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Author Topic: Currency's value is decided by consensus  (Read 1673 times)
johnyj
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May 02, 2013, 03:49:36 PM
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I had an impression that everthing else's value can be decided by a market price expressed with the currency, but currency's value is only decided by consensus

For example, although 4x more money have been printed since 2008, and GDP growed at a very slow pace, the price of everything stayed relatively stable, because the consensus of USD's value has not changed, so "more USD = more wealth", not "more USD = lower USD value"

And once that consensus has been reached, without a fundamental change in the system, the value of the currency will not change

Same for bitcoin, I think its value should be decided by some kind of consensus, not supply and demand. It's arguable how to establish this consensus though

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May 02, 2013, 04:04:02 PM
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Consensus on the purchase value of Bitcoin is not reported anywhere. Only a few exchanges report any transaction values in terms of local currency. There needs to be a way to report the local currency value used in transactions.

Any significantly advanced cryptocurrency is indistinguishable from Ponzi Tulips.
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May 02, 2013, 04:06:13 PM
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This can only happen when vendors are selling stuff for BTC only.
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May 02, 2013, 04:12:23 PM
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I had an impression that everthing else's value can be decided by a market price expressed with the currency, but currency's value is only decided by consensus

For example, although 4x more money have been printed since 2008, and GDP growed at a very slow pace, the price of everything stayed relatively stable, because the consensus of USD's value has not changed, so "more USD = more wealth", not "more USD = lower USD value"

And once that consensus has been reached, without a fundamental change in the system, the value of the currency will not change

Same for bitcoin, I think its value should be decided by some kind of consensus, not supply and demand. It's arguable how to establish this consensus though

I think it didnt happend because printed money are for banks so they can lend it to us and make money out of it. If we could print the same amount of money the price for items would fall. So in the end its banks who is robbing us for our "greater good"...

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May 02, 2013, 05:00:44 PM
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The only consensus fiat is controlled by is that of central bankers in hidden smoke filled rooms.
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May 02, 2013, 06:28:54 PM
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The reason why there has not been massive price inflation with the fed QE over the last couple years is because of the collapse of credit money being replaced by fed base money. If things had been allowed to go as they were, there would have been significant price deflation as trillions of dollars really did just disappear. But that would have been terrible for the banks, so we have what we have.

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May 02, 2013, 06:51:02 PM
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The OP is venturing into some very complicated monetary theory here...

The fact is that you can't take aggregates (money supply, usually measured M0, [or the monetary base,] M1, M2, and if you're not the Fed, M3,) and extrapolate to what the value of said currency should be. You must ask who holds the money, what the market's propensity to spend and invest is, and what markets are receiving the spenders' money?

And that's on the simple side of "accurately" looking at the question.

It is absolutely true, given the same economic fundamentals (the market's time preference/discount rate [which is related to the savings rate, as well as the fractional reserve rate,] the real productivity of the economy, distribution of money etc.) that more money in circulation would result in higher prices because people would have more of it to spend on the same number of goods. That being said, economics doesn't occur in this sort of a vacuum. There's never an "all else equal" state in the world economy.

So more USD does not mean more wealth. All real wealth comes down to productivity. If you can't measure wealth in terms of real consumption and investment by people (rather than governments/corporations,) then you aren't actually measuring wealth at all. This is one reason why I am personally annoyed by the reliance on GDP, and even Real GDP because that's the same metric just augmented by an imperfect (and often biased,) measure called the "implicit price deflator." This is similar to the CPI but differently weighted. In the end, it's all a measure of the flow of money rather than real wealth, and, while it's correlated with real wealth, you cannot give an always accurate objective quantitative measurement of that which is necessarily subjectively valued.

Now, bringing this back around to the OP's idea of consensus, that's exactly what supply/demand finds in a market of people with subjective valuations surrounding the good or service at hand. Price is determined by finding the margins where equilibrium occurs in the market of people looking to buy and sell.

Buying and selling are merely descriptors for which side of a desired exchange the person stands on; when you're a buyer, then you're signalling that you subjectively value Good X more than you do Good Y, at a given price (or exchange rate.) Applied to buying BTC, this means that you value Bitcoins more than you do Y amount of dollars. If you put in a buy order for $100 per BTC, this shows to the market that you value 1 Bitcoin more than you do $100 dollars, as you're opting to make that exchange. If you apply this to selling, it's the exact opposite.

All of this comes together over thousands, even millions of exchanges to create a market price. Often times, arbitrage also occurs, where you may have $100 that you could use to purchase a Widget with. In dollars, the Widget costs $50, but through Bitcoins you may be able to purchase it for $45 worth of Bitcoins. In that case, you'd save yourself $5 worth of relative value by using Bitcoins to make the purchase, and through your actions you will bring the relative value closer together, meaning that Bitcoin's relative valued price would tend upwards towards $50 while the dollar's price tends downwards towards $45. This is how price stability will come about, and that is why it's so important for people to begin using bitcoins for exchanges, and eventually making their pricing in bitcoins rather than dollars converted to relative bitcoin amounts (meaning the bitcoin becomes the unit of accounting.)

Now, I've probably stepped beyond the intended scope of the thread, so I think I'll stop here for the moment. Feel free to ask any questions you may have.
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May 02, 2013, 11:06:06 PM
 #8

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Same for bitcoin, I think its value should be decided by some kind of consensus, not supply and demand. It's arguable how to establish this consensus though

The consensus is determined by supply and demand, same thing with the USD.  Wink

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May 03, 2013, 12:44:30 AM
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The evolution of the marketplace which eschewed commodity money for fiat money (the current situation) is commonly brought up as a repudiation for commodity money by those with a vested interest in maintaining the fiat currency regime. This speaks to my question from the other day.  The issue of commodity money vs. non-commodity money is inherent in the evolution of the use of the commodity as money.  That one commodity was chosen by the market through time as the one which could be universally exchanged for any other commodity is the process which bitcoin cannot replicate.  

If that was indeed the case, then a return to a truly hard money standard is impractical in today's markets, hence the rise of credit money to handle problems of liquidity to clear markets.  

The question to be considered is what is the limitation of commodity money in a world where the property rights of the commodity can be transferred without physical transference of the commodity itself.  This was an issue under the International Gold Standard pre 1914, the necessity of moving large volumes of gold which created demand imbalances for it (or at least that is the claim of credit money apologists).
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May 03, 2013, 05:10:08 AM
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So more USD does not mean more wealth. All real wealth comes down to productivity.


If USD present some value, more USD means more value. A store of value is wealth, it has nothing to do with productivity. In California gold rush, more gold did not cause inflation, it created the whole west coast economy, because in people's consensus, gold is value, and that consensus seldom changes

Actually there are many such kind of consensus when it comes to pricing. I think a consensus greatly affect the supply and demand, it is the driven power behind people's buying and selling decision

A decent PC always cost 1-2K during the latest 15 years, it's not that PC can not become cheaper or more expensive, it is just a consensus that PC should be around this price range, so if the seller price the PC too high, they might not get good sale, and they don't want to price it too low either, unless engaged in a price war


Another example is fiat money. Before 1971, it was backed by gold, and after 1971, it was backed by nothing, but the purchasing power still holds relatively stable after 1971, of course there were inflation, but the value of fiat money did not drop to zero due to the consensus had not changed

If I'm a commercial bank and I know FED will tighten when inflation is high, then I will not lend money to those projects which might push up the CPI, by doing this I can get more interest free money from FED, this is just simple reasoning, and I know even if I lend lots of money out, the consensus of money's value won't change for a long time



I think one general consensus about bitcoin is that the value of bitcoin should always rise due to fixed supply, but how fast it will rise? 100% per year or 1000% per year? There are no good answer yet. If majority of people had reached a consensus, then they will buy or sell based on this consensus. Currently the consensus might has somthing to do with difficulty

In mining, there is a consensus of 3 month ROI, it almost formed a culture now in bitcoin mining hardware investment, so all the mining product pricing is more or less following this guide line

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May 03, 2013, 05:19:50 AM
 #11

Wealth can't be stored. Things can be stored, and promises can be accumulated, but neither of those constitute wealth.
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May 03, 2013, 05:36:07 AM
 #12

In California gold rush, more gold did not cause inflation, it created the whole west coast economy, because in people's consensus, gold is value, and that consensus seldom changes

I don't believe you are drawing a 100% accurate conclusion here. It wasn't because gold has value by consensus, it was because mining for gold was a profitable opportunity. It was a job. It created infrastructure based around a currency that could be produced to facilitate that infrastructure. People were willing and able to work, but the infrastructure was not there. Gold provided the lubricant.

Just by doing a quick google search I found this article: http://whiskeyandgunpowder.com/gold-and-deflation-a-trick-question/ it talks about how the purchasing power of gold actually falls during recessions. It isn't the gold itself, it is what the gold represents: a medium of exchange. It does not fix the greater problems of money and whatever it is that causes business cycle-like events.

I read an article awhile back about a time when Switzerald stopped coining gold in an effort to keep the value of its currency more stable, as the gold supply at the time was inflating quickly. And it worked. It just goes to show that gold has its failings just like every other currency to date. It is not some magical standard by which all currency should be held, it is just a very compelling case of the regression theorem of money.

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May 03, 2013, 06:10:40 AM
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If USD present some value, more USD means more value.

You're assuming the value does not change in accordance with the creation of more USD. It's certainly true that the change is not immediate, and under some market circumstances (like the current situation in the USA,) it doesn't change for quite some time because other factors are distorting the market as well. This is what is meant by economists when they describe money as being a non-neutral good. It isn't that prices all over the world instantly change to reflect the difference in supply of dollars, rather, those new dollars must be spent and circulated such that prices throughout the structure of production may be adjusted accordingly.

Quote
A decent PC always cost 1-2K during the latest 15 years

You're mistaking expected value ranges for an ever changing PC market for some sort of consensus saying that a "good" PC must cost 1-2K. But that doesn't make any sense at all, not only because there is no such consensus except that which supply/demand creates, but because a "good" PC is not one single good. It is, in fact, several thousand combinations of goods at any given moment, and those goods change over time. You can't possibly make the comparison here. It just doesn't make sense.

Quote
Before 1971, it was backed by gold, and after 1971, it was backed by nothing, but the purchasing power still holds relatively stable after 1971, of course there were inflation, but the value of fiat money did not drop to zero due to the consensus had not changed

The value actually changed quite radically in response to the halt in fixed rate exchange to gold...
http://research.stlouisfed.org/fred2/series/CPIAUCSL

Take a look at the growth speed of CPI prior to and post 1971. That's a dramatic shift.

But beyond that, asking for dollars to become worthless (drop to zero,) to claim that anything other than your point was made is absurd.

Look... I think you honestly mean well, but you just don't understand the economics behind this. I would highly suggest that you find somewhere to take an intro to micro/macro economics course. This idea that markets choose things by consensus is well described by the idea of supply/demand, but you're blowing right past that relatively basic point then you're trying to discuss some things that require rather in depth monetary theory to find any meaningful conclusions.

I would also highly suggest that you read about the Subjective Marginal Theory of Value. You seem to be missing some key points in regards to valuations, and this reading will go a long ways to help you come to a better understanding about the whole of economic thought in general.

I would particularly suggest Economics in One Lesson by Henry Hazlitt. That is a fantastic starting point for all economic thought.

Good luck to you in these endeavors, johnyj.
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May 03, 2013, 06:29:20 AM
 #14

Just by doing a quick google search I found this article: http://whiskeyandgunpowder.com/gold-and-deflation-a-trick-question/ it talks about how the purchasing power of gold actually falls during recessions. It isn't the gold itself, it is what the gold represents: a medium of exchange. It does not fix the greater problems of money and whatever it is that causes business cycle-like events.

Under Gesell theory it is the unpaid for liquidity premium that causes the business cycle.

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May 03, 2013, 06:42:05 PM
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In California gold rush, more gold did not cause inflation, it created the whole west coast economy, because in people's consensus, gold is value, and that consensus seldom changes

I don't believe you are drawing a 100% accurate conclusion here. It wasn't because gold has value by consensus, it was because mining for gold was a profitable opportunity. It was a job. It created infrastructure based around a currency that could be produced to facilitate that infrastructure. People were willing and able to work, but the infrastructure was not there. Gold provided the lubricant.

Just by doing a quick google search I found this article: http://whiskeyandgunpowder.com/gold-and-deflation-a-trick-question/ it talks about how the purchasing power of gold actually falls during recessions. It isn't the gold itself, it is what the gold represents: a medium of exchange. It does not fix the greater problems of money and whatever it is that causes business cycle-like events.

I read an article awhile back about a time when Switzerald stopped coining gold in an effort to keep the value of its currency more stable, as the gold supply at the time was inflating quickly. And it worked. It just goes to show that gold has its failings just like every other currency to date. It is not some magical standard by which all currency should be held, it is just a very compelling case of the regression theorem of money.


In a depression it is a buyers paradise, but you need "coin of the realm" not gold.

You see in a depression nobody has a nickel a job or an income.  You got rich who've consolidated and you got poor who've got squat.

Your gold is only worth what "the rich" decide they wanna pay for some more of it.

Art, antiques, rare minerals/metals and collectables are your "first rate" Mediums of Savings, not commodity metals. Silver may be a successful high end barter tool. Debt backed paper will be near-worthless. But oil is the new "black gold" this time.


During the gold rush and the last depression paper was "Gold-debt backed" to the private Fed Gold Pharaohs' Debt-Note Printing Company by bond-tax slavery. The US treasuries' gold was then looted by the Gold Debt Pharaohs out their "gold window" until Nixon closed it, because it was all gone. They had been renting it out and re-hypohecating it as well, till now all the paper gold is just worthless MBS derivative-junk they keep floating with mountains of counterfeit Debt Backed Notes.

The only thing that "backs" Fed Debt Receipt Notes now is that

- Everybody else are devaluing their (Central Bankster) Debt Receipt Notes in lock step with the Fed's.
- And they are "pegged" to now-"Peak Oil" values which are priced and traded in them (Fed Debt Notes) alone.

In the last depression people who bought gold mining stocks prospered heavily by dividend-income and stock value, all others lost and kept barely losing or breaking even.

This time it will be oil explorers/drillers, and with government-socialist war-communist Capitol gains taxes everywhere, you'll have to move to a peaceful little out of the way nation to profit from them.

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May 05, 2013, 08:57:04 PM
 #16


I would also highly suggest that you read about the Subjective Marginal Theory of Value. You seem to be missing some key points in regards to valuations, and this reading will go a long ways to help you come to a better understanding about the whole of economic thought in general.

I would particularly suggest Economics in One Lesson by Henry Hazlitt. That is a fantastic starting point for all economic thought.

Good luck to you in these endeavors, johnyj.

I just brought up some simple facts and common sense that everybody knows, of course there are lots of different theories and explainations, but I believe the truth is in common sense

Values are all subjective, that's the reason people need to find an anchor, that anchor is money

I read most of the economy books in the school many years ago and I even had a degree in economics, but I don't believe all those books when it comes to money. When you can issue money without doing anything, you can sponsor (with your printed money) what ever economy theory you can find to support your money creation, that's the reason keynesian economics are selected by central banks the latest several decades

Just like in bitcoin community, when people can mine the coin by themselves, they will find what ever economy theory that support a deflative monetary system, and even create such a theory if needed

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May 06, 2013, 01:36:34 AM
 #17

I just brought up some simple facts and common sense that everybody knows, of course there are lots of different theories and explainations, but I believe the truth is in common sense

Values are all subjective, that's the reason people need to find an anchor, that anchor is money

I read most of the economy books in the school many years ago and I even had a degree in economics, but I don't believe all those books when it comes to money. When you can issue money without doing anything, you can sponsor (with your printed money) what ever economy theory you can find to support your money creation, that's the reason keynesian economics are selected by central banks the latest several decades

Just like in bitcoin community, when people can mine the coin by themselves, they will find what ever economy theory that support a deflative monetary system, and even create such a theory if needed

"Common sense" is a misnomer. The common theme is that people don't use good sense, let alone good reasoning. Where the truth lies is in understanding how humans think, act, and react in an environment given certain conditions (i.e. scarcity.)

Your comment about "finding an anchor" is interesting... I think you may be referring to the ability for money to be the unit of account in a way that enables economic calculation. That being said, to imply that money is then objectively valued in some way is false, even as it allows for sound objective comparisons between goods and services in a relativistic manner across an economy.

As for believing books or theories, that's not what I'm advocating. Instead, I suggest that people use sound reasoning to establish a valid means of understanding events in context. To follow a theory without first reflecting on the fundamental nature of the specific case at hand is asking to be wrong.
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May 06, 2013, 04:45:02 PM
 #18

I had an impression that everthing else's value can be decided by a market price expressed with the currency, but currency's value is only decided by consensus

For example, although 4x more money have been printed since 2008, and GDP growed at a very slow pace, the price of everything stayed relatively stable, because the consensus of USD's value has not changed, so "more USD = more wealth", not "more USD = lower USD value"

And once that consensus has been reached, without a fundamental change in the system, the value of the currency will not change

Same for bitcoin, I think its value should be decided by some kind of consensus, not supply and demand. It's arguable how to establish this consensus though

As Keynes described it, what you are talking about here are the phenomenon of "sticky prices". Nobody remembers when a big luxury home was $5,000 new (1850's) or when a decent brick one was still $16,000, or when a new Ford went down to $500 from $1,000 or a new economy car was $1999, but they all expect a decent home today to be $149 - $200,000 and an econobox car to be $17,000. People will accept small incremental inflationary increases over time but not a huge one at a single bite. Markets will accept price "bargains" without a blink, but will completely stall or erupt in boycotts of hostility over any sort of a "X" "crisis".

With Bitcoin Over the Counter (OTC) Funded Credit Swap Derivatives, the price and very pricing structure of this new "funding vehicle" is the main barrier to it's acceptance as any form of sort of a "money", period, let alone it's competitiveness as a validly dependable and stabilized Medium of Labour Exchange "Currency" in the global or any local marketplace.

While the rest of the planet's economies careen down the Neo-Keynesian toilet water-flush swirl of the endless "monetized-debt" inflation doomed to them by their suicidal Freidmanist Urinate-Down "voodoo" counter-economics, we genuinely still have a chance here to float this boat against their tidal waves of greedy private-monetarist economic self-destruction. When their current suspension of all interest rates ends it will be a global marketplace calamity such as the world has never seen.

Currently while one might wish to pretend that the "laws of supply and demand" or as you put it "some kind of consensus" are somehow "controlling" the wildly inflationary and deflationary hourly torture-spirals of it's unknown and unknowable moment to moment exchange-value, the Bitcoin Credit Swap Derivative is priced by the foolish and capricious antics of corrupt, greedy and mischievous penny stock market speculators on a deregulated wild-penny speculation market that poses as a "currency exchange". The number of Bitcoin Credit Swap Derivatives will never ever have as much of an impact on their credit-swap exchange-values as the brainless lunacy of this idiotic "come and take me over" penny-stock market "pricing" madness does, and will continue to do unless saner heads prevail.

Bitcoin OTC-fCS Derivative Pricing Problems:

The purely fiat price of purely fiat-valued Bitcoin Swap Derivatives is completely anarchic nonsense and currently deviates plus or minus 30% on an hourly, daily or weekly basis due to infantile penny-stock market speculators dancing it's exchange value around to feed their crazy antics with little-peanut bet-bids. Catastrophically, those who suffer most severely from this childish, stupid and inane "penny stock market" exchange valuation scheme are large clients with large wallets, who are the very market we so desperately wish to serve.

If one carefully looks at any chart on any given day one can clearly see that price valuation fluctuations have nothing to do with supply or demand volumes, and are totally a function of small-potato speculation biddings. Fee and bidding schemes are 100% of the problem.

In any normal Medium of Labour Exchange "currency" valuation, a money changer always has "reserve pools" much like barrels of money-notes to which he applies the day's or weeks most recent exchange rates. If a merchant, contractor or producer needs the foreign currency they can get a bucket or a few buckets or a few or a barrel full of them at the given rate. Not only that they can be fairly sure the exchange rates will stay relatively stable from day to day or week to week.

In the stupidly ignorant Bitcoin OTC Funded Credit Swap derivative market this has been made impossible. All Bitcoin OTCfCS buyers must wait for sellers willing to part with all that they need for a price/profit the sellers alone see fit and all Bitcoin OTCfCS  derivative sellers must wait for buyers willing to buy (all of) them at a price (or loss-bargain that) the buyer deems fit. This means that haggling over the price of a tenth of a BTC has as much of an affect on it's minute to minute exchange-value as the  supply or demand for 10,000 of them does.

Moreover it gets much much worse than this because in terms of value through-put it is simply unbearably tortuous and impossible for any large retailer to transfer any meaningful amount of liquidity through a so-called "Bitcoin Exchange" at any given price or range of them even if or during all in one day, let alone when doing up a bank deposit at close of business-day.  Trying to exchange 10,000 Bitcoins is impossible to do in any single transaction at any but the most punishingly low or high price, without inciting an instant "penny stock market" stampede. Invariably speculators will horn in on the large buy or sale until it can never be finished.

Such large volumes always leave huge price gulfs between bids and asks in their wakes inducing even further volatility

What these so-called "exchanges" need to do is to act like exchanges not like penny stock markets.

We need:

Tightly regimented bid/ask echelon-rungs about the current basis price to facilitate patient bargain seekers at low fees.
Higher fees for smaller transactions
Higher fees for more frequent transactions
Daily limits on or exponentially higher fees for high frequency bidding/bidders
Exponentially higher fees for further out of range ask echelons beyond the "normal" basis-centric range
Exceptions for trigger floor bid "price support" bids.

The idea is to encourage stable price-upwards growth at controlled rates while accommodating heavier wallets to be able to pass throughwithout causing huge waves or taking massive losses to negotiate a single order.


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May 06, 2013, 05:31:55 PM
 #19

People will accept small incremental inflationary increases over time but not a huge one at a single bite. Markets will accept price "bargains" without a blink, but will completely stall or erupt in boycotts of hostility over any sort of a "X" "crisis".


True, I noticed that normal people's tolerance for a price change is around a couple of percent, and that's also the reason most of the services charge a couple of percent

But sometimes foreign exchange rate can change as much as 20-50% in a year, so it's normal for bitcoin to flucturate even more

I think currently the consensus is that bitcoin is still in the price discovery mode, unless it reach the adoption for majority of IT interested people and provide enough liquidity at a much higher exchange price, the price will remain unstable, and there are many early adopters still think this is a bubble and they want to cash out to fiat when they see a fast exchange price rise

If one bitcoin worth 1 million dollar, then all the daily transactions will not shake the exchange rate too much, even those early adopters want to buy some island, they will just dump a couple of coins

And I do think 1 million dollar bitcoin could be possible because that is just a consensus needs to be reached among people, not necessary to have some real value behind it. Just like USD, no one will believe that 85 billion dollar worth nothing, but they are really created out of nothing every month


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May 06, 2013, 05:51:14 PM
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People will accept small incremental inflationary increases over time but not a huge one at a single bite. Markets will accept price "bargains" without a blink, but will completely stall or erupt in boycotts of hostility over any sort of a "X" "crisis".


True, I noticed that normal people's tolerance for a price change is around a couple of percent, and that's also the reason most of the services charge a couple of percent

But sometimes foreign exchange rate can change as much as 20-50% in a year, so it's normal for bitcoin to flucturate even more

I think currently the consensus is that bitcoin is still in the price discovery mode, unless it reach the adoption for majority of IT interested people and provide enough liquidity at a much higher exchange price, the price will remain unstable, and there are many early adopters still think this is a bubble and they want to cash out to fiat when they see a fast exchange price rise

If one bitcoin worth 1 million dollar, then all the daily transactions will not shake the exchange rate too much, even those early adopters want to buy some island, they will just dump a couple of coins

And I do think 1 million dollar bitcoin could be possible because that is just a consensus needs to be reached among people, not necessary to have some real value behind it. Just like USD, no one will believe that 85 billion dollar worth nothing, but they are really created out of nothing every month



It's 100% true that a national economy's Medium of Labour Exchange "currency" is solely backed by what it's own people see as the Labour Value that it pays for. So a janitor makes $1200 an auto worker or brick layer $3,000 a doctor $8,000 and a banker's hard work is rewarded with $20-75,000 a week, and what those amounts buy makes the janitor the poor dude. the amount of money that the private Federal Reserve Gold-Pharaoh's printing company counterfeits to pass out to themselves to fix markets with and rent out to the governments that they own for the taxes they can extort is largely irrelevant until they start inflating everything with interest rates again.
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