what is killing bitcoin by drastically deflating it?

[Brutus I]

Yes...I'm sure all the bitcoin retailers are just loathing the dramatic increase in the price of the bitcoins that they are receiving

Although a rapidly rising commodity brings smiles to all faces who are holding it, it also discourages people holding it for exchanging it for goods, services, and indeed Fiat currency. Now, this is when things are on the way up. On the way down, the volatility will destroy people using Bitcoin for real world economic transactions. Either way, the volatility cannibalises that which underpins the basis of the whole 'value' of Bitcoins.

Seems like there are a lot of smug types around here who think the whole Bitcoin universe's behaviour is running in accordance with their own personal simple world paradigm of how things should work. My word of warning to such people is that they should perhaps consider the possibility that perhaps they are not as smart as they think, and that perhaps they have merely got lucky, inadvertently hitching a ride on a dragons tail wings. True, that dragon may soar and spiral ever higher into the heavens, taking everyone with it along for the ride. But when that dragon dives, it will nose down right into the flames below, revealing to everyone, their false illusions regarding what is driving Bitcoins.

Do people forget what happens when market value far exceeds the underlying assets supporting it? Housing crash 2008 anyone? One thing that I could safely bet my own house on, would be that the market value of Bitcoins, is exceeding the underlying economy which supports it, by an order of several magnitude at the moment. For anyone to 'invest' in Bitcoin now for purposes of speculation, they would be doing so on the premises of 'greater fool theory' (a bigger fool than themselves will come along and pay even more than they did at some point in the future). As for the posts I have seen where people are discussing putting their pension funds into Bitcoin...OYF! 

Spot on.

[1715081278]

1715081278

[1715081278]

1715081278

[1715081278]

1715081278

[Mike Christ]

I just got this real crazy idea.

What if Bitcoin encourages people to stop spending more than they need to buy?  Since by holding BTC you're likely to become wealthier, thereby decreasing the need to spend frivolously, people would hold onto their coins and spend them only when they had to, such as for food, shelter, and the recurring payments of entertainment--and everything else would be only if they really mean to spend, as on their business ventures or schooling or whatever else.  On the other hand, with fiat, you're encouraged to get rid of it ASAP on whatever it is you need or want.  Capitalism seems to favor an inflating currency, as people are more likely to get rid of their cash by either buying or investing in something else (but average Joe seems to prefer to buy.)  Therefor, more money runs around, the economy (is supposed to) keep moving, la-de-da.

I think a society that's more focused on conserving their cash (and thus, their resources) is much better off than the society that must eternally spend and expand.  Maybe people won't waste their hard-earned money so quickly then, and won't be so easy to coerce into giving a bank for gambling purposes--I mean, investing.  This system seemed to work well when we needed to spend and expand, but now that phase is over, and the cup keeps spilling over.

[Brutus I]

I just got this real crazy idea.

What if Bitcoin encourages people to stop spending more than they need to buy?  Since by holding BTC you're likely to become wealthier, thereby decreasing the need to spend frivolously, people would hold onto their coins and spend them only when they had to, such as for food, shelter, and the recurring payments of entertainment--and everything else would be only if they really mean to spend, as on their business ventures or schooling or whatever else.  On the other hand, with fiat, you're encouraged to get rid of it ASAP on whatever it is you need or want.  Capitalism seems to favor an inflating currency, as people are more likely to get rid of their cash by either buying or investing in something else (but average Joe seems to prefer to buy.)  Therefor, more money runs around, the economy (is supposed to) keep moving, la-de-da.

I think a society that's more focused on conserving their cash (and thus, their resources) is much better off than the society that must eternally spend and expand.  Maybe people won't waste their hard-earned money so quickly then, and won't be so easy to coerce into giving a bank for gambling purposes--I mean, investing.  This system seemed to work well when we needed to spend and expand, but now that phase is over, and the cup keeps spilling over.

Savings and capital accumulation is a benefit of a deflationary currency. But stability is important. Not going to have that this early in the game.

[odolvlobo]

I think the following facts are convincing evidence against the claim that the rising value of BTC encourages hoarding.

• The number of transactions is increasing rapidly, and faster than the money supply. Transactions (excluding popular addresses such as SD, mining pools, and exchanges) have more than quadrupled over the last year. Increased hoarding would mean fewer transactions. Source: http://blockchain.info/charts/n-transactions-excluding-popular
• The number of bitcoin days destroyed per day is rising. In fact, the rapid increase since January shows that the number of coins being hoarded is dropping quickly as the price goes up. Source: http://blockchain.info/charts/bitcoin-days-destroyed
• Daily volume on Mt. Gox has gone through the roof. After all, if hoarding were increasing, then there would be less BTC for sale. Source: http://bitcoincharts.com/charts/mtgoxUSD#rg360zm1g10zm2g25zvzcv

Of the three, the bitcoin days destroyed metric is the best indicator of hoarding vs. spending. If 100% of the coins were hoarded, then the value would be 0. If the percentage of coins being hoarded were constant, then the value would be a constant fraction of the number of coins and the difference would be the number of coins being hoarded. If no coins are being hoarded, then the value would be 100% of the number of coins.

[Alonzo Ewing]

As you state, there are benefits of saving, something that modern economics overlooks.  Saving is prudent for most people.  It allows capital accumulation, something necessary for future investment. 

The current economy, based on inflation, forces everyone to speculate.  Even at 2% inflation, in a generation, savings are cut by half.  Why save?

The problem is not everyone is cut out to be a speculator.  Only a select few are.  Speculation should be their domain, not the domain of everyone.

The balance between saving and spending should be determined by a free market interest rate.  Unfortunately, none exists today.

In a bitcoin economy, the value of money would grow with time.  Only those who are cut out for speculating and investing would do so.  The average joe would be content to save, and they would be able to capture the growth of the economy through the rise in the value of bitcoins, not through speculation.

I just got this real crazy idea.

What if Bitcoin encourages people to stop spending more than they need to buy?  Since by holding BTC you're likely to become wealthier, thereby decreasing the need to spend frivolously, people would hold onto their coins and spend them only when they had to, such as for food, shelter, and the recurring payments of entertainment--and everything else would be only if they really mean to spend, as on their business ventures or schooling or whatever else.  On the other hand, with fiat, you're encouraged to get rid of it ASAP on whatever it is you need or want.  Capitalism seems to favor an inflating currency, as people are more likely to get rid of their cash by either buying or investing in something else (but average Joe seems to prefer to buy.)  Therefor, more money runs around, the economy (is supposed to) keep moving, la-de-da.

I think a society that's more focused on conserving their cash (and thus, their resources) is much better off than the society that must eternally spend and expand.  Maybe people won't waste their hard-earned money so quickly then, and won't be so easy to coerce into giving a bank for gambling purposes--I mean, investing.  This system seemed to work well when we needed to spend and expand, but now that phase is over, and the cup keeps spilling over.

[aarreeaa]

I see that most of you are trilled that bitcoin value quickly increases.
And that really is great for those that invest in virtual bit coins and intend to profit by selling (outexchanging) them later.

But bitcoin <-> real money exchanges usually make small (traditionally - ~2%-5%) profit per exchange.
With such deflation (~3-6% per day) exchangers actually lose by selling bitcoin, so fees should go up...

While bitconin's value deflates so fast, its very bad for buying/selling stuff & services.
WHY? The most obvious aspect: More and more people become hesitant to make purchase today and decide to wait few days to get it cheaper - bad for merchants (10-30% of potential sales are lost).

[odolvlobo]

WHY? The most obvious aspect: More and more people become hesitant to make purchase today and decide to wait few days to get it cheaper - bad for merchants (10-30% of potential sales are lost).

Yeah, and electronics manufacturers are going broke because everybody waits until the prices drop before buying. Sorry, your argument isn't supported by the facts.

[aarreeaa]

WHY? The most obvious aspect: More and more people become hesitant to make purchase today and decide to wait few days to get it cheaper - bad for merchants (10-30% of potential sales are lost).

Yeah, and electronics manufacturers are going broke because everybody waits until the prices drop before buying. Sorry, your argument isn't supported by the facts.

Why did you quote mine and then strawman my position?

[DataPlumber]

WHY? The most obvious aspect: More and more people become hesitant to make purchase today and decide to wait few days to get it cheaper - bad for merchants (10-30% of potential sales are lost).

Yeah, and electronics manufacturers are going broke because everybody waits until the prices drop before buying. Sorry, your argument isn't supported by the facts.

Why did you quote mine and then strawman my position?

I for one am unclear why that's a distortion of your argument.  People don't stop needing things just because holding on to money longer can mean you'll get more value for it tomorrow.

Every time I buy computer hardware, I know that if I wait another week/month/whatever, I'd get a better value for less currency spent.  But that doesn't seem to stop me from upgrading.

[anabolic weasel]

I think one of the problems with bitcoin to be implemented to buy and sell in commerces is this volatility, because the average seller doesn't want to be adapting its prices every 3 hours since their prices need to be sharp to compete.

[OskarLoderr]

I wouldn't say deflation is killing bitcoin.

What it's doing is making people put off what they don't need to buy today. Yes, this will cost some businesses some of their profits for a while. But that will stop after the depreciation tapers off.

Granted, we're talking about MacroEcon, so there are always going to be exceptions. Just how many exceptions, I can't tell you because I haven't really seen any solid data on the subject. There isn't a BLS for bitcoin that I've seen.


Personally, I'm not spending right now anyway because I'm saving up for a second GPU to drop in my machine.

[mickeyshrugged]

  You're talking about the price of Bitcoin relative to the dollar-- relative to a weakening fiat currency. Think about that. You're not actually talking about the price of Bitcoin in terms of something people would actually want to buy.

Once we start pricing Bitcoin in terms of gold, other commodities, or in terms of a consumer price index, volatility isn't even a meaningful subject.

[DeathAndTaxes]

But bitcoin <-> real money exchanges usually make small (traditionally - ~2%-5%) profit per exchange.
With such deflation (~3-6% per day) exchangers actually lose by selling bitcoin, so fees should go up...

Oh no.  We haven't lost money and our fees have actually gone down.  I must be doing something wrong.

[Operatr]

As long as the Bitcoins reside in in-network, those Bitcoins will still buy that product will still be equivalent to how much it is worth retail. Today the buying power of a Bitcoin is about $100, any Bitcoin price would increase or decrease to reflect the change in how much a Bitcoin can purchase. If you can now buy $100 worth of stuff with a coin you bought much earlier at $10, you still gained $90 of buying power just for being an early adopter.

I think people are looking too short-term though. This growth will occur over years, don't worry about your coins but save some up, and spend some of them too to help the Bitcoin economy function.

The Bitcoin network is consuming bank accounts right now from broken systems, naturally its going to be a crappy looking graph while this goes on, this is just the beginning.

 

[DGrandioseD]

Many bitcoin holders may feel like its a good thing that bitcoin -> $ value doubled within past few weeks,
but thats terrible news for people who sell stuff and would like to accept bitcoin...

It's a newborn for starters, and because there's a fixed supply and a forever increasing pool of adopters, the value is set to rise until everyone knows what Bitcoin is and has decided they want it or don't want it.

Yup, it'll continue to rise imo

[Peter Lambert]

I think one of the problems with bitcoin to be implemented to buy and sell in commerces is this volatility, because the average seller doesn't want to be adapting its prices every 3 hours since their prices need to be sharp to compete.

A couple lines of code should fix that for online sellers:

RATE = {get current bitcoin price from mtgox.com}
PRICE = XXXX USD
BTCPRICE = (PRICE / RATE) BTC

Have this run when the buyer loads their page, and they will always have an up to date price.

[yvv]

Re: price swings and how they affect merchants - there's a menu cost. You need to change your price as BTC moves around since your inputs are likely denominated in your local currency, but your output is priced in BTC.

Keep your menu price in local currency, use a local currency quote at time of checkout. It's not rocket science.

fixed

[yvv]

Yes...I'm sure all the bitcoin retailers are just loathing the dramatic increase in the price of the bitcoins that they are receiving

Although a rapidly rising commodity brings smiles to all faces who are holding it, it also discourages people holding it for exchanging it for goods, services, and indeed Fiat currency. Now, this is when things are on the way up. On the way down, the volatility will destroy people using Bitcoin for real world economic transactions. Either way, the volatility cannibalises that which underpins the basis of the whole 'value' of Bitcoins.

Seems like there are a lot of smug types around here who think the whole Bitcoin universe's behaviour is running in accordance with their own personal simple world paradigm of how things should work. My word of warning to such people is that they should perhaps consider the possibility that perhaps they are not as smart as they think, and that perhaps they have merely got lucky, inadvertently hitching a ride on a dragons tail wings. True, that dragon may soar and spiral ever higher into the heavens, taking everyone with it along for the ride. But when that dragon dives, it will nose down right into the flames below, revealing to everyone, their false illusions regarding what is driving Bitcoins.

Do people forget what happens when market value far exceeds the underlying assets supporting it? Housing crash 2008 anyone? One thing that I could safely bet my own house on, would be that the market value of Bitcoins, is exceeding the underlying economy which supports it, by an order of several magnitude at the moment. For anyone to 'invest' in Bitcoin now for purposes of speculation, they would be doing so on the premises of 'greater fool theory' (a bigger fool than themselves will come along and pay even more than they did at some point in the future). As for the posts I have seen where people are discussing putting their pension funds into Bitcoin...OYF! 

+1

[yvv]

• The number of transactions is increasing rapidly, and faster than the money supply. Transactions (excluding popular addresses such as SD, mining pools, and exchanges) have more than quadrupled over the last year. Increased hoarding would mean fewer transactions. Source: http://blockchain.info/charts/n-transactions-excluding-popular
• The number of bitcoin days destroyed per day is rising. In fact, the rapid increase since January shows that the number of coins being hoarded is dropping quickly as the price goes up. Source: http://blockchain.info/charts/bitcoin-days-destroyed
• Daily volume on Mt. Gox has gone through the roof. After all, if hoarding were increasing, then there would be less BTC for sale. Source: http://bitcoincharts.com/charts/mtgoxUSD#rg360zm1g10zm2g25zvzcv

You observations are very good. But they don't tell anything about hoarding rate. All this would happen if number of bitcoin users increase, or number of hoarders increase.

To hoard a bitcoin you need to make a number of transactions. A miner should sell it because he needs to pay off his loan for mining hardware as soon as possible. He needs to transfer his bitcoins to exchange, then a buyer needs to transfer them to his wallet. And those who care about safety and anonymity would pass their btc several times to different wallets. From your plots, you do not know, what exactly happened with those bitcoins: where they spent for goods, or did they make their tricky way to offline saving wallets.

The use of bitcoins as currency definitely increases, you hear it on the news lately, but I strongly suspect that hoarding increases at much higher rate. I do not have any strong arguments for or against this assumption though, except conversations with friends who buy bitcoins and ASICs just to hoard.
 

[aarreeaa]

...
I for one am unclear why that's a distortion of your argument.  People don't stop needing things just because holding on to money longer can mean you'll get more value for it tomorrow.

We arent talking about money in general. You can buy stuff online with creditcard, bankwire, paypal, etc... and decentralized, anonymous currency - bitcoin (good idea only as long as its stable and reliable payment option).
Obvious trend is: many who have bitcoins that become a lot more valuable with each passing week (compared to real money like $, EUR, whatever), do see it as an investment and are more and more reactant to buy stuff with bitcoin.