Bitcoin's first major deflation event, and its consequences

[Nagato]

In my opinion, bubbles are not only natural in human history(Yes they occurred under a gold standard as well, though to a much lesser extreme), but also beneficial in the case of Bitcoin.

Because of the distribution model of Bitcoin, early adopters/miners of Bitcoin in 2009-early 2011 obtained a majority of the coins without having much use for them at that time. The first bubble was the only way to make them redistribute it either because of greed(on the way up) or fear(on the way down). I would never have been able to buy some coins in the single digits if the first bubble did not pop.

Without distribution of coins to a larger base, the price cannot reach stability. The more hands that hold Bitcoins, the lower the volatility will become. And the fear phase during bubble popping is the best time for large holders to redistribute

[solex]

In my opinion, bubbles are not only natural in human history(Yes they occurred under a gold standard as well, though to a much lesser extreme), but also beneficial in the case of Bitcoin.

Because of the distribution model of Bitcoin, early adopters/miners of Bitcoin in 2009-early 2011 obtained a majority of the coins without having much use for them at that time. The first bubble was the only way to make them redistribute it either because of greed(on the way up) or fear(on the way down). I would never have been able to buy some coins in the single digits if the first bubble did not pop.

Without distribution of coins to a larger base, the price cannot reach stability. The more hands that hold Bitcoins, the lower the volatility will become. And the fear phase during bubble popping is the best time for large holders to redistribute

+1  That is a truly important observation.

[arepo]

Oh how I yearn for the day far in the future when all of you with sophistry infatuated people will get your meeting with the cold hard reality and when this "Deflation is bad, mkay?!" idiocy will have been destroyed once and for all much like "Earth is the center of the universe, mkay?!" once upon a time was.

i would expect a moderator to take discussion more seriously than this. i tried to address your point and present a more nuanced argument than 'deflation is bad'. in fact, i would easily disagree with that statement myself. look! we're in agreement!

if you actually took the time to read past the OP, you'd see i fear the long squeezes associated with too-fast growth driven by the new masses of uninformed speculators, not deflation.

you might as well be a republican screaming about how i hate america.

[hazek]

i would expect a moderator to take discussion more seriously than this.

That's because your mind naturally appeals to authority and you haven't yet learned to restrain that appeal and listen to logic, reason and empirical evidence above else instead.

My role as a moderator should lend zero credibility to my posts. All my role is is an authority on which posts follow the rules of this forum and other things related to rules and operations of this forum (two sections only anyway), that's it. When my posts aren't about that, me being a moderator has absolutely no relevance. None what so ever. I'm just an ordinary poster like yourself and my post should be evaluated by everyone through the use of reason, logic and empirical evidence whether or not they make sense.

if you actually took the time to read past the OP

Believe it or not the issues you raised have been raised so many times already that I seriously doubt you bring anything new to the table and even if you do, you are wrong. Not from an economical perspective but from a technological and philosophical perspective. In case you didn't notice even if you have a valid concern and a valid proposal, Bitcoin's rules can't be changed. So if you think it has a flaw I suggest you take the open source code, modify it and start your own alt cryptocurrency: https://bitcointalk.org/index.php?board=67.0 Because other than that no matter what you say or how much sense you make, for better or for worse, Bitcoin is what Bitcoin is. Take it or leave it. It's up to you.

[arepo]

i would expect a moderator to take discussion more seriously than this.

That's because your mind naturally appeals to authority and you haven't yet learned to restrain that appeal and listen to logic, reason and empirical evidence above else instead.

i would think it's rather because i would expect any poster, at all, to take this discussion more seriously. but having been shouted down and flamed for alternatively beating a dead horse and hating bitcoin, i've lost a little faith in the spirit of open discussion that moderators like yourself try to encourage.

Believe it or not the issues you raised have been raised so many times already that I seriously doubt you bring anything new to the table and even if you do, you are wrong. Not from an economical perspective but from a technological and philosophical perspective. In case you didn't notice even if you have a valid concern and a valid proposal, Bitcoin's rules can't be changed. So if you think it has a flaw I suggest you take the open source code, modify it and start your own alt cryptocurrency: https://bitcointalk.org/index.php?board=67.0 Because other than that no matter what you say or how much sense you make, for better or for worse, Bitcoin is what Bitcoin is. Take it or leave it. It's up to you.

again, it's not about the fundamentals of the bitcoin protocol, OR any fundamental problem with deflationary currency. try again:

this is going to lead perhaps not to a bubble as it did before, but a massive deflationary event that pushes the purchasing power of bitcoin far above its track for healthy growth (see the height above the SMAs that the price is at right now) and will inevitably lead to massive profit-taking, predatory speculation, and price volatility. many new investors who thought they were going to be rich will find themselves in the same position as those who bought coins at $30. the growth of the userbase is good and should be encouraged not by predatory speculative behavior where earlier adopters laugh as the new users line their pockets, but lower-risk lower-price-point profit-taking that won't introduce massive volatility into the market. the former will help the bitcoin community grow in the long run. the latter will hurt the adoption of btc in the short run.

in other words, it's short-sighted and introduces systemic risk into the community. this is an example of a nash equilibrium that leaves players worse off than if they played in a pre-coordinated manner, like the Prisoner's Dilemma. everyone would be better off if the price of the coins were growing but with less risk of suddenly crashing. at this point purchasing coins is again a very high-risk investment because users have decided to distribute risk amongst the entire userbase while they continue to play musical chairs.

it's about bad behavior. we all agree that ponzi schemes are bad behavior. why is it so difficult to see why this, too, has a negative impact on the adoption of bitcoin? this is all i've been trying to say this entire thread.

[robamichael]

http://mises.org/daily/6362/The-Deflationary-Spiral-Bogey

[hazek]

why is it so difficult to see why this, too, has a negative impact on the adoption of bitcoin? this is all i've been trying to say this entire thread.

Because it makes zero sense: Hey people, we have a problem!! Many people will want to use Bitcoin so bitcoins are going to become very valuable therefor no one will want to use it!!!11

I mean, I don't know what more to say to this.

[molecular]

quote from the Porsche Cayman selling thread:

Maybe in 2 years I'll buy it for 0.1 BTC

Maybe people just don't want a Porsche currently as badly as the politicians crying for the economy to revive would like?

Maybe we're currently still producing much more stuff than needed.

http://mises.org/daily/6362/The-Deflationary-Spiral-Bogey

from above link:

While the idea of lower prices may sound attractive, deflation is a real concern for several reasons. Deflation discourages spending and investment because consumers, expecting prices to fall further, delay purchases, preferring instead to save and wait for even lower prices. Decreased spending, in turn, lowers company sales and profits, which eventually increases unemployment.

Oh my god! It's harming the holy company sales. Quick, DO SOMETHING!

Do we want:

• constantly growing economy

or

• happy people

I think if we want the second option, the first one is not necessarily a way to achieve that. Maybe we should start thinking more fundamentally about what role "employment" plays or should play in our society.

I remember as a child I didn't understand why everybody was so keen to have employment. It seemed to suck to have a job. It was explained to me that it was about the money. Actually nowadays I think it's about security. People are afraid of not being able to live well and support a good life for their family.

In a "deflationary spiral", it's suddenly possible for people to actually save money. They might decide to work for 2 years and then take a break and see the world or spend more time with their loved-ones for a year or two. They will still buy food, shelter and airplane tickets and at the same time make room for someone else to earn some money.

I know people will probably call me naive and tell me it's more efficient to invest into one employee and suck the life out of him than to educate two of them.

I still think using "sound money" will change a lot of things in the minds of people and it's the way to go.

;tldr: "The economy must grow" <- I'm sick of that shit. In a deflationary spiral "the economy would grind to a halt" <- I seriously doubt that.

[arepo]

why is it so difficult to see why this, too, has a negative impact on the adoption of bitcoin? this is all i've been trying to say this entire thread.

Because it makes zero sense: Hey people, we have a problem!! Many people will want to use Bitcoin so bitcoins are going to become very valuablevolatile therefor no one will want to use it!!!11

I mean, I don't know what more to say to this.

FTFY. you continue to respond to a point that i'm not making, and ignore the one that i am. i don't really know what more to say to this.

try again? reread the post i linked last. seriously. i don't even mention the words deflationary spiral. it's all about bad behavior. please, please, please put the effort in if you're going to post again. otherwise just don't bother.

;tldr: "The economy must grow" <- I'm sick of that shit. In a deflationary spiral "the economy would grind to a halt" <- I seriously doubt that.

i know the OP is about this. but the discussion has moved way past this dead horse. no one is arguing that the economy will grind to a halt... i didn't even say that in the OP. i referenced the mechanism of the deflationary spiral as a way to explain recent price rises. i feel it's also an example of predatory speculation, which will lead to newcomers having a bad time.

[Boussac]

@OP
You are falling victim to a flawed logic: the deflationnnary spiral can only happen when people are using a single currency.
When they are several, competing currencies, why would the economy come to a halt because one of the currencies is emerging as more valuable than the others?
The deflationary spiral is a problem for a monopolisitic currency because all prices are denominated in this currency.
Also, the deflationary spiral is a problem for economists who advocate unlimited money supply growth and unsustainable development: if the money supply grows exponentially, they need more consumer spendings just to keep things afloat.

Bitcoin prices are always and will always be displayed alongside other denominations. If people see the euro price of a computer is stable while the bitcoin price is dropping, why on earth would they think that the computer is getting cheaper ?
People are not stupid: they will simply realize bitcoins are becoming more valable against the euro.
So people will not postpone their purchase of the computer based on future price expectations.
They will part with their savings (in bitcojns) only if they need the computer now.
Bitcoins are no different from an investment in a stock with high yield, high liquidity.
The asset underlying the value of the stock is an internet transaction processing network: the valuation can be measured against other transaction processing networks (check the stock price of Visa Inc). There will be no more than 21 million shares outstanding.
Who can reasonnably say that a high performance stock can trgigger a deflationnary spiral ? This is silly.
Bitcoins are not meant to replace other currencies: bitcoins welcome competition because bitcoins are made of a better design..

[Frequency]

First let me say that I didnt read all of the post, but that I agree with arepo, in fact I have really enjoyed most of his post. The problem that he is talking about relates first and foremost to price stability. I can tell from the responses that I did read that we don't have a lot of retail business owners commenting here. This price spike has pushed me right out of the market and has friends saying that they won't use it. I have a couple friends that were looking at buying and have said no way. "I feel like I am missing out on making a lot of money, but I just cant take that kind of risk" I would not even consider taking BTC as payment for my goods at this time. I simply can not take payments in a currency that is so volatile. This is the heart of the matter. If people are holding coins off the market it pushes up price and distorts the signals.  The only way for BTC to work is if it is used as money not a commodity. I find no reason what so ever to compare the two. BTC is 1's and 0's in the cloud with no intrinsic value what so ever.       

Then could you please explain to me what the intrinsic value of a rembrandt painting is because its worth $30millon dollar.. That is only some paint on some paper isn't it??

[molecular]

First let me say that I didnt read all of the post, but that I agree with arepo, in fact I have really enjoyed most of his post. The problem that he is talking about relates first and foremost to price stability. I can tell from the responses that I did read that we don't have a lot of retail business owners commenting here. This price spike has pushed me right out of the market and has friends saying that they won't use it. I have a couple friends that were looking at buying and have said no way. "I feel like I am missing out on making a lot of money, but I just cant take that kind of risk" I would not even consider taking BTC as payment for my goods at this time. I simply can not take payments in a currency that is so volatile. This is the heart of the matter. If people are holding coins off the market it pushes up price and distorts the signals.  The only way for BTC to work is if it is used as money not a commodity. I find no reason what so ever to compare the two. BTC is 1's and 0's in the cloud with no intrinsic value what so ever.      

Then could you please explain to me what the intrinsic value of a rembrandt painting is because its worth $30millon dollar.. That is only some paint on some paper isn't it??

Hm, this is a better example than the gold I usually bring up that seems to derail people or make them emotional to the point where the rational mind is being switched off.

[xxjs]

First let me say that I didnt read all of the post, but that I agree with arepo, in fact I have really enjoyed most of his post. The problem that he is talking about relates first and foremost to price stability. I can tell from the responses that I did read that we don't have a lot of retail business owners commenting here. This price spike has pushed me right out of the market and has friends saying that they won't use it. I have a couple friends that were looking at buying and have said no way. "I feel like I am missing out on making a lot of money, but I just cant take that kind of risk" I would not even consider taking BTC as payment for my goods at this time. I simply can not take payments in a currency that is so volatile. This is the heart of the matter. If people are holding coins off the market it pushes up price and distorts the signals.  The only way for BTC to work is if it is used as money not a commodity. I find no reason what so ever to compare the two. BTC is 1's and 0's in the cloud with no intrinsic value what so ever.      

Then could you please explain to me what the intrinsic value of a rembrandt painting is because its worth $30millon dollar.. That is only some paint on some paper isn't it??

Hm, this is a better example than the gold I usually bring up that seems to derail people or make them emotional to the point where the rational mind is being switched off.

Clearly famous paintings have moneyness also. It is a safe haven for saving, when money are worthless and other investiments risky.

[Zomdifros]

Limiting the total supply of bitcoins was a stroke of genius from Satoshi.

• It provides an incentive for early adopters to mine the currency, thereby fueling it's adoption
• It will probably make Satoshi extremely rich, perhaps the wealthiest person to have ever lived on this planet
• It won't have a serious effect on the use of Bitcoin as a currency, since merchants can simply choose to have all incoming bitcoins automatically exchanged for fiat, thus limiting the volatility risk, and users of the currency can always choose to buy more bitcoins to replenish the ones they've used to buy stuff
• The most important reason of all: if the supply of bitcoins wasn't limited, there would remain a serious risk that an alternative currency would take over, since it could be a better store of value than the ever inflating Bitcoin

[thefiniteidea]

In my opinion, bubbles are not only natural in human history(Yes they occurred under a gold standard as well, though to a much lesser extreme), but also beneficial in the case of Bitcoin.

Because of the distribution model of Bitcoin, early adopters/miners of Bitcoin in 2009-early 2011 obtained a majority of the coins without having much use for them at that time. The first bubble was the only way to make them redistribute it either because of greed(on the way up) or fear(on the way down). I would never have been able to buy some coins in the single digits if the first bubble did not pop.

Without distribution of coins to a larger base, the price cannot reach stability. The more hands that hold Bitcoins, the lower the volatility will become. And the fear phase during bubble popping is the best time for large holders to redistribute

+1  That is a truly important observation.

I agree. Well said nagato... well said.

[CurbsideProphet]

It is just a wishfully thinking if you believe bitcoin's road to currency would be smooth and easy.

this is probably </thread>. i'm just worried that the wave of new investors or whatever is behind this price action knows not what they do.

If that's your largest worry, then you're better off investing in improving the Bitcoin infrastructure or providing a good/service.  You don't need to hoard Bitcoin to be part of the economy, be the casino and not the gambler, if you will.

[valiron]

So it seems that the bitcoin userbase has made a decision about the currency vs. store-of-value dichotomy and has overwhelmingly chose the latter.

What we see is nothing but  Gresham's law: http://en.wikipedia.org/wiki/Gresham's_law

People hoard good money and spend bad money.

This is deflationnary for BTC  but it does jeopardize its currency status.Eventually BTC will reach an equilibrium for its value. Similar things did happen historically at the moment when bimetallic standard were in place.

[Walter Rothbard]

why is it so difficult to see why this, too, has a negative impact on the adoption of bitcoin? this is all i've been trying to say this entire thread.

Because it makes zero sense: Hey people, we have a problem!! Many people will want to use Bitcoin so bitcoins are going to become very valuable therefor no one will want to use it!!!11

I mean, I don't know what more to say to this.

Furthermore, this has been addressed in many places by competent economists, and the people who start these kinds of threads are rarely familiar with the arguments against their ideas, and they never address them.  No homework has been done first.  People just show up and claim they are seeing something that nobody else is seeing, and then get upset and call names when noone agrees with them.  And my ignore list just grows.

[molecular]

People hoard good money and spend bad money.

This is deflationnary for BTC  but it does jeopardize its currency status.Eventually BTC will reach an equilibrium for its value.

This sums it up quite well for me.

Similar things did happen historically at the moment when bimetallic standard were in place.

how would an equilibrium be reached when the gold/silver ratio is fixed at an arbitrary value and the market disagrees? Can you point me to some such historical event?

[valiron]

Similar things did happen historically at the moment when bimetallic standard were in place.

how would an equilibrium be reached when the gold/silver ratio is fixed at an arbitrary value and the market disagrees? Can you point me to some such historical event?

In the wiki you have an introduction to bimetallism and some historical events: http://en.wikipedia.org/wiki/Bimetallism

Eventually the evolution was towards the gold standard in the XIXth century. When Gresham law acts, the equilibrium is reached by the non-circulation of the good money. The same may happen for BTC...and there is nothing wrong with this...A BTC would be like a 400oz gold ingot...