Bitcoin is a great foreign currency

[johnyj]

In another thread there was such a discussion: You can't purchase anything in US with euro, but it does not render euro worthless. All you need to know is that someone on this planet accept this currency as payment, then it should have some value. In fact, you might know nothing about euro, it might just collapse quickly because of those problems in southern europe, but as long as you can exchange it to USD, it has value...

In this sense, bitcoin is no difference than any foreign currency of a country that you have never been to. Just knowing that some people on this planet accept payment for this currency is enough, it is not necessary to use it to purchase anything around you, all you need is an exchange

And, just like USD still keep its value without gold backing it, as long as you can exchange a foreign currency to your local currency with a good rate, even no one in the world accepting payment with that foreign currency, you don't care

The only concern might be: If the people accepting that currency getting less, its exchange rate will drop. But the forex exchange rate is mostly affected by central bank's monetary policy, their rate decision and even market intervention. Comparing with their influence, the real economy's affect on exchange rate is very small

We all saw that when one country greatly increased money supply, the other country would immediately increase their money supply about the same scale, otherwise their currency would rise sharply in exchange and heavily hit their export

For those foreign currency traders, bitcoin is a foreign currency which has a superior property: Downside risk is always limited due to limited supply, in worst case you end up buying all the coins at $100 with a capital around 1 billion USD. But the upside potential is unlimited. This great property will surely attract lots of currency traders, it's almost a no risk strategy to always go long and double down until they bought all the coins, if that will ever happen

[ruletheworld]

The value of a currency comes from circulation and acceptance. At this initial stage, the value of Bitcoin will increase when it is circulated as opposed to hoarded, which is going long and holding on to your Bitcoins. Ironically, the more people who are 'long Bitcoin' in this scenario, the worse it is for Bitcoin and thus the people holding it themselves. Spend your Bitcoins, make it more widely accepted. That's the only way for the 'currency value to increase'.

[johnyj]

The value of a currency comes from circulation and acceptance. At this initial stage, the value of Bitcoin will increase when it is circulated as opposed to hoarded, which is going long and holding on to your Bitcoins. Ironically, the more people who are 'long Bitcoin' in this scenario, the worse it is for Bitcoin and thus the people holding it themselves. Spend your Bitcoins, make it more widely accepted. That's the only way for the 'currency value to increase'.

Not really sure about this reasoning, gold for example has almost quit the circulation and no one accept payment in gold coins/bars, it still gained quite a lot in exchange rate because of the fiat money inflation

For bitcoin, supply is fixed, and the demand for bitcoin could be just driven by two simple facts:
1. The exchange rate always rise quickly, at least 4x per year
2. You can always exchange it back to your local currency

These two conditions are enough to keep the exchange rate rise at least 4x per year, so it is a self-sustainable loop once started. And during this loop, there will be more and more business accept payment of bitcoin, just because these two facts

Before, any kind of fast rise in price of anything will eventually crash, because the supply will increase to cope with a fast appreciation of price, even the gold is no exception, if price rise fast enough, there will be many gold mines start to operate to expand production. But bitcoin's supply is fixed, this is the fundamental difference

[Stephen Gornick]

Ironically, the more people who are 'long Bitcoin' in this scenario, the worse it is for Bitcoin and thus the people holding it themselves.

Below I make the argument that the bitcoin economy isn't impacted if there is hoarding:

Scenario 1: 10 million BTC are "hoarded" for a year (i.e., they aren't spent at all) and the remaining 1.3 million BTC get spent on average once a week.  On an annual basis that means there is the aggregate spending of ~68 million BTC.

Scenario 2: 11.3 million BTC are spent, on average, once every other month.  Nobody is "hoarding" at all.  On an annual basis there is the aggregate spending of ~68 million BTC.

Both of those result in the exact same aggregate spending (denominated in BTCs) on an annual basis.   So it matters not that those with 9 million BTC sat on them in scenario 1 versus nobody hoarding whatsoever in scenario 2.

But at the same time I realize the downside to the hoarding (versus having coins circulating) is that those coins being hoarded can be dumped on the market which results in exchange rate volatility.  A person who holds coins with the intention of using them for purchases is going to hold onto them whereas a person holding coins for speculative reasons may reduce the position or liquidate the position entirely -- especially when the exchange rate is falling.

So I'm not saying "hoarding" is good, I'm just rejecting the argument that is commonly made asserting that everyone needs to be spending their coins for the currency to succeed.

[marcus_of_augustus]

The value of a currency comes from circulation and acceptance. At this initial stage, the value of Bitcoin will increase when it is circulated as opposed to hoarded, which is going long and holding on to your Bitcoins. Ironically, the more people who are 'long Bitcoin' in this scenario, the worse it is for Bitcoin and thus the people holding it themselves. Spend your Bitcoins, make it more widely accepted. That's the only way for the 'currency value to increase'.

The error in this reasoning is that because bitcoins have essentially unlimited divisibility, hoarding is not in any way a hindrance to the "velocity of money" ... think about it, you'll need to define exactly what you mean by circulation and come up with that metric in terms of real goods value, i.e. you cannot use the unit of account you need to use a "velocity of value" ... use real terms.

E.g. 11 million bitcoins can be stagnant ("hoarded") and velocity of the circulating remaining 500k can be higher than if total float of 11.5 million were circulating.

[johnyj]

But at the same time I realize the downside to the hoarding (versus having coins circulating) is that those coins being hoarded can be dumped on the market which results in exchange rate volatility.  A person who holds coins with the intention of using them for purchases is going to hold onto them whereas a person holding coins for speculative reasons may reduce the position or liquidate the position entirely -- especially when the exchange rate is falling.

So I'm not saying "hoarding" is good, I'm just rejecting the argument commonly made that everyone needs to be spending their coins for the currency to succeed.

When it comes to spending, you can just take out a fiat loan and spend, and sell a little bit coin each month for repay of the loan, thus not affect the exchange rate too much

Short term volatility caused by speculation can be regarded as noise

[countryfree]

Yes! I like the idea of "foreign currency". Some people want to make a BTC town but that's not a good idea. BTC must be kept foreign, that's one of its greatest strength.

[xxjs]

I agree completeley with the OP and the first post in this thread. But the hoarding/spending problem crept in, and I would like illustrate what is the connection.

Lets say you have for some time wanted to buy a consumer item, one night you decide that you will go out and buy it next day. The vendor receives the money, but was not prepared to do anything immediately, but a day later he decides that these items sell very well, he orders some more to fill up the shelves. During the time from the consumer decision to his action, the money is effectively removed from circulation. The same with the time from the sale to the time the vendor completes the restock deal. The temporary removal of the money from circulation is a deflationary pressure (on the general price level).

The decisions could have been made in advance, the consumer could have decided that on the next salary, he would buy, and the shopkeeper could have in advance decided that if he sells one more of these items, he would know it was a success and restock immediately after that. In that case, there would be no effective money supply contraction. This means that if anything, a so called high velocity of money would reduce the effective money supply. I dont like the notion of money velocity, because I think the effect is small and opposite of what the mainstream thinks.

The consumer trade sets off (of course marginally as a result of just one sale) a restructuring of the whole production process to attract work and capital to that kind of consumer good and the corresponding type of capital. What mainstream just ignores, is that this work and capital is removed from production of other types of goods, and the net effect is zero.

Now to hoarding, which for now can be defined as saving in the form of money. This saving does still not change the capital structure, and it does not increase productivity. It only effectively removes the money from circulation and therefore the effective money supply, making the remaining money more valuable. This effect is of course temporary, because the point of saving is to spend later.

The only thing that can increase the capital, therefore increase productivity, therefore make the world richer, is investment, that is buying more capital goods, and of course only in the line of production of what is most effective, which means what the consumers want. The prices decides that.

But there is a link between hoarding and investment, an that is that you have to save first, then invest. It is not possible to do it the other way.

Tl;dr Hoarding does nothing for the level of wealth in the world, but indirectly it spawns investment, which does.

[J603]

Not really sure about this reasoning, gold for example has almost quit the circulation and no one accept payment in gold coins/bars, it still gained quite a lot in exchange rate because of the fiat money inflation

Gold has a high value only in fiat as a sort of physical stock. In terms of what you can actually buy with it, there's not much.

For bitcoin, supply is fixed, and the demand for bitcoin could be just driven by two simple facts:
1. The exchange rate always rise quickly, at least 4x per year
2. You can always exchange it back to your local currency

You can't prove that BTC will increase 4x a year forever. And the difference between the maximum value and current value is much larger than the difference between the minimum value and the current value. BTC has lost more value than its gained, if you get what I'm saying.

These two conditions are enough to keep the exchange rate rise at least 4x per year, so it is a self-sustainable loop once started. And during this loop, there will be more and more business accept payment of bitcoin, just because these two facts

Those aren't facts. You have no idea what will happen to bitcoins next year. They could be worth 4x more (one could hope) or they could be worth nothing.

Before, any kind of fast rise in price of anything will eventually crash, because the supply will increase to cope with a fast appreciation of price, even the gold is no exception, if price rise fast enough, there will be many gold mines start to operate to expand production. But bitcoin's supply is fixed, this is the fundamental difference

Gold's supply is fixed too. That does not make it invincible.

However I think the main problem is that you're supposedly arguing for BTC's value yet you measure it in fiat. The value of a USD is not measured in another form of currency's value. It is measured by the products and services it provides. If I gave you $100,000 you would think it's a lot because you can buy a lot with it. You can buy a house, a car, food, anything you want. With 100,000 BTC, what is it worth? Most people would immediately think "that's 10,000,000 dollars". That is its worth- for now. Currently bitcoins are less of a currency and more of a stock or commodity. Their value as a currency is significantly less than their value in fiat.

[johnyj]

I agree completeley with the OP and the first post in this thread. But the hoarding/spending problem crept in, and I would like illustrate what is the connection.

Lets say you have for some time wanted to buy a consumer item, one night you decide that you will go out and buy it next day. The vendor receives the money, but was not prepared to do anything immediately, but a day later he decides that these items sell very well, he orders some more to fill up the shelves. During the time from the consumer decision to his action, the money is effectively removed from circulation. The same with the time from the sale to the time the vendor completes the restock deal. The temporary removal of the money from circulation is a deflationary pressure (on the general price level).

The decisions could have been made in advance, the consumer could have decided that on the next salary, he would buy, and the shopkeeper could have in advance decided that if he sells one more of these items, he would know it was a success and restock immediately after that. In that case, there would be no effective money supply contraction. This means that if anything, a so called high velocity of money would reduce the effective money supply. I dont like the notion of money velocity, because I think the effect is small and opposite of what the mainstream thinks.

The consumer trade sets off (of course marginally as a result of just one sale) a restructuring of the whole production process to attract work and capital to that kind of consumer good and the corresponding type of capital. What mainstream just ignores, is that this work and capital is removed from production of other types of goods, and the net effect is zero.

Now to hoarding, which for now can be defined as saving in the form of money. This saving does still not change the capital structure, and it does not increase productivity. It only effectively removes the money from circulation and therefore the effective money supply, making the remaining money more valuable. This effect is of course temporary, because the point of saving is to spend later.

The only thing that can increase the capital, therefore increase productivity, therefore make the world richer, is investment, that is buying more capital goods, and of course only in the line of production of what is most effective, which means what the consumers want. The prices decides that.

But there is a link between hoarding and investment, an that is that you have to save first, then invest. It is not possible to do it the other way.

Tl;dr Hoarding does nothing for the level of wealth in the world, but indirectly it spawns investment, which does.

Well, the current problem (or maybe the ultimate reason for any recession) is overproduction and the reduced aggregate demand resulted from that oversupply of goods/services. A deflative currency will prevent that from happening since the investment will be much more careful and there will not be significant oversupply of goods/services

[johnyj]

For bitcoin, supply is fixed, and the demand for bitcoin could be just driven by two simple facts:
1. The exchange rate always rise quickly, at least 4x per year
2. You can always exchange it back to your local currency

You can't prove that BTC will increase 4x a year forever. And the difference between the maximum value and current value is much larger than the difference between the minimum value and the current value. BTC has lost more value than its gained, if you get what I'm saying.

If I can prove this using a mathematical formula, that will be a great achievement for fundamental analysis! I'm working on it  

These two conditions are enough to keep the exchange rate rise at least 4x per year, so it is a self-sustainable loop once started. And during this loop, there will be more and more business accept payment of bitcoin, just because these two facts

Those aren't facts. You have no idea what will happen to bitcoins next year. They could be worth 4x more (one could hope) or they could be worth nothing.

Of course everything has a risk, even government bond could worth nothing if the government default, not even mention the fiat money which is created out of nothing, but that should also be factored in the fomula  

Before, any kind of fast rise in price of anything will eventually crash, because the supply will increase to cope with a fast appreciation of price, even the gold is no exception, if price rise fast enough, there will be many gold mines start to operate to expand production. But bitcoin's supply is fixed, this is the fundamental difference

Gold's supply is fixed too. That does not make it invincible.

Bitcoin have almost constant 3600 coins generation per day, but the global gold production expanded a lot during recent years after the gold price rally. Although total amount of gold is limited on earth, the daily production is flexible, that's the reason gold price can not rise as fast as bitcoin, since when price rise too fast, the production and supply will increase

[DeathAndTaxes]

Bitcoin have almost constant 3600 coins generation per day, but the global gold production expanded a lot during recent years after the gold price rally. Although total amount of gold is limited on earth, the daily production is flexible, that's the reason gold price can not rise as fast as bitcoin, since when price rise too fast, the production will increase.

Not really.  While gold production is elastic (can increase in high prices and decline in low prices) there is a LOT of gold already out there.  Gold production is about 2% of existing above ground supply.  So even gold companies going crazy and doubling production only means a 4% year over year increase in the available supply.  The good news is Bitcoin is seeing a similar effect.  As the number of coins minted increase and the daily production decreases the effect of newly minted coins has less and less of an effect.  Unlike gold new supply is still rather meaningful (supply is being expanded by ~10% annually right now) but over time that will only decrease.

[crumbs]

In another thread there was such a discussion: You can't purchase anything in US with euro, but it does not render euro worthless. All you need to know is that someone on this planet accept this currency as payment, then it should have some value. In fact, you might know nothing about euro, it might just collapse quickly because of those problems in southern europe, but as long as you can exchange it to USD, it has value...

A reasonable person, living in US, who knows nothing about euro, would not accept euro as payment.  
At the very least, he has to know the exchange rate, and have *some reason to accept it instead of the dollar.*  Otherwise, both bitcoin & euro are out of luck.

In this sense, bitcoin is no difference than any foreign currency of a country that you have never been to.

I'm not in the habit of accepting money from places i've never been to, especially if i know that *that place does not exist.*

Just knowing that some people on this planet accept payment for this currency is enough, it is not necessary to use it to purchase anything around you, all you need is an exchange

Well, no.  You need a *good* exchange.  One which is local, convenient, fast, and guaranteed to be there tomorrow.  Bitcoin exchanges fit none of those criteria.

And, just like USD still keep its value without gold backing it, as long as you can exchange a foreign currency to your local currency with a good rate, even no one in the world accepting payment with that foreign currency, you don't care

The only concern might be: If the people accepting that currency getting less, its exchange rate will drop. But the forex exchange rate is mostly affected by central bank's monetary policy, their rate decision and even market intervention. Comparing with their influence, the real economy's affect on exchange rate is very small

We all saw that when one country greatly increased money supply, the other country would immediately increase their money supply about the same scale, otherwise their currency would rise sharply in exchange and heavily hit their export

For those foreign currency traders, bitcoin is a foreign currency which has a superior property: Downside risk is always limited due to limited supply, in worst case you end up buying all the coins at $100 with a capital around 1 billion USD. But the upside potential is unlimited.

In worst case the worth of a bitcoin bought for $100 becomes 0.  Zero.  Nothing.  Consider bitcoin clone coins that died.  They too had limited supply.
Wha happened?

This great property will surely attract lots of currency traders, it's almost a no risk strategy to always go long and double down until they bought all the coins, if that will ever happen

All i can say is please, for the love of everything that's good, kind & fuzzy -- *do not trade in bitcoin until you learn that Martingale is for rubes!*  Lawdy.

[johnyj]

For those foreign currency traders, bitcoin is a foreign currency which has a superior property: Downside risk is always limited due to limited supply, in worst case you end up buying all the coins at $100 with a capital around 1 billion USD. But the upside potential is unlimited.

In worst case the worth of a bitcoin bought for $100 becomes 0.  Zero.  Nothing.  

If I spent 1 billion USD and bought all the bitcoins at $100, and their exchange rate went to zero because of a chain fork (even that might not crash the price to zero), then my maximum loss is 1 billion dollar. For those close to central bank, 1 billion dollar is only 1/3 of the money created by FED daily, I'm sure some banker can afford to lose all of it (In fact he will receive most of those USD back, since all those people who sold their coin will put their fiat profit back into his bank )

[johnyj]

Bitcoin have almost constant 3600 coins generation per day, but the global gold production expanded a lot during recent years after the gold price rally. Although total amount of gold is limited on earth, the daily production is flexible, that's the reason gold price can not rise as fast as bitcoin, since when price rise too fast, the production will increase.

Not really.  While gold production is elastic (can increase in high prices and decline in low prices) there is a LOT of gold already out there.  Gold production is about 2% of existing above ground supply.  So even gold companies going crazy and doubling production only means a 4% year over year increase in the available supply.  The good news is Bitcoin is seeing a similar effect.  As the number of coins minted increase and the daily production decreases the effect of newly minted coins has less and less of an effect.  Unlike gold new supply is still rather meaningful (supply is being expanded by ~10% annually right now) but over time that will only decrease.

I believe, similar to bitcoin, the actual amount of gold that were being traded on market is very small part of total supply. Mostly fresh mined gold and some jewelry gold, most of other gold were hoarded in gold vault. So, the gold price is heavily affected by the newly mined gold, which mostly go to the market for exchange. If every one dump their gold on the market, the price will crash 90% at least

[crumbs]

For those foreign currency traders, bitcoin is a foreign currency which has a superior property: Downside risk is always limited due to limited supply, in worst case you end up buying all the coins at $100 with a capital around 1 billion USD. But the upside potential is unlimited.

In worst case the worth of a bitcoin bought for $100 becomes 0.  Zero.  Nothing.  

If I spent 1 billion USD and bought all the bitcoins at $100, and their exchange rate went to zero because of a chain fork (even that might not crash the price to zero), then my maximum loss is 1 billion dollar. For those close to central bank, 1 billion dollar is only 1/3 of the money created by FED daily, I'm sure some banker can afford to lose all of it (In fact he will receive most of those USD back, since all those people who sold their coin will put their fiat profit back into his bank )

I like your logic.  
It, then, follows that the banker should buy a billion dollars worth of wooden nickels from me (if i promised him unlimited upward potential -- see Pascal's Wager), because:
1.  He can afford it -- he'll just print moar.
2.  I'll deposit the money in his bank anyhow.
Amirite?

Edit:  If you don't know Pascal's Wager, Wikip is a bit long-winded.  Here it is in a nutshell:  Pascal tells us that we should believe in (Christian) God, because 2 x 2 table, like this:

	God exists	God doesn't exist
You_Believe	Infinite win (heaven)	Finite loss (wasted time on church)
You_Do_Not_Believe	Finite win (saved time on church)	Infinite loss (hell)

This is a typical "go long, 'coz the upside is infinite" argument.  Here's the problem:
If Pascal's Wager makes sense, it's not only smart to believe in Christian God, but in anything promising infinite reward, no matter how unbased the promise.  

[J603]

Well the problem with Pascal's wager is that there's a greater chance of being wrong if you believe in a God.

If there's a 50-50 chance of there being a God, then atheism will incorporate a 50% chance of being correct, and being religious will also incorporate 50%. However, there is not one religion, while there is "one" atheism. So really, if you believe in the Christian God, you probably have a less than 1% chance of being correct. And if say Allah is the true God, you're going to hell. If you're an atheist you're going to hell too, but at least you had a greater chance of being correct.

In terms of cryptocurrencies, it's better to be an "atheist" or "agnostic" and be skeptical at all times. Following a "religion" (which could be each individual currency such as BTC, LTC, Ripples, etc) gives you a tiny percentage of being correct. It's better to be very cautious, and make informed decisions rather than blindly follow bitcoins.

[johnyj]

I remember during last boom, I read some talk from a chinese bank official, he said that in order to control the speculative effect of bitcoin, so that it does not hurt the economy when it has grown too big, they would like to acquire a large amount of bitcoin at hand as reserve. So they could cool down the market frenzy when necessary

Of course this talk is non-sense, because he would need to cool down the frenzy all over the world with his little reserve, but that talk at least showed that it is possible that someone from the banks already started to accumulate coins since 2 years ago. If some entities have already accumulated more than 5% of total coin supply, then essentially they could corner the market, this is a well-known practice in central bank's forex intervention

[J603]

I remember during last boom, I read some talk from a chinese bank official, he said that in order to control the speculative effect of bitcoin, so that it does not hurt the economy when it has grown too big, they would like to acquire a large amount of bitcoin at hand as reserve. So they could cool down the market frenzy when necessary

Of course this talk is non-sense, because he would need to cool down the frenzy all over the world with his little reserve, but that talk at least showed that it is possible that someone from the banks already started to accumulate coins since 2 years ago. If some entities have already accumulated more than 5% of total coin supply, then essentially they could corner the market, this is a well-known practice in central bank's forex intervention

Keep in mind that if bitcoins get popular enough, even one bitcoin will be a huge sum of money. That banker was not talking nonsense. Right now there are 11.5 million bitcoins. That means if everyone got into bitcoins there would only be enough for everyone to have .0016 each if they're distributed evenly. At the market cap we will each be able to have .003. Keep in mind that some people have thousands, which means that people who get in late will get less and less bitcoins as more are spread around. So even if that man has only 100 bitcoins, his "little" reserve is not so little.

[crumbs]

Well the problem with Pascal's wager is that there's a greater chance of being wrong if you believe in a God.

If there's a 50-50 chance of there being a God, then atheism will incorporate a 50% chance of being correct, and being religious will also incorporate 50%. However, there is not one religion, while there is "one" atheism. So really, if you believe in the Christian God, you probably have a less than 1% chance of being correct. And if say Allah is the true God, you're going to hell. If you're an atheist you're going to hell too, but at least you had a greater chance of being correct.

I guess i wasn't clear.  I didn't mean to suggest Pascal's Wager had much merit -- just the opposite.  I brought it up to highlight the ridiculousness of the "always bet on the unlimited positive potential" argument.  

In terms of cryptocurrencies, it's better to be an "atheist" or "agnostic" and be skeptical at all times. Following a "religion" (which could be each individual currency such as BTC, LTC, Ripples, etc) gives you a tiny percentage of being correct. It's better to be very cautious, and make informed decisions rather than blindly follow bitcoins.

The problem with the "there may be other gods" rebuttal is that as long as those gods offer infinite gains and finite losses (let's drop the "hell" part for this hypothetical), it always *seems* rational to bet on at least one of them (each offers infinite rewards, as opposed to finite rewards of atheism).  In the coinz world, that translates to "better bet on each and every coin."  That, of course, is bunk.
If you really want to pick apart Pascal's Wager, there's no end of problems there.  The use of infinity (both hedonic & temporal) is pretty fast & lose, and i didn't even bother calling it a probability table 'coz there's no way to consistently quantify anything.  I doubt anyone ever found God through Pascal's Wager