Deflationary currency? Really?

[BitterTea]

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.

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]

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.

[Lithium]

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
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.

[barbarousrelic]

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.

[Sultan]

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.

[db]

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.

[Thndr]

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.

[Sultan]

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.

[Steve]

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.

[Steve]

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.

[BitterTea]

@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.

[Sepp]

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.

[kiba]

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?

[LMGTFY]

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.

[MoonShadow]

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.

[Sepp]

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.

[Sepp]

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?

[benjamindees]

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.

[db]

- 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.

[wb3]

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.