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Author Topic: Deflation or Inflation  (Read 982 times)
xali
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August 18, 2011, 07:13:15 PM
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Is bitcoin currently in deflation or inflation? There was all this talk of bitcoin definitely being deflationary what with even a sticky being placed talking about deflation being good, but right now is it even deflationary? Was the drop from 30 natural due to the increased production of bitcoin with out proportionate demand?

Smiley ;/)
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xali
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August 19, 2011, 03:19:14 AM
 #2

So does no one know the answer?? =/

Smiley ;/)
miscreanity
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August 19, 2011, 04:48:35 AM
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Until the supply base has matured near ~21mm units or mining halts due to being unprofitable, the supply of Bitcoins is increasing. Therefore, inflation is currently the dominant trend.

The drop from $30 appears to have been a normal correction for such a move up. The only difference that appeared so shocking was the magnitude in price change. Otherwise, the behavior on a percentage scale is similar to equities that garner significant interest and make huge gains (in Bitcoin's case, a whopping 30-bagger), then settle and consolidate.
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August 19, 2011, 12:18:36 PM
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Until the supply base has matured near ~21mm units or mining halts due to being unprofitable, the supply of Bitcoins is increasing. Therefore, inflation is currently the dominant trend.

The drop from $30 appears to have been a normal correction for such a move up. The only difference that appeared so shocking was the magnitude in price change. Otherwise, the behavior on a percentage scale is similar to equities that garner significant interest and make huge gains (in Bitcoin's case, a whopping 30-bagger), then settle and consolidate.

No, this is wrong. The supply of bitcoins is determined by an algorithm that is predictable (while you can't predict who will get a particular block of 50, you can predict how many will be generated and roughly when they will be). This was set from the start to be halved every certain number of years, so that right now, when a block is solved, the payout is 50 BTC. Some time next year (I think I read somewhere that it will be in May), that will drop by half, to 25... the same number of years later it will be halved again.

That's why it will be an asymptotic curve all the way to 21 million coins... technically, you will ALWAYS have the chance to generate more, but by the year 2020 you'll have a better chance of winning the lottery.

Again, someone who is better informed about bitcoin may wish to correct me, and please do.
miscreanity
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August 19, 2011, 02:45:23 PM
 #5

No, this is wrong. ...

While you are technically correct, that's addressing a different issue. The question was in regard to the current state of Bitcoin's existing unit base, which is inflating by any definition (even though Bitcoin's natural tendency is toward deflation).
proudhon
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August 20, 2011, 12:10:02 AM
 #6

Is bitcoin currently in deflation or inflation? There was all this talk of bitcoin definitely being deflationary what with even a sticky being placed talking about deflation being good, but right now is it even deflationary? Was the drop from 30 natural due to the increased production of bitcoin with out proportionate demand?

If the question is asked relative to the start of bitcoin trading to now, then the answer is that it is extremely deflationary.  If the question is asked relative to the past 2 months or so, then the answer is that it is very inflationary.
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August 20, 2011, 12:24:46 AM
 #7

It's deflating by default, since everyone who mined coin will most likely hoard them, so actually there are only small amount of coin in circulation.

When the people doing business saw that bitcoin are so difficult to get (if they want to exchange more goods for bitcoin, the bitcoin value rise immediately due to small amount of supply), they will consider other coins which are easy to get

xali
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August 20, 2011, 01:33:16 AM
 #8

If the question is asked relative to the start of bitcoin trading to now, then the answer is that it is extremely deflationary.  If the question is asked relative to the past 2 months or so, then the answer is that it is very inflationary.

buddy ANYONE can simply compare the prices between two points in time and say oh it went higher so it was deflating but from there to there it went lower so it was inflating.

the point is WHY??

And I'm still severely confused.

Though this is what I've come up with, even though I know it's flawed so I still need more smart analysis. Bitcoin in general should be deflationary because overall coins are limited. BUt each day coins are created and given to miners. The poster above said that miners hoard, but I can tell you that that is very WRONG. Miners mine with mining rigs and use electricity. The coins they get they must sell to pay off their rigs and pay for the electricity to break even. Only in the profit could there be potential for hoarding, and even then most just want to make a profit.

The greatest cause of bitcoins being sold is mining. This should make bitcoins inflate somewhat, depending on my next point.

Now the question is, is the amount of bitcoins being bought more or less than the ones being sold. Is the rate going up or down. Is it deflating or inflating? Is the supply more than or less than the demand?

Now we have to really look at what's been happening in the past few months. Up until we hit the 30 point, it was indeed deflating. Why?
And then after it inflated. Why?

I'll try and answer myself in a moment but I must eat dinner. please think about this instead of just half assing it. aren't there any REAL economists here?

Things to consider, people buying only because the rate was going higher and higher; the number of hacks with hackers undoubtedly selling all their stolen bitcoins; the number of miners decreasing because of a lower rate; etc etc.

DAMN this is confusing

Smiley ;/)
proudhon
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August 20, 2011, 02:08:46 AM
 #9

Now the question is, is the amount of bitcoins being bought more or less than the ones being sold. Is the rate going up or down. Is it deflating or inflating? Is the supply more than or less than the demand?

Again, the answer to those questions will depend largely on the time frame you look at.  From, say, April to June demand outpaced supply, and this was apparent in what the price was doing over that time period - it was going up.  If, on the other hand, we look at the period from around mid June to early August, for example, we see that supply outpaced demand, and this was similarly apparent in what the price did over that time period - it went down.

As to the separate question of why supply outpaces demand in some cases and in others demand outpaces supply, there are loads of variables involved about which we can make best guesses which are sometimes well informed by the available information we have and sometimes are merely guesses.

For example, it was obvious enough on the forums that fear and uncertainty post-MtGox hack led many people to offload coins.  Presumably because of considerations that somehow their coins could be stolen, and that if they at least sold some, perhaps all, of them now they would at least have something instead of nothing.   At the same time, many people seemed hesitant to buy bitcoins because of hacking worries and the speculative belief that the price would very probably go lower and they could buy more for their money.  It seems plausible that for these and other reasons we saw supply outpace demand, and, therefore, price fall.

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buddy ANYONE can simply compare the prices between two points in time and say oh it went higher so it was deflating but from there to there it went lower so it was inflating.

You're right.  Nevertheless, you asked a question about about that very thing.  If it's so simple a question to answer that anyone can do it (and I agree with you about that), they why do you throw a little fit when somebody answers that question when you ask it - e.g. "Is bitcoin currently in deflation or inflation?".  That question doesn't ask why bitcoin is currently inflationary or deflationary.  It asks whether it is one or the other.  Sure, you did ask a why question, and I simply didn't answer it.  Your OP didn't tell anyone which one you thought more important, and, again, if your first questions about whether bitcoin is deflationary or inflationary are so obvious that somebody answering them upsets you, then why did you ask the questions?


jtimon
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August 21, 2011, 01:04:41 PM
 #10

You have to distinguish between monetary "xflation" and price "xflation".
Monetary inflation is just the growth in the monetary base, so until the 21M are generated (if we don't take wallet losses into account) bitcoin will have monetary inflation.
Since the adoption has grown faster than the monetary base, bitcoin has had price deflation, which means that general prices in terms of bitcoins have dropped.

The original use for inflation was monetary inflation, but the most used meaning today is price inflation. They're related but they're not the same thing.
In the equation of exchange ( M * V = P * Q ), monetary xflation would be dM and price xflation, dP.
If dM > 0  -> price inflation
If dM < 0  -> price deflation
If dP > 0  -> monetary inflation
If dP < 0  -> monetary deflation

What mantains dP < 0 with dM > 0 in the bitcoin economy is dQ > 0.
I hope this helps.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
Karmicads
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August 25, 2011, 12:01:04 PM
 #11

The bitcoin economy is a bit like a fat guy sitting on a sofa.
Sometimes he eats a bag of chips and puts on a little weight.
sometimes he breaks wind and looses a little.

The bitcoin economy works just the same, except there is no fat guy.  Wink
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