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Author Topic: Bitcoin is a closed system  (Read 1267 times)
AngelusWebDesign
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August 28, 2011, 04:20:15 AM
 #1

Bitcoin was supposed to be limited, so hyperinflation doesn't occur. Apparently creating new blockchains is a workaround for this limitation -- a limitation which was put there for the stability of Bitcoin.

Any windfall from mining "alternate blockchains" HAS to come from somewhere -- maybe partially from me, when I sell my 10 BTC for $85 instead of $115? It's gotta be. For every extra dollar gained *someone* is losing a dollar.

I don't think many people understand this whole *coin universe is a closed system. 100% closed. As in, only so much money sloshing around.

John, Mike, Frank, Sally, Alice, and Tom are playing "economy" with seashells and buttons. There are only so many of either, so the economy is stable. They trade them in exchange for US Dollars, too. Sure, once in a while one of the kids begs his/her mom for a few bucks of their next allowance...but basically there is only $5 from each kid in "the system" sloshing around. One person's windfall is another person's wipeout. And if Tom starts another currency, "Acorns" and starts trading them for buttons/seashells, it's bound to bring down the value of the existing 2 currencies. The fact is that only $25 is sloshing around the kids' "economy", which would have to be the total value of the various "currencies" they're trading. Now what if the seashells and buttons were limited, but the acorns weren't? In other words, the value of their existing currency(ies) were stable, but then a second or third currency comes along, and causes the value of the STABLE currency to drop, because demand is divided up.

I think the key point here is: Even if the quantity of Seashells is carefully monitored to prevent hyperinflation, the introduction of a second currency (Acorns) can cause hyperinflation IF two conditions are met: A) the citizens use both currencies, B) the price of Acorns is pegged to Seashells

Zimbabwe experienced hyperinflation, but it didn't affect us here in the US, because no one here uses Zim dollars. Moreover, we don't peg the dollar's value to "how many Zim dollars" it's worth. The same can't be said for Bitcoin and other *coins. The latter are easily traded for BTC, BY THE SAME SMALL GROUP OF PEOPLE.

Anyone holding their wealth (or a portion of it) today in "solidcoins" or "IXcoins" means that much less demand for BTC. No wonder BTC is $8.50 instead of $11.50 like last week.

This describes the Bitcoin universe to a T. It's a closed system. We have X members, with a total of $X they can play around with in this Bitcoin game. People come and go, making and losing money, but when you make $10 it's coming from someone else. (Unlike the real economy, where wealth is actually created.)

Show me a factory that was built with Bitcoins (no USD) and I'll be proven wrong. All we have in the Bitcoin economy (besides gambling and speculation) is a few niche retailers selling things like T-shirts. These "mom & pop" shops have to sell their BTC immediately to buy more T-shirts, since their suppliers don't accept Bitcoin. So you spend 2 BTC on a shirt (causing 2 BTC to be "bought" on the market) and the seller has to SELL 2 BTC on the market. How does it help the market to spend 2 BTC?
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3phase
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August 28, 2011, 07:09:18 AM
 #2

Angelus, you got something there, but not exactly.

The price of the alternative currencies is not "pegged" to BTC. It's floating according to how people want to trade them for BTC.

The point that BTC is a closed system is absolutely spot on. And before someone mentions the "merchants" that accept Solidcoins, they should divide the total daily revenue of those merchants in Solidcoin currency with the 24hr volume in the Solidcoin Exchange and tell me what that number is implying.

So if BTC is a closed system, people trading them with other *Coins does not change the supply of BTC, therefore no inflation is caused by that.

A good analogy would be if you would imagine that Bitcoiners suddenly decide to trade their BTC for ... Seashells or Acorns. BTC supply again doesn't change, just BTC changing wallets.

If I have 1000 Solidcoins which currently are worth around 20 BTC, it DOES NOT mean that I have 20 BTC !!!. If I want to REALLY have those extra 20 BTC, I need to sell them to someone else, and then they're mine!! That someone else then will phantasize that they have some extra BTC (since they mentally also will calculate their current value) but THEY WON'T have them, until they manage to sell to someone else and so on. What happens then if the majority of Solidcoin holders decide to demand BTC instead as the SC price is falling? They will have to sell. And then the question comes: TO WHOM?

It's essentially the same thing as saying that Bill Gates has x million shares of Microsoft valued at y$ therefore he has xy$ net worth. Can he actually put his hands on this amount of money by selling those shares? I guess not.

Regarding the drop of BTCUSD price, I tend to think that several late coming miners exploited the low SC difficulty in the past few days (and Ixcoins/I0coins a few days ago), sold their *Coins for BTC, and then cashed in their BTCs, happy to be able to make 4x times the fiat (USD) value that they were making before. "Look ma, I told you I can make money out of this computer. (This week at least...)". If that occurred, it would explain the BTC price drop, at least in part.

Personally, I did exploit the price/difficulty discrepancy to increase my BTC holdings, and I'm quite happy at that.

Inflation from alternative chains would result only if a substantial amount of those alternative coins was being traded for actual goods and services. This would increase the supply of available cryptocurrency which can be spent in the real world. For now, this seems not to be the case.

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August 28, 2011, 09:20:28 AM
 #3

I like 3phases analysis, but not his conclusion. 21,000 bitcoins worth of solidcoins were not dumped all at once (that's roughly 840,000 solidcoins at near to the highest price they ever traded for). Considering the drops were more or less single time mass sells, it's more likely a small combo of some solid/i0/ix coin cashouts, and more largely an early bitcoin adopter or hacked account dropping a buttload of coinage on to the market.

That aside, listen to 3phase, if you look hard enough you can find a boogeyman anywhere, doesn't mean you should be afraid of him though.
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August 28, 2011, 09:28:38 AM
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I don't think many people understand this whole *coin universe is a closed system. 100% closed. As in, only so much money sloshing around.
It's not, though. The other currencies are too small to make much of an impact, so most of the volatility comes from mood swings.

The fact is that only $25 is sloshing around the kids' "economy", which would have to be the total value of the various "currencies" they're trading.
That's not what the price of the currency means. The fact that the market cap of Bitcoin is currently about $60 million does not mean that there are $60M USD "sloshing around" in the Bitcoin community. All it takes to arrive at that market cap is one person with $1 who wants bitcoins and nobody with bitcoins willing to sell for less than 8.60. The crash comes because a large portion of the bitcoin owners gets less optimistic and want to sell. Then they'll start to fight for whatever amount of dollars that is available by undercutting each other.
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August 28, 2011, 09:57:57 AM
 #5

The amount of money sloshing around is constantly changing. I'd call that a 100% open system.

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August 28, 2011, 11:37:25 AM
 #6

Bitcoin was supposed to be limited, so hyperinflation doesn't occur. Apparently creating new blockchains is a workaround for this limitation -- a limitation which was put there for the stability of Bitcoin.

Any windfall from mining "alternate blockchains" HAS to come from somewhere -- maybe partially from me, when I sell my 10 BTC for $85 instead of $115? It's gotta be. For every extra dollar gained *someone* is losing a dollar.

I don't think many people understand this whole *coin universe is a closed system. 100% closed. As in, only so much money sloshing around.

John, Mike, Frank, Sally, Alice, and Tom are playing "economy" with seashells and buttons. There are only so many of either, so the economy is stable. They trade them in exchange for US Dollars, too. Sure, once in a while one of the kids begs his/her mom for a few bucks of their next allowance...but basically there is only $5 from each kid in "the system" sloshing around. One person's windfall is another person's wipeout. And if Tom starts another currency, "Acorns" and starts trading them for buttons/seashells, it's bound to bring down the value of the existing 2 currencies. The fact is that only $25 is sloshing around the kids' "economy", which would have to be the total value of the various "currencies" they're trading. Now what if the seashells and buttons were limited, but the acorns weren't? In other words, the value of their existing currency(ies) were stable, but then a second or third currency comes along, and causes the value of the STABLE currency to drop, because demand is divided up.

I think the key point here is: Even if the quantity of Seashells is carefully monitored to prevent hyperinflation, the introduction of a second currency (Acorns) can cause hyperinflation IF two conditions are met: A) the citizens use both currencies, B) the price of Acorns is pegged to Seashells

Zimbabwe experienced hyperinflation, but it didn't affect us here in the US, because no one here uses Zim dollars. Moreover, we don't peg the dollar's value to "how many Zim dollars" it's worth. The same can't be said for Bitcoin and other *coins. The latter are easily traded for BTC, BY THE SAME SMALL GROUP OF PEOPLE.

Anyone holding their wealth (or a portion of it) today in "solidcoins" or "IXcoins" means that much less demand for BTC. No wonder BTC is $8.50 instead of $11.50 like last week.

This describes the Bitcoin universe to a T. It's a closed system. We have X members, with a total of $X they can play around with in this Bitcoin game. People come and go, making and losing money, but when you make $10 it's coming from someone else. (Unlike the real economy, where wealth is actually created.)

Show me a factory that was built with Bitcoins (no USD) and I'll be proven wrong. All we have in the Bitcoin economy (besides gambling and speculation) is a few niche retailers selling things like T-shirts. These "mom & pop" shops have to sell their BTC immediately to buy more T-shirts, since their suppliers don't accept Bitcoin. So you spend 2 BTC on a shirt (causing 2 BTC to be "bought" on the market) and the seller has to SELL 2 BTC on the market. How does it help the market to spend 2 BTC?


You forget that in order to buy these alternative currencies you need BTC. So if you are coming in to invest into namecoins or ixcoins etc you have to either mine or BUY btc which makes the btc price go up NOT down.

What makes BTC price go down is people cashing out of BTC. It has nothing to do with alternative currencies.

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gw4tt
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August 28, 2011, 07:05:22 PM
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the alt coins seem more like gambling/ponzi schemes to me still. Will be interesting to see where things end up though, one of them could take out bitcoin for all I know.

Solidcoin looks like it is starting to diverge into a real alt coin though.
bcpokey
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August 28, 2011, 09:32:06 PM
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the alt coins seem more like gambling/ponzi schemes to me still. Will be interesting to see where things end up though, one of them could take out bitcoin for all I know.

Solidcoin looks like it is starting to diverge into a real alt coin though.

This typically seems to happen when mining an alt coin comes near parity with mining bitcoins, and people begin to head back to bitcoin. It happened with name, Ix, i0 and now sc (though namecoin prices are actually still comparitively high given its current predicament). Solid almost bucked the trend though, we'll see what happens there. Ix stole it's retargetting algo so it may be in for a rough ride.
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August 31, 2011, 07:59:10 PM
 #9

@ OP:

I agree, Bitcoin needs to be treated as a currency and not a commodity. If this can be achieved then other alt currencies pegging themselves to BTC won't matter. In the real global economy, other currencies peg themselves to other currencies, you can see this with China & the USD. There is a debate to this, and its effects on the economy itself, but it is done.

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AngelusWebDesign
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August 31, 2011, 09:19:05 PM
 #10

To add to my original post:

When you have Currency A *and* Currency B in circulation -- used by the same group of people -- you really need to add the total circulation of BOTH currencies together to get the total currency in circulation.

In other words, if Bitcoin changed its algorithm to 100 coins per block instead of 50, people wouldn't wonder why the USD/BTC price went down by 50% on the market.

But it's a bit more mysterious when another currency comes on the scene, and essentially does the same thing. Sure, the coins are worth 1/30th of a BTC, but there are still hundreds of thousands of them. And people are buying them, which takes away demand that would otherwise go to Bitcoin.

You can't just look at the number of Bitcoins in existence (divided by the amount of USD in the system) to get a value per BTC -- you have to include other *coin rip-offs as well if people are holding those.

There are only so many libertarians and geeks putting their money in ANY KIND OF *coin digital currency.
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August 31, 2011, 10:16:42 PM
 #11

But so is any share based economy (ie stocks) They fluctuate. One day, a new company's shares go public, other shares are worth less, and then it switches around. Basically, you are comparing Bitcoin to shells, when they are just any currency. Sure we can make more, but generally, it stays stable.

I want to continue to ponder this, but it is very difficult to choose words, so inb4 this turns into an argument thread of people discussing world currencies and values and etc.

Note, I use BTC just as I would stocks, or any asset really. Especially since BTC are can be liquidated

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