How, Why and When the Bitcoin Model will Fail

[BitcoinFX]

The bitcoin model will eventually fail. Don't worry this won't happen for a very long time (perhaps not). In fact, for everyone reading this, it probably won't happen within our lifetime. Although, it will certainly start to happen in around 130 years (for sure), if not way before. I'm not talking about worth or value, bulls and bears, up and down trends etc., I mean it can't survive as a long-term 'currency'...

When bitcoin was first established, a bitcoin was worth nothing, except perhaps for the cost of the hardware (software), an internet connection, the electricity and the time required to generate them, as in fact it remains today.

When I first joined this forum NewLibertyStandard had an electricity meter plugged into the wall socket for his PC to calculate the exact cost required to generate a bitcoin. Thus, fixing a simple exchange rate for PayPal and the US dollar, of just a few cents.

Whilst most forum members at that time were aware the price would probably increase with a growing demand for 3rd party exchangers and 'real world' exchange for goods and services, few (including myself) could of predicted the very fast inflation or increased 'value' against real currencies.

However, what I did model at that time and what I will share with everyone now are the reasons why bitcoin will imho eventually fail as a currency. The model is inherently flawed and unfair.

Bitcoin has a hard limit of about 21 Million bitcoins. See: http://bitcoin.org/en/about

As per. the wiki page See: https://en.wikipedia.org/wiki/Bitcoin "...a hard limit of 21 million bitcoins is reached during the year 2140."

Most studies into bitcoin have focused on price, inflation, technical specifications and the model up to the end of this graph. This is certainly the boom time?

Bitcoins are divisible to 8 decimal places yielding a total of approx. 21×10 14 currency units.

What will happen when all of the 21 Million bitcoins are in circulation?

Bitcoin will, in theory, experience some years of perceived stability (with some initial price 'spikes') with a long-term 'table top' like chart, although still with the potential for sizable peeks and troughs, although leading to eventual and certain pricing decline, with a strong and continual downwards trend throughout. If you like, a 'wonky' table with two short legs!

Why? Quite simply because the money supply has stopped.

No one will want to buy into a currency that is in constant and perpetual decline. It will effectively be the exact opposite to what we have already seen to date. Bitcoins 'bankers' (the major miners and holders of bitcoins) will be clambering to sell and trade-off their bitcoins, as they become ever increasingly scarce and therefore 'worthless stock'. On this basis, some may also retain bitcoins, with the hope of price increases in relation to rarity, moreover there will be inevitably less and less people to actually trade bitcoins with...

Consider in 200+ years just how many of these 21 Million bitcoins will of been 'lost' forever. The 8 decimal places are irrelevant long-term.

Now imagine, what would happen if say the US Federal Reserve one day just decided to stop printing any new money. All of the money in circulation would eventually, in theory, disappear. Moreover, Its overall value as a currency would certainly diminish, in favor of other new / existing currencies, crypto or otherwise. Bitcoins will not even be worth their 'weight' in anything!

Printing to much currency against your GDP output is very problematic. Again, its boom time for a while and then total bust (in theory). This is currently true for the Euro and the Dollar.

See: http://www.youtube.com/watch?v=O_TjBNjc9Bo

Not printing enough currency is also very problematic.

See: http://www.youtube.com/watch?v=vm3DixfL9o0

What is much much worse is to stop printing anymore currency whatsoever!

Ironically, the bitcoin supply had to be limited for the purpose of implementing the original client protocol, by design. It is in fact the limited and finite supply that gives it any 'value' in the first place. It created the 'gold rush'... Satoshi remains a genius cryptographer, over being an economist? This project remains an experiment, although it is a fantastic and innovative one.

The frantic necessity to generate and to save bitcoins is currently inherent amongst bitcoin users.  "I sold all my bitcoins and now the price has sky rocketed" or "I bought into bitcoin high and now the price has plummeted" or "I spent thousands on mining hardware and can never recover my costs" etc. It's very difficult to know what the best thing to do with your bitcoins really is at any given moment actually is, right?

In Modern Money Mechanics, money is only actually money if it is 'moving'. All money is effectively 'debt' i.e. it is owed to someone by somebody for something. If this wasn't true, then we wouldn't need any currencies at all i.e. we would all still be happy swapping say apples for oranges etc.

The crypto model adopted by bitcoin is inherently 'unfair' and 'flawed' imho, just like in capitalism where the already rich and powerful become increasingly richer and more powerful at the expense of others. We are already seeing this with bitcoin. Soon, (if not already) only established and large corporations, big banks, already very wealthy individuals, governments and nation states, with access to super computers will be the only people able to generate any bitcoins. This 'free market' will be totally monopolized, this has already started to happen.

I believe there is a better model and a better approach, although that is entirely another topic.

So, when does the bitcoin bubble actually burst? Probably, at exactly the very moment when the 21 Million bitcoins are generated, followed by a 'spike' and then a theoretically 'steady' decline back down to zero? A bitcoins intangible 'true worth'? Probably. Until then, there will be many new bitcoin adopters, users and investors that will come and go, we will see more bullish and bearish movements, although imho the major price trend can only really go one way, until all of the coins are in circulation and perhaps it will even continue beyond that, maybe not!

Is bitcoin really the internet currency of the future? I'm not so sure about that. Something very similar to bitcoin probably stands a very good chance for true internet and financial freedom for the masses and there are certainly much worse alternatives.

Bitcoin is a 'bubble' !?! http://www.youtube.com/watch?v=A7TuFy0fcuw

[Razick]

TL;DR (read part of it) but: Supply drops ---> Price Rises.

[alexeft]

TL;DR (read part of it) but: Supply drops ---> Price Rises.

Exactly. A whole lot of text with one fundamental flaw!!! 

[BitcoinFX]

TL;DR (read part of it) but: Supply drops ---> Price Rises.

I have referred to that very price rise, as the potential 'spikes' after all bitcoins are in circulation.

It does not matter who long it takes to happen, the model does and will eventually fail, you can't trade in diminishing intangibility.

One way or another there will be no bitcoins left to trade with!

The system maybe expanded upon or replaced before that time, but with the current model there is no other eventual outcome. It is a certainty.

[masize]

TL;DR (read part of it) but: Supply drops ---> Price Rises.

Exactly. A whole lot of text with one fundamental flaw!!! 

You can work around with lot of theories about what could happen in the future. You can predict 130 years? Anything can happen in that time. Actually is probable that in 130 years the money wont be used anymore, I mean the actual bills, everything will be done electronically.

A lot of economists have spoken about the scarse bitcoin supply in the future. No currency in the world have experienced this, thats why Bitcoin is an experiment, and is getting more real everyday.

Its true that when supply goes down, the price goes up. So there'll be a time when most people wont want to trade them or sell them. Price will continue to go up then, more value. If price would happen to go down, then you'll see people trading with the currency.

What you basically are saying is that Bitcoin is doomed by its increasing value. How is this a bad for the currency?

Last example:

I live in Argentina, the local currency called (Argentine Peso) is devaluating, with an annual inflation of 25%.
So people don't trust the local currency and shelter their savings in US dollars.
The US dollar price is getting more valuable, from the Argentine pesos point of view.

There's a lot of exchange, people selling and buying, but the value increases over time.
Cars, Real state properties, investments, are all done in US dollar.

Think about Bitcoin as the US dollar in my country. It can have up and down, but it always be better than Argentine Pesos.

You can read about the situation here:
http://thebluemarket.wordpress.com/2012/10/18/bitcoin-dollars-and-pot-banging-protests-in-argentina/

[BitcoinFX]

What you basically are saying is that Bitcoin is doomed by its increasing value. How is this a bad for the currency?

No. All value is irrelevant. The model is 'doomed' because there will only ever be 21 Million Bitcoins.

There are not enough bitcoins to sustain adoption by the masses, in accordance with population growth against an increasing number of internet users.

Aside from this, assume that say only 10 bitcoins a year are 'lost', because someone dies and no one knows the password for their wallet etc.

In the early days, on this forum, I once sold someone 1,200 bitcoins, they tried to transfer them to a usb via a linux 'live' cd... and lost them.

'No worries' you might say we can still trade 0.1 , 0.01 , 0.001 . 0.0001 , 0.00001 etc.

I does not matter how long this takes, once 21 Million bitcoins are generated, it will happen.

Reverse / flip this triangle image, as if it were my modeled graph.



C to A is the boom. Point A is 21 Million Bitcoins. A to B is the inevitable and intangible 'deprecation' back to zero.

In the actual models I ran C to A was usually more curved i.e. the opposite concave to this...



A to B was less steep and even flat, but the outcome is always the same. That's the model, reality will be different, but there is only one overall conclusion. Eventually 0 Bitcoins are left.

[dmartig]

damn i'm screwed/ i won't be able to pay for the nursing home in 2140
when i will be 191........well past my prime earning years

[BitcoinFX]

damn i'm screwed/ i won't be able to pay for the nursing home in 2140
when i will be 191........well past my prime earning years

This is the most sensible comment yet !  

[solomon]

Can't you just add more decimal places?

[MoonShadow]

Can't you just add more decimal places?

Yes.

[masize]

What you basically are saying is that Bitcoin is doomed by its increasing value. How is this a bad for the currency?

No. All value is irrelevant. The model is 'doomed' because there will only ever be 21 Million Bitcoins.

There are not enough bitcoins to sustain adoption by the masses, in accordance with population growth against an increasing number of internet users.

Aside from this, assume that say only 10 bitcoins a year are 'lost', because someone dies and no one knows the password for their wallet etc.

In the early days, on this forum, I once sold someone 1,200 bitcoins, they tried to transfer them to a usb via a linux 'live' cd... and lost them.

'No worries' you might say we can still trade 0.1 , 0.01 , 0.001 . 0.0001 , 0.00001 etc.

I does not matter how long this takes, once 21 Million bitcoins are generated, it will happen.

Reverse / flip this triangle image, as if it were my modeled graph.

C to A is the boom. Point A is 21 Million Bitcoins. A to B is the inevitable and intangible 'deprecation' back to zero.

In the actual models I ran C to A was usually more curved i.e. the opposite concave to this...


A to B was less steep and even flat, but the outcome is always the same. That's the model, reality will be different, but there is only one overall conclusion. Eventually 0 Bitcoins are left.

You sould set some axis labels on it. Y axis is bitcoins total, and X is time? What do you mean C to A is the boom? A to B ? You go backwards?

You shouldn't worry about 130 years. A lot of things can happen in between. Bitcoins banks can be founded. Even Bitcoin private keys can be backed-up in cold storage or in people's will document or whatever. In the future if BTC is so valuable as it is intented, people will safe-secure this and wont be lost so easily. Gold exists since forever, and people don't lose it easily. Even if its lost, BTC currency will get more value overtime and people will only have fractions of BTC. BTW, Bitcoin is not intended to be the absolute only currency in the world, if the fractions gets too little and difficult to get, just use your local currency. Its simple, BTC is just an awesome option, that gets more and more value over time, for different reason, just like the one you said.

[pretendo]

deflation is simply the speculation of money, just like the speculation of any other asset. A deflationary spiral is simply a speculative bubble of money.

Do you believe bubbles can last forever? If no, then you do not believe that deflation is a problem with bitcoin.

[BitcoinFX]

Eventually 0 Bitcoins are left.

I disagree. In hypothetical future if bitcoins are still in circulation and there are just few bitcoins left (other are lost), then they are likely to be distributed among billions of people, each having tiny fractions of satoshi... So, yes, maybe we won't have a full bitcoin eventually, but we'll still have fractions of it, that are enough to trade (we can make it more divisible if needed).

Correct. More decimal places can be added.

However, there is a 3rd fundamental factor to all of this. As the total popularity and distribution increases, the overall rate of lost wallets increases as well.

As the decimal places are moved to cope with this and match with the transaction distribution we basically continue to run out of bitcoins against worth. This again makes it even harder to make transactions or to trade anything with others.

This also creates a 'human' factor, where the user base declines or migrates to another currency / system and this further compounds our problem.

As I described, as soon as all bitcoins are in circulation, there is only one eventual outcome. The time that takes to happen afterwards is the only real unknown.

Anyone still want a slice of Pizza ? Get it while its hot !  

[MonkeyBear68]

I do not think the limit of 21 million will cause it to fail. As others have posted a single bitcoin can be divided into many decimal places, and that number can be increased if needed. It is all simply a matter of nomenclature. We can think of the whole US GDP in terms of a single unit called "One US Economy" that unit is divided into trillions of dollars or hundreds of trillions of pennies. It's all just naming. I think the most valuable aspect of bitcoin is the ability to easily transfer them anywhere for free.

[robamichael]

You forget that paper is not durable, and this is the reason that bills are removed from supply.

In the case of BTC, their durability is dependent on the strength of the network, and a user's ability to store password information properly.

How durable will networks be in 100 years? The future is never certain.

[MonkeyBear68]

I think that "found" wallets could be more of a problem. Let's say that all but 1000 or so bitcoins remain in circulation in say the year 2200. These would still be viable for an economy as they can be sub-divided to many decimals. But, what if someone finds Grandpa's old computer with 10,000 BTC on it?

[Razick]

What you basically are saying is that Bitcoin is doomed by its increasing value. How is this a bad for the currency?

No. All value is irrelevant. The model is 'doomed' because there will only ever be 21 Million Bitcoins.

There are not enough bitcoins to sustain adoption by the masses, in accordance with population growth against an increasing number of internet users.

Aside from this, assume that say only 10 bitcoins a year are 'lost', because someone dies and no one knows the password for their wallet etc.

In the early days, on this forum, I once sold someone 1,200 bitcoins, they tried to transfer them to a usb via a linux 'live' cd... and lost them.

'No worries' you might say we can still trade 0.1 , 0.01 , 0.001 . 0.0001 , 0.00001 etc.

I does not matter how long this takes, once 21 Million bitcoins are generated, it will happen.

Reverse / flip this triangle image, as if it were my modeled graph.



C to A is the boom. Point A is 21 Million Bitcoins. A to B is the inevitable and intangible 'deprecation' back to zero.

In the actual models I ran C to A was usually more curved i.e. the opposite concave to this...



A to B was less steep and even flat, but the outcome is always the same. That's the model, reality will be different, but there is only one overall conclusion. Eventually 0 Bitcoins are left.

Perhaps eventually, I think a more realistic concern is that Bitcoin is rendered obsolete by some new technology or a huge portion of the worlds computers are destroyed by EMP or something of that sorts. I just don't think this is a legitimate concern.

Assuming that the network still functions, the less Bitcoins the more they are worth. If the price dropped, that means they are likely to circulate more, in other words becoming a valid currency again. If circulation drops, the price will rise.

Would you say that because eventually we may run out of gold, uranium or some other valuable metal, it would start to drop in value as we got close to running out? I don't think so.

Furthermore, as much as most of us would hate it, from what I understand the system could be changed to bring back small block rewards if it became absolutely necessary.

[Francesco]

I hoped for a serious discussion, but OP is quite oddly deceived, unless he's a troll.

Deflation is a serious problem for any economy, nevertheless.

[Operatr]

I hoped for a serious discussion, but OP is quite oddly deceived, unless he's a troll.

Deflation is a serious problem for any economy, nevertheless.

Eventually as other currencies are sucked into Bitcoin their buying power would stabilize, I think

[MikeH]

nothing to worry about, there will only be 500 million people on the planet by then.