The current Bitcoin economic model doesn't work

[smooth]

Hmmm is having merchants directly accept bitcoins for goods really as important as seems hitherto to have been thought?

Yes. Bitcoins will have no value of nobody accepts them as payment.

Hmm. How do we know that?  Perhaps they would have pure "collectable" value as the first block chain currency.

[Meni Rosenfeld]

Hmmm is having merchants directly accept bitcoins for goods really as important as seems hitherto to have been thought?

Yes. Bitcoins will have no value of nobody accepts them as payment.

Hmm. How do we know that?  Perhaps they would have pure "collectable" value as the first block chain currency.

I guess they will. But it will be negligible compared to the value they can have as the de-facto global currency.

[smooth]

Hmmm is having merchants directly accept bitcoins for goods really as important as seems hitherto to have been thought?

Yes. Bitcoins will have no value of nobody accepts them as payment.

Hmm. How do we know that?  Perhaps they would have pure "collectable" value as the first block chain currency.

I guess they will. But it will be negligible compared to the value they can have as the de-facto global currency.

Again, I'm not sure how we know that.  Let's say there is a BTCv2 that succeeds as a de-facto (or even potentially official) global currency.  BTC (v1) might still be worth more to collectors even if it doesn't circulate in commerce.  In fact, it could be BTCv17 that succeeds globally, and I would guess that BTCv1 would be worth more than BTCv2-BTCv16.  There is rare currency of various types that isn't legal tender any more and wouldn't be accepted in commerce by anyone, but still has significant collector value.  But none of those are "The First Currency" of their type.  That could be huge.

 

[anderxander]

Bitcoins are divisible to eight decimal places giving 2,100,000,000,000,000 total units.

Or 300,000 per person on the planet in 2033

The speculative price in terms of dollars doesn't particularly matter.  It is the trust in the network that the transaction is good and verifiable that gives the currency value.

What is the value of trust?  

Do you trust banks and governments to value your goods?

As the dollar becomes less and less trusted around the world and as the number of them in circulation increases, people will flee from it anyway.  It's backed by the "Full Faith and Credit of the US Government" in other words blood shed and exploitation of resources. In other words, if you don't trust the dollar as a system of valuation, we'll kill you.

What people will be looking for is a trusted way to transact.


The problem with tying it to energy prices is that energy prices, while stable, are still centrally determined and the price of which is subject to the manipulation of energy prices through speculation. The problem with Bitcoin is that it still relies on an external valuation system, that of what the people who issue currencies think stuff is worth.

What happens when distributed generation is achieved?

http://openfarmtech.org/weblog/2010/10/distributed-generation/

http://openfarmtech.org/weblog/category/global-village-construction-set/steam-engine-construction-set/


Right now through centrally issued currencies the price of things is determined by a minority of people. In Bitcoin, it requires a majority of people to participate in the valuation of things.

Deflation is bad because nobody spends their money, they only save it because it gains value over time. Can you imagine what would have happened if, say, the Japanese government hasn't printed any (or very few) Yens during the last century while the population exploded? One 1911 Yen would have been more than enough to buy a house today. Who then would have spent their Yens in 1911? Why, almost noone of course! This bad scenario is only avoidable if the number of available BTCs continues to grow with its user base at least proportionally.

Is deflation bad?

The effects of deflation are:

Decreasing nominal prices for goods and services ( I like cheap stuff)
Increasing real value of cash money and all monetary items (I like when $10 buys lots of cheap stuff)
Discourages bank savings and decreases investment (Money actually circulates in the economy rather than being horded)
Enriches creditors at the expenses of debtors (Isn't that why we're here? To enrich ourselves rather than our creditors?)

 Inflation reduces the real value of money over time; conversely, deflation increases the real value of money.

This allows one to buy more goods with the same amount of money over time.

The problem you are talking about arises from the issuance of currency.  Deflation is correlated with depressions – including the Great Depression, as banks defaulted on depositors.  Not all episodes of deflation correspond with periods of poor economic growth.

 In modern economies, deflation is usually caused by an induced drop in aggregate demand, artificially created by the currency issuer to induce a recession and (more rarely) long term economic depressions, so that those with money can buy assets at fire sale prices before prices are artificially inflated again.

[stic.man]

it comes down to whether or not you believe bitcoins will be viable in the global community.  If you do, then you invest because 21 million coins spread out over billions or trillions of dollars means inevitable gains.  If not then you sit on your hands and go about other endeavors.

[zef]

Suggester: its difficult to formulate a response to "disprove" what you are saying since you are arguing so many points with so many people.  I suggest you boil down your arguments to the basic assumptions you are making, rather than the effects of those assumptions applied to a complex system such as bitcoins. This would make it easier to come up with counter arguments.  

For simplicity Ill try to list some assumptions you are making as I have deduced from your posts, correct me if I am wrong.

• Subjective value cannot come to a consensus without some authority or "backing" by an already established good, ie prices can never stabilize with out a "peg" such as electricity or USD.
• Deflation has a fundamentally different effect on price stability than inflation, ie prices are more unstable with a controlled deflation than they are with a controlled inflation.
• Any investment where early adopters have incentives to get others involved, and gain the most if the investment actually becomes popular is a ponzi scheme and therefore unsustainable.
• There is no value in bitcoins, or anything else for that matter, as a tool used purely in trade and commerce, it is only viable for speculation; essentially trading against already established currencies.

I would like to address these points, and perhaps it will make it easier for others as well, as I feel its much more manageable than addressing the multitude of predictions as to the effects of these assumptions on the bitcoin economy.

[anderxander]

Though I do agree with suggester on the idea of a stabilizing force for the value of bitcoins.

Is it being overlooked thats the massive internal price deflation of bitcoins is the offsetting force to hording for speculation? In otherwords hording the currency for monetary gain is essentially useless because the deflation of bitcoin values of goods and services will force their circulation. It becomes pointless to keep trying to mine for fed dollars at some point vs just spending all the mined and accumulated bitcoins.

[jaime]

@zen  thanks synthesizing the discussion

• Subjective value cannot come to a consensus without some authority or "backing" by an already established good, ie prices can never stabilize with out a "peg" such as electricity or USD.

Isn't that the case with Gold?

• Deflation has a fundamentally different effect on price stability than inflation, ie prices are more unstable with a controlled deflation than they are with a controlled inflation.

Is deflation about BTC value or "consumer prices"?  I can't see BTC as a mainstream currency.

• Any investment where early adopters have incentives to get others involved, and gain the most if the investment actually becomes popular is a ponzi scheme and therefore unsustainable.

We can see this kind of investment everyday in the stock market. 

• There is no value in bitcoins, or anything else for that matter, as a tool used purely in trade and commerce, it is only viable for speculation; essentially trading against already established currencies.

They're many values in the Bitcoin system for trade and commerce (secure, anonymous, non repudiable,...) but those won't be in our minds until BTC reaches an stable value.

Others are investing in the Bitcoin system, as you would have invested in Google's IPO if it's initial offering was set at 0.01. Now you only trade shares against established currencies, and this is the same thing, I see BTC now as 'shares' of Bitcoin's "IPO".



Jaime
--------------------------------
Madrid, Spain

[Meni Rosenfeld]

@zen  thanks synthesizing the discussion

• Subjective value cannot come to a consensus without some authority or "backing" by an already established good, ie prices can never stabilize with out a "peg" such as electricity or USD.

Isn't that the case with Gold?

You could say that gold is backed by its industrial uses. But AFAIK the value of gold is much higher than had it not been used as a currency, so indeed the lion share's of gold's value does not come from backing.

• Deflation has a fundamentally different effect on price stability than inflation, ie prices are more unstable with a controlled deflation than they are with a controlled inflation.

Is deflation about BTC value or "consumer prices"?  I can't see BTC as a mainstream currency.

In principle, consumer prices, but currently exchange rate with USD is used as a proxy because everyone uses it as a guide for BTC prices.
Why wouldn't BTC be a mainstream currency?

[kjj]

@zen  thanks synthesizing the discussion

• Subjective value cannot come to a consensus without some authority or "backing" by an already established good, ie prices can never stabilize with out a "peg" such as electricity or USD.

Isn't that the case with Gold?

You could say that gold is backed by its industrial uses. But AFAIK the value of gold is much higher than had it not been used as a currency, so indeed the lion share's of gold's value does not come from backing.

It gets worse.  The price of A can't be stable unless it is pegged to the price of B.  The price of B is stable because it is stable.

All prices, of all things, in all places, and at all times, are backed by supply and demand only.  Everything else is an illusion.

[jaime]

Why wouldn't BTC be a mainstream currency?

Well, one of the main threats for Bitcoin will come when that possibility becomes a real one. The owners of the current system wont allow something like Bitcoin to take over --too many years working in the other direction--

[chretienm]

I just have this to say. The idea that people won't sell something that over time has been rising is a very silly and unrealistic idea. Despite the Govt inflating our fiat currency to the moon causing gold and silver to rise people have always bought AND SOLD those metals as those who bought low take profits to spend NOW rather than wait to take larger profits to spend later. For this reason it does not matter that bitcoins will someday not be created anymore...so what? Yes of course the bitcoin will rise in value just as the Canadian dollar rises against the USD because those making US dollars are insanely printing tons of them out of thin air,much morer so than their Northern cousins do. Just because a currency is rising against other currencies doesn't mean people won't spend it if and when they need to. Bitcoins is where I expect savings to be kept.
Martin

[romkyns]

Is deflation bad?

The effects of deflation are:
[snip]
Discourages bank savings and decreases investment (Money actually circulates in the economy rather than being horded)

I think this point is quoted out of context. Deflation only discourages savings on fear of bank insolvency. It does encourage hoarding of money via other means. We don't have banks to collapse, so I think this point is completely the wrong way around - deflation encourages people to hoard BTC.

I'd gladly join a BTCv2/fork which does away with the total currency limit by removing the halving of rewards. I'm also rather convinced by Suggester's arguments in favour of tying BTC reward to network hashrate.

[BitterTea]

I'll give 5 BTC to anyone who can provide an economic definition of "hoarding" which does not rely on personal preference and is demonstrably different than "saving".

[kjj]

Ok.  Here is the thing about the bitcoin hoarding arguments.

If people are sitting on bitcoins instead of spending them, then the amount in circulation will fall, and prices (of everything) will fall too.  These low prices will provide an incentive for "hoarders" to spend their coins while prices are low.  Which means that the amount in circulation will go up, which will cause prices (of everything) to go up.  Which will cause people to hold onto their coins instead of spending them.  Which will cause prices (of everything) to fall.  These low prices will provide an incentive for "hoarders" to spend their coins while prices are low.  Which means that the amount in circulation will go up, which will cause prices (of everything) to go up.  Which will cause people to hold onto their coins instead of spending them.  Which will cause prices (of everything) to fall.  These low prices will provide an incentive for "hoarders" to spend...

Get it?

The one thing that I wish that everyone understood when they got out of high school is the concept of the dynamic equilibrium.

[bitcoinfrenzy]

I'll give 5 BTC to anyone who can provide an economic definition of "hoarding" which does not rely on personal preference and is demonstrably different than "saving".

I'll give it a shot:

Hoarding has three general meanings in an economic sense.  They are as follows: (1) acquiring excessive quantities of items that have little value in the market (think the crazy person who hoards paperclips), (2) acquisition based on an expectation that certain items will become extremely valuable related to current values during times of economic, political, or environmental crisis, or (3) acquisition based on on an expectation that such items will become extremely valuable compared with current values due to future scarcity.

Saving, on the other hand, merely involves guarding or preserving an asset for future use.  It does not require an expectation of future windfall profits, or excessive acquisition of items that have little value in the market.  

Did I win?

1JxsbbP2k5KHYGWtmggT7yJJ4eRtj7n9sJ

[afterburner229]

The one thing that I wish that everyone understood when they got out of high school is the concept of the dynamic equilibrium.

Concept of the dynamic equilibrium works on large ensembles only, and also, on large time intervals, compared with single interaction's time. For now, to input/output BTC/$/goods from the bitcoin market, one may spend many hours or even days. Even if one sell/buy a small thing like T-shirt or coffee-cup or $ equivalent of that.

From physical point of view, Bitcoin society is like a highly rarefied gas, with some thousands of atoms, @ time intervals of some microseconds. It is apparently NOT an equilibrium system.

[kjj]

It is not yet an equilibrium system.  But it will be if it catches on.  And if it doesn't catch on, then who cares about hoards of coins?

[BitterTea]

The one thing that I wish that everyone understood when they got out of high school is the concept of the dynamic equilibrium.

Concept of the dynamic equilibrium works on large ensembles only, and also, on large time intervals, compared with single interaction's time. For now, to input/output BTC/$/goods from the bitcoin market, one may spend many hours or even days. Even if one sell/buy a small thing like T-shirt or coffee-cup or $ equivalent of that.

From physical point of view, Bitcoin society is like a highly rarefied gas, with some thousands of atoms, @ time intervals of some microseconds. It is apparently NOT an equilibrium system.

What the hell are you babbling about? How is selling anything for bitcoins any different than selling them for dollars or seashells?

[BitterTea]

I'll give 5 BTC to anyone who can provide an economic definition of "hoarding" which does not rely on personal preference and is demonstrably different than "saving".

I'll give it a shot:

Hoarding has three general meanings in an economic sense.  They are as follows: (1) acquiring excessive quantities of items that have little value in the market (think the crazy person who hoards paperclips), (2) acquisition based on an expectation that certain items will become extremely valuable related to current values during times of economic, political, or environmental crisis, or (3) acquisition based on on an expectation that such items will become extremely valuable compared with current values due to future scarcity.

Saving, on the other hand, merely involves guarding or preserving an asset for future use.  It does not require an expectation of future windfall profits, or excessive acquisition of items that have little value in the market. 

Did I win?

1JxsbbP2k5KHYGWtmggT7yJJ4eRtj7n9sJ

1) does not apply to this discussion, though you are correct, but it relies on a subjective evaluation of "excessive"
2 and 3) seem to be a definitions for speculation, not hoarding