temptation to avoid spending a deflationary currency and keep accumulating instead as that money is getting more and more valuable. This will move most of the money supply into a speculative circle of bubbles and bursts, so it will eventually lose its currency characteristics, as no one will use it for actually buying stuff.

[gentlemand]

Hmm. I'm not sure we're anywhere near finding what Bitcoin's actual economic model is. It could take the form of several things or be something totally unexpected.

The hard limit is quite extreme and may eventually lord over all other virtues. Time will tell.

[USB-S]

Hmm. I'm not sure we're anywhere near finding what Bitcoin's actual economic model is. It could take the form of several things or be something totally unexpected.

The hard limit is quite extreme and may eventually lord over all other virtues. Time will tell.

If there was no hard limit, then that would spook a lot of people away, because why not just use regular fiat money if there's unlimited supply anyway. There's a finite supply of everything on this planet, then how come the money gets to be infinite. However the 21mil hard cap causes a lot of hoarding, which would drive up the prices to abysmal levels pretty quickly. However bitcoin is currently a pretty inflationary currency at the moment and it still manages to increase in price. There is just no telling what would happen if the inflationary would turn to deflationary.

[gentlemand]

If there was no hard limit, then that would spook a lot of people away, because why not just use regular fiat money if there's unlimited supply anyway.

It's just as easy to bake in a hard annual inflation limit. Obviously it's too late for Bitcoin to do this but I can see future coins perhaps taking it on board. Doge does it but I don't know if there's an actual limit or whether no one cares enough to refine it. I think we'll be waiting for quite a while before we have a clue what effects a total limit will have.

[USB-S]

If there was no hard limit, then that would spook a lot of people away, because why not just use regular fiat money if there's unlimited supply anyway.

It's just as easy to bake in a hard annual inflation limit. Obviously it's too late for Bitcoin to do this but I can see future coins perhaps taking it on board. Doge does it but I don't know if there's an actual limit or whether no one cares enough to refine it. I think we'll be waiting for quite a while before we have a clue what effects a total limit will have.

Dogecoin still halves every 4 years. Just that the supply is kind of huge. I think it was something like 125k per block at the moment. It's like Kenya or some other countries hyperinflationary currency. Would be funny to see what happens if doge hits 1 satoshi. How will they go lower than that? in before 10 doge for 1 satoshi.

As for a more stable inflationary crypto coins, I think that clam is creating a new token every minute via proof of stake, so that would be quite predictable inflationary rate, however due to the nature of that coin you can't predict the supply of it because there are still a lot of clams to be dug out.

[johnyj]

The economic model behind fiat money is even more severely flawed, but human can still adapt to it, so they will have no problem adapting bitcoin

[deisik]

What things do you think they forget?

Short version, it (the economic model behind Bitcoin) disfavors trade and production, and thereby undermines the reason for money (Bitcoin) existence as such

Long version, let's assume we have an economy that produces apples and oranges. Say, I have an apple and you have an orange, and we have decided to sell them to each other. We could just exchange them directly, but we decided to use bitcoins to facilitate the trade. Thereby we emitted two bitcoins and agreed not to mint any more bitcoins (the 21 million cap). In this way you have one bitcoin and I have one bitcoin, and we set the price for apples and oranges at a bitcoin per piece. So far so good. In a short while, I produced an extra apple, while you produced nothing. Now we have two apples and one orange in the economy, but we still have only two bitcoins, thereby bitcoins appreciate in value since we can trade for bitcoins only. I don't want apples but need oranges whereas you need apples and want to trade in oranges. In this way, you can demand two apples for your bitcoin, which represents your orange, while I can still get just one orange. Somehow you didn't produce anything but nevertheless became richer (can buy two apples instead of one) while I worked hard to produce an extra apple but actually became poorer (only two apples now allow me to buy the same one orange)...

It is obvious that I will shrink from trading my apples for bitcoins, and unless trading makes me richer, I won't produce either (since I don't need apples)

[deisik]

What does this example teach us? First, it shows that money has a utilitarian function of facilitating trade in the economy, that it has no value of its own (except for transactional utility). Second, it shows that the claims that early adopters have some "right" to profit from Bitcoin appreciation are unsubstantiated at best and in fact turn out to be socialistic fundamentally

[bitcoinstudent19212]

I think what they used to forget is temptation to temptation to avoid spending a deflationary currency and keep accumulating instead as that money is getting more and more valuable. This will move most of the money supply into a speculative circle of bubbles and bursts, so it will eventually lose its currency characteristics, as no one will use it for actually buying stuff.

Hmm I think that this  is not necessarily true. Obviously in a hyper-deflationary currency then this would be the case,  but in normal times I don't think that the 'Bitcoin economy' would react like that. Most developed countries operate with low levels of inflation, this doesn't stop them spending all of their money as soon as they earn it- despite it devaluaing every day that it is kept in the bank account. People have to spend money to live, so I don't see this being an issue.

However, if bitcoin is working alongside a two-tiered currency system then I do think there is an incentive to hold and speculate- but all it takes is a shock in the other monetary system for that to change....  

[deisik]

The economic model behind fiat money is even more severely flawed, but human can still adapt to it, so they will have no problem adapting bitcoin

I don't think so. In fact, the economic model behind fiat money, if not abused in application, is actually more fair, since it favors producers, not savers and profiteers, thereby making the whole society richer

[bitcoinstudent19212]

Thereby we emitted two bitcoins and agreed not to mint any more bitcoins (the 21 million cap). In this way you have one bitcoin and I have one bitcoin, and we set the price for apples and oranges at a bitcoin per piece. So far so good. In a short while, I produced an extra apple, while you produced nothing. Now we have two apples and one orange in the economy, but we still have only two bitcoins, thereby bitcoins appreciate in value since we can trade for bitcoins only...........

It is obvious that I will shrink from trading my apples for bitcoins, and unless trading makes me richer, I won't produce either

I think that the fundemental flaw in the argument is to do with minting the new coins. This example would be the same if we produced extra coin. Unless you give the coin to one individual who becomes richer as a result of that - not through his production, then you have to split the coin equally. If both individuals are left with 1.5BTC, then they have the same dilemma. It is not a question of not having the money in question, it is the point that there has been an over-production of one good which has caused it to fall in price/value. Even if this was an economy which didn't have a fixed monetary supply there would still be the dillema. If you valued the orange at more than the value of two apples, then you would do the trade. In the same way, if I thought that my orange was worth what it was at the start (one apple) then I would still do the trade too.

In your example it is a question of utility preferences for each good, not a problem with the monetary supply.       

[deisik]

Thereby we emitted two bitcoins and agreed not to mint any more bitcoins (the 21 million cap). In this way you have one bitcoin and I have one bitcoin, and we set the price for apples and oranges at a bitcoin per piece. So far so good. In a short while, I produced an extra apple, while you produced nothing. Now we have two apples and one orange in the economy, but we still have only two bitcoins, thereby bitcoins appreciate in value since we can trade for bitcoins only...........

It is obvious that I will shrink from trading my apples for bitcoins, and unless trading makes me richer, I won't produce either

I think that the fundemental flaw in the argument is to do with minting the new coins. This example would be the same if we produced extra coin. Unless you give the coin to one individual who becomes richer as a result of that - not through his production, then you have to split the coin equally. If both individuals are left with 1.5BTC, then they have the same dilemma. It is not a question of not having the money in question, it is the point that there has been an over-production of one good which has caused it to fall in price/value. Even if this was an economy which didn't have a fixed monetary supply there would still be the dillema. If you valued the orange at more than the value of two apples, then you would do the trade. In the same way, if I thought that my orange was worth what it was at the start (one apple) then I would still do the trade too

Okay, I agree that my example is an oversimplification of matters (I tried to keep it as simple as possible). But it still serves the purpose of showing the major flaw behind the Bitcoin monetary model, namely, that the savers (who produce nothing) obtain an unjustified privilege of sharing profits from producers (who actually make society richer). Let's assume that we have an unlimited demand for apples, but the producers of apples see no reason to produce more apples exactly because of the system which should, ironically, facilitate production...

Why would producers want to miserably give away a part of their produce (revenue) for free because of something which doesn't even have value of its own?

[bitcoinstudent19212]

Okay, I agree that my example is an oversimplification of matters. But it still serves the purpose of showing the major flaw behind the Bitcoin monetary model, namely, that the savers (who produce nothing) obtain an unjustified privilege of sharing profits with producers (who actually make society richer)...

Why would producers want to miserably give away a part of their revenue for something which doesn't even have value of its own?

But isn't that the problem with any monetary system which is backed up with something intrinsically useless?

Having a means of exchange which lets you buy services without having to do direct swaps with something you have produced is incredible practical and something that I don't think anyone would want to get rid of. Personally I don't want to have to carry around loads of t-shirts that I've made until I find a restaurant owner who is willing to give me a meal in exchange for one of my t-shirts. Having a token which expresses and proves the value of my production, although technically worthless, is worth something as long as someone else is willing to take it.

However, I think I might have missed the point you're trying to make?

 

[btckold24]

I think when bitcoin was created im not sure he expected asics and all these bitcoin farms all over the world to pop up - I would guess with the upcoming halving that no one could expect the difficulty would of got this quick this fast.  The whole asic mining concept is very flawed and almost impossible to ROI without free electricity.  I miss the good ole days of mining with a 5850 video card after playing wow lol

[deisik]

Okay, I agree that my example is an oversimplification of matters. But it still serves the purpose of showing the major flaw behind the Bitcoin monetary model, namely, that the savers (who produce nothing) obtain an unjustified privilege of sharing profits with producers (who actually make society richer)...

Why would producers want to miserably give away a part of their revenue for something which doesn't even have value of its own?

But isn't that the problem with any monetary system which is backed up with something intrinsically useless?

Having a means of exchange which lets you buy services without having to do direct swaps with something you have produced is incredible practical and something that I don't think anyone would want to get rid of. Personally I don't want to have to carry around loads of t-shirts that I've made until I find a restaurant owner who is willing to give me a meal in exchange for one of my t-shirts. Having a token which expresses and proves the value of my production, although technically worthless, is worth something as long as someone else is willing to take it.

However, I think I might have missed the point you're trying to make?

If the economy expands, more goods are being produced overall, but given the limited money supply, it leads to currency appreciation (more goods chasing less money) which allows the savers to become richer for doing virtually nothing (by being able to buy more with their stash). It essentially means that producers are sharing (socializing) their profits with do-littles...

I didn't quite understand what you meant by "monetary system which is backed up with something intrinsically useless"

[bitcoinstudent19212]

If the economy expands, more goods are being produced overall, but given the limited money supply, it leads to currency appreciation (more goods chasing less money) which allows the savers to become richer for doing virtually nothing (by being able to buy more with their stash). It essentially means that producers are sharing (socializing) their profits with do-littles...

I didn't quite understand what you meant by "monetary system which is backed up with something intrinsically useless"

I think that is true, but I would imagine that producers would be changing their prices in order to make sure their production remains profitable for them. If I was a producer, then I would also be profiting from the fact that the revenue I am receiving is constantly appreciating, so my raw materials will end up being 'relatively' cheaper. Furthermore, if the currency is appreciating then I can pay my workers less and they will maintain the same purchasing power, this gets carried through the economy and as long as producers/workers are dynamic then it should not cause problems.

Sure there are some people who have a 'stash' but there is a limit to how long they can keep this without spending it, I guess this is the 'payoff' from being someone who adopts the technology early and bears the risk of it failing.

In terms of my comment on monetary system, I just meant that it is impossible to have a medium of exchange that isn't intrinsically useless. Even systems like the gold standard relies on people's perception that gold is valuable. People can argue that it is nice for jewelry/pretty but that is mainly because it is expensive to start off with - like everything else, the value is based on societies perceptions (rightly or wrongly we cant change this!)     

[deisik]

If the economy expands, more goods are being produced overall, but given the limited money supply, it leads to currency appreciation (more goods chasing less money) which allows the savers to become richer for doing virtually nothing (by being able to buy more with their stash). It essentially means that producers are sharing (socializing) their profits with do-littles...

I didn't quite understand what you meant by "monetary system which is backed up with something intrinsically useless"

I think that is true, but I would imagine that producers would be changing their prices in order to make sure their production remains profitable for them

They won't be able to do this since their prices are determined on market terms, i.e. through the balance of demand and supply. If the currency is appreciating, raw materials actually end up more expensive to you, since your profits are diminished when you sell finished goods for less price (due to currency appreciation)...

I have explained it many times already how exactly an appreciating currency hurts producers up to a point they begin suffering losses and stop production

[deisik]

Sure there are some people who have a 'stash' but there is a limit to how long they can keep this without spending it, I guess this is the 'payoff' from being someone who adopts the technology early and bears the risk of it failing

As I have already said, the claims of a "payoff" are neither substantiated nor fair. This technology (at least as it is declared to be) is not to profit early adopters, since its alleged aim (a universal payment system) is downright antagonistic to such an idea, unless you are going to use Bitcoin for something other than a means of payment. The claim of bearing the risk of early adoption is also unsubstantiated since there would be none if it had actually been used for making business (risky only for businesses that sell goods for it). Really, why would you want to hold Bitcoin if it was conceived for selling and buying goods?

Unless you deem it as a means of profiteering and the whole enterprise as a Ponzi scheme, indeed. But then it is good old risk of a speculator losing his money, nothing romantic or moral about it