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Question: Despite being inherently deflationary, bitcoin supports spending due to the risk of lost funds over time due to fraud or user error.
Strongly Agree - 3 (8.3%)
Agree - 9 (25%)
Not sure - 6 (16.7%)
Disagree - 10 (27.8%)
Strongly Disagree - 4 (11.1%)
Shut up, Meg. - 4 (11.1%)
Total Voters: 36

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Author Topic: [OPINION] Despite being inherently deflationary, bitcoin supports spending..  (Read 1343 times)
Matthew N. Wright
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May 24, 2013, 08:50:00 PM
 #1

..because if people don't spend, the risk of being hacked, losing their coins, etc increases over time.

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May 24, 2013, 08:53:56 PM
 #2

..because if people don't spend, the risk of being hacked, losing their coins, etc increases over time.

If you spend it, on anything other than transactions where you don't want a paper trail, you are misguided.  There is no investment out there that offers the upside of Bitcoin.

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May 24, 2013, 08:54:29 PM
 #3

Yes. It is hard to spend your fiat money when it loses its purchasing power. With deflationary currency your savings gain more purchasing power and at somepoint you want to use your wealth.

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May 24, 2013, 09:08:38 PM
 #4

Yes. It is hard to spend your fiat money when it loses its purchasing power. With deflationary currency your savings gain more purchasing power and at somepoint you want to use your wealth.

Surely spending your fiat as fast as possible while it is losing purchasing power makes more sense than spending your Bitcoin that is rising in value?

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Matthew N. Wright
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May 24, 2013, 09:17:36 PM
 #5

Yes. It is hard to spend your fiat money when it loses its purchasing power. With deflationary currency your savings gain more purchasing power and at somepoint you want to use your wealth.

Surely spending your fiat as fast as possible while it is losing purchasing power makes more sense than spending your Bitcoin that is rising in value?
Of course! However, my personal point was more of a tongue-in-cheek one, that people are being hacked and losing their digital balances quite often, that the fear of holding such a fragile (electronic) balance whether the pressure is entirely on them may cause them to want to get rid of it sooner than later.

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May 24, 2013, 09:21:27 PM
 #6

I've made the same statement multiple times in the past Matthew.

There is a real cost associated with either securing your Bitcoins properly or risk of losing your Bitcoins.  If you make them secure enough to withstand hackers (offline), physical theft (stored in a safe), blackmail (plausible deniability), and fire (multiple locations), then it also makes them extremely cumbersome to spend or use.  That cumbersomeness = loss of time.  Time is money.

On the other hand, if you don't secure your Bitcoins against every one of the above possibilities, then it is entirely possible that you could lose your Bitcoins, so there is a risk cost of holding them.

I think the biggest incentive to spend them is the volatility though.  And there's nothing you can do to change that, except hedging.  Sure, the price might be on a general uptrend, and you might believe that it will continue heading that direction, but there's always the possibility of something terrible happening and causing the price to plummet.  So, you spend because you don't know if you'll still be able to spend tomorrow.

Summary: There are three ways to lose money by not spending Bitcoins:
- By theft or loss.
- By spending time or money in keeping them secure.
- By the value dropping.
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May 24, 2013, 09:26:14 PM
 #7

Ah I thought you were seriously telling us to sell our Bitcoin.  I agree totally with you Smiley

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Matthew N. Wright
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May 24, 2013, 09:30:17 PM
 #8

I've made the same statement multiple times in the past Matthew.

There is a real cost associated with either securing your Bitcoins properly or risk of losing your Bitcoins.  If you make them secure enough to withstand hackers (offline), physical theft (stored in a safe), blackmail (plausible deniability), and fire (multiple locations), then it also makes them extremely cumbersome to spend or use.  That cumbersomeness = loss of time.  Time is money.

On the other hand, if you don't secure your Bitcoins against every one of the above possibilities, then it is entirely possible that you could lose your Bitcoins, so there is a risk cost of holding them.

I think the biggest incentive to spend them is the volatility though.  And there's nothing you can do to change that, except hedging.  Sure, the price might be on a general uptrend, and you might believe that it will continue heading that direction, but there's always the possibility of something terrible happening and causing the price to plummet.  So, you spend because you don't know if you'll still be able to spend tomorrow.

Summary: There are three ways to lose money by not spending Bitcoins:
- By theft or loss.
- By spending time or money in keeping them secure.
- By the value dropping.

True that!

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May 24, 2013, 10:54:16 PM
 #9

Yes. It is hard to spend your fiat money when it loses its purchasing power. With deflationary currency your savings gain more purchasing power and at somepoint you want to use your wealth.

Surely spending your fiat as fast as possible while it is losing purchasing power makes more sense than spending your Bitcoin that is rising in value?

Surely converting all your fiat into Bitcoin and spend them only when you need to spend them would make even more sense? I mean if Bitcoin is always rising in value why would you hold any fiat in the first place? And once all your liquid money is in Bitcoins I am pretty sure you are going to spend some of it.

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alkuluku
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May 25, 2013, 05:52:01 AM
 #10

Yes. It is hard to spend your fiat money when it loses its purchasing power. With deflationary currency your savings gain more purchasing power and at somepoint you want to use your wealth.

Surely spending your fiat as fast as possible while it is losing purchasing power makes more sense than spending your Bitcoin that is rising in value?

Surely converting all your fiat into Bitcoin and spend them only when you need to spend them would make even more sense? I mean if Bitcoin is always rising in value why would you hold any fiat in the first place? And once all your liquid money is in Bitcoins I am pretty sure you are going to spend some of it.
The value of Bitcoin won't always be rising. Do you see why?

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May 25, 2013, 07:40:15 AM
 #11

...snip...
The value of Bitcoin won't always be rising. Do you see why?

The very idea of a deflationary currency is that it always rises in spending power over time.  Of course I agree the price will bounce about a bit as we move from early adopters to mass acceptance.  But the underlying trend will be an an increase in spending power per Bitcoin. 

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May 25, 2013, 08:56:05 AM
 #12

...snip...
The value of Bitcoin won't always be rising. Do you see why?

The very idea of a deflationary currency is that it always rises in spending power over time.

The markets should know that this will happen, so they should price it in and move the change in spending power from the future to the present.

Put another way, if the average Bitcoin trader thought the Bitcoin would be at $260 this time next year, why is some chump on MtGox willing to hand over his Bitcoin to you for $130? And who are all the other morons who are standing by and letting you take $260 of money off the said chump for $130, rather than offering to take it off his hands for $140?

This is what I don't get about the hoarding theory. If it's rational to hoard, it's also rational to buy, and if it's rational to buy the price should rise. And it should keep moving - fast - until it gets to the point - there must be one somewhere - where it's not rational to buy any more, even bearing in mind the future money supply. And at that point, it's not rational to hoard any more either.
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May 25, 2013, 09:14:57 AM
 #13

...snip...
The value of Bitcoin won't always be rising. Do you see why?

The very idea of a deflationary currency is that it always rises in spending power over time.

The markets should know that this will happen, so they should price it in and move the change in spending power from the future to the present.

Put another way, if the average Bitcoin trader thought the Bitcoin would be at $260 this time next year, why is some chump on MtGox willing to hand over his Bitcoin to you for $130? And who are all the other morons who are standing by and letting you take $260 of money off the said chump for $130, rather than offering to take it off his hands for $140?

This is what I don't get about the hoarding theory. If it's rational to hoard, it's also rational to buy, and if it's rational to buy the price should rise. And it should keep moving - fast - until it gets to the point - there must be one somewhere - where it's not rational to buy any more, even bearing in mind the future money supply. And at that point, it's not rational to hoard any more either.


The key word here is 'markets' - its a plural.  People need Bitcoin for their transactions today.  That market creates demand.  People have expensive mining kits and want cash from those kits.  That market creates supply.  People want to invest in something that is risky but has huge upside.  That market creates hoarders.  There are umpteen other drivers to supply and demand of Bitcoin. 

So there will be savers but there will also be consumers.  Of course, the consumers are making the right decision for them as they need their drugs or to place their bets right now.  But the savers are making the right decision to hoard because the usage of Bitcoin can only grow over time which will push up its value.

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May 25, 2013, 09:44:14 AM
 #14

what is the dollar? is it shit paper maybe? as the euro?
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May 25, 2013, 09:50:38 AM
 #15

...snip...
The value of Bitcoin won't always be rising. Do you see why?

The very idea of a deflationary currency is that it always rises in spending power over time.

The markets should know that this will happen, so they should price it in and move the change in spending power from the future to the present.

Put another way, if the average Bitcoin trader thought the Bitcoin would be at $260 this time next year, why is some chump on MtGox willing to hand over his Bitcoin to you for $130? And who are all the other morons who are standing by and letting you take $260 of money off the said chump for $130, rather than offering to take it off his hands for $140?
Yes, but only to the degree where the discounted price gives you the natural rate of interest as a return on your bitcoin investment.

If the expected return on the average investment is 7% yearly, and the expected price of bitcoin is 260 USD in one year, then a bitcoin today should be valued at ~242 USD (242*1.07=~260). Buying a bitcoin for more than that means you will lose out since there are better investment options availible. By extension the 260 USD price needs to be calculated by discounting the expected price 2 years from now.

You are completely right about your next point that the rationale behind hoarding and buying is basically the same, and that if no one uses bitcoin the price will simply rise until they are inclined to do so.


OnT, a deflationary currency promotes savings in another way than an inflationary one. As the purchasing power of bitcoin increases people get wealthier. This means that their marginal utility of money is reduced and thus are more inclined to spend. Bitcoin promotes a get rich first, spend later philosophy rather than a spend now, never get rich one.

The thing people often forgets is that saving does not mean you refrain from spending, it means you postpone spending. Reduced spending in the present means increased spending in the future. A Bitcoin economy means more total spending, just not now.
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May 26, 2013, 05:03:03 AM
 #16

...snip...
The value of Bitcoin won't always be rising. Do you see why?

The very idea of a deflationary currency is that it always rises in spending power over time.  Of course I agree the price will bounce about a bit as we move from early adopters to mass acceptance.  But the underlying trend will be an an increase in spending power per Bitcoin. 
I guess everyone should buy some bitcoins, stop working and live on the increasing spending power.

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May 26, 2013, 07:21:02 PM
 #17

Absolutely not.

Bitcoin does support spending, simply due to its amazing functionality as a currency. I strongly disagree with the notion that there has to be a risk or reality of lost puchasing power over time (whether it's theft or inflation or NIRP) in order to actively promote spending.

You don't need to introduce some Freicoin demurage bullshit, inflation, or outright risk of theft, in order to promote spending, because of the following principle:
A person will spend their money for a good or service when the need for the good/service in the present moment outweighs the potential reward of waiting an indefinite amount of time for the purchasing power of the money to increase.
BTC users are not robots. They have human needs. I doubt the number of people who use BTC EXCLUSIVELY for hoarding and USD EXCLUSIVELY for spending is anywhere as high as the occupy wall st. bears might imagine when concocting their manipulation schemes.

Furthermore, a currency that promotes spending while actively discouraging saving is NOT what we want. We want to encourage responsible saving in case of a rainy day, in case of medical emergency, as planning for college, house purchase, car purchase, etc, without entering into massive amounts of debt. We want to discourage living paycheck to paycheck.

TL;DR: People will spend bitcoins that appreciate in value; same as they spent gold and silver for 6000 years that appreciated in value, same as they spend USD when they are under the illusion that it appreciates in value in their savings account (remember, they do not necessarily realize that inflation is higher than reported figures and actually creates a direct loss in their purchasing power - they THINK they are gaining money from their 1.5% interest rate, yet they still spend it.)


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