Deflatory nature of Bitcoin - the problem and a possible solution

[benzone]

There has been much talk about the deflatory nature of Bitcoin (limited final mas). Outsiders i.e. economists mostly argue it is a major drawback. 1-2% inflation is supposed to be healthy for any currency. Without it people become motivated to be passive (hold on to currency, not make transactions, not take loans, not do business). Bitcoin supporters often claim that all of this is irrelevant, since Bitcoin is just a payment instrument, not a national currency, it isn't tied to any actual economy.

In my opinion Bitcoin does have a problem, it is its considerable and perhaps growing volatility. As I see this, it is directly related to deflatory nature of the currency. Even if at the time I write this the cumulative amount of Bitcoins is still growing, people already seem to behave with the final limited amount in mind. By that I mean that a substantial portion of wallets is used as a high risk investment, rather than a means for making payments i.e. transactions. This leads to demand surpassing supply, causing short term growth which stimulates such behavior even further. Exponential growth leads to a degenerate situation when the currency becomes stale as the majority of Bitcoin owners delay all their transactions to make considerable short term gains during these bursts. When people start trying to cash in their quick gains and make the transactions they have postponed, we see the opposite process - a swift decline of value accompanied by large transaction volumes. At this point I see no reason for this trend of volatility to stop, I even predict it might become more problematic.

Now to the possible solution; we simply need to motivate the majority of people to make transactions ASAP, not trying to make opportunistic short term gains by delaying them. And yes, the only apparent solution seems to be mild inflation. But how to achieve this by not completely changing the otherwise amazing basic Bitcoin principles, its magic formula? The answer I propose are variable transaction fees. The variable percentage of these fees would be proportional to the duration an individual has held on to the Bitcoins in his or her wallet. These fees would of course have to be minimal, calculated at 10 minute intervals (minimal transaction time), amounting to perhaps no more that 1% per year (0.00002% per 10 minutes holding period). If we would want to further stabilize the currency, a 'chairman of Bitcoin reserve' could make minor periodic adjustments to this rate depending on the market conditions. I think this could stabilize the market and preserve the basic nature of the Bitcoin, minimal transaction fees are being mentioned as a possibility from the start. I think that by introducing an instrument to mitigate the volatility, Bitcoin could only benefit and become stronger.

PS
I'm not suggesting inflation (rising prices of goods i.e. decreasing value of currency) as a goal! I'm suggesting a variable transaction fee with the goal to make the prices stable.

[Lethn]

Go and make a coin that has 1% - 2% inflation instead of trying to change a deflationary one for your own ends

[benzone]

Go and make a coin that has 1% - 2% inflation instead of trying to change a deflationary one for your own ends

I'm suggesting a solution to Bitcoins problems (mainly volatility). I don't seen any way how I would personally benefit from such a change.

[FenixRD]

I challenge you to make any of your theory make sense using the equation of exchange, or a modified form of it with a logical proof of why the iteration makes sense.

At a words-level: the oldest deflationary good there is — land — continues to be traded and recommended for investment, even by those who cannot grasp the actual ways that a system like Bitcoin will interact with the remaining economy. Justify that, also, please. (As an investment, meaning you are not using it, merely "hoarding" it, as most land is held, and all is claimed. For most of us, land is the ultimate in an analogy to a 100% pre-mined coin. But its uniqueness is undeniable. This, BTW, is a useful fact for the "ponzi by early adopters / too late to invest" arguments.)

Also, permanent-inflation coins exist. If they are superior to commerce, by virtue of some variable to the equation of exchange that has thus far eluded me, I am confident the market will adopt one or more. Also, the existence of alt-coins themselves permits the market to modify the *global* M, thereby creating inflation in the global P. While Bitcoin is not inflationary (and neither is it inherently deflationary; some prefer to say it is because it is expected that humans will lose coins and we also assume the population of humans using Bitcoin will be increasing for the duration of Bitcoin's use, but Bitcoin itself is algorithmically inflationary with an inverse logarithm dictating its inflation, until the limit is reached at the neutral projection of the year 2140, at which point it becomes static) the global economy of decentralized currencies is as inflationary, or static, or deflationary, as the market chooses it to be. Solving this within Bitcoin is solving a nonexistent problem, if for no other reason than it is already solved, if it is indeed a problem.

[FenixRD]

Go and make a coin that has 1% - 2% inflation instead of trying to change a deflationary one for your own ends

I'm suggesting a solution to Bitcoins problems (mainly volatility). I don't seen any way how I would personally benefit from such a change.

No? So for you personally, the volatility is not an issue? I assume you also will not be disadvantaged by your proposed change?

If so, then, why is there a problem at all? Either you believe you are not an average user, but that average users are disadvantaged by volatility; or, you are an average user, and therefore there is no problem because average users are not disadvantaged.

Are you an average user, or a special user? And please justify why.

[cr1776]

There has been much talk about the deflatory nature of Bitcoin (limited final mas). Outsiders i.e. economists mostly argue it is a major drawback. 1-2% inflation is supposed to be healthy for any currency. ... If we would want to further stabilize the currency, a 'chairman of Bitcoin reserve' could make minor periodic adjustments to this rate depending on the market conditions.

As Lethn stated, go make your own currency with inflation (or use an alt-coin with it) and a central "chairman of the Bitcoin reserve" if you think it is better.  Then you can see what people will use, and what they won't.  Perhaps you are right, and everyone wants an electronic version of fiat currency that is continually losing value due to inflation with some central authority figure to control it in which case if you start this, you'll have the opportunity to have a lot of early coins.

Anyway, to propose a having a "chairman of the Bitcoin reserve" seems to show a complete lack of understanding of the nature and benefits of a peer to peer distributed network without a central corruptible authority figure.

[benzone]

I challenge you to make any of your theory make sense using the equation of exchange...

At a words-level: the oldest deflationary good there is — land — continues to be traded and recommended for investment, ...

Also, permanent-inflation coins exist. ...

OK, here we go; M*V=P*Q (M=mass, V=revolving velocity, P=price, Q=trading quant.). If we observe the market as it is now, we see that mass is stable and all other variables are very unstable. Price fluctuates and so does trading volume. Most of the time we have low trading volume, with occasional spikes (positive and negative) in price accompanied with much higher volumes. So we can conclude we have low and unstable velocity of money, which I think is pretty bad. The goal should be exactly the opposite, a high and stable velocity, supported by stable prices and constant high trading volumes.

When you compare Bitcoin to land, there is one huge difference; land is a resource that provides yield (rent, crops, ...). Bitcoin is just money, it can only provide profit when traded.

The only bright future I see is when a currency becomes relevant. Many small coexisting currencies are doomed to also be irrelevant. Bitcoin is now on a good path. For it to succeed completely, it needs a stable price which will allow more and more goods to be sold for Bitcoins directly. Otherwise it will remain more or less a bubble, even if deflatory in nature.

I see many people defending the deflatory nature per se. Why??? The goal should be for it to be strong, globally relevant and foremost useful to as many people as possible.

[cr1776]

I challenge you to make any of your theory make sense using the equation of exchange...

At a words-level: the oldest deflationary good there is — land — continues to be traded and recommended for investment, ...

Also, permanent-inflation coins exist. ...

OK, here we go; M*V=P*Q (M=mass, V=revolving velocity, P=price, Q=trading quant.). If we observe the market as it is now, we see that mass is stable and all other variables are very unstable. Price fluctuates and so does trading volume. Most of the time we have low trading volume, with occasional spikes (positive and negative) in price accompanied with much higher volumes. So we can conclude we have low and unstable velocity of money, which I think is pretty bad. The goal should be exactly the opposite, a high and stable velocity, supported by stable prices and constant high trading volumes.

When you compare Bitcoin to land, there is one huge difference; land is a resource that provides yield (rent, crops, ...). Bitcoin is just money, it can only provide profit when traded.

The only bright future I see is when a currency becomes relevant. Many small coexisting currencies are doomed to also be irrelevant. Bitcoin is now on a good path. For it to succeed completely, it needs a stable price which will allow more and more goods to be sold for Bitcoins directly. Otherwise it will remain more or less a bubble, even if deflatory in nature.

I see many people defending the deflatory nature per se. Why??? The goal should be for it to be strong, globally relevant and foremost useful to as many people as possible.

You should do some reading about the blockchain and other uses for bitcoin before you make statements like the ones above about it being "just money."

Regarding "deflationary nature," (presuming that is what you mean by "deflatory"), most people disagree with the need for inflation (except for statist economists) and see bitcoin as stable alternative.  As others have said if you want inflation and think that it is required to succeed, use an alt-coin or start one.  If inflation is needed to "be strong, globally relevant and foremost useful to as many people as possible", your alt-coin will take off like wild fire and you'll be a hero.

"Stable price" in WHAT term??? Dollars, Yen, Euro, Yuan?  They are all inflating away value every day.  If by "stable price" you mean stable value, that means no inflation.

[benzone]

I challenge you to make any of your theory make sense using the equation of exchange...

At a words-level: the oldest deflationary good there is — land — continues to be traded and recommended for investment, ...

Also, permanent-inflation coins exist. ...

OK, here we go; M*V=P*Q (M=mass, V=revolving velocity, P=price, Q=trading quant.). If we observe the market as it is now, we see that mass is stable and all other variables are very unstable. Price fluctuates and so does trading volume. Most of the time we have low trading volume, with occasional spikes (positive and negative) in price accompanied with much higher volumes. So we can conclude we have low and unstable velocity of money, which I think is pretty bad. The goal should be exactly the opposite, a high and stable velocity, supported by stable prices and constant high trading volumes.

When you compare Bitcoin to land, there is one huge difference; land is a resource that provides yield (rent, crops, ...). Bitcoin is just money, it can only provide profit when traded.

The only bright future I see is when a currency becomes relevant. Many small coexisting currencies are doomed to also be irrelevant. Bitcoin is now on a good path. For it to succeed completely, it needs a stable price which will allow more and more goods to be sold for Bitcoins directly. Otherwise it will remain more or less a bubble, even if deflatory in nature.

I see many people defending the deflatory nature per se. Why??? The goal should be for it to be strong, globally relevant and foremost useful to as many people as possible.

You should do some reading about the blockchain and other uses for bitcoin before you make statements like the ones above about it being "just money."

Regarding "deflationary nature," (presuming that is what you mean by "deflatory"), most people disagree with the need for inflation (except for statist economists) and see bitcoin as stable alternative.  As others have said if you want inflation and think that it is required to succeed, use an alt-coin or start one.  If inflation is needed to "be strong, globally relevant and foremost useful to as many people as possible", your alt-coin will take off like wild fire and you'll be a hero.

"Stable price" in WHAT term??? Dollars, Yen, Euro, Yuan?  They are all inflating away value every day.  If by "stable price" you mean stable value, that means no inflation.

Again, I'm not advocating inflation. I'm proposing a variable transaction fee to compensate for negative effects of inherent deflation.

All major currencies are far more stable than Bitcoin. Bitcoin prices swing over 10% each and every trading day, when was the last time USD did that?

[cr1776]

Again, I'm not advocating inflation. I'm proposing a variable transaction fee to compensate for negative effects of inherent deflation.

All major currencies are far more stable than Bitcoin. Bitcoin prices swing over 10% each and every trading day, when was the last time USD did that?

This would be a hard fork and you would likely get very few people to switch to something that guarantees they will lose a certain amount of value each year.  However, you are certainly welcome to fork bitcoin with the changes you propose and then you can see how many people agree that this is what is holding bitcoin back.  Instead of trying to convince us here, just grab the code, make the changes (it seems pretty simple to add code to calculate the fee as you propose based on coin age), announce that as of a certain date, FeeCoin will start, using the bitcoin blockchain as of that date (or make an alt and start over).  If this is really what will hold bitcoin back in the future, it should be easy to get a critical mass of users of bitcoin to switch to your fork.  You'll be the bitcoin savior.  If a majority switch, it might even adopt the name Bitcoin 2.0. 

The real way to find out if it is a good idea or not is to put it out there for people to use and see what people choose freely.  My opinion is that people won't choose to use something where they are guaranteed to lose value.  People here won't be able to determine that by talking.  ;-)

Anyway, just because someone calls something that acts just like inflation - eating away the value of savings each year - something else doesn't change its nature.  You assume several things too: first that bitcoin is and will remain deflationary when it has an expanding monetary base and second that a currency with an eventual stable number of units will be deflationary.

The nature and value of bitcoin do not depend on the exchange value for fiat currencies.  If you read more about bitcoin, you will see that it is more than a currency, providing value (like land as someone said above) and that the exchanges are merely an entry point for non-miners.  Changing the bitcoin protocol to do something to promote exchange stability is outside of the bitcoin idea since that would inherently cause inflation in bitcoin due to the inflationary nature of all fiat currencies when controlled by a central bank.  E.g. if you want to essentially try to peg bitcoin to the Euro or Dollar, you will be importing their inflation and that is a bad idea.

:-)

[benzone]

...
This would be a hard fork and you would likely get very few people to switch to something that guarantees they will lose a certain amount of value each year. ...

As for people losing money within the system I'm proposing; either you are deliberately oversimplifying or you just don't understand economics. Given the fixed final amount of Bitcoins on one side and the ever growing world economy, Bitcoin is bound to be at least slightly gaining value, prices of goods in Bitcoins are bound to be going down and exchange rates to other currencies are bound to constantly rise. If the yearly fee rate would be smaller or equal to the appreciation rate, nobody would lose their money.

[cr1776]

...
This would be a hard fork and you would likely get very few people to switch to something that guarantees they will lose a certain amount of value each year. ...

As for people losing money within the system I'm proposing; either you are deliberately oversimplifying or you just don't understand economics. Given the fixed final amount of Bitcoins on one side and the ever growing world economy, Bitcoin is bound to be at least slightly gaining value, prices of goods in Bitcoins are bound to be going down and exchange rates to other currencies are bound to constantly rise. If the yearly fee rate would be smaller or equal to the appreciation rate, nobody would lose their money.

Assume I have 10 bitcoins today. Ten years from now I go to spend them and have the 2% annual "fee" taken. I can only spend 8 bitcoins. I have lost twenty percent of the bitcoins I owned. That is a loss of value.  If, as you stated, bitcoin is only a currency the exchange rate is irrelevant.

Anyway, I'll be interested in seeing how this alt-coin turns out. I dare say that most people will look at the calculation above and do it the same way and stick with the real bitcoin, not this proposed fork.

Good luck forcing the majority of the network to do so if they disagree with a fee that erodes the number of bitcoins they own over time like inflation does whether or not the fiat value increases or not.

[LiteCoinGuy]

Go and make a coin that has 1% - 2% inflation instead of trying to change a deflationary one for your own ends

i guess there is already one 

[Lethn]

As for people losing money within the system I'm proposing; either you are deliberately oversimplifying or you just don't understand economics.

I was going to be polite but I can't let that kind of arrogance slide, economics is simple, neo-keynesian economists ( those who are most in the public eye now, like Paul Krugman ) overcomplicate economics to the point that they even make up words and phrases to hide what they're actually doing, you know Quantitative Easing? That's called money printing and interest rate fixing, what you're proposing by putting in inflation is money printing, adding to the money supply, all that would do is cause the currency involved to lose value and make it more expensive for people to buy everyday things.

People like you are the product of almost a century of brainwashing to believe in one extremely wrong economic theory that ignores basic mathematics.

i guess there is already one

There is actually you're right, stuff like Freicoin is already out there, I don't understand why people like him just don't go over to that coin instead of trying to ruin another more successful coin.

[benzone]

...


Assume I have 10 bitcoins today. Ten years from now I go to spend them and have the 2% annual "fee" taken. I can only spend 8 bitcoins. I have lost twenty percent of the bitcoins I owned. That is a loss of value.  If, as you stated, bitcoin is only a currency the exchange rate is irrelevant.
...

Wrong! If the price of let's say a car in Bitcoins today is 10 BTC and the price of a comparable class car in ten years is 8 BTC you haven't lost any value. You have lost a nominal amount of 2 BTC, but have at the same time retained the full value of your assets in BTC.

[chaoticbrain]

I find it odd max even finds it necessary to leak information, though this could be big news and a price rise.

[ProfMac]

There is an alternate way to address volatility in bitcoins.  That is to use it as a promissory note.

For example, I may work at the local food co-op.  I will sell bitcoins to our customers at a certain price, such as $750 / BTC.  I know which of the bitcoins I sold to them, and they will of course segregate those bitcoins into an "account" with the name "food co-op"

When they come in to purchase, if they pay from an address that had our address as the input, that coin is credited at $750 / BTC in the purchase.

Everywhere else, this bitcoin is just an ordinary bitcoin.  If the price starts to rise, our customer can spend the bitcoins where-ever they wish.  If the price falls, they are protected from the volatility.  We are also protected, since we sold them at that price in the first place.

[FenixRD]

I find it odd max even finds it necessary to leak information, though this could be big news and a price rise.

1) Wrong thread? Lol

2) As long as he has it from a true source, it's exactly the purpose of journalism. The longer the information is floating around in secret circles but not in public, the more "insiders" can buy before the public does. The sooner to real-time we find things out, the better off we are, and the less "insider-like trading" can occur at our loss (well, perhaps our decreased gain). So unless it is false, it really doesn't matter why Keiser said it.

[FenixRD]

There is an alternate way to address volatility in bitcoins.  That is to use it as a promissory note.

For example, I may work at the local food co-op.  I will sell bitcoins to our customers at a certain price, such as $750 / BTC.  I know which of the bitcoins I sold to them, and they will of course segregate those bitcoins into an "account" with the name "food co-op"

When they come in to purchase, if they pay from an address that had our address as the input, that coin is credited at $750 / BTC in the purchase.

Everywhere else, this bitcoin is just an ordinary bitcoin.  If the price starts to rise, our customer can spend the bitcoins where-ever they wish.  If the price falls, they are protected from the volatility.  We are also protected, since we sold them at that price in the first place.

This is exactly what my company does, except for an initial fee. Thus people are protected against negative volatility, we make a modest profit (we also offer many other things, most of which are also modestly profitable), and the world is happy.

[Limones]

You guys have successfully convinced me to find some more in depth economics books and classes locally. Thanks. I think education can never be too good when dealing with money.