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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 580732 times)
flaviojr123
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February 05, 2018, 09:24:00 PM
 #961

Hello, this is my first post on this thread I couldn't read 50 pages of internet discussion so kindly correct me if anything I'm assuming is obviously wrong.

BTC main value proposition is to be a decentralized currency and/or value store.

I understand price inflation is considered bad because it unfairly damages savers vs consumers. On the other side, some people can handle inflation reasonably well by re-indexing contracts every so often. This is common behavior in countries with high inflation, and again I understand it still damages savers but the damage can be reasonably controlled. Additionally, some would argue that inflation is bad even for those prepared for it because it raises the cost of doing business.

The point that I want to discuss is, isn't bitcoin's price fluctuation equally bad to inflation in the fact it raises the cost of doing business?

If we all accept BTC as a volatile store of value, does it imply it can't be the decentralized currency most would use?

Now let me try to explain some of my assumptions: 1. BTC price will always be volatile.

The BTC supply increasing rate is positive, that rate is fixed looking in the short term (30-90 days). On the other side, demand is highly unpredictable. Fixed supply and highly unpredictable demands cause unpredictable prices.

Common counter arguments:
1 "BTC is volatile but it always rises in the long-term so it doesn't matter". Is it does, it increases the cost of business. I can't start a bakery with only BTC capital because in the first dip I will have to take loans to pay wages.
1.1 "Oh, but you can't see that happening because you can't see far enough." This sounds like a highly utopian view. Pragmatically, we need a path from here to there, I turn to you and ask, how can we get there?
1.2 "Okay, it doesn't matter for some people and that's all". Okay, then BTC will be a niche store of value.
2 "Demand will stabilize in the long term." How?
3 "Price stability is a myth, market demands always change them" Sure, it's a myth. Yet it is desirable. If we are designing the system, shouldn't we take that in account? "No, we shouldn't, if you want to do that go and create your own coin." Okay, then BTC will be a niche store of value.

Right now it looks to me that price instability prevents BTC wide adoption.

What incentives do savers have to buy-in on a inflationary money supply? The incentive of stability? That's one reason people agree being exposed to the USD. Am I defending inflation tax? No. I'm asking could there be benefits to having a transparent voluntary contract with varying money supply rate. And I'm leaning towards a yes to this question.

If the supply of a coin could be influenced by price then we would have a more stable coin, the cost we pay is inflation. The issue then becomes an optimization issue, on what would be a proper trade-off.

What are your thoughts?

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February 06, 2018, 06:18:43 AM
 #962


Since we're both very excited about this, and to restrain our words from moving too far from the point, I think we should address one issue at a time.

My interpretation from the above definition related to economics:

1. Price Inflation refers to the "general increase in prices" part of that definition
2. Money Supply Inflation refers to the "fall in the purchasing value of money" part of that definition

Therefore, I can not agree that inflation "means the same thing as increase", as it conflicts with the "fall in the purchasing value of money" part of that definition.

Note: this is not an argument of what the "general increase in prices" or "fall in the purchasing value of money" means. We can get to that once your interpretation of the word inflation is understood.

I wish I had half the skill you do answering questions...So poised and professional.
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February 07, 2018, 08:07:53 AM
 #963

Yes you could estimate future cash flows of you had contracts or sales data.

For example I worked for a bakery that made 20K per month.  Then I decided to model my business after theirs but in a different past of town that didn't have a good bakery.  I could estimate that within a few years my business could possibly genstate similar income

Or if I snuck behind their backs and offered the same baguette to a distributor for 20% less and stole their contract
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February 07, 2018, 03:20:36 PM
 #964

To my mind BTC is very volatile, which means unpredictable risk of inflation/deflation. So mostly it is an investing and saving too. I.e. some alternative currencies should be used to run a business
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February 07, 2018, 03:45:19 PM
 #965

We can take the example of recession on america during 2008, collapse of layman brothers too....
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February 07, 2018, 03:54:43 PM
 #966

In simple and understanding words inflation just indicate the situation of buying 1 kg of sugar from market @ Rs.45/kg during 2016 and buying sugar from market @ Rs.55/kg during 2017 i.e in laymen language decreasing in purchasing power of money and the reverse case will be the example of deflation.
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February 07, 2018, 04:03:29 PM
 #967

future value of bitcoin will depend on the percentage of money being replaced by crypto, and on the bitcoin percentage of all crypto cap

Enjoy your life, one day at a time. Bitcoin Address: 1HrWs3tDzWr13zocV3qP9ENRLgiDuewtsu
flaviojr123
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February 07, 2018, 06:19:00 PM
 #968

To my mind BTC is very volatile, which means unpredictable risk of inflation/deflation. So mostly it is an investing and saving too. I.e. some alternative currencies should be used to run a business

Thanks for the answer corall. I really just want to know if that's a consensus because that means there's an unattended demand for stable crypto currency.
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February 07, 2018, 06:37:03 PM
 #969

nice team
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February 07, 2018, 10:44:14 PM
 #970

To my mind BTC is very volatile, which means unpredictable risk of inflation/deflation. So mostly it is an investing and saving too. I.e. some alternative currencies should be used to run a business

Thanks for the answer corall. I really just want to know if that's a consensus because that means there's an unattended demand for stable crypto currency.

Crypto economy is a new way of economy so nobody can predict for sure the rules of demand if future. I would expect slight inflation of bitcoin in the future
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February 08, 2018, 11:07:53 AM
 #971

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer



Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.



Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.



What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading! Wink

Wow. Thank you. I gained my knowledge!
Mary0K.am
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February 08, 2018, 02:49:13 PM
 #972

That's the thing though, you guys are getting trolled, by those damn neo-keynesians Cheesy
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February 09, 2018, 05:29:21 AM
 #973

Inflation and deflation are both economic situations that has been occurring in our time. Inflation occurs when demands are high and supply are low so the price tends to go up, while on the other hand deflation occurs when supply are many but not enough money is available to purchase. This topic is very timely since this is also one of the factors affecting bitcoins today.
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February 09, 2018, 11:33:20 AM
 #974

Hello, this is my first post on this thread I couldn't read 50 pages of internet discussion so kindly correct me if anything I'm assuming is obviously wrong.

BTC main value proposition is to be a decentralized currency and/or value store.

I understand price inflation is considered bad because it unfairly damages savers vs consumers. On the other side, some people can handle inflation reasonably well by re-indexing contracts every so often. This is common behavior in countries with high inflation, and again I understand it still damages savers but the damage can be reasonably controlled. Additionally, some would argue that inflation is bad even for those prepared for it because it raises the cost of doing business.

The point that I want to discuss is, isn't bitcoin's price fluctuation equally bad to inflation in the fact it raises the cost of doing business?

If we all accept BTC as a volatile store of value, does it imply it can't be the decentralized currency most would use?

Now let me try to explain some of my assumptions: 1. BTC price will always be volatile.

The BTC supply increasing rate is positive, that rate is fixed looking in the short term (30-90 days). On the other side, demand is highly unpredictable. Fixed supply and highly unpredictable demands cause unpredictable prices.

Common counter arguments:
1 "BTC is volatile but it always rises in the long-term so it doesn't matter". Is it does, it increases the cost of business. I can't start a bakery with only BTC capital because in the first dip I will have to take loans to pay wages.
1.1 "Oh, but you can't see that happening because you can't see far enough." This sounds like a highly utopian view. Pragmatically, we need a path from here to there, I turn to you and ask, how can we get there?
1.2 "Okay, it doesn't matter for some people and that's all". Okay, then BTC will be a niche store of value.
2 "Demand will stabilize in the long term." How?
3 "Price stability is a myth, market demands always change them" Sure, it's a myth. Yet it is desirable. If we are designing the system, shouldn't we take that in account? "No, we shouldn't, if you want to do that go and create your own coin." Okay, then BTC will be a niche store of value.

Right now it looks to me that price instability prevents BTC wide adoption.

What incentives do savers have to buy-in on a inflationary money supply? The incentive of stability? That's one reason people agree being exposed to the USD. Am I defending inflation tax? No. I'm asking could there be benefits to having a transparent voluntary contract with varying money supply rate. And I'm leaning towards a yes to this question.

If the supply of a coin could be influenced by price then we would have a more stable coin, the cost we pay is inflation. The issue then becomes an optimization issue, on what would be a proper trade-off.

What are your thoughts?


👍🏻
shikon_shard
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February 09, 2018, 01:03:37 PM
 #975

So do we advertise bitcoin so that all 21million btc Will be generated already? Was that it? Was that why more people=more money ?
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February 09, 2018, 01:23:31 PM
 #976

Very interesting, and descriptive thought analysis on the inflation-deflation principles of money supply as related to Bitcoin; and cryptocurrency in general (or those that will be successful anyway).

I had been thinking of this a bit differently, with similar effects, but had not given as much thought to this theory yet.

In my mind when I heard about those being inherent in Bitcoin, and viewed illustrations like those around with the grocery cart much fuller, and then mostly empty... well that's about as far as I got with my thought process on this and believed I had substantially understood that.

However, I was thinking more in terms of Bitcoins deflationary effects not so much as what used to cost BTC20, now cost BTC10, or visa-versa for the inflationary part. I applied only the fact that over time everything costs us more, such as groceries per said illustrations, and our local currencies do not increase in value... we have to earn more to meet the rise in the costs of goods and services.

Therefore using fiat was inflationary and Bitcoin was offering deflationary effects where the opposite would occur due to the fact that it is not governed or controlled by one central authority (which can impose other changes in value to the monetary system) and that regardless of the highs and lows (which I did not think about too much) that in time hodling Bitcoin alone--the value would increase largely due to scarcity of the coin down the road.

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February 10, 2018, 02:42:28 PM
 #977

An excellent post that I'll sticky so people can learn from.
やほ
flaviojr123
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February 11, 2018, 04:29:13 AM
 #978

What incentives do savers have to buy-in on a inflationary money supply?

Excellent job for a first post Flavio!  Wink

Call me stupid but, if the money in my wallet would inflate in value between the time I put it in and the time I spend it (widely shared view of BTC over the long term), that would be a pretty good incentive!

Note that I'm looking at the long term, say 2 to 5 years, so perhaps more of a savings wallet than one for the weekly groceries!



You actually misunderstood me a little bit. When I say inflationary money supply, I mean the opposite of bitcoin. Inflationary money supply causes your money to be worth less and less with time. The question I want to raise is. Is there no incentive for people to have money on an inflationary supply?

Given that price volatility increases cost of business then it's reasonable to say this cost can be measured. Inflation raises cost of business too. "When does inflation cost trumps volatility and vice-versa?" That's the question I really wanna raise.
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February 11, 2018, 06:30:44 PM
 #979

Good post/ Blockchain can have only deflation because the amount of bitcoin is limited.
And what do you tonk about it?
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February 12, 2018, 12:55:24 PM
 #980

How can a digital simulation of money become more illusory than it already is? Simulated money will always be an illusion, but because it is a simulation we do not have to accept the 'rules' coded into it as if they were the Ten Commandments. Instead, we can select the relevant sections of source code, hit the delete button, and start over.
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