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Author Topic: Deflationary currency? Really?  (Read 8629 times)
BitterTea (OP)
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March 14, 2011, 09:14:23 PM
 #1

I've seen this term used more and more to describe Bitcoin, and I really don't think it fits.

The supply of Bitcoins is inflating, though the rate of inflation is decreasing. Once ~21 million coins have been created, it is true that the currency will only experience monetary deflation.

However, gold is deflationary in exactly the same way. The supply of gold in the ground is finite, and as the easy gold is found and mined, the cost of mining the same amount of gold increases. The circulated supply of gold also deflates over time, due to natural processes causing minute amounts of gold to separate from the coin or bar.

Yet, does anyone refer to gold as a "deflationary currency"?
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March 14, 2011, 10:33:41 PM
 #2

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Deflationary currency
who is using that definition ?
board search points only to you.

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March 14, 2011, 10:36:18 PM
 #3

The monetary deflation of both gold and Bitcoin is (will be) insignificant. What people are talking about is falling prices from economic growth which has nothing to do with deflating the money supply but is still confusingly called "price deflation".
BitterTea (OP)
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March 14, 2011, 10:42:40 PM
 #4

who is using that definition ?
board search points only to you.

Try just "deflationary". I got 3 pages of hits. It seems to me that it's "common knowledge" that Bitcoin is deflationary. Perhaps it's a viewpoint only held by a vocal minority, but it does not seem that way.

The monetary deflation of both gold and Bitcoin is (will be) insignificant. What people are talking about is falling prices from economic growth which has nothing to do with deflating the money supply but is still confusingly called "price deflation".

Do people not realize that price deflation can occur even while using a currency that undergoes monetary inflation? A good example is the technology sector, priced in USD.

Additionally, the only reason we see price deflation today is that prices are set in USD and converted to Bitcoin. Since Bitcoin is growing in strength relative to the dollar, it gives the appearance that prices are decreasing. Once prices are set and denominated in BTC, I think most of this will go away.
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March 15, 2011, 09:08:05 AM
 #5

By contrast, currencies that are based on the value of debt, like the U.S. Dollar, are inherently inflationary. This is because, in a debt based monetary system, there must always be more money owed than is in circulation. If there were no net debt there would be no money. A currency such as this must be continually inflated in order to remain operational.

Why? What would happen if they just stopped printing money?

Deflation is the enemy to this type of monetary system

Why? What is the difference from Bitcoin or gold?

The problem with this scenario is that it depends on exponential growth forever, which is not possible with finite resources.

Maybe not forever but a quite long time. Keep configuring the same stuff in ever more desirable ways. A lightbulb is thousands of times more useful and valuable than the rocks it is made of. A GPS navigator made from the same matter is hundreds of times more useful and valuable than the lightbulb.

This is the way Bitcoin works. Since there is a limited supply, and it can not be inflated by 'fiat' it will limit the rate of growth of it's economy to the rate at which new value can be discovered.

The rate of growth is always limited to the rate at which new value can be discovered no matter what.
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March 15, 2011, 04:19:14 PM
 #6

The money supply is not expanded by printing money, but by issuing credit. This is what the Fed does when it does Quantitative Easing, it issues credit.

Suppose they scrap the printing presses and then go on a Zimbabwe-style credit issuing binge. Now a banana costs a billion dollars. You feel like having a banana and go to the nearest ATM and try to withdraw a few billion dollars. See the problem?

This has been going on for a long time... And we have recycled only a tiny portion of the same stuff, mostly it was all just wasted, and so we have the problem that we have now.

Few things are really wasted unrecoverably. In the end it's all atoms and pretty much anything can be recycled if the need arises. You just need energy.
BitterTea (OP)
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March 15, 2011, 04:41:22 PM
 #7

You do need energy. Only right now the amount of energy that is takes to extract energy resources is higher than it has ever been in our history.

This is significant. Especially if you disagree with this statement, I highly recommend watching this series of videos - "The greatest shortcoming of the human race is our inability to understand the exponential function".
barbarousrelic
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March 15, 2011, 07:29:34 PM
 #8

"Disinflationary" would be a more fitting adjective to describe the Bitcoin model.

http://en.wikipedia.org/wiki/Disinflation

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Disinflation is a decrease in the rate of inflation

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
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March 15, 2011, 09:08:19 PM
 #9

You do need energy. Only right now the amount of energy that is takes to extract energy resources is higher than it has ever been in our history.

This is significant. Especially if you disagree with this statement, I highly recommend watching this series of videos - "The greatest shortcoming of the human race is our inability to understand the exponential function".

Population growth is a serious long term problem.

Resource usage not so much. It is limited by available materials and the energy from the sun. It would be stupid to bet on exponentially increasing amounts of for example copper, so don't. Prices will make sure most people won't.

Economic growth is a good thing, not a problem. It will eventually slow, but having run out of new ideas to discover and new things to invent is quite an accomplishment and a pretty nice problem to have.
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March 15, 2011, 10:40:24 PM
 #10

"Disinflationary" would be a more fitting adjective to describe the Bitcoin model.
http://en.wikipedia.org/wiki/Disinflation
If there is disinflation there is still inflation, only less. Bitcoin leads to the opposite of inflation, which is deflation (provided there is economic growth and the population stays the same or increases).
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March 16, 2011, 12:43:36 AM
 #11

Resource usage not so much. It is limited by available materials and the energy from the sun. It would be stupid to bet on exponentially increasing amounts of for example copper, so don't. Prices will make sure most people won't.

Mine asteroids.

barbarousrelic
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March 16, 2011, 02:07:57 AM
 #12

"Disinflationary" would be a more fitting adjective to describe the Bitcoin model.
http://en.wikipedia.org/wiki/Disinflation
If there is disinflation there is still inflation, only less. Bitcoin leads to the opposite of inflation, which is deflation (provided there is economic growth and the population stays the same or increases).
I think we're hung up on the difference between monetary deflation and price deflation.

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
no to the gold cult
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March 16, 2011, 03:11:29 AM
Last edit: March 16, 2011, 03:42:58 AM by SumChancer
 #13

who is using that definition ?
board search points only to you.

Try just "deflationary". I got 3 pages of hits. It seems to me that it's "common knowledge" that Bitcoin is deflationary. Perhaps it's a viewpoint only held by a vocal minority, but it does not seem that way.

The monetary deflation of both gold and Bitcoin is (will be) insignificant. What people are talking about is falling prices from economic growth which has nothing to do with deflating the money supply but is still confusingly called "price deflation".

Do people not realize that price deflation can occur even while using a currency that undergoes monetary inflation? A good example is the technology sector, priced in USD.

Additionally, the only reason we see price deflation today is that prices are set in USD and converted to Bitcoin. Since Bitcoin is growing in strength relative to the dollar, it gives the appearance that prices are decreasing. Once prices are set and denominated in BTC, I think most of this will go away.

I think there is some confusion here depending on what one considers as 'deflating'. In the sense that Bitcoin is a 'deflationary currency' it is the price of goods compared to BTC that would be deflating, even as more BTC are being introduced to the economy. As long as the value of a single BTC continues to rise in relation to other commodities (say U.S. Dollars) it is a 'deflationary currency'. Once the maximum number of BTC is in circulation it would be essentially free of inflation, but until then this designation properly depends on the market forces relative to BTC compared to other commodities. In this respect it behaves as other limited commodities, such as gold or oil. Even though gold and oil continue to be introduced into the economy this now happens at a slower rate then it once did, this being irrespective of demand. Even when there is additional demand the rate of extraction of these resources lags that demand. Were gold and oil to be considered 'currency' in this respect they would also be deflationary.

By contrast, currencies that are based on the value of debt, like the U.S. Dollar, are inherently inflationary. This is because, in a debt based monetary system, there must always be more money owed than is in circulation. If there were no net debt there would be no money. A currency such as this must be continually inflated in order to remain operational. Deflation is the enemy to this type of monetary system, so is too much inflation because this would mean an inevitable deflationary correction which may be difficult to fix. The problem with this scenario is that it depends on exponential growth forever, which is not possible with finite resources. And this is fundamentally the problem with the world economy now. We already got all the easy stuff, now it requires more resources to extract more resources... Placing a limit on growth. And I don't think we are smart enough or have the will to fix that fast enough to keep the system of an inflationary currency going indefinitely.

So, why would a 'deflationary currency' be any better than an 'inflationary currency'? An 'inflationary currency' encourages consumption because the longer you hang onto it the less stuff you can buy with it, in this way it also discourages resource efficiency. OTOH a 'deflationary currency' encourages resource efficiency because the longer you hold onto it the more it is worth. The only time it makes economic sense to spend a 'deflationary currency' is when you have an opportunity to arbitrage it for something of greater value to you. This is the way Bitcoin works. Since there is a limited supply, and it can not be inflated by 'fiat' it will limit the rate of growth of it's economy to the rate at which new value can be discovered.

Great post. I like bitcoin but all the Libertarian ideology around it I find wrong-headed and naive, almost to the point of despair. This analysis however is reassuring, I realize that from the ideological perspective this is the argument I'm in it for.

I'm not concerned with government spying on me or bankers forever trying to figure out ways to take my stuff away (I don't discount that kind of thing totally, I merely consider such things as issues of bad or hijacked governance). "G", (government spending) is merely a function of the community's attempt to make rational collective decisions (ooh, scary, the "C" word, Libertarians don't believe in "collectivism" (that's Libertarian for "society") because it's tyranny, Ayn Rand says so, every man is an island you see), and Banking as a profession is merely the current method of turning "S" (savings) into "I" (investments) though this process too can malfunction or get hijacked.

In my bones I feel that bitcoin has the quality of not requiring eternally increasing growth, perhaps now we can embark on persistent development instead (certainly there's much that is neglected that needs to be developed). Really it's just growth in another direction, but the use of the different word is important to make the point. From an ideological perspective the idea of bitcoin and sustainable development is something I really dig.
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March 16, 2011, 10:30:25 AM
 #14

Inflation in the monetary sense is a term that lost all meaning with the advent of tiered money.  Now we can have both inflation and deflation at the same time.  The price of paper instruments (mortgages, derivatives) goes down, while the price of physical goods (food, energy) goes up.  Bankers call this deflation.  Everyone else calls it inflation.

To answer the original question, yes, many people will argue that a gold standard is 'deflationary'.  It's ridiculous, of course.  And it belies the extent to which wealth confiscation has become an acceptable part of American culture.  Any monetary standard that doesn't automatically enable the confiscation of productivity growth through technical advancement is considered 'deflationary' and therefore bad.

When, in reality, deflation just means cheaper goods and fewer jobs means more free time and the only real problem is the concentration of wealth created by, wait for it, monetary fraud and manipulation in the name of wealth redistribution.

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March 16, 2011, 11:10:07 AM
 #15

So, why would a 'deflationary currency' be any better than an 'inflationary currency'? An 'inflationary currency' encourages consumption because the longer you hang onto it the less stuff you can buy with it, in this way it also discourages resource efficiency.
Neither model encourages or discourages consumption, it just shifts the best way to preserve wealth. With inflation you should buy what you need early, but that doesn't mean you should consume it. Because it will be more valueable tomorrow than it is today, it makes just as much sense to delay consumption as it would with a deflationary model.
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March 16, 2011, 11:58:55 AM
 #16

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With inflation you should buy what you need early, but that doesn't mean you should consume it.

Division and distribution is the same as consumption.  They are absolutely equivalent.

This applies to everything from raw materials, refined commodities, manufactured goods, and obviously services.

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March 16, 2011, 02:23:59 PM
 #17

Nothing I said was the least bit Keynesian.  But biflation does have meaning.  It tells us that there is not one unified market, just like you said.  There are artificial barriers separating monetary tiers, and this makes measurement of any kind of "on net" metric impossible.

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March 16, 2011, 02:40:42 PM
 #18

Division and distribution is the same as consumption.  They are absolutely equivalent.
I guess we live in different worlds, then. In mine you can't eat the cake and have it.
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March 16, 2011, 03:39:24 PM
 #19

Division and distribution is the same as consumption.  They are absolutely equivalent.
I guess we live in different worlds, then. In mine you can't eat the cake and have it.

So in your world what do you do to consume things that is different from division and distribution?

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March 16, 2011, 04:42:50 PM
 #20

Quote from: BitterTea
I've seen this term used more and more to describe Bitcoin, and I really don't think it fits.

The supply of Bitcoins is inflating, though the rate of inflation is decreasing. Once ~21 million coins have been created, it is true that the currency will only experience monetary deflation.

The Bitcoin "monetary base" (number of outstanding Bitcoins) is deflationary in the long term and their supply will, given enough time, approach 0. This is because once a wallet is lost the Bitcoins associated with it are no longer transferable and effectively forever removed from the Bitcoin supply. This is a terrible flaw in the Bitcoin paradigm as it currently implemented.

Quote from: BitterTea
However, gold is deflationary in exactly the same way. The supply of gold in the ground is finite, and as the easy gold is found and mined, the cost of mining the same amount of gold increases. The circulated supply of gold also deflates over time, due to natural processes causing minute amounts of gold to separate from the coin or bar.

Yet, does anyone refer to gold as a "deflationary currency"?

The gold supply is not in deflation and likely never has been for any significant period in history. Total supplies of gold have increased every year since gold has been considered valuable.
BitterTea (OP)
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March 16, 2011, 05:05:27 PM
 #21

The Bitcoin "monetary base" (number of outstanding Bitcoins) is deflationary in the long term and their supply will, given enough time, approach 0. This is because once a wallet is lost the Bitcoins associated with it are no longer transferable and effectively forever removed from the Bitcoin supply. This is a terrible flaw in the Bitcoin paradigm as it currently implemented.

What? The total number of Bitcoins will never decrease, but people will lose the means to access these coins. However, the rate at which access is lost will be inversely proportional to value. You have more of an incentive to protect your wallet when Bitcoins are worth $10 than when they are worth $1.

Quote
The gold supply is not in deflation and likely never has been for any significant period in history. Total supplies of gold have increased every year since gold has been considered valuable.

Really? Are you saying that there is an infinite amount of gold that we can extract from the planet? Gold is a soft metal, and wears easily. Are you saying that given a finite supply of gold, and that a coin loses some gold atoms every time it is touched, that Bitcoins are not the same as gold in this regard?
Grinder
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March 16, 2011, 05:14:46 PM
 #22

So in your world what do you do to consume things that is different from division and distribution?
Sorry, I assumed your reply had some relevance to my initial message.
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March 16, 2011, 05:30:36 PM
 #23

Quote
Quote
Quote from: Lithium on Today at 04:39 pm
The Bitcoin "monetary base" (number of outstanding Bitcoins) is deflationary in the long term and their supply will, given enough time, approach 0. This is because once a wallet is lost the Bitcoins associated with it are no longer transferable and effectively forever removed from the Bitcoin supply. This is a terrible flaw in the Bitcoin paradigm as it currently implemented.

What? The total number of Bitcoins will never decrease, but people will lose the means to access these coins. However, the rate at which access is lost will be inversely proportional to value. You have more of an incentive to protect your wallet when Bitcoins are worth $10 than when they are worth $1.

You are correct. What I intended to say is that: The supply of Bitcoins will, given enough time, approach 0. It doesn't matter how many there actually are as there could be 100 million Bitcoins but if people can only use 10 million of them there is in effect only 10 million in existence. People will get much better at protecting their coins and loss will be inverse to their value  as you say but that will not stop the supply of coins from reaching 0 eventually.

Quote
Quote
Quote
The gold supply is not in deflation and likely never has been for any significant period in history. Total supplies of gold have increased every year since gold has been considered valuable.


Really? Are you saying that there is an infinite amount of gold that we can extract from the planet? Gold is a soft metal, and wears easily. Are you saying that given a finite supply of gold, and that a coin loses some gold atoms every time it is touched, that Bitcoins are not the same as gold in this regard?

No, I don't claim that there is an infinite amount of gold, it is clearly a finite resource; however, since people have mined it faster than it is consumed/lost the supply has been increasing. This trend is likely to continue very far into the future until all economically recoverable gold is removed from the Earth's crust. New Bitcoin supply on the other hand will cease in a relatively short time span leading to loss and supply deflation relatively quickly.
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March 16, 2011, 05:43:38 PM
 #24

I have a very hard time imagining that the amount of Bitcoins that people simply lose will by anything more than a negligible amount

And even if people do lose them, the amount lost per year will trend towards zero far faster than the total supply of Bitcoin will trends toward zero. No matter the length of time they will not reach zero.

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
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March 17, 2011, 12:29:14 AM
 #25

I dislike the analogy of BitCoin mining to Gold mining.

There is one huge difference between the two:

With Gold the ease/difficulty of uncovering does not adjust according to the amount of human effort invested in attempting to find it, whereas BitCoin's "difficulty" is dependant on the amount of people attempting to mine it.

For example. If there were only 3 people in the network, they would each find it easier to earn BitCoins than 3,000 people in the network.

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March 17, 2011, 09:11:41 AM
 #26

I have a very hard time imagining that the amount of Bitcoins that people simply lose will by anything more than a negligible amount

And even if people do lose them, the amount lost per year will trend towards zero far faster than the total supply of Bitcoin will trends toward zero. No matter the length of time they will not reach zero.

And they are divisible, anyway. The total amount is irrelevant. Even if it did approach zero it would never reach exactly zero and everything would work fine.
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March 17, 2011, 11:03:32 AM
 #27

I have a very hard time imagining that the amount of Bitcoins that people simply lose will by anything more than a negligible amount

And even if people do lose them, the amount lost per year will trend towards zero far faster than the total supply of Bitcoin will trends toward zero. No matter the length of time they will not reach zero.

And they are divisible, anyway. The total amount is irrelevant. Even if it did approach zero it would never reach exactly zero and everything would work fine.


Technically the dollar is Divisible too.

The only problem with losing bitcoins is causing deflation, in which the supply is reduced and 1BTC would be worth more of another currency. With the slashdot effect, a massive deflation caused by demand happened and bitcoins raised in USD significantly. The difficulty also was raised which is making it harder/limiting the supply that is introduced as well. The difficulty should resolve itself and the market will decide if the current price remains stable or inflation will occur due to lack of demand. However whatever happens is exactly how economics work. It might even rise in price due to dollar inflation or a consistent amount of demand.


However the supply of Bitcoins are still in an inflation state, in which the supply is increasing. During this period the project will either fail or become a success. If it does become a success, the long period of time it takes for bitcoins to max out will also show signs of the amount being lost per year going down to a minor percentage, in which any significant deflation of the currency due to reduced supply would take potentially years to cause an issue.

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March 17, 2011, 06:53:10 PM
 #28

I dislike the analogy of BitCoin mining to Gold mining.

There is one huge difference between the two:

With Gold the ease/difficulty of uncovering does not adjust according to the amount of human effort invested in attempting to find it, whereas BitCoin's "difficulty" is dependant on the amount of people attempting to mine it.

For example. If there were only 3 people in the network, they would each find it easier to earn BitCoins than 3,000 people in the network.

It is similar in this respect: Early on both BTC and Gold were easy to mine, it was not very energy intensive, but as time goes on and all the 'easy' BTC and gold has already been brought onto the market it becomes ever more resource intensive to produce. BTC is superior in this respect because everyone knows how much will be produce at any given time, with gold not so much.

I understand your point-of-view to a certain respect, certainly.

However regarding the early Gold rushers, what you find is that the constraint of unearthing Gold was physically limited. For example, if 100 people mined Gold in the early days, just because 3 people mine is 1000 years later, it doesn't increase their chance of finding gold.

However with BitCoin the frequency of unearthing fresh BitCoins is dependant on the amount of people mining for it. More people, less BitCoins distributed, less people, more BitCoins distributed. Of course, this is slowly decreasing every four years anyhow, I'm just saying that within the four years, it is down to the whim of the network.

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March 18, 2011, 04:47:07 PM
 #29

It is similar in this respect: Early on both BTC and Gold were easy to mine, it was not very energy intensive, but as time goes on and all the 'easy' BTC and gold has already been brought onto the market it becomes ever more resource intensive to produce. BTC is superior in this respect because everyone knows how much will be produce at any given time, with gold not so much.

I understand your point-of-view to a certain respect, certainly.

However regarding the early Gold rushers, what you find is that the constraint of unearthing Gold was physically limited. For example, if 100 people mined Gold in the early days, just because 3 people mine is 1000 years later, it doesn't increase their chance of finding gold.

However with BitCoin the frequency of unearthing fresh BitCoins is dependant on the amount of people mining for it. More people, less BitCoins distributed, less people, more BitCoins distributed. Of course, this is slowly decreasing every four years anyhow, I'm just saying that within the four years, it is down to the whim of the network.

With bitcoin, there is a more-or-less constant overall rate of mining new coins (per individual miner, the rate is dependent on the number of fellow miners, but overall, the rate is constant)...this is different from gold in the sense that more people mining gold yields higher rates of overall gold production and fewer miners yields lower rates of production overall.  I'm not sure what difference this makes.  It may mean that since the overall rate of production doesn't vary with the price (as it does with gold), the mining activity doesn't have any natural moderating affects on bitcoin price volatility.  As the price of bitcoin falls, the reduction in miners doesn't reduce the net new bitcoins being introduced.  Similarly, as the price rises, the increase in miners doesn't increase the rate of new bitcoins indroduced.  In this respect, I think it is different from gold mining.  I wonder whether it would have been better to have made the reward for finding a block to vary with the difficulty (having a higher reward when difficulty is higher, and lower when it's lower) and have the ratio of reward to difficultly decline toward zero over time.  This would mean that you wouldn't have a fixed upper bound on the total number of bitcoins produced, but mining activity might have a more moderating affect on the price of bitcoins.

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March 18, 2011, 07:21:58 PM
 #30

Inherent in the design of Bitcoin is a tendency for BTC creation to behave as a P+I (proportional + integral) loop controller. Which means that, as the rate of block mining varies, the benefit derived from that will drive the capacity of block mining activity. This is by design, it will always be like this. So, over the long term mining difficulty will always follow price and not the other way around. Without an upper bound on the amount of currency created you can not guarantee controlled inflation, so this is also part of the economic design. Since there is only so much gold on the planet the two currencies will tend to resemble each other more over the long term.

How do you arrive at the conclusion that mining difficulty will always follow price based on the fact that the control mechanism operates like a PI controller?  I know that some have mined the data (pun intended) to show that this might indeed have been the case so far, but what is the connection between this assertion and the PI controller aspect of the difficulty setting?  The network is adjusting the difficulty to account for increases or decreases in the rate of block creation in order to target a specific rate of block creation (one every 10 minutes), but the network doesn't care about the market value of bitcoins.

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BitterTea (OP)
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March 18, 2011, 07:29:48 PM
 #31

@Steve

I think the idea is that the number of miners, and thus the difficulty, are related to the market price of Bitcoins. As the price rises, the number of miners increases, which increases the difficulty. As the price falls, the number of miners decrease, which decreases the difficulty.
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March 28, 2011, 05:56:01 PM
 #32

Deflationary, inflationary, both are undesirable in a currency.

Can't we talk about having a STABLE currency, and what it would take to keep a currency reasonably stable?

Prices, ideally, should neither increase, nor should they decrease. The ideal for any currency is stability.

Bitcoin is a great step forward in the direction of having a stable currency, but it does not seem that its creation algorithm is directed towards obtaining stability. We will have gradually increasing difficulty of mining, until a few years from now, mining will practically come to a halt.

Now if bitcoin were to serve a substantially stable market, meaning there is a community of bitcoin users that does not either substantially increase in numbers nor decrease, the currency could be said to be stable in the long term.

I do have a feeling though, that the long term intention of the creators and the early adopters of bitcoin is to expand the user base to hundreds of millions, perhaps even to billions of users.

Since stability of a currency is a function of demand (user base) and availability (fixed in our case after the target amount of bitcoins programmed by its creator has been reached) in a long term view, this means that bitcoin will very likely be a deflationary currency, i.e. that prices, as expressed in bitcoin, will be continually falling, as the user base grows.

For stability, the target amount of bitcoins should be ajustable - preferably by some automatism - to follow the growth of the user base.
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March 28, 2011, 06:00:16 PM
 #33

Deflationary, inflationary, both are undesirable in a currency.

Can't we talk about having a STABLE currency, and what it would take to keep a currency reasonably stable?

Prices, ideally, should neither increase, nor should they decrease. The ideal for any currency is stability.


Why is stability is a good thing compared to deflationary economic growth?

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March 28, 2011, 06:13:06 PM
 #34

Bitcoin is a great step forward in the direction of having a stable currency, but it does not seem that its creation algorithm is directed towards obtaining stability. We will have gradually increasing difficulty of mining, until a few years from now, mining will practically come to a halt.
But as mining decreases, so does difficulty. The most recent re-targeting saw a decrease in difficulty, because mining had decreased following the previous re-targeting.

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March 28, 2011, 08:08:21 PM
 #35

Deflationary, inflationary, both are undesirable in a currency.

What is really best in a currency is predictability.  The undesirable characteristics of deflation or inflation have to do with their unpredictable nature, and their magnitude.  Either condition, in moderation, isn't really a problem.  Bitcoin will be very stable in the future, because it's monetary base is entirely predictable out to decades.  While the economy that it represents isn't nearly as stable as the monetary base, once the economy grows to something comparable to Paypal's, the voltility of the spot price will dampen on it's own.  Even modern fiat currencies are unstable compared to one another, and float constantly on foreign currency exchanges.  This is not really a problem.  Bitcoin is actually inflating the monetary base at a rapid rate, running just under 50% APR right now, but will drop over the next two years to about 6.25% APR just after the drop in the block reward around Jan 2013.  The rising value of a bitcoin over the past several months is a reflection of the rapid growth of the economy. (i.e. more people are getting into Bitcoin, and want a starting sum)  We can see the effects of the changing economic size because the economy is still very small, but as the tech matures, which I predict will occur between 2013 and 2015, the economic growth rate will start to experience deminishing rates of ongoing growth.  And even if it doesn't, the effects of the change in economic size will be dampened by it's much greater size.  All things considered, the trade value of a bitcoin, as expressed in another currency or gold, silver, whatever; will settle down to something much more akin to the relative trade values of fiat currencies on the forex.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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March 31, 2011, 10:29:57 AM
 #36


Why is stability is a good thing compared to deflationary economic growth?

I suppose you mean to compare stability (of a currency's value) with deflationary development (of that currency's value). They do not really have anything to do with economic growth as such.

To answer the question, as I understand it, stability of a currency (in relation to the goods it buys)

- avoids continual change of prices of goods as expressed in a currency (think of having to change a price list frequently).

- simplifies comparative analysis of economic activity over time (think balance sheets).

- promotes public confidence in the currency.
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March 31, 2011, 10:35:29 AM
 #37


Stability an arbitrary goal, even as growth is an arbitrary goal. The difference is that an inflationary currency is inherently unstable, continual inflationary growth at any rate will ultimately become unsustainable. This unsustainable condition defines the limit of an inflationary economy. OTOH the limit of a deflationary economy is defined by the lowest price limit. With a currency that is not very divisible this is rather limited by the smallest divisible unit. For example it may be reasonable to pay one penny for a potato, but less reasonable to pay one penny for a ton of potato, transactions become unwieldy. This is not the case for a currency that is essentially infinitely divisible... which is something we have never had before.

Stability is something of a relative thing. There will always be market segments that are unstable and you can not fix this by managing a currency or a monetary system. What you would have to do, in effect, is to micromanage the availability and demand for each individual commodity... Ain't gonna happen...

Not talking here about stability of an economy as such.

The stability I have in mind is price stability.

And if price stability can be attained by relatively simple means, why prefer eternally sliding prices until one day we (might) run into the physical limit where prices can no longer slide because they can't be expressed, as the unit has been subdivided by too many decimals?
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March 31, 2011, 12:30:26 PM
 #38

Quote
why prefer eternally sliding prices until one day we (might) run into the physical limit where prices can no longer slide because they can't be expressed, as the unit has been subdivided by too many decimals?

Any good or service that must be priced at or near the Planck limit is by definition too cheap to meter.

Civil Liberty Through Complex Mathematics
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March 31, 2011, 05:08:25 PM
 #39

- avoids continual change of prices of goods as expressed in a currency (think of having to change a price list frequently).
Prices always change. No currency manipulation saves you from changing your price list when bananas double in price relative to potatoes while potatoes drop 20% relative to pencils, as happens all the time.
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March 31, 2011, 05:26:37 PM
 #40

Quote
Bitcoin was designed for divisibility. Without any further technical measures one Bitcoin can be divided to a granularity of .00000001, which means that if one Bitocin were deflated to $1,000,000,000 it could still be divisible to one penny. At this rate a 21 million BTC economy would amount to 210 quadrillion Dollars. Other technical measures can extend this amount of divisibility practically indefinitely. This is a degree of divisibility that neither Dollars or gold enjoy. To attempt to apply such divisibility to a commodity currency such as gold involves increasing overhead to a point of infeasibility. The prospect of applying a layer of abstraction to gold or other commodity currencies also introduces the possibility of fractionalizing it to an arbitratry level.

Granted, because BitCoin is in fact a construct (like math, infinity, etc...) there is no end to its divisibility, unlike Gold, Silver, etc...

I may be wrong but my calculations put it at 21 Quadrillion not 210, but I did not recheck my math.

Let me ask though, when Egypt turned off the internet, what would the value of the BitCoin be, if you were holding them as an Egyptian?

What would the Value of Gold be if you were holding that as an Egyptian?

BitCoin will always hold a transitory value, but will be quickly converted into a physical one. Constructs are just that, Constructs. They are important to use, but hold no value In Real Life.

People use Math, but don't hold onto it after it is used to accomplish something. It is used to accomplish something and then discarded for what it was used to attain. Once the problem is solved, it is of no use to re-solve the problem.


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wb3
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March 31, 2011, 05:51:04 PM
Last edit: March 31, 2011, 06:06:22 PM by wb3
 #41

Granted, because BitCoin is in fact a construct (like math, infinity, etc...) there is no end to its divisibility, unlike Gold, Silver, etc...

I may be wrong but my calculations put it at 21 Quadrillion not 210, but I did not recheck my math.

Let me ask though, when Egypt turned off the internet, what would the value of the BitCoin be, if you were holding them as an Egyptian?

What would the Value of Gold be if you were holding that as an Egyptian?

BitCoin will always hold a transitory value, but will be quickly converted into a physical one. Constructs are just that, Constructs. They are important to use, but hold no value In Real Life.

People use Math, but don't hold onto it after it is used to accomplish something. It is used to accomplish something and then discarded for what it was used to attain. Once the problem is solved, it is of no use to re-solve the problem.

I think you are right, and I think my math was actually off in a couple of places (so many fingers and toes and all that...)

It makes perfect sense to shift between different assets given different economic conditions (political upheaval, & etc...) but this is not an argument for/against Bitcoin, gold, dollars specifically. Rather, I see it as an argument for diversification, and an argument against some sort of mythical, universal currency.


If I could paraphrase (and possibly mangle) Robert Anton Wilson:

"Just give me a bag of Crack to keep my troops loyal and a sheet of Acid to keep myself crazy..."

Agreed, I think you are onto something. Money is just a transitory system to make "Bartering" more efficient. The real value is not in the transitory money but in the resources acquired with it.  Even with a single monetary system, the value of the single system would differ based on geology and closeness to the resources being sought. So a single monetary system would change its value by location.

I.E. $5 dollars for milk in New York, $3 for milk in Iowa.

Even with multiple currencies, location matters in the value of the monetary system based on available resources.

Gold is just the use of a Resource as a monetary system to simplify bartering. So it will always hold an intrinsic value.

Net Worth = 0.10    Hah, "Net" worth Smiley
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March 31, 2011, 10:10:11 PM
 #42

I spend alot of money and I think I know a thing or two about money.

You might be very intelligent, but it is our experience that most of what people believe is true about "money" is wrong.  Much of it is counterintuitive.

For example; in a literal sense, I'd be willing to wager that you have never (directly) used real money to buy anything, and may not have ever even touched it.

US $, Euros, Yen; none of these things are money.  They are currencies, as is Bitcoin.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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April 01, 2011, 01:50:22 AM
 #43

I spend alot of money and I think I know a thing or two about money. Ever since the recent economic crisis(which is caused by people spending money which doesn't exist) I think that people have in fact become more spiritually enriched. Losing money is not such a bad thing, people in the third world are in fact happier because they have their family and friends. Now that people are happier they will be encouraged to spend more and because people have less they will make what they have go further. I'm no mathematician but I think this is pretty obvious.   Tongue

I think you might be right on the trend.

But remember the quote: "Man does not live on bread alone" does not imply that bread is not needed, so no matter how much inclination there is toward the spiritual, you must still acquire the "Bread".

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April 25, 2011, 08:33:41 PM
 #44

If anyone is interested in contributing to alternative to Bitcoin, check out #Carrot (#Carrot-dev for development) on Freenode and maybe come help with development.  See http://weusecarrots.com/ as to why Carrot is better than Bitcoin.  Currently, no code is available.
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April 25, 2011, 09:18:40 PM
 #45

So pizza should still cost 10kBTC?

Play Bitcoin Poker at sealswithclubs.eu. We're active and open to everyone.
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