Deflatory nature of Bitcoin - the problem and a possible solution

[ProfMac]

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.

Fixed that for you.
-- Prof Mac

[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.

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.

What is your good/service area?
Have you modified a client to help you with tracking this?

[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.

What is your good/service area?
Have you modified a client to help you with tracking this?

All purpose financial services, kind of like a bank, but like a bank was back when their purpose was to safeguard assets from loss. In 2014 I include "manipulation and unnatural devaluation" in "loss". It's been thus far somewhat of a private deal, in that it was exclusively word of mouth. I keep meaning to take it further but I have been too busy with my research. (That may be changing; I just committed to a project not two hours ago, so the recruiting effort begins shortly.) Anyway, yeah, actual insured asset vault storage like art and gold bullion, as well as an automated "fiat-decoupled" bitcoin exchange (not like Coinbase, but not real-time either; all funds are in cold storage), secured loans, etc. On the promissory-like functionality side, we promise your funds will never be worth less than the 5-day EMA. There are a couple other "account" types but that's the most popular.

My modified client is really a protocol-compliant custom client that runs on a board comprised of mostly an old Stratix III. One here, and a duplicate cloaked in Japan with a special sync method and a dead man switch to release funds if I croak or something. At one point last year I'd developed a "hardware exchange" after that NY startup (I think) started talking about developing a "millisecond" exchange. Figured I'd beat them by writing everything in hardware on FPGAs, and then also be basically impervious to normal hacking, but around 85% I got dragged into the real world for a while.

Did you have some insight / ideas? What is your specialty, btw? The new project I mentioned is going to require some software skills, and I'm mainly a HW guy. I can't do all this realistically on an FPGA.

[nastybit]

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.

What is your good/service area?
Have you modified a client to help you with tracking this?

I don't get it. You buy bitcoin from the market let's say at $950, then you sell at your customer for $1000.
Your customer can spend their bitcoin freely or spend them to your "store" for a $1000 value.
Let's say the price goes down to $500, customers see an advantage now at spending $1000 in your "store" and you get the BTC back.
Now, are you protected from the volatility?

[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.

What is your good/service area?
Have you modified a client to help you with tracking this?

I don't get it. You buy bitcoin from the market let's say at $950, then you sell at your customer for $1000.
Your customer can spend their bitcoin freely or spend them to your "store" for a $1000 value.
Let's say the price goes down to $500, customers see an advantage now at spending $1000 in your "store" and you get the BTC back.
Now, are you protected from the volatility?

Lost opportunity (the new chance at a gain from $500 to ??) is not the same as liability or loss. As long as whatever I'm holding to maintain their $ at its promised value should they choose to "return" the BTC is not losing value, and dependent on the confidence that Bitcoin will eventually rise above their purchase price.

[nastybit]

Ok so it's all based on the fact that you believe that "Bitcoin will eventually rise above their purchase price". You invest capital, you borrow it in another form (BTC) and you hope for the best. In the meantime you use the new capital to make some profit somehow and decrease the possibility to have a loss. Is that what you are saying?

[cr1776]

...

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.

I am not sure where you learned math, but if I have $1000 today and in 10 years, you take $200 as a fee and I have $800, I have lost $200 in value. I have lost 2% per year (not compounded).  Same for bitcoin.  Saying that is "Wrong!" is at such odds with math that you clearly need to review it.  I started with 10, you took 2, I ended up with 8.   That is a loss.

Where I come from 2 BTC is not "nominal".  Right now it is nearly $2000.  Hardly a nominal amount.  Also, there is no guarantee that it will appreciate so you can't say, but in fiat terms you are still ahead.  Finally you assume that I intend to cash my bitcoin out for an inflating currency to buy a car.  Why would you assume that someone wouldn't just sell me a car for BTC?

Here is my final thought on this since you are having serious problems having a civil discussion:  if you don't like Bitcoin, go to freicoin or fork bitcoin with a rule that will steal 1-2% of their bitcions each year.  Or start an alt-coin.   If you think this is a brilliant idea that will save bitcoin from itself, put up your time where your mouth is.  Instead of arguing here, fork bitcoin and see if you can get people to follow you.  You should have no problem since this is such a wonderful idea.

[ProfMac]

I don't get it. You buy bitcoin from the market let's say at $950, then you sell at your customer for $1000.
Your customer can spend their bitcoin freely or spend them to your "store" for a $1000 value.
Let's say the price goes down to $500, customers see an advantage now at spending $1000 in your "store" and you get the BTC back.
Now, are you protected from the volatility?

My customers are protected from the volatility.  I am not.  From my point of view, it is the same as if I held them in a cold wallet.  I also don't pre-load any fees.
Here's the timeline:

0.  I borrow $2500 from somewhere.
1.  I pay $970 for inventory, lights, and labor (grocery stores operate on about 3% margin)
2.  I pay $1000 for 1 BTC.
status:  <$2,500>; $530 cash on hand, operations stocked, 1 BTC held (exchange value $950)

3.  They pay me $1,000 for 1 BTC.
4.  Bitcoin drops to $500
5.  They buy a whole winter's supply of granola, yogurt, and roasted almonds, their retail bill comes to $1,000
6.  They pay me in the store BTC.
status:  <$2,500 in debt>,  $1,530 on hand, no inventory, 1 BTC (exchange value $500)

7.  I pay $970 for inventory, lights, and labor
status:  <$2,500 in debt> $560 cash on hand, operations stocked, 1 BTC held (exchange value $500)

[nastybit]

I understand but if you are not protected, what's the point? Also you said before

[...]
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.

Are you protected or not?

Also it's not like a cold wallet because if the price goes up your customer will not use that bitcoin at your shop and you will never see it again

[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.

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.

What is your good/service area?
Have you modified a client to help you with tracking this?

All purpose financial services, kind of like a bank, but like a bank was back when their purpose was to safeguard assets from loss. In 2014 I include "manipulation and unnatural devaluation" in "loss". It's been thus far somewhat of a private deal, in that it was exclusively word of mouth. I keep meaning to take it further but I have been too busy with my research. (That may be changing; I just committed to a project not two hours ago, so the recruiting effort begins shortly.) Anyway, yeah, actual insured asset vault storage like art and gold bullion, as well as an automated "fiat-decoupled" bitcoin exchange (not like Coinbase, but not real-time either; all funds are in cold storage), secured loans, etc. On the promissory-like functionality side, we promise your funds will never be worth less than the 5-day EMA. There are a couple other "account" types but that's the most popular.

My modified client is really a protocol-compliant custom client that runs on a board comprised of mostly an old Stratix III. One here, and a duplicate cloaked in Japan with a special sync method and a dead man switch to release funds if I croak or something. At one point last year I'd developed a "hardware exchange" after that NY startup (I think) started talking about developing a "millisecond" exchange. Figured I'd beat them by writing everything in hardware on FPGAs, and then also be basically impervious to normal hacking, but around 85% I got dragged into the real world for a while.

Did you have some insight / ideas? What is your specialty, btw? The new project I mentioned is going to require some software skills, and I'm mainly a HW guy. I can't do all this realistically on an FPGA.

I'm a semi-retired analytical chemistry professor.  This means I have worked a bit in electronics design, repair, troubleshooting, and day-to-day usage.  I have also worked a long time with some "early adopter" software, primarily the N. Wirth languages.  I have programmed embedded systems where everything in the system was software that I wrote.  I have looked at some of N. Wirth's hardware languages for programming FPGAs, but I never have bought a board and done anything hands on with it.

At this point, I'm trying to figure out what it will mean for bitcoin to be adopted as a currency, and produce some software or systems that will be needed then.  I am especially trying to figure out what this would mean in the small town of Morris, MN, where there are 1,800 full time college students in a town of about 5,000 population.  I think if I can define a healthy bitcoin ecosystem here, the lessons learned will be very helpful to bitcoin everywhere.  I especially want to know how to make income from bitcoin separate from mining, or trading on price volatility.

[thaaanos]

There seem to people that believe that an appreciating currency is a good Idea
I would like to invite those people to come live and work in Greece, Over the past 4 years Euro is appreciating:
Wages down by 40% Consumer Prices up by 20%, Land value down by 60%. A Paradise.

Now that we have established what the problem, lets propose a solution that will solve many problems at the same time
while the parameters can be tweaked the basic idea is:

A. Block reward is maintained at a constant bonus
B. A rolling invalidation of blocks starting from the genesis block occures

So there is a Block Window of valid transactions. The size of the window determines the total number of Bitcoins in existence.

Pros
1. Early adopters get a fair share of value without becoming parasites
2. Late adopters have a chance in the economy
2. Wealth accumulation is discouraged (Hodling)
3. Blockchain database is bounded
4. Lost/forgoten/orphaned coins are eventualy reclaimed
5. Will be easier to get accepted by goverments

Cons
1. Early adopters will hate it and will be resistant to the change

Now for the window part

C. The rate of invalitations and block creation is unrelated
C. A link between the economy growth/recesion and the block window size is somehow* created

Pros
1. A chance at market stability

*As I am opposed to create rules that act as forces of nature and rather trust individual and collective human judgement,
I would like to have that parameter not hardcoded but open to negotiation and discussion.

So why not making another coin you may ask?
Because if Bitcoin fails the whole experiment of p2p cryptocurencies will fail and all we will have left with will be Bankster issued virtual currencies

EDIT:
Maybe Invalidation threshold/rate can be decided by a de'facto concessus between the independent private Invalidation threshold/rate that miners choose.

[kaito]

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.

Sounds pretty good actually but I doubt it'll get accepted, nor do I think it should be. BTC is fine as it is. Do it with an alt coin if you believe in it.

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.

WTF? Are you out of your friggin mind? The thought alone is disgusting enough.

[FenixRD]

There seem to people that believe that an appreciating currency is a good Idea
I would like to invite those people to come live and work in Greece, Over the past 4 years Euro is appreciating:
Wages down by 40% Consumer Prices up by 20%, Land value down by 60%. A Paradise.

Now that we have established what the problem

AND fucking halt.

I continue to be amazed by the new sources of confusion. They almost always seem to come down to someone basically choosing to define a standard term, with their own definition. This, in fact, may be Bitcoin's greatest weakness: Assuming the general public is smart enough to understand their own native language.

What you described is the opposite of the Euro appreciating for you: If wages are down and consumer goods are up, your buying power is decreasing. It's appreciating against you. And the Euro is not appreciating, as a whole, when compared to the world, so Greece is mega-screwed.

Land, being a bit like a commodity with extremely low V, and one which subjects its owner to the above, derives a great portion of its value from its location, and the majority economy there. A bit like small alts derive their value from the overall BTC / crypto economy.

Now that we have established the problem is you lacking a dictionary, perhaps we can move on.

[thaaanos]

There seem to people that believe that an appreciating currency is a good Idea
I would like to invite those people to come live and work in Greece, Over the past 4 years Euro is appreciating:
Wages down by 40% Consumer Prices up by 20%, Land value down by 60%. A Paradise.

Now that we have established what the problem

AND fucking halt.

I continue to be amazed by the new sources of confusion. They almost always seem to come down to someone basically choosing to define a standard term, with their own definition. This, in fact, may be Bitcoin's greatest weakness: Assuming the general public is smart enough to understand their own native language.

What you described is the opposite of the Euro appreciating for you: If wages are down and consumer goods are up, your buying power is decreasing. It's appreciating against you. And the Euro is not appreciating, as a whole, when compared to the world, so Greece is mega-screwed.

Land, being a bit like a commodity with extremely low V, and one which subjects its owner to the above, derives a great portion of its value from its location, and the majority economy there. A bit like small alts derive their value from the overall BTC / crypto economy.

Now that we have established the problem is you lacking a dictionary, perhaps we can move on.

Well English is not my native language so please. When I mean Euro in Greece is appreciating, I mean Euro's value is appreciating against Greece's average household (given that most people own their house). What does euro "appreciating for me" means?

[diedicar]

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.

so the higher the holding period the higher the transaction fee? that's an incentive to hold the coins further. it seems me flawed. The only way to simulate inflation (or counterbalance deflation) would be property tax on hoarding, indipendently from actual transactions. Or maybe there are other ways to this feat... first of all we are already experiencing a way out to price deflation: there is plenty of coins borning everyday.
 I wonder when the "austrians" will finally get that cryptocurrencies are the most keynesian item ever conceived. LOL!

[Lloydie]

Well English is not my native language so please. When I mean Euro in Greece is appreciating, I mean Euro's value is appreciating against Greece's average household (given that most people own their house). What does euro "appreciating for me" means?

The probs in greece is not due to current euro deflation, it's due to greece borrowing too much in the past and greece can't pay it back because the econ is unproductive.

If you find Btc deflation objectionable use an alt coin with built in inflation. Btc doesn't have the built in problems of the euro yet because there in min debt in Btc.

Btc works because it is the coin that most people prefer right now.

[thaaanos]

Well English is not my native language so please. When I mean Euro in Greece is appreciating, I mean Euro's value is appreciating against Greece's average household (given that most people own their house). What does euro "appreciating for me" means?

The probs in greece is not due to current euro deflation, it's due to greece borrowing too much in the past and greece can't pay it back because the econ is unproductive.

If you find Btc deflation objectionable use an alt coin with built in inflation. Btc doesn't have the built in problems of the euro yet because there in min debt in Btc.

Btc works because it is the coin that most people prefer right now.

The part about greece is oversimplification but Im not going to argue about it.
As long as I have the option of not beeing forced to trade my assets for bitcoins in the future I will be happy, but can you make that guarantie?

[Lloydie]

Well English is not my native language so please. When I mean Euro in Greece is appreciating, I mean Euro's value is appreciating against Greece's average household (given that most people own their house). What does euro "appreciating for me" means?

The probs in greece is not due to current euro deflation, it's due to greece borrowing too much in the past and greece can't pay it back because the econ is unproductive.

If you find Btc deflation objectionable use an alt coin with built in inflation. Btc doesn't have the built in problems of the euro yet because there in min debt in Btc.

Btc works because it is the coin that most people prefer right now.

The part about greece is oversimplification but Im not going to argue about it.
As long as I have the option of not beeing forced to trade my assets for bitcoins in the future I will be happy, but can you make that guarantie?

Simple, no one forces anyone to use Btc unlike the Euro and other Fiat currencies.  You don't like it, you move it to something else - end of story.

[thaaanos]

Viva la BTC revolution

_{credits Nick74}

[FenixRD]

Well English is not my native language so please. When I mean Euro in Greece is appreciating, I mean Euro's value is appreciating against Greece's average household (given that most people own their house). What does euro "appreciating for me" means?

The probs in greece is not due to current euro deflation, it's due to greece borrowing too much in the past and greece can't pay it back because the econ is unproductive.

If you find Btc deflation objectionable use an alt coin with built in inflation. Btc doesn't have the built in problems of the euro yet because there in min debt in Btc.

Btc works because it is the coin that most people prefer right now.

The part about greece is oversimplification but Im not going to argue about it.
As long as I have the option of not beeing forced to trade my assets for bitcoins in the future I will be happy, but can you make that guarantie?

We certainly cannot guarantee that a country with a history of enforcing poor decisions and removing choice by mandate, will not ever do so with a completely free system like Bitcoin. Greece can do as it pleases.

Also, re: above, Austrians and Keynesians are both wrong, though Keynesians much more so because they have corrupted and ran with flawed iterations of Keynes' work. Much like Marx would shudder at the attempts to create a collectivist society, Keynes, who was raised in an age where the aristocracy was benevolent and generous, would be appalled.

The reasons come down to a quote by a personal hero, and one which I have spotted recently around the community. It is the truth, and the guiding principle of Bitcoin, whether users know it or not (which is the beauty and the point), and it is the answer to why I can care about politics and not vote, and why I spend all my time considering solutions and none of it lobbying. It was said by an amazing man, and a probable fellow DEC2 mutant:

You can never change things by fighting the existing reality. To change things, build a new model that makes the existing model obsolete. —R. Buckminster Fuller