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Author Topic: Bitcoins Can Inflate Too - Stop worrying about deflation.  (Read 12118 times)
TradeFortress 🏕
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December 11, 2012, 11:41:16 AM
 #1

The year is 2030. People revolted and threw the feds out. Everyone pays in bitcoins, woo! But all the 21 million bitcoins have being mined already.

An apple sells for 0.05 BTC. The average hourly wage is 1 bitcoin. Everyone's happy.

Someone loses their coins. The world population grows. Now the average hourly wage is only 0.9 bitcoins! People stop buying apples as much as they did before.

An apple now sells for 0.045 BTC. Everyone's happy again.

But then people realize that just by holding bitcoins and not buying, they are actually becoming richer! Plus, someone loses their wallet again, and the world population grows. Now the average hourly wage is 0.8 bitcoins from the natural deflation, and people start putting 1/4 of their wage into a coin store wallet to become richer. The apple farmer realizes less and less people are buying apples, and have to lower the price. And then people knows that if they don't buy something, they will have more buying power tomorrow.

So nearly nobody buys things. The world economy collapses. Then some corporation called the Federal Reserve comes, 'hey, here's our fiat!'.

Right?

WRONG.

This will not happen because of fractional reserve banking.

Alice deposits 1 bitcoin into the bank.
Bob deposits 10 bitcoins into the bank.
> Coins in bank: 11 bitcoins

Carpenter borrows 5 bitcoins to start up a new business.
> Coins in bank: 6 bitcoins

Don't see the problem?

Alice sees her statement with 1 bitcoin.
Bob sees his statement with 10 bitcoins.
Carpenter sees his wallet with 5 bitcoins.

Kaboom. Inflation. Fractional reserve banking will *save* us from a deflationary spiral.
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DarkHyudrA
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December 11, 2012, 12:26:11 PM
 #2

We all know that BTC can't bee the only one crypto-currency.
21 million bitcoins is way too low for a whole world economy to use, and a few other reasons make BTC unable to work as the only one.

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December 11, 2012, 01:00:29 PM
 #3

21 million bitcoins is way too low for a whole world economy to use
That would be true if there were only 21 million bitcoins, but that's not the actual limit. There will be 21000000.00000000 bitcoins. That's plenty for a world economy.
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December 11, 2012, 01:09:24 PM
 #4

Two Point One Quadrillion Satoshi

Hey, that'd make a good handle of some sort...

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December 11, 2012, 01:09:51 PM
 #5

21 million bitcoins is way too low for a whole world economy to use
That would be true if there were only 21 million bitcoins, but that's not the actual limit. There will be 21000000.00000000 bitcoins. That's plenty for a world economy.

Most of those decimal numbers can't be used, they worth almost nothing, if they worth something more than a penny, then it's a problem: we will pay more than pennys for every transaction.
Conclusion: stills small for a whole world economy.

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der_meister
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December 11, 2012, 01:15:33 PM
 #6

If needed, in future, numbers after decimal point can be increazed.
 21 000 000.000000000000000000000000000000000000000000000000000000000000000000000000000 00000000000000000000000000000000000000000000000000000000000000000000000000 Is it better? Grin

Moving on is a simple thing,
what it leaves behind is hard...
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December 11, 2012, 01:18:12 PM
 #7

then it's a problem: we will pay more than pennys for every transaction.
Of course we won't. Transaction fees will keep pace with the exchange rate. This has already happened before.
Conclusion: stills small for a whole world economy.
Conclusion: you're not interested in the truth because you're just stating conclusions without bothering to learn if they are correct or not, so I'm not going to miss anything valuable by ignoring the rest of your posts.
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December 11, 2012, 01:20:16 PM
 #8

Most of those decimal numbers can't be used, they worth almost nothing, if they worth something more than a penny, then it's a problem: we will pay more than pennys for every transaction.
Conclusion: stills small for a whole world economy.

Bitcoin wasn't necessarily intended to be great for micro- and nanotransactions, it just happens to work quite well for them now. On top of that, the mandatory fee imposed for "spammy"-looking transactions has already been lowered from BTC0,01 (one million satoshi) to BTC0,0005 (50.000 satoshi). We can only speculate about whither it will travel in future.

Support Bitcoin and set your client always to add a fee to transactions, even if the network permits freebies! I'm currently using BTC0,00025 (25.000 satoshi) and pay the BTC0,0005+ should the client request it.

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December 11, 2012, 01:27:52 PM
 #9

You don't need fancy economics to tell you that inflation is possible. Inflation is going to happen when quantum computing arrives on the scene, plain and simple.

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December 11, 2012, 01:32:16 PM
 #10

then it's a problem: we will pay more than pennys for every transaction.
Of course we won't. Transaction fees will keep pace with the exchange rate. This has already happened before.
Conclusion: stills small for a whole world economy.
Conclusion: you're not interested in the truth because you're just stating conclusions without bothering to learn if they are correct or not, so I'm not going to miss anything valuable by ignoring the rest of your posts.

You say that, but me neither you can prove who is wrong, and ignoring just make you less valuable tha my posts Cheesy

I made a simple conclusion because we have 21.000.000 for 1.000.000.000(~50% of the world population, expecting at least in "2030" that 50% of the world can use a decent internet and have a good monthly income) people. In this case, we need lots of decimal numbers, because we must remember that companies and other rich wallets will have far more BTC than common wallets.

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December 11, 2012, 02:20:07 PM
 #11


I made a simple conclusion because we have 21.000.000 for 1.000.000.000(~50% of the world population, expecting at least in "2030" that 50% of the world can use a decent internet and have a good monthly income) people. In this case, we need lots of decimal numbers, because we must remember that companies and other rich wallets will have far more BTC than common wallets.

To replace all the USD in circulation, deposited and invested (near 10200 bilion of dollars) we need a bitcoin every $487.000. So with 8 decimal digits we can still rappresent 0,5 cent. Adding  another 3 decimals and we can replace all the currencies of the world with less then 0,1 cent of precision.

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December 11, 2012, 02:22:59 PM
 #12

1. If most people are hoarding for gain, causing deflation, then guys who are actually spending are getting profits. assumption that 100% of bitcoin users will hoard is pretty impossible.
2. Fractional reserve banking will be great reason NOT to keep your money in bank. Problem solved.

What most people do not get is that it's not currency what is valuable, the only thing valuable are goods and services. Currency is just a specific tool for estimating relative value. If you want the job well done, you shall not mess with your tools.

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December 11, 2012, 02:41:01 PM
 #13

A big problem with decimals is that people will make mistakes.

It is easy to send 10.25 BTC but it is more accident prone when you have to send 0.000001025 btc, especially when you are in a hurry (is that 5 zero's after the decimal point or 6?)

I know, I know there are ways to overcome that, but it will be a hassle if we have to add too many decimal places
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December 11, 2012, 02:54:54 PM
 #14

You could just copy and paste the numbers that the person has asked for rather than write the whole thing in the Bitcoin client, it isn't that hard, oh and deflation isn't a bad thing, for one thing it makes it far easier to live because prices fall, the people who bitch about deflation are likely the same type of people who invest in real estate etc. and hugely benefit from inflationary policies like interest rate fixing and money printing.

Oh and by 'invest' in housing, I mean they buy a dirt cheap wreck, make it look pretty for cheap and then charge an outrageous amount of money that's several times higher than what the house is actually worth.
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December 11, 2012, 02:55:41 PM
 #15

A big problem with decimals is that people will make mistakes.

It is easy to send 10.25 BTC but it is more accident prone when you have to send 0.000001025 btc, especially when you are in a hurry (is that 5 zero's after the decimal point or 6?)

I know, I know there are ways to overcome that, but it will be a hassle if we have to add too many decimal places

Regardless. It is a solution. Now, moving on....

In Cryptography we trust.
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December 11, 2012, 03:07:45 PM
 #16

The year is 2030 . . . But all the 21 million bitcoins have being mined already.
In the year 2030, only 20.5 million bitcoins will have been mined.  Miners will still be mining additional bitcoins at a rate of 112.5 bitcoins per day.



This will not happen because of fractional reserve banking.

Alice deposits 1 bitcoin into the bank.
Bob deposits 10 bitcoins into the bank.
> Coins in bank: 11 bitcoins

Carpenter borrows 5 bitcoins to start up a new business.
> Coins in bank: 6 bitcoins

Don't see the problem?

Alice sees her statement with 1 bitcoin.
Bob sees his statement with 10 bitcoins.
Carpenter sees his wallet with 5 bitcoins.

Kaboom. Inflation. Fractional reserve banking will *save* us from a deflationary spiral.

Lets pretend for a moment that banks (and their insurance companies) settle on 10% reserve.  So The banks can loan out some of their deposits, but have to keep at least 10% of all deposits in actual bitcoins.

Given your example the bank has 11 actual bitcoins and 16 bitcoins worth of deposits.

So the bank loans out another 9 bitcoins to Dave.
Now we have 11 coins in bank and 25 bitcoins worth of deposits.

Then the bank loans out 6 coins to Edward.
Now 11 coins in bank and 31 worth of deposits.

This process can continue until there are a total of 110 bitcoins worth of deposits.
So magically, 11 "real" bitcoins becomes 110 bitcoins worth of spending power in the economy.
Transactions between people or businesses that use the same bank don't even go through the blockchain.  The bank just adjusts the necessary deposit account info accordingly.

Transactions between different banks can be acknowledged by both banks without transferring any actual bitcoins. Some people using bank A will buy from people using bank B, some using bank B will buy from people at bank A.  The banks agree to keep track of net difference and on some agreed schedule (daily?) they use the blockchain to transfer only the necessary difference between them.  So if in a given day bank A customers spend a total of 1,000,000 BTC in thousands of transactions with bank B customers, and bank B customers spend a total of 1,000,010 in thousands of transactions with bank A customers, there is still only a single 10 BTC transaction added to the blockchain that day to represent all that economic activity.

Why will people use banks instead of just keeping their own secure wallets?  A variety of reasons.  Perhaps they trust the bank to do a better job of securing the bitcoins than they believe they can do themselves?  Perhaps the banks offer to pay a small interest rate on deposits? Perhaps the banks provide a convenience for engaging in bitcoin based transactions in the physical world (debit cards, checks, etc)  Perhaps the banks offer reduced transaction fees (bank only has to pay blockchain transaction fees on a 10BT transaction instead of thousands of transactions valued at over 2 million BTC)?

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December 11, 2012, 04:41:30 PM
 #17


But then people realize that just by holding bitcoins and not buying, they are actually becoming richer! Plus, someone loses their wallet again, and the world population grows. Now the average hourly wage is 0.8 bitcoins from the natural deflation, and people start putting 1/4 of their wage into a coin store wallet to become richer. The apple farmer realizes less and less people are buying apples, and have to lower the price. And then people knows that if they don't buy something, they will have more buying power tomorrow.

So nearly nobody buys things. The world economy collapses.


Yeah, just like nobody ever buys computers over the last few decades because we know they will be cheaper in the future.  Also gas, according to your logic here nobody buys gas now because we know it will be more expensive later. 

WRONG.

Quote

Kaboom. Inflation. Fractional reserve banking will *save* us from a deflationary spiral.



Well there is nothing to *save* us from, as plenty of people have pointed out with more poise and grace than I.

And yes, you're right that the same FRB that rose out of gold could in theory rise out of bitcoin.  The differences however are substantial:

1) Physical weight of bitcoins much less
2) Easy to audit bitcoins

Especially number 2 would be very important when a bank tries to sell you their "bitcoin certificates". 


 




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December 11, 2012, 04:48:45 PM
 #18

A big problem with decimals is that people will make mistakes.

It is easy to send 10.25 BTC but it is more accident prone when you have to send 0.000001025 btc, especially when you are in a hurry (is that 5 zero's after the decimal point or 6?)

I know, I know there are ways to overcome that, but it will be a hassle if we have to add too many decimal places
If Bitcoin is worth a significant amount, then clients will simply display a different denomination.  Instead of showing you as having 15.25 BTC, it'll show your balance as 15,250 mBTC.  And then gas will be 3mBTC/gallon, an apple will be 0.97mBTC, etc.

It would be extremely easy to make a Bitcoin client show a different decimal point as the default value, and it wouldn't actually change anything behind the scenes.
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December 11, 2012, 04:54:12 PM
 #19

. . .
2) Easy to audit bitcoins

Especially number 2 would be very important when a bank tries to sell you their "bitcoin certificates". 
To audit bitcoins, you would need to know all the addresses that the bank is using to store the bitcoin reserves, and you'd have to have proof from the bank that they have access to all the private keys associated with those addresses.  I'm not sure that this makes it any easier to audit the bank.

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December 11, 2012, 04:58:13 PM
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Why will people use banks instead of just keeping their own secure wallets?  A variety of reasons.  Perhaps they trust the bank to do a better job of securing the bitcoins than they believe they can do themselves?  Perhaps the banks offer to pay a small interest rate on deposits? Perhaps the banks provide a convenience for engaging in bitcoin based transactions in the physical world (debit cards, checks, etc)  Perhaps the banks offer reduced transaction fees (bank only has to pay blockchain transaction fees on a 10BT transaction instead of thousands of transactions valued at over 2 million BTC)?

That's the big assumption which underpins the OP and the viability of BTC fractional reserve, and which I have a hard time believing.  I don't think that in a Bitcoin future, all (or even a decisive majority) of BTC will be held within a banking system.  A big driver for Bitcoin adoption is, in my opinion, the idea of financial privacy and becoming your own bank.  Banking institutions might still be used as public-facing temporary BTC handlers for deposits and transfers for extra privacy, but once the BTC arrives at its destination, a large part then likely moves into private wallets.  Especially if bank runs and misadventures with hot wallets keep occurring.

Bottom line: how much money lives in Coinbase, Instawallet, MtGox, etc. versus private wallets, today?  Until that number gets to 51%, I won't believe that there is a preference for people to hold BTC in 3rd party wallets versus private wallets.

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