You guys don't get it - Bitcoin will act like a Ponzi scheme until Dec 2012

[niko]

While I agree with the general premise of the OP, I think the term "Ponzi scheme" is not appropriate, as it implies an intent to profit at the expense of new adopters.  While I did profit from the naive speculators who flooded the market with fiat in June/July, I never intended to. I never even hoped to.

The inflation rate is relatively high right now, I agree. However, the potential balancing events are unpredictable. We had a huge influx of fiat money due to "get rich fast" speculators in June/July. Most of them got burned, and left. The exchange rate may now plummet, or it may again pick up due to, for example, a sudden adoption for online gambling or for international money transfers. We will only know in retrospect.

[1713480480]

1713480480

[1713480480]

1713480480

[1713480480]

1713480480

[1713480480]

1713480480

[RodeoX]

While I agree with the general premise of the OP, I think the term "Ponzi scheme" is not appropriate, as it implies an intent to profit at the expense of new adopters. ...

+1  And in a ponzi scheme there is a victim who is unaware of the plan. In Bitcoin, it's open source and there for all to see.

[Vandroiy]

high inflation? 25% APR is tiny considering how new bitcoin is.  Most disruptive technologies fail. But the ones that don't fail, usually grow a lot faster than 25% APR in the first few years.  

This answers the thread and should have ended it.

Bitcoin today is not that tiny. The total market cap of Bitcoin is around 24 million dollars at this exchange rate.

lol A market of 24M USD. Now, do you want a comparison with USD M1 supply, which is above 900 000 000 000 USD and inflating? But why compare with M1, Bitcoin may be as suitable for fractional reserve banking! Good luck with another order of magnitude when you compare to M2. Don't like USD, want me to start Gold comparisons, or any other target market Bitcoin is aiming for?

Estimate of world gold value: $8,338,701,310,883. Gold. Gold! Come on, the stuff is only ever useful as a coating or to look lol-shiny.

What definition of "tiny" do you use? Bitcoin is currently ridiculously small. If it grows, that growth exceeds inflation in no time.

[fornit]

high inflation? 25% APR is tiny considering how new bitcoin is.  Most disruptive technologies fail. But the ones that don't fail, usually grow a lot faster than 25% APR in the first few years.  

Bitcoin today is not that tiny. The total market cap of Bitcoin is around 24 million dollars at this exchange rate. And the inflation is 33% not 25%.

That's tiny.

indeed.
i think f&f counts money in units like burgers or something. i just tried to find a good example of something that costs around 24mio dollars. first thing i tried was planes, unfortunately, the smallest commercial passenger aircraft from airbus already costs 65mio. didnt bother to look up boeing after that ...

24mio isnt much if you consider how many people already work on bitcoin related software or services.

[MoonShadow]

And the inflation is 33% not 25%.

Yes, you're right.  Sorry.

So next year it will be around 25% then suddenly drop to 12.5%.

Wait, I thought it was going to cut the block reward in half, why is it going from 33, 25, then 12.5?  

Because the currency is issued at a steady rate, so in the first year the monetary base starts at zero and goes to 2620800, then double that again the second anniversary.  So at the second anniversary, the inflation rate is roughly 50%.  The same amount is issued during the third year, so around the third anniversary the inflation rate is about 33%.  Likewise, the same amount is issued during the fourth year, so around the fourth anniversary, the rate is 25%; then the block reward cuts in half, so the rate suddenly drops to 12.5%.  The inflation rate is relative to the monetary base already issued.

[DeathAndTaxes]

high inflation? 25% APR is tiny considering how new bitcoin is.  Most disruptive technologies fail. But the ones that don't fail, usually grow a lot faster than 25% APR in the first few years.  

Bitcoin today is not that tiny. The total market cap of Bitcoin is around 24 million dollars at this exchange rate. And the inflation is 33% not 25%.

That is tiny compared to global economy (or even a local economy).  Hell it is small compared to just the time value of those creating/development/running Bitcoin businesses (and services).

Currently (or at least in the past) the economy is/was growing at many magnitudes higher than 33%.  The growth of money supply only results in loss of purchashing power IF the underlying economy is growing slower.  Excluding speculation (and speculation would still exist even w/ no monetary growth) if Bitcoin economy grows 100% this year, the money supply grows 33%, and it was currently fairly valued we should expect the "price" of Bitcoin to rise 300%.

When the economy is very small it is very easy to grow by large %.  I open a shop selling t-shirts.  1 per day.  Some news story hits and by growth rates goes up 500% in a day. If I can turn that into a longer term growth trend maybe I end up w/ 20,000% growth the first year.    Nike is never going to have 20,000% growth and as my T-shirt company gets larger it will never be able to sustain 20,000% growth either.

High monetary growth is only material if the economy is growing slower than the rate of monetary growth.  If Bitcoin (at only really <2 years old) can't sustain 33% growth for a couple years then it has no future. If it CAN then by 2017 inflation is more like 4% per year.  Obviously if Bitcoin is a 1 B economy it can't sustain 33% growth but it certainly can sustain 4%.

For the record when Bitcoin was 1 month old it had a (forward looking) monetary growth rate of 1200%.

[BadBear]

And the inflation is 33% not 25%.

Yes, you're right.  Sorry.

So next year it will be around 25% then suddenly drop to 12.5%.

Wait, I thought it was going to cut the block reward in half, why is it going from 33, 25, then 12.5?  

Because the currency is issued at a steady rate, so in the first year the monetary base starts at zero and goes to 2620800, then double that again the second anniversary.  So at the second anniversary, the inflation rate is roughly 50%.  The same amount is issued during the third year, so around the third anniversary the inflation rate is about 33%.  Likewise, the same amount is issued during the fourth year, so around the fourth anniversary, the rate is 25%; then the block reward cuts in half, so the rate suddenly drops to 12.5%.  The inflation rate is relative to the monetary base already issued.

Oh I see, wasn't thinking about it that way. 

[HostFat]

Excluding speculation (and speculation would still exist even w/ no monetary growth) if Bitcoin economy grows 100% this year, the money supply grows 33%, and it was currently fairly valued we should expect the "price" of Bitcoin to rise 300%.

I think that the point of forcing 25 bitcoin over the actual 50.
It's a way to give a kick to the price.

[Technomage]

The issue with high inflation rate is extremely overrated. A new technology such as this, if there is anything to it (and I believe there is), will grow fast enough to counter even a 30% yearly inflation. Very easily. Look at what the price of 1 bitcoin was last December and it's evident that we have grown much more than 30%. This will most likely continue to be the case. End of discussion.

What part of the value is from speculative demand and what part is from real trade demand is another issue entirely. Speculative demand will never go to 0 with Bitcoin (unless the cryptography fails or something like that), in fact there is a high probability of it growing due to the properties of Bitcoin as a currency. I find the difference between trade demand and speculative demand important though, if it grows too big we enter a bubble. Currently we are not in a bubble, in my opinion.

This argument can be countered though, it's actually possible for bitcoins to reach a very high and fairly stable value even with a large difference between speculative demand and real trade demand. This has been proven with gold, the actual usage of gold in industry or as a medium of exchange is super small compared to its usage as a store of value or as an investment.

[PrintCoins]

What would happen if the FED said that in January of 2013 they would double all of the money and distribute that doubling to everyone?

The effect would be immediate, even though that money hasn't been printed yet.

Bitcoin is a game of perfect information about future bitcoin production. Everyone knows exactly how much money will exist and when the supply will stop.

This means that all investors already are trading with the knowledge of how much will be out there. They can expect (but this is the fuzzy fun risk section) that all miners will likely dump their coins when production stops.

The actual existence of the coins now isn't all that relevant because they will exist in the future. So stop concerning yourself with the coin production side of things. Just assume that 21 mil exists, and some people just aren't willing to let go of it until later.

[Steve]

Just did some quick calculations on the inflation rate:

now: ~33%
end of 2012: 25% then drop to 12.5%
end of 2013: ~11.13%
end of 2014: ~10.01%
end of 2015: ~9.10%
end of 2016: ~8.34% then drop to ~4.17%

The good news is that by the end of 2012, the inflation rate will be in the ballpark of most fiat currencies (could even be less depending on what govt's do with the printing presses and how you measure inflation).  The drop at the end of 2016 is really going to pinch.

[PrintCoins]

If you can expect that with any reasonable certainty, then you should already be trading for the expected inflation rate.

A lot of people think of inflation as some result of an equation based upon the number of people, amount of money, etc etc.

Really money is worth what people expect its value to be. With zero risk factors, the change in price of bitcoins should be zero from now till the end of time. Risk factors are the major reason the price will change, and if will fluctuate based upon changes in people's perception of it and people fleeing from other currencies to it.

What I am saying is since the future production is perfectly predictable, it can be complete removed from any forecasting models since all rational traders are already accounting for it in the current price.

When future money supply is perfectly known, it is no longer a factor in the change of value.

(Note: I believe this should be moved over to the speculation forum)

[FlipPro]

[miscreanity]

Bitcoin is not a ponzi scheme. It is not a pyramid. It is not even primarily a transactional currency.

Bitcoin is a reservoir; a store of value.

The reason Bitcoin has experienced the volatility and recent bubble is because capital was flowing into the fledgling economy with an expectation of something different than what it was, not to mention the lack of maturity in the system. The mere fact that the Bitcoin system has survived is incredible and a testament to the elegance and resilience of the underlying structure.

Understanding stock and flow and demand elasticity is critical. The former determines the depth of the reservoir while the latter determines the breadth. Bitcoin is still relatively shallow and small in width, so the volume of capital it can support remains limited.



The above compares the inflation rates and stock-to-flow ratios of Bitcoin and gold (all values starting from 2009 at a base of 1 and showing relational change thereafter; data sources available at bottom of linked page). With gold, both variables have been steady for a very long time (gold production shows the cumulative amount mined, from which the inflation rate can be inferred - that's historically been a little over 1.5% per annum).

A stable medium such as gold (and eventually Bitcoin) can store an unlimited amount of wealth so long as sufficient divisible units are available to maintain liquidity matching the level of demand. Bitcoin is in an early growth phase, so current behavior and performance are not fully indicative of what there will be as a mature system. The system will approximate historical gold performance by the 2016-2020 period at the earliest. That should also be about the time frame in which division of full Bitcoins into Satoshis starts to become a necessity.

Paper fiat money (EUR, USD, etc) is a natural counterpart for Bitcoin & gold in that it functions to maintain stable price levels by allowing unrestricted amounts to be created in order to match economic growth. Bitcoin & gold act as safe, long-term repositories for stored wealth that are affected by, but not dependent upon economic activity the way fiat currency is. This table shows how the two types of money interact:

Think of Altcoin as the translation layer between a consistent measure of value (Bitcoin or gold), and the fluctuating quantity and quality of goods and services in an entire economy. It doesn't matter whether there are 10,000 potatos or 1,000,000 - the price for them will still be the same in Altcoins. The more potatos there are, the cheaper they become in Bitcoins. Assume that potatoes are the only goods in our example economy, a maximum for Bitcoin of 1,000 Satoshis and an initial 10:1 Altcoin/Bitcoin to potato ratio:

Annual Potato Yield	>Total Altcoins	>Value in Altcoins	>Total Bitcoins	>Value in Bitcoins
100	1,000	10	1,000	10
1,000	10,000	10	1,000	1
10,000,000	100,000,000	10	1,000	0.0001

Can you imagine if potato crop yields fell significantly one year and people saw the US dollar-denominated price of potatoes go from $1/ea to $10,000?

Now under a fixed 2% annual rate rise for Altcoins, with the same starting assumptions as above:

Annual Potato Yield	>Total Altcoins	>Value in Altcoins	>Total Bitcoins	>Value in Bitcoins
100	1,000	10	1,000	10
1,000	1,020	1.02	1,000	1
10,000,000	1,040	0.000104	1,000	0.0001

The same problem arises as that with Bitcoin. A fixed absolute value increase would obviously be even more divergent. You can see from these tables that it is impossible for Bitcoin to serve both purposes alone. A second, more flexible Bitcoin system is necessary in the vein of Altcoin.

Bitcoin, like gold, is for saving and major transactions. Fiat is for day-to-day spending/trading. A Bitcoin-like variant that behaves like fiat would provide the spending functionality that most people are trying to force Bitcoin to do. Trying to force one system to act as both is impossible, as even with a perfectly-balanced approach (such as demurrage, which acts to address a management issue that the Bitcoin system inherently solves), divergences eventually lead to catastrophic failure. Two functionally independent systems can interact effectively for an indefinite period of time, all else being equal.

[PrintCoins]

Bitcoin, like gold, is for saving and major transactions. Fiat is for day-to-day spending/trading.

I don't see that at all. It is trival to spend bitcoin on tiny things. Due to its lack of fees and fast transaction rate (~10 minutes is pretty fast) it is perfect for micropayments. If an in-person merchant is willing to accept a transmitted transaction as a completed purchase (fine for paying for something small), than it is instant. Also bitcoin backed coins and bills (physical bitcoins) can easily take the place of fiat.

[miscreanity]

Bitcoin, like gold, is for saving and major transactions. Fiat is for day-to-day spending/trading.

I don't see that at all. It is trival to spend bitcoin on tiny things. Due to its lack of fees and fast transaction rate (~10 minutes is pretty fast) it is perfect for micropayments. If an in-person merchant is willing to accept a transmitted transaction as a completed purchase (fine for paying for something small), than it is instant. Also bitcoin backed coins and bills (physical bitcoins) can easily take the place of fiat.

Right now, yes. Remember though, these are still the early stages. Inflation is very high compared to what it will be as a mature, stable system. The incentive to spend will invert as stability and adoption increases.

Look at the structure, not just the momentary behavior. If there were no limit on the number of units to be created, what you've described would hold true for the lifetime of the system. That's the key element that makes Bitcoin a store of value rather than primarily a means of exchange.

For a quick example, take the California gold rush. A good number of people were able to accrue large amounts of wealth and many spent a lot. The discovery didn't last long, though. Meanwhile, the gold had been mined and still existed, but with reduced mining production it became more worthwhile to hold gold than spend it.

As evident in the table earlier, a static unit base becomes more valuable over time. Thus, prices decline overall. However, as the size of an economy expands, the prices will drop at an accelerating rate. Imagine paying $10 for lunch one year, $1 the next and $0.01 another after that. It might be great for consumers, but businesses strongly prefer stable metrics - it's very difficult to project for future expenditures when prices aren't consistent. That's why having a currency that keeps pace with the economy is much more desirable for stability, but doesn't work well for savings.

[tacotime]

Bitcoin is generally not an investment.  It's made to deflate or inflate as necessary and acts as a medium of exchange.

If you want solid, likely rates of growth, why not invest in some blue chips?

[PrintCoins]

Bitcoin, like gold, is for saving and major transactions. Fiat is for day-to-day spending/trading.

I don't see that at all. It is trival to spend bitcoin on tiny things. Due to its lack of fees and fast transaction rate (~10 minutes is pretty fast) it is perfect for micropayments. If an in-person merchant is willing to accept a transmitted transaction as a completed purchase (fine for paying for something small), than it is instant. Also bitcoin backed coins and bills (physical bitcoins) can easily take the place of fiat.

Right now, yes. Remember though, these are still the early stages. Inflation is very high compared to what it will be as a mature, stable system. The incentive to spend will invert as stability and adoption increases.

Look at the structure, not just the momentary behavior. If there were no limit on the number of units to be created, what you've described would hold true for the lifetime of the system. That's the key element that makes Bitcoin a store of value rather than primarily a means of exchange.

For a quick example, take the California gold rush. A good number of people were able to accrue large amounts of wealth and many spent a lot. The discovery didn't last long, though. Meanwhile, the gold had been mined and still existed, but with reduced mining production it became more worthwhile to hold gold than spend it.

As evident in the table earlier, a static unit base becomes more valuable over time. Thus, prices decline overall. However, as the size of an economy expands, the prices will drop at an accelerating rate. Imagine paying $10 for lunch one year, $1 the next and $0.01 another after that. It might be great for consumers, but businesses strongly prefer stable metrics - it's very difficult to project for future expenditures when prices aren't consistent. That's why having a currency that keeps pace with the economy is much more desirable for stability, but doesn't work well for savings.

It will deflate as more people start using it (unless traders have all taken that into account). As it approaches market saturation, the value changes will level off and stabilize. With the same number of people and the same number of coins and the same amount of economic activity, you have the same coin valuation. More economic activity -> inflation. More people -> deflation. More (unexpected) coins -> inflation.

[Technomage]

It will deflate as more people start using it (unless traders have all taken that into account). As it approaches market saturation, the value changes will level off and stabilize. With the same number of people and the same number of coins and the same amount of economic activity, you have the same coin valuation. More economic activity -> inflation. More people -> deflation. More (unexpected) coins -> inflation.

+1

I agree that Bitcoin is eventually more ideal as a store of value but it is not bad as a medium of exchange either. What many do not understand is that when Bitcoin userbase inflates, people are actually using Bitcoin more because there is a great inflow of new people who just want to try it out. This will always be the case. Once the userbase stabilizes and people get used to using it, we have already experienced the increases in value and decreases in prices. So the incentive to not spend bitcoins due to rising value is only theoretical. It will not be a significant problem unless the rise in value is constant and predictable, and I can't see how it could be.

So I admit that miscreanity has a point, but it's not the complete picture. There is one more thing to take into account as well, which is services such as bit-pay. These allow Bitcoin to be used side by side with fiat without the risk of losing money due to price volatility. The main problem here is the volatility which is a necessary evil as long as Bitcoin is this small. I don't see people or companies who use Bitcoin being very unhappy if the value of their bitcoins is rising. The problem is when the value goes down.

[Steve]

Bitcoin, like gold, is for saving and major transactions. Fiat is for day-to-day spending/trading. A Bitcoin-like variant that behaves like fiat would provide the spending functionality that most people are trying to force Bitcoin to do. Trying to force one system to act as both is impossible, as even with a perfectly-balanced approach (such as demurrage, which acts to address a management issue that the Bitcoin system inherently solves), divergences eventually lead to catastrophic failure. Two functionally independent systems can interact effectively for an indefinite period of time, all else being equal.

There is a lot of good stuff in this post and I generally agree that over time bitcoin will work out well as a store of value.  However, that doesn't negate its utility as a medium of exchange at all.  You mention stock and flow…if you understand that, then you should understand that regardless of flow, you can rebalance stock as you see fit.  For example, you may wish to maintain a certain balance of assets in your wallet (for now, just pretend that we have coins of various kinds that can serve as contractual proxies for real underlying assets).  You might want 20% in bitcoin, 20% in gold, 20% in a broad stock market ETF, 20% in corporate bonds, and 20% in a real estate trust.  You can maintain that balance as you send or receive funds by automatically selecting which assets to transfer or rebalancing after transactions.  Notice that bitcoin is unique among these assets because it, unlike the others, does not carry counter party risk…all the other assets are contractual substitutes for the real thing and thus have counter party risk.  Due to the lack of such risk, bitcoin will likely always be the preferred medium of exchange (even though you could transfer any of those other assets as easily as bitcoin itself).

Also, given the scenario above, I really start to question whether there is any need at all for an artificially "stabilized" (stable against what exactly?) medium of exchange.  Instead, you can decide on an allocation as above and view your purchasing power relative to any sort of index you choose (i.e. relative to the price of a basket of goods at your local grocery store).  In a sense, all any fiat currency really is is an ETF that tracks the price of some basket of goods…just not very well.  Its utility as a medium of exchange is only relevant because until recently we haven't had computers and software that make it easy to set and view prices relative to anything else.