Bitcoin's first major deflation event, and its consequences

[molecular]

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...

yes, you're right, nothing wrong with that.

[1713532050]

1713532050

[1713532050]

1713532050

[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...

yes, you're right, nothing wrong with that.

Of course a BTC has better properties than a 400 oz gold ingot...it is divisible at no cost...and may be moved at no cost...and it is securely stored at no cost...

[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 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.

hazek's recaps of 'my argument' have consistently been strawmen. i'm convinced he doesn't even read what i write. there is some predatory speculation going on right now, and it's being fueled by the sentiment that bitcoin is supposed to go up, up, up. this kind of behavior scares me.

he snipped the quote in just the right place to make it look like i've been beating the same old deflationary spiral dead horse. and it makes me a little sad that you're assuming all of these things about me just because i've taken an unpopular opinion. it's dangerous to tend to think that people who disagree with you have rarely done their homework.

i also probably don't even disagree with you. deflationary currencies are perfectly fine, no fundamental problem about them. this thread was in response to the then 500%, now 600% growth in the price in the past 12 months. this is unprecedented since the early deflation rallies from pennies to dollars that led to the bubble.

to recap better, i'm trying to say: SOMETHING'S GOING ON. i have a negative feeling about it. if you have a positive feeling, please share here.

thanks

[molecular]

arepo, I have taken your concerns seriously and I thought about them and what others had to say here in this thread. I came - for myself - to the conclusion that your concerns do not have much substance.

I'm not blindly saying "all is good, enjoy the ride": there will be volatility, also to the downside.

I don't buy the "predatory speculation" explanation for the rally. Other simple fundamental reasons (like tons of people discovering bitcoin and businesses entering the game) seem more likely to me.

Neither do I think a "deflationary spiral" would happen or is a bad thing in general. I don't think it's currently applicable to bitcoin.

;tldr: people listened to you but noone got really scared.

[hazek]

arepo, I have taken your concerns seriously and I thought about them and what others had to say here in this thread. I came - for myself - to the conclusion that your concerns do not have much substance.

I'm not blindly saying "all is good, enjoy the ride": there will be volatility, also to the downside.

I don't buy the "predatory speculation" explanation for the rally. Other simple fundamental reasons (like tons of people discovering bitcoin and businesses entering the game) seem more likely to me.

Neither do I think a "deflationary spiral" would happen or is a bad thing in general. I don't think it's currently applicable to bitcoin.

;tldr: people listened to you but noone got really scared.

Yes he is right, I didn't read practically anything he wrote but the above response sounds pretty much what I'd answer with if I had read it all.

The thing that most have a hard time grasping is that when I examine markets I always put ethics first. I.e. the individual having the ability to do whatever and if this means being clobbered in a manipulated market, then so be it because he will learn from it or go extinct and if he learns from it he will be better of next time. So I really don't care what monsters you can find in a market regulated strictly by consumption i.e. in a free market.

[molecular]

oh btw: thanks arepo for voicing your concerns. I really appreciate it.

It's probably not easy as a bear on these forums. Keep at it, we need the bears to keep us sane!

[twolifeinexile]

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...

yes, you're right, nothing wrong with that.

Of course a BTC has better properties than a 400 oz gold ingot...it is divisible at no cost...and may be moved at no cost...and it is securely stored at no cost...

Bitcoin do have cost, and huge cost -- the ever increasing hashing power and that power need return....

[rupy]

Don't saw me down at the ankles if I'm wrong but isn't this just proof of the difficulty/price coupling?

We know for sure that if the price goes down the difficulty goes down (GPU miners stop mining)...

What if the price is decided by the miners that only sell to a high price point to be able to continue mining?!

If this is true, ASIC's will lower stabilize the price once they kick out GPU's because the electricity bill will be lower for miners.

What do you say?

Edit: I think the rush is ASIC fueled = raising the price to what it needs to be in order for ASIC to be barely profitable keeping the mining going...

Basically making this a reward drop + ASIC effect

[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...

yes, you're right, nothing wrong with that.

Of course a BTC has better properties than a 400 oz gold ingot...it is divisible at no cost...and may be moved at no cost...and it is securely stored at no cost...

Bitcoin do have cost, and huge cost -- the ever increasing hashing power and that power need return....

I can't help it if you can't read properly.

--> Bitcoin is divisible at no cost, dividing gold has cost (split a krugerrand and try to sell it, you will then understand what I mean)

--> Bitcoin can be moved at no cost, transportation of gold has cost in security measures (see the recent gold repatriations...)

--> Bitcoin can be securely stored at no cost, gold needs vaults and expensive security measures.

On the other hand the cost of hashing will be largely covered by fees...which are much cheeper that any bank fee...

[KTE]

arepo, your deflation assessment is true in most parts. If Bitcoin someday does not have any benefits over other currencies or becomes the only actively used currency, I believe it will succumb into a deflationary spiral.

You, however, are way, way ahead of your time looking into signs about this happening today. BTC is nowhere close to being an established major form of trade, and before it gets there, BTC follows a completely different set of rules.

Also, the other *very* important point your assessment doesn't take into account is the benefits that Bitcoin has as a form of payment over other currencies. The anonymity, protection from hostile regulation, lack of fees and possibility of instant peer to peer global transactions make it very desirable to do trades with. As long as other forms of doing trade are less desirable / not viable for certain transactions, bitcoin will have parties interested in using it for transactions and will be widely adopted as a payment method. Even though the price of Bitcoins goes up due to scarcity, you still need to make transactions to consume or do business, and you tend to pick the form of trade most suitable for those actions whether or not holding the currency in question is also a good investment. This is easy to understand by thinking what you would do if you only had bitcoins and no other possession worth of any value.

Final point that I think you are missing is that it's extremely easy to create new cryptocurrencies. Should Bitcoin's value skyrocket so high up that trading with it doesn't make any sense, people start to move to another similar currency that is more hospitable for trading, because at some point the inertia of changing currencies becomes smaller than the difficulty of doing business in the current one. This in turn will put a downward pressure on BTC's value, and in the long run these two (or more) currencies will reach some sort of a balance.

[lebing]

oh btw: thanks arepo for voicing your concerns. I really appreciate it.

It's probably not easy as a bear on these forums. Keep at it, we need the bears to keep us sane!

Yep, we do. Cheers Arepo

[lebing]

Final point that I think you are missing is that it's extremely easy to create new cryptocurrencies. Should Bitcoin's value skyrocket so high up that trading with it doesn't make any sense, people start to move to another similar currency that is more hospitable for trading, because at some point the inertia of changing currencies becomes smaller than the difficulty of doing business in the current one. This in turn will lower BTC:s value, and in the long run these two (or more) currencies will reach some sort of a balance.

I continue to hear this argument and don't understand the logic. It takes a significant amount of time, effort & more importantly infrastructure, to come close to competing with another currency. People will not start using ltc (or some other currency which does not have a significant advantage over the existing one) simply because btc is priced too high. There is simply to much friction stopping its adoption. The only reason btc is taking off now is because there are so many advantages to the existing currencies, it has nothing to do with the price.

[KTE]

I continue to hear this argument and don't understand the logic. It takes a significant amount of time, effort & more importantly infrastructure, to come close to competing with another currency. People will not start using ltc (or some other currency which does not have a significant advantage over the existing one) simply because btc is priced too high. There is simply to much friction stopping its adoption. The only reason btc is taking off now is because there are so many advantages to the existing currencies, it has nothing to do with the price.

Yes, yes and yes. It takes a lot of effort to compete with another currency. That's why there won't be a competitor to BTC in a long time. But if far into the future BTC is the only currency that we trade with, there will be demand for another competing currency. Should this happen, the relative costs of setting up a new digital currency are miniscule. This should be pretty obvious.

You should re-read my post, I never said that the price of BTC has anything to do with it's popularity right now. The price of BTC is just an arbitrary number, it only becomes relevant in the case I mentioned above, where BTC would be in an uncontrolled deflationary spiral.

[arepo]

It's probably not easy as a bear on these forums. Keep at it, we need the bears to keep us sane!

got that right

but the appreciation is appreciated

[imsaguy]

On the other hand the cost of hashing will be largely covered by fees...which are much cheeper that any bank fee...

What is the percent of fees per block?  Tiny.  The vast majority of 'profit' in mining right now is the block reward, not fees.  As the block reward goes down, fees will need to climb.  You can argue that costs for mining will go down because hardware gets faster, but you'd be wrong.  Its the same reason the price of computers haven't really changed.  There's a certain cost to keeping the technology "current" and you can't get around that.

[MoonShadow]

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...

Not no cost.  There is always a cost to someone, although not necessarily to yourself.  Someone bears the cost.  Presently that is the miners.

[Monster Tent]

If gold leads to no new investments why wasn't mankind still stuck in caves hoarding its gold for 6000 years ? After all why move out of the cave and into a house when your gold will be worth more tomorrow

[Monster Tent]

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...

yes, you're right, nothing wrong with that.

Of course a BTC has better properties than a 400 oz gold ingot...it is divisible at no cost...and may be moved at no cost...and it is securely stored at no cost...

Bitcoin do have cost, and huge cost -- the ever increasing hashing power and that power need return....

I can't help it if you can't read properly.

--> Bitcoin is divisible at no cost, dividing gold has cost (split a krugerrand and try to sell it, you will then understand what I mean)

--> Bitcoin can be moved at no cost, transportation of gold has cost in security measures (see the recent gold repatriations...)

--> Bitcoin can be securely stored at no cost, gold needs vaults and expensive security measures.

On the other hand the cost of hashing will be largely covered by fees...which are much cheeper that any bank fee...

Fees havent yet replaced the missing 25btc from the recent block halving.

[arepo]

When I first made this post, I had not even yet dreamed of $150 price swings in the bitcoin economy. My only hope is that the discussion helped others dream of just that this past week, and protect their money with stop orders and smart speculation. This is what happens when deflation gets out of hand. I hope that this correction helps return us to the new normal and we see healthy sustainable growth from here on out.

[Adrian-x]

When I first made this post, I had not even yet dreamed of $150 price swings in the bitcoin economy. My only hope is that the discussion helped others dream of just that this past week, and protect their money with stop orders and smart speculation. This is what happens when deflation gets out of hand. I hope that this correction helps return us to the new normal and we see healthy sustainable growth from here on out.

As I argued on page 1 until we have saturated adoption, a relatively even distribution, and a free market we will have volatility, if you don't like volatility you need to find a P2P crypto currency that distributes coins something similar to the rate of adoption. Volatility is a result of uneven distribution.