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Author Topic: Bitcoin Dilution and Inflation  (Read 1000 times)
The Core
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August 28, 2011, 12:06:40 AM
 #1

I know the number of bitcoins is limited to 21 million, but since anyone can create a new currency using the open source software used to create bitcoin, why wouldn't that be inflationary for the bitcoin, itself?

IOW, gold is scarce because you can't "make" more gold. But likewise, you can't make anything that's exactly the SAME as gold in every single way. But with bitcoin, that's not true... anyone can create another bitcoin that is EXACTLY the same as the original bitcoin, in every way.

So how is that not inflationary?
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Evil Juggalo
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August 28, 2011, 12:28:44 AM
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Due to the proof of work system you can never have 2 of the same "Coins" be spent.. The designs works against that..

However if someone made a lateral Bitcoin system (Like namecoin, IX, and others) those could be mined in the same process and then a market would be needed to trade value between the 2. But this does not increase the amount of coins in BTC..

The system itself works very well, its the people running pools and markets that are the weakness as time has shown us a few times.
BitcoinStars.com
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August 28, 2011, 01:43:54 AM
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Everything points to a deflationary future for bitcoin as long as the infrastructure evolves properly
indio007
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August 28, 2011, 04:09:24 AM
 #4

God, I am so tired of the deflation thing. BTC goes to 8 decimals. This makes the standard deflation /inflation model irrelevant for quite a while or till 1 BTC = $10,000,000
supersquish
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August 28, 2011, 04:29:40 AM
 #5

I could make something that looked like USD, but wasn't quite, and call it "NEWSD". But for it to have a value significant enough to drop the value of USD it would have to have something good going for it right? People use BTC and there has to be a pretty good reason for them to think it is worth less.
The Core
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August 28, 2011, 05:27:21 AM
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Nobody is really answering the question. People DO make counterfeit dollars, and those fake dollars DO cause inflation. If people can create an infinite number of currencies that are identical to Bitcoin, why wouldn't it be inflationary?

I'm sorry if anyone is "sick" of the topic, but this seems like it could be a pretty glaring hole in the claim that Bitcoin is deflationary. Yes, if it is were truly limited to 21 million units, it would be scarce, and deflationary, but if an infinite number of dilutive (and identical) alternatives can be created easily, then it could devalue everything. These are important questions, and if they can be answered in a satisfactory way, then I think it will be great for the future of Bitcoin. But if the answer is "just because," then we've all got a real problem.

Yes, it's true: the Bitcoin network will ONLY confirm and accept verifiable Bitcoins. And each of those bitcoins will be unique. But that doesn't stop another identical network from creating dilutive pressure on the entire Bitcoin network. Please, someone explain to me why I'm wrong.

And try to be nice -- we're all simply looking for the best possible theories so we can make informed, rational decisions.

indio007
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August 28, 2011, 05:42:32 AM
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Not sick of the topic , sick of the deflation thing. Bitcoins won't experience deflation for a LOOOOONNNGG time. There are 21 million BTC to the 8th decimal. That means there can be 2,100,000,000,000,000 units of currency. More than enough. It's probably more than all other currencies combined.

The other crypto-currencies are not as secure as BTC because they don't have the same hashing power. Block chains can't be intermingled. The copy coins can only be traded for BTC but at this moment they are inferior.
coiningz
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August 28, 2011, 09:02:15 AM
 #8

Alternative blockchains are only inflationary to Bitcoin if it draws interest away from Bitcoin, plain and simple.  It also won't help that many of them thus far (IXcoin, SolidCoin, etc) have BTC exchanges, so you can buy their currency with BTC.  As SolidCoin (http://www.solidcoin.info) has been more widely adopted, I've watched Bitcoin plummet some 18 or 20% in value against the USD.  Anyway, the big draw away from Bitcoin will be in features.  Bitcoin developers are rigid and slow; SolidCoin has already broken some of those barriers by implementing good proposed changes that the Bitcoin devs would not.  In the end, the superior chain (either in numbers or features) will win. 
Pearikay
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August 28, 2011, 09:08:58 AM
 #9

Btc is the best of all
Gabi
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August 28, 2011, 11:30:47 AM
 #10

Alternative blockchains AREN'T bitcoin!

Quote
But with bitcoin, that's not true... anyone can create another bitcoin that is EXACTLY the same as the original bitcoin, in every way.
No, it won't be BITCOIN. It will be something else. Similar but not the same thing.

It's like saying gold become less valuable cause people mine silver, platinum etc etc... no, silver is NOT gold!
The Core
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August 28, 2011, 03:04:51 PM
 #11

Actually, gold IS less valuable because of the existence of silver, platinum, copper, et cetera. If those things didn't exist, gold would be far more valuable than it is. Alternatives ALWAYS reduce the value of a commodity or service.

Likewise, several strong but similar competitors to BTC will reduce its value. And that's why I'm suggesting these pressures might be inflationary.
skubeedooo
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August 30, 2011, 02:52:48 PM
 #12

Yes, this kind of thing worries me too.  If someone did come up with a bitcoin-like technology (BTCv2) that was substantially better in some way then presumably more people would invest in it, more merchants would accept it etc.  This would clearly devalue the BTCv1 w.r.t other things (usd, eur, gold, land, whatever) because there would be the same supply but less demand.  But of course BTCv2 will come along at some point, that's just innovation.  Will it be backward compatible?  Can it be backward compatible?

As I see it, the only thing that could save BTCv1 in the long-run is the 'network-effect' of many people having already invested a lot of money in it.  The longer bitcoin goes without a competitor the more embedded it will become, hence less likely that it will be displaced by a non-backward-compatible BTCv2.  But how embedded it needs to be to not be replaced by better technology is anyone's guess.
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