Bitcoin. In no way deflationary.

[MPOE-PR]

I. Bitcoin inflation. Bitcoin is regularly described as “deflationary”, “designed to deflate”, “non inflationary” etc. This is not at all true in the present tense and dubious in the future tense. Specifically, here’s the evolution of Bitcoin MB :

http://blockchain.info/charts/total-bitcoins

So now, what deflation are we talking about ? With the MB going from just under 9mn to just over 11mn over the course of one year it’d stand to reason that Bitcoin inflation is a very healthy 25% a year. Of course it speaks volumes to the desperate situation of fiat currencies that the Bitcoin exchange rate has appreciated from two to three digits over the same interval its inflation was “only” 25%, but nevertheless : you can’t talk of deflation in an environment which inflates from under 9 to over 11 in a year. It just makes no sense.

That aside, consider the problem of the M3 : If you credit the monetization of S.MPOE theory, for instance, that’s a solid 0.7mn that has been added to the M3 on top of the ~2.3 mn added through sheer Bitcoin printing. We are talking over 30% M3 inflation for the 2012 Bitcoin fiscal year, folks.

This trend will only continue, and as the pressure for the M3 meeting actual economic activity increases the compensatory mechanism of financial instrument monetization will go into full bore, easily deleting by orders of magnitude any and all deflationary effects (such as the small and rapidly diminishing loss of coins through actual physical destruction of wallets / passwords / etc).

In short : Bitcoin is not deflationary. It inflates, and can inflate abundantly, but only through market-directed processes. The fiat process of inflation is unavailable. That is all. To say Bitcoin is deflationary is akin to saying a married woman is sterile. No, she’s not, the balance of new life is created by married women. They just don’t happen to be available to the general public through its “elected” representatives, that is all.

Full article on Trilema.

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[CanadianGuy]

"To say Bitcoin is deflationary is akin to saying a married woman is sterile. No, she’s not, the balance of new life is created by married women."

Not the best written analogy i've read, lol..

[Birdy]

Atm Bitcoin is inflationary due to the new coins mined.
But in the long run Bitcoin is deflationary by the amount of coins lost.

[MPOE-PR]

"To say Bitcoin is deflationary is akin to saying a married woman is sterile. No, she’s not, the balance of new life is created by married women."

Not the best written analogy i've read, lol..

What's wrong with it?

[CanadianGuy]

oh.. umm..  nothing at all 

 LOL

[Spendulus]

Atm Bitcoin is inflationary due to the new coins mined.
But in the long run Bitcoin is deflationary by the amount of coins lost.

The article uses, as do you, a meaning of inflationary based on percent new coins added, but that isn't correct.  Inflation could also occur with fewer coins, with higher monetary velocity, or it could NOT OCCUR, with more coins, but with usage increasing at a similar rate as new coins.

There is also the "latent inflation", which is existent but yet to be realized in price levels on the street, and this is typically seen when governments start printing money like crazy.  I suppose there could be some similar thing with bitcoins.

[Spendulus]

"To say Bitcoin is deflationary is akin to saying a married woman is sterile. No, she’s not, the balance of new life is created by married women."

Not the best written analogy i've read, lol..

What's wrong with it?

There may not be anything wrong with an analogy that is not clear except that it isn't clear, and that's important, since an analogy should clarify the cause and effect relationships, not further confuse them.

I also did not see the analogy.

[myrkul]

Atm Bitcoin is inflationary due to the new coins mined.
But in the long run Bitcoin is deflationary by the amount of coins lost.

The article uses, as do you, a meaning of inflationary based on percent new coins added, but that isn't correct.  Inflation could also occur with fewer coins, with higher monetary velocity, or it could NOT OCCUR, with more coins, but with usage increasing at a similar rate as new coins.

It's common, especially amongst the Austrian types on this forum, to use inflation in it's original (monetary only) meaning, while others (typically the Keynesians and monetarists) use it in it's more modern price inflation meaning. If we're using the modern meanings of inflation and deflation, then Bitcoin is very strongly deflationary at the moment. If we use the original terms, then it's strongly inflationary, but demand is increasing even faster than supply.

[Birdy]

Atm Bitcoin is inflationary due to the new coins mined.
But in the long run Bitcoin is deflationary by the amount of coins lost.

The article uses, as do you, a meaning of inflationary based on percent new coins added, but that isn't correct.  Inflation could also occur with fewer coins, with higher monetary velocity, or it could NOT OCCUR, with more coins, but with usage increasing at a similar rate as new coins.

There is also the "latent inflation", which is existent but yet to be realized in price levels on the street, and this is typically seen when governments start printing money like crazy.  I suppose there could be some similar thing with bitcoins.

I know I'm only talking about the supply side, not the demand one.
It's the build in deflation/inflation of Bitcoin, of course this doesn't translate to the one on the market (we all can see how volatile it is right now).

[MPOE-PR]

Atm Bitcoin is inflationary due to the new coins mined.
But in the long run Bitcoin is deflationary by the amount of coins lost.

The article uses, as do you, a meaning of inflationary based on percent new coins added, but that isn't correct.  Inflation could also occur with fewer coins, with higher monetary velocity, or it could NOT OCCUR, with more coins, but with usage increasing at a similar rate as new coins.

There is also the "latent inflation", which is existent but yet to be realized in price levels on the street, and this is typically seen when governments start printing money like crazy.  I suppose there could be some similar thing with bitcoins.

This is a sizable quantity of words which do not seem to carry any sort of meaning. If you'd be kind enough to proceed systematically from some sort of commonly known point it'd probably help.

I also did not see the analogy.

Let's illustrate the illustrative analogy by the help of an illustrative analogous table:

Thesis. In the general discussion of currency (A) at issue is the problem of inflation (B). The fact is that Bitcoin allows creation of new currency (C) through market-controlled mechanisms (D) but not through fiat, or if you prefer political, mechanisms (F).

Analogy. In the general discussion of human life (A') at issue is the problem of procreation (B'). The fact is that marriage allows the creation of new people (C') through intra-marriage mechanisms (D') but not through public, or if you prefer orgiastic, anonymous, polyamorous, loser-gets-some-action-too mechanisms (F').

Therefore bitcoins are the analogue of married women, Bitcoin (as a protocol) the analogue of marriage, politics the analogue of irresponsible, venereal-disease ridden, slovenly, high-risk sexual behaviors. Finally Bitcoin finance is the analogue of wholesome family relations.

A pregnant analogy, perhaps. And a pretty clever one at that.

[BTConomist]

But in the long run Bitcoin is deflationary by the amount of coins lost.

Has it really come to this?... So far, the "coins lost" argument is out to be the best of all GOLD 2.0 arguments that have ever been brought up on this forum.

[MPOE-PR]

It's common, especially amongst the Austrian types on this forum, to use inflation in it's original (monetary only) meaning, while others (typically the Keynesians and monetarists) use it in it's more modern price inflation meaning. If we're using the modern meanings of inflation and deflation, then Bitcoin is very strongly deflationary at the moment. If we use the original terms, then it's strongly inflationary, but demand is increasing even faster than supply.

It happens that any non-monetary "definiton" of inflation fails to be a definition and practically works as either a red herring or strawman in any discussion of economics. Should somebody finally be able to construct a non-monetary definition that actually works as such it may be taken into account (at some point, by someone). As it is, the keynesian pseudo-inflation is pretty much only interesting to politicos.

[Birdy]

But in the long run Bitcoin is deflationary by the amount of coins lost.

Has it really come to this?... So far, the "coins lost" argument is out to be the best of all GOLD 2.0 arguments that have ever been brought up on this forum.

I think about 1 million coins is already lost, when they were worth like nothing.
It's difficult to tell a number, but I believe that about 0.5-1% of coins are lost every year due to forgotten passwords, burned machines, unspendable small amounts that are forgotten and so on.
Once the mining doesn't produce a lot of coins anymore that is quite a bit of growth for all other coins.

[myrkul]

It's common, especially amongst the Austrian types on this forum, to use inflation in it's original (monetary only) meaning, while others (typically the Keynesians and monetarists) use it in it's more modern price inflation meaning. If we're using the modern meanings of inflation and deflation, then Bitcoin is very strongly deflationary at the moment. If we use the original terms, then it's strongly inflationary, but demand is increasing even faster than supply.

It happens that any non-monetary "definiton" of inflation fails to be a definition and practically works as either a red herring or strawman in any discussion of economics. Should somebody finally be able to construct a non-monetary definition that actually works as such it may be taken into account (at some point, by someone). As it is, the keynesian pseudo-inflation is pretty much only interesting to politicos.

I agree completely. I count myself amongst those "Austrian types." Eventually, Bitcoin will switch to being properly deflationary, but given that a) it will be a very gradual slope, or at the very least very long plateaus between deflationary events (lost or destroyed private keys) and b) lost and hoarded coins are functionally identical, and unless a private key is known to be lost, it's unwise to treat it as actually gone, I don't see it being a problem. When/if it does become a problem, Bitcoin2 is a simple code fork away.

[Birdy]

I agree completely. I count myself amongst those "Austrian types." Eventually, Bitcoin will switch to being properly deflationary, but given that a) it will be a very gradual slope, or at the very least very long plateaus between deflationary events (lost or destroyed private keys) and b) lost and hoarded coins are functionally identical, and unless a private key is known to be lost, it's unwise to treat it as actually gone, I don't see it being a problem. When/if it does become a problem, Bitcoin2 is a simple code fork away.

I can agree with you on this, it's not a problem.

[BTConomist]

Once the mining doesn't produce a lot of coins anymore that is quite a bit of growth for all other coins.

Are you accounting for the fact that most of the miners would eventually move onto the next best thing (some alternative and profitable implementation of crypto-currency? Wouldn't all your bitcoins be lost then? Look, contrary to a popular believe in the GOLD 2.0 era, the pump and dump schemes (the drivers of USD/BTC exchange rates today) don't create deflation in BTC... The deflation in a BTC-based economy can only be created through increases in BTC spending, not through BTC trading. How many miners do you know who are spending their bitcoins like there's no tomorrow? Hoarding still seems to be the popular choice today.

[Birdy]

Once the mining doesn't produce a lot of coins anymore that is quite a bit of growth for all other coins.

Are you accounting for the fact that most of the miners would eventually move onto the next best thing (some alternative and profitable implementation of crypto-currency? Wouldn't all your bitcoins be lost then? Look, contrary to a popular believe in the GOLD 2.0 era, the pump and dump schemes (the drivers of USD/BTC exchange rates today) don't create deflation in BTC... The deflation in a BTC-based economy can only be created through increases in BTC spending, not through BTC trading. How many miners do you know who are spending their bitcoins like there's no tomorrow? Hoarding still seems to be the popular choice today.

Miners will still be able to gain money with transaction fees, but it's not new money.
But yes, it's possible that a better crypto-currency takes Bitcoins place and all BTC will be worthless then (it's not the miners who decide this though).

[BTConomist]

Miners will still be able to gain money with transaction fees, but it's not new money.

And how exactly do you see this happening when hoarding seems to be everyone's favorite pastime? As you can see, lost coins don't drive BTC's deflation... No spending = no deflation.

[myrkul]

Miners will still be able to gain money with transaction fees, but it's not new money.

And how exactly do you see this happening when hoarding seems to be everyone's favorite pastime?

Let me just make sure I understand how you're constructing your model, here.

You're basing your assumptions about what will happen in a stable, mature marketplace on what is currently happening in a new, unstable one?

[BTConomist]

You're basing your assumptions about what will happen in a stable, mature marketplace on what is currently happening in a new, unstable one?

Yes, something like that, except that GOLD 2.0 would probably continue to be the focus of the larger bitcoin community for many years to come... Until the community finally succeeds at creating yet another MMORPG economy, which will eventually become a ghost town when someone invents a much better MMORPG economy, offering bitcoin miners the opportunity to explore new technological advances in a GOLD 3.0 era.