Could rapid price appreciation prevent Bitcoin's success?

[Coinseeker]

I understand all of that.  The point I'm making is that that article could have been published 4 years ago, and, in fact, people did write such things 4 years ago, and 3 years ago, and 2 years ago, and last year.  And, yet, it seems, at least anecdotally, that spending has not stagnated.  What I'm suggesting is that we don't need to speculate about future values.  We already have a history of deflation and possible increased spending to explain, which runs contrary to the deflationary argument.

Oh ok, I see your point better. 

[Rockford]

We'll here's the thing.  Bitcoins are used in transactions.  The author's theoretical problem has been discussed from the very beginning.  People were raising the exact same issue in 2010 when bitcoins were trading at a nickel...and people went on and bought them and spent them.

I don't know that there's a real academically satisfying response to the complaint.  On the one hand, the author raises a serious economic concern (though, he's quite late to the party in raising it): That the deflationary nature of bitcoin will contributes to the system's failure.  And on the other hand, there is the following fact:  People spend bitcoins.

Agreed, people obviously spend Bitcoin's but as they become more valuable, will they be spent more or less?  Isn't it a fair to at least question whether the higher the value is, the less you're inclined to spend?  Nancarrow makes good points as well but for the interim we mostly do still have disposable income and can hoard.  I would say that is true for 95%+ of people who are buying Bitcoin's.  Isn't it at least possible that spending could drop drastically as we cross the $500, $1000, $10,000 mark of Bitcoin's?

It's absolutely fair to raise the question.  What I'm suggesting is that it's an open question.  I think the deflationary argument against bitcoin is compelling.  And, yes, it's absolutely possible that spending could drop drastically as the value goes up.  But, here's a question:  Has bitcoin spending dropped drastically as the value has gone up?  What's so important about the future values of $500, $1000, and $10,000?  It seems there's enough history now that we can scrape together enough data to make some preliminary judgments.

For example, the value of 1 BTC is more than 400x greater than when I bought my first bitcoins in early 2011.  Has spending decreased more than 400x?  Has it increased?  By how much either way?  If it's increased, what are the best explanations for that behavior?  I've read a lot of anecdotal evidence that merchants see increased spending during rally periods.  I think it'd be a worthwhile project to investigate these claims more rigorously since they offer some early empirical evidence that empirically runs contrary to the deflationary argument's theoretical claims.  

Granted, it's still early.  Still, I'm not aware of a deflationary currency environment of this size from which to draw empirical evidence to either substantiate or contradict an old, and widely accepted economic theory.

Proudhon,
its really a pleasure to read your posts!

I'll give you 500 Internet-Karma.

yours sincerely

[Tirapon]

I think the answer to the 'deflationary problem' is quite straightforward.

I bought my first coins at less than $10 each. Now that 1 bitcoin is valued at more than $300 I'm more than happy to spend some of them on things that I want. I bought some silver, I've bought vouchers using Gyft, and I've bought a few things from bitmit. At the moment I still can't buy everything that I'd like to using BTC directly, but I'm expecting that to change over the next few years.

So I imagine this is the same for most other people. People buy bitcoins either as an investment, or because they agree with the idea of an alternative to government fiat - there are many reasons to get into Bitcoin, and probably for most people its a combination of several reasons. But most people are happy to start spending coins once they've seen some profit, the same way as most people are happy to 'cash out' some of their coins to lock in profits (spending bitcoins is the same as cashing out. You're just cashing out into goods/services instead of into USD/EUR etc.)

This seems to be a very simple observation. It makes me wonder how this 'deflationary problem' came about in the first place. Simple observation shows that its a myth (people are spending coins) and a few minutes of considering one's own behaviour should provide a simple enough explanation as to why there is no deflationary problem.

[ildubbioso]

This is the number of transaction, it goes up with the price: http://blockchain.info/charts/n-transactions-excluding-popular?timespan=all&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

[Coinseeker]

I think the answer to the 'deflationary problem' is quite straightforward.

I bought my first coins at less than $10 each. Now that 1 bitcoin is valued at more than $300 I'm more than happy to spend some of them on things that I want. I bought some silver, I've bought vouchers using Gyft, and I've bought a few things from bitmit. At the moment I still can't buy everything that I'd like to using BTC directly, but I'm expecting that to change over the next few years.

So I imagine this is the same for most other people. People buy bitcoins either as an investment, or because they agree with the idea of an alternative to government fiat - there are many reasons to get into Bitcoin, and probably for most people its a combination of several reasons. But most people are happy to start spending coins once they've seen some profit, the same way as most people are happy to 'cash out' some of their coins to lock in profits (spending bitcoins is the same as cashing out. You're just cashing out into goods/services instead of into USD/EUR etc.)

This seems to be a very simple observation. It makes me wonder how this 'deflationary problem' came about in the first place. Simple observation shows that its a myth (people are spending coins) and a few minutes of considering one's own behaviour should provide a simple enough explanation as to why there is no deflationary problem.

This is a really good post.  I think that's exactly what I was doing when I read the article.  I thought about what I would do and what I'm doing.  For me, I'm in DEEP regret over Bitcoins I've spent now.  I've cashed out to pay rent, bills and gyft to get the often necessary Papa John's pizza.  

Point is, the higher the value, the less I spend and at this point can't imagine spending any until I really see how high things are going to go.  That's not to suggest that everyone will do the same but again, the article raised the question and I figured who better to offer opinions, than those of you here.  It's not an argument that I've ever heard raised so while it seems it's not new to many of you, it certainly was for me.

This is the number of transaction, it goes up with the price: http://blockchain.info/charts/n-transactions-excluding-popular?timespan=all&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address=

I could be wrong but this isn't necessarily merchant transactions is it?  This includes transactions to and from wallets, to and from exchanges, etc?  That would show an increased activity on the blockchain but that wouldn't necessarily mean that "spending" is actually increasing, would it?  Just that more bitcoins are moving through the blockchain.  Am I understanding this correctly?

[Lauda]

Could rapid price appreciation prevent :insertrandomstock:'s price?
Bitcoin kind of handles similar to stock. Did the price appreciation of anything prevent it's success?

Well if Bitcoin is just a stock then you're right, but if that's the case, Bitcoin shouldn't be referred to as a currency.  Although I doubt anyone on this forum is going to agree with that view point. Bitcoin is not just a stock and has aims as a legitimate currency, so my question still stands.

Re-read what I said.
It kind of handles like stock, it is not stock. This was pretty much about the price.

[Coinseeker]

Re-read what I said.
It kind of handles like stock, it is not stock. This was pretty much about the price.

And yet I still fail to see how this is relevant.  Thanks for chiming in though.

[Lauda]

And yet I still fail to see how this is relevant.  Thanks for chiming in though.

Don't worry about bitcoins success. That's for one.

[balanghai]

Basically you don't have to buy a whole Bitcoin. You can buy how much you can afford. May it be BTC0.1 or BTC0.01. So the idea of affording a whole Bitcoin will not hinder its success.

[Coinseeker]

Basically you don't have to buy a whole Bitcoin. You can buy how much you can afford. May it be BTC0.1 or BTC0.01. So the idea of affording a whole Bitcoin will not hinder its success.

I don't think that was the point of the article.  Rather, will people's desire to maximize their investment in Bitcoin, prevent them from spending their Bitcoins as prices continue to rise?  That is the basic question.  I think there is a general consensus that this has been said about Bitcoin from the beginning and Bitcoins continue to be spent.  So, based on that data it's at least fair to say the trend could likely continue.  However, there is still uncharted territory that remains up in the air as Bitcoin values go parabolic so it does at least remain possible, that hoarding over spending could have an effect down the road. As with any experiment, just have to wait and see. 

  

[DeeSome]

I think that the rapid price rise can only be good for Bitcoin, apart from of course Btc owners seeing their assets increase in value there is the problem of all the hoops to jump through to acquire bitcoins so I would expect more people to accept bitcoins in payment for goods and services.
This expansion of the market place could then encourage people to spend some of their coins for goods without having to worry about the govt. insisting they pay tax on profits earned due to appreciation of their bitcoins, which of course the govt. would know about if exchanging for fiat currencies.  

[Siegfried]

What's important about future values is people's reaction to increased ROI on their investment.  The pizza scenario is a perfect example.  If you can buy a pizza today for say 0.1 BTC but in a matter of days (or whatever) that same 0.1 BTC could be worth $200.  Arbitrary numbers but I'm just making the point that people's willingness to spend something that continues to prove that it not only will be more valuable tomorrow but is actually designed to be that way, very well could stagnant spending.  As ones confidence grows that Bitcoin will be significantly more value next month than today, spending them makes less and less sense, from a investment stand point.  Which is obviously the point the article was making.

It seems rather simple to me. You can buy pizza today for $20 and not spend BTC, or you can buy the pizza with BTC and use the $20 to immediately buy more BTC. The outcome is the same. Personally, I prefer to buy things with BTC and use my fiat income to buy more BTC because I know that my BTC purchases help the BTC economy which will cause the value of my BTC savings to rise, and because I think it is fun to use BTC. I am sure many others feel the same way.

[assortmentofsorts]

I think this can be solved with Gavin's smart fee implementation. The only hinderance I see is that with deflation, the amount of fee paid increases significantly if a fixed fee exists. If that is tackled I don't see any problem with deflation.

Assuming the number of transactions per fixed period (lets say the period is 1 month) is a constant and considering an essential commodity (lets say its onions) is priced at X bitcoins, with deflation, the price of the commodity decreases with increase in value of bitcoin. You wouldn't be spending "more" bitcoins but "less" bitcoins. But the amount of transactions would remain fairly constant. Isn't that a good thing? You are now really "saving". With inflationary currency, your savings are actually decreasing with devaluation of currency. That means if onions are priced at $X per metric ton, with double inflation the cost would be roughly around $2X per metric ton. Before you know it, your savings would be reduced by half. That means you would have to work harder to make up for the loss in your savings. The concept of savings when applied to a inflationary currency is a farce. You never really are saving anything in an inflationary economy.

Read this comment written by Satoshi when he announced the launch of Bitcoin on P2PFoundation (link: http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source?commentId=2003008%3AComment%3A9562) :

To Sepp's question, indeed there is nobody to act as central bank or federal reserve to adjust the money supply as the population of users grows. That would have required a trusted party to determine the value, because I don't know a way for software to know the real world value of things. If there was some clever way, or if we wanted to trust someone to actively manage the money supply to peg it to something, the rules could have been programmed for that.

Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.

EDIT: This means that instead of fixing the price of a currency and regulating the supply of products (which is easy if its only one product... but with increase in number of products the price has to be readjusted always) you are now considering that the products price be regulated against the currency rate. The former would involve multiple variables to fix the currency to keep the product price fairly constant, the latter would require just 1 variable (the currency rate) to fix the product price.

[assortmentofsorts]

As far as merchants are concerned, they will either get the price in fiat they asked for (even if the number of bitcoins they earn decreases gradually) but the value of coins they collect will keep increasing with time. So both the spender and the merchant are benefitted.

[Vandroiy]

Disregarding the article and answering the topic question:

rapid price appreciation of the type we're seeing right now may be a negative factor for Bitcoin's success. Ultimately, Bitcoin's expected value stems from its ability to transfer value. If pure speculation drives the price up and then can't sustain the high price, this causes additional price instability for merchants.

Also, if we are to face popping macroscopic bubble, this can send prices falling for many consecutive years, which creates negative sentiment, possibly at a time crucial to success. If everyone's first associations with Bitcoin are "bubbles", "hobby speculators", and "crazy price swings", I doubt that's a good thing.

[inform]

i think this interest question

[gollum]

The rising and volatile price of BTC/USD is not good at all for bitcoin as a currency, although it is good as an investment / speculative asset.

From customers perspective: Why should I spend my bitcoins to buy an iPad today if the price of bitcoin goes up every day? I keep my bitcoins they might go up 1000%

From webshops perspective: Why should I accept bitcoin as a currency if the price is volatile? I might sell my products with a loss if the BTC price drops after I sell my product and want to convert the revenue to USD.

[Hawker]

If you want to buy drugs or to place a tax free bet or send a remittance to your family, you want to do it now.  So fiat is converted to Bitcoin and then used fast.  The actual value of Bitcoin is an irrelevant details - the drugs or bet or family remittance is worked out in fiat and the Bitcoin is just a delivery mechanism for that value.

[wraymund]

People are lumping speculators and purchasers together. Not everyone who buys BTC does so to speculate.

[vesperwillow]

Redirect the perspective to fiat, and I think you'll see cryptocurrency with finite supply levels is actually more valuable and sustainable in the long run, whether as a "currency" or as a transfer mechanism.

My point: The US Dollar, there's no inherint value for sure. Why does the US dollar have any value? The officials claim it's backed by gold, which is in limited supply. Unfortunately for us, nobody knows what the actual supply level is, or if we even have the gold to back up the paper bills. Gold has a value from 'back in the day' because it was highly desired. This is why there's any sort of basic value.

Still, the value is an amount people agree upon. Bitcoin has a limited supply and unlike gold, can be transacted much easier, quicker and with hardly any hassles--it can also be secured much easier. Limited supply, more secure, easier to transfer, not based on a random object found in the dirt controlled by governments--it's definitely something more valuable to the people once they realize all of this.

In all reality, US federal reserve notes are not much different than decimals of BTC. 1 gold bar is worth what, 35,000$? So a single reserve note is worth 0.0000285714285714286 GLD. And you still need receipts to prove transactions. At least with cryptocurrency the existence itself is the receipt.

It's a much better long-term solution overall. I also believe altcoins have a good purpose in light of this, especially if BTC is the basis of all of them, let it be the slower "master value" coin, and have altcoins used for other types of transactions. It actually increases security and usefulness.