The current Bitcoin economic model doesn't work

[BalkanBoy]

I can't say I understand what point that you were trying to make, but I can say for certain that not all people react in the above generality.  I am an INTP, it's not in my personality makeup to reject new data lightly, nor to take much stock in the opinions of others.

Do not take this as an ad hominem - just think about it before you have the 'automatic' (emotional) response - but what kind of a personality "does not take much stock in the opinions of others"? A trusting or distrusting one?

Pretending that we do not use emotions, in addition to data/logic/facts when making decisions, is, in my view, deadly.

At the core of who we are, we're driven by our emotions as well as reason. What is the incentive for my dad, who is 64, and never interacted with computers his entire life nor does he intend to, to trust BitCoin over the dollars in his pocket? It will definitely not be an in-depth analysis of BitCoin. It will be my word or other people or authority he trusts to make the decision.

Does your personality get an MD degree before you go to a doctor because you do not take much stock in the doctor's opinion?

Either you are playing devil's advocate here, or perhaps you are very young .... Again, not to berate you, but I am a little surprised you do not see the point.

[marcus_of_augustus]

Suggester has been wrong for 18 months, why should we believe anything will change?

Just a reminder of how "wrong" I've been for 18 months:


Doesn't look like perpetual deflation. Doesn't look like a crazy horse. Doesn't look like a speculators' den. Doesn't look like a nerve-wrecker with each single transaction. No, It's a perfectly sensible stable currency with a promising future.

So you are heavily invested and quite wealthy from all your gains then? If you predicted this so perfectly why haven't you profited, altruism?

What happens next sooth-sayer?

[MoonShadow]

I can't say I understand what point that you were trying to make, but I can say for certain that not all people react in the above generality.  I am an INTP, it's not in my personality makeup to reject new data lightly, nor to take much stock in the opinions of others.

Do not take this as an ad hominem - just think about it before you have the 'automatic' (emotional) response - but what kind of a personality "does not take much stock in the opinions of others"? A trusting or distrusting one?

Pretending that we do not use emotions, in addition to data/logic/facts when making decisions, is, in my view, deadly.

If it were a matter of pretending, I would agree.  I did not have any emotional attactment to Bitcoin or it's success when I learned about it.  I had no opinion about it until I understood it.  But once I understood it, I had an opinion. 

At the core of who we are, we're driven by our emotions as well as reason.

Do you understand what I am referring to when I say I'm an INTP?  I'm just about an unemotional in my decision making processes as is likely possible.  I am not driven by emotion, it has taken me decades just to fake it well.

What is the incentive for my dad, who is 64, and never interacted with computers his entire life nor does he intend to, to trust BitCoin over the dollars in his pocket? It will definitely not be an in-depth analysis of BitCoin. It will be my word or other people or authority he trusts to make the decision.

This is likely true for most people, but by this point he will be using Bitcoin because that's what other people trust, not because he trusts what other people say.

Does your personality get an MD degree before you go to a doctor because you do not take much stock in the doctor's opinion?

Sans the license to practice, almost a yes.

Either you are playing devil's advocate here, or perhaps you are very young .... Again, not to berate you, but I am a little surprised you do not see the point.

I am neither playing, nor am I particularly young.  Do you regularly see those who hold opinions other than your own to be inmature or inexperienced in your own mind?  If your point was that emotion plays a a role in how people view Bitcoin, I think you were being too vague, but I still would say, so what?  The vast majority of people don't understand how fiat currency works, and don't care.  They only know that everyone else uses it.  Bitcoin takes over as those who care to know, switch; and are followed by those who don't care to know.

[BalkanBoy]

Do you understand what I am referring to when I say I'm an INTP?  I'm just about an unemotional in my decision making processes as is likely possible.  I am not driven by emotion, it has taken me decades just to fake it well.

Wow... I am impressed .... You remind me of Mr. Data from Star Trek, cold, unemotional, calculating and driven.... by the love of the BitCoin!

I wish you the best of luck in your pursuit.

[Anonymous]

Creighto, the whole Jung personality game is just as notable and credible as astrology. I hope you know that.

[BalkanBoy]

Creighto, the whole Jung personality game is just as notable and credible as astrology. I hope you know that.

Carl Gustav Jung also said "The most terrifying thing is to accept oneself completely".... I hope he knows that one too.

[Anonymous]

Creighto, the whole Jung personality game is just as notable and credible as astrology. I hope you know that.

Carl Gustav Jung also said "The most terrifying thing is to accept oneself completely".... I hope he knows that one too.

I like Jung now. A never-ending curiosity for oneself and others can prove to be quite a virtue. Actually, it's a foundation most relationships lack. One should not neglect it in the relationship with oneself.

Good food for thought.

[AaronM]

I voted no, for a few reasons.

1. The current model is not flawed.  There is nothing wrong with price deflation, since if you need to buy things, you need to buy them instead of hoarding all of your bitcoin.  Bitcoin is unlike a Ponzi scheme in that the _true_ non-bubble price of a Bitcoin won't go to zero if the cryptography underlying Bitcoin is sound.  There always be someone interested in taking your Bitcoins.

Of course, the best defense against a price drop (even in the face of the "doomsday scenario" of the government shutting down all exchanges) is a healthy exchange of bitcoins for real goods and services, not just other currency.

2. Even if it was mildly flawed, there should never be a precedent of changing the rules.  If the rules change, the result should not be called "Bitcoin".

[AaronM]

I'd also like to refute the whole "OMG early adopters are making a fortune!" argument: for an early adopter to maximize their profits from hoarding while the price rises, they would have to never lose faith in Bitcoin.  As soon as they do, they sell, and then they're at the same level as newcomers.

[bitcool]

If you have a better economic model, why bother messing with the existing bitcoin? As it has been said many times: create your own block chain.

In all seriousness, this is not just a shut-you-up one liner. For the first time in history, people can actually experiment with different monetary economic models. Back in history, when people chose seashell, metals or paper as money, most of the money characteristics was pretty much set by nature, or the nature of government. They didn't have the luxury defining the characters of their money and then enforcing it via electronic circuitry.

Now with this concept of cryptocurrency, money systems based on different models can co-exist: inflacoin, deflacoin, constcoin. People have options to choose whatever they like the most. It will be interesting to see how Gresham's law (http://en.wikipedia.org/wiki/Gresham's_law) works in this environment.

One possible outcome is there will be no clear winner, or, winner/loser change over time. At a time like we are living now, after decades of inflationary monetary  policy worldwide, I would guess deflacoin, aka bitcoin, has more appeal to (more and more) people.

[BalkanBoy]

Beautifully said. It sounds to me like you are powerfully related to other people. As a result of being powerfully related to your fellow human beings - whether through therapy, healing of trauma, faith or all of the above- you got to know who you are.  That's something that a BitCoin can't buy.... and one can be only transformed into such a human being... by a certain higher power which most people do not beleive exists.

I wish more people were like you. The good does indeed survive!

I like Jung now. A never-ending curiosity for oneself and others can prove to be quite a virtue. Actually, it's a foundation most relationships lack. One should not neglect it in the relationship with oneself.

Good food for thought.

[ShadowOfHarbringer]

If you have a better economic model, why bother messing with the existing bitcoin? As it has been said many times: create your own block chain.

In all seriousness, this is not just a shut-you-up one liner. For the first time in history, people can actually experiment with different monetary economic models. Back in history, when people chose seashell, metals or paper as money, most of the money characteristics was pretty much set by nature, or the nature of government. They didn't have the luxury defining the characters of their money and then enforcing it via electronic circuitry.

I join this.

I think it is very important and quite interesting that we experiment to find the best workin currency model (or perhaps find some ways to improve current model).
Maybe it would be beneficial for BTC users for 2, 3 or more separate systems to exist simultaneously.

Although this should be done through a fork, not forcing changes on the current chain. The market will decide the rest. If there really is a demand for "StuffCoin", "Inflatacoin", "SuperDeflataCoin" etc, then market will preserve them and they will live their own lives.

So Suggester: please go start your own chain. Seriously.

[Marxian]

There are three aspects that the current Bitcoin system and Suggester's solution share and which you wouldn't like to have in a currency:

1. A Bitcoin's current value is determined by the currently socially necessary labour time to produce one bitcoin.
This means that Bitcoin is a digital currency money. In the current model the value changes by 19% p.a. on average. But Suggester's model shares the same flaw. Although Bitcoin would not be deflationary anymore, the value still depends on commodities like hardware and electricity. Money can't be created as needed, but has to be produced with commodities. This implies …

2. Money supply is severely restricted.
Bitcoin is only a Ponzi/pyramid scheme without any use besides speculation. You cannot create money as it is needed. There would be no banks, no credits, no interest rates. This system can never work in a growing capitalist economy. It can't measure the value of the produced goods because there can never be enough Bitcoins.

3. A huge part of the economy serves only the mining of Bitcoins.
Since Bitcoins are produced only with electricity and computing, a great part of capital (means of production and labour) has to be expended on the production of the society's money. This is economically and ecologically insane, to put it politely! Even under Suggester's model an economy could only grow as the Bitcoin mining industry grows. Just imagine nearly every worker working for an electricity/Bitcoin mining company. This industry would invest all its profits in Bitcoin mining and draw capital from all other industries. Soon there would not be any other industry than Bitcoin mining and related industries.

All these fundamental problems exist in both the current model and Suggester's model. That's why I suggest to drop this Bitcoin Ponzi scheme altogether.

[DrSammyD]

It can't measure the value of the produced goods because there can never be enough Bitcoins.

You can't measure the value of produced goods period.

1. Keeps rising forever, then it's a Ponzi scheme which will collapse at some point.

Gold is a perpetually deflationary currency. When is that going to collapse down to it's industrial use value?

[AaronM]

There are three aspects that the current Bitcoin system and Suggester's solution share and which you wouldn't like to have in a currency:

1. A Bitcoin's current value is determined by the currently socially necessary labour time to produce one bitcoin.

You have it backwards. The time to mine one bitcoin is determined by the difficulty level, and the difficulty level is approximately determined by 1) the value of Bitcoins, 2) the number of Bitcoin users, and 3) the level of "mining enthusiasm".

The value of one bitcoin is determined by people's beliefs in what goods and services they can get for that bitcoin in the future.

2. Money supply is severely restricted.
Bitcoin is only a Ponzi/pyramid scheme without any use besides speculation. You cannot create money as it is needed. There would be no banks, no credits, no interest rates. This system can never work in a growing capitalist economy. It can't measure the value of the produced goods because there can never be enough Bitcoins.

How can you be sure there's enough USD or Euros?  If central banks determine there's not "enough" of their currency, they issue more and the value of each one is diluted -- inflation.

Credit is entirely possible, as are banks.  You don't need a fiat currency for those.  We had both credit and banks when currencies were backed by precious metals.

Here is my litmus test for Bitcoin: are Bitcoins being exchanged for real goods and services (not mining paraphernalia)? If so, then it's not a Ponzi/Pyramid scheme.

3. A huge part of the economy serves only the mining of Bitcoins.
Since Bitcoins are produced only with electricity and computing, a great part of capital (means of production and labour) has to be expended on the production of the society's money. This is economically and ecologically insane, to put it politely! Even under Suggester's model an economy could only grow as the Bitcoin mining industry grows. Just imagine nearly every worker working for an electricity/Bitcoin mining company. This industry would invest all its profits in Bitcoin mining and draw capital from all other industries. Soon there would not be any other industry than Bitcoin mining and related industries. [...]

I think you greatly over-estimate the need for mining.  It seems to me that most of the mining going on is driven by enthusiasm, and is happening at a loss.  When the enthusiasm passes, the only mining will be done by people making a profit, and so there will be much more real economic activity in proportion to mining activity.

[Marxian]

You can't measure the value of produced goods period.

Well, then Bitcoin is completely useless. How would I buy anything if the money does not measure the value of goods? Measuring value is one of the functions of money.

Gold is a perpetually deflationary currency. When is that going to collapse down to it's industrial use value?

Gold is neither a currency nor is it deflationary. According to this chart it seems inflationary and volatile. The peak price of 1980 was $2251 in 2010 dollars. Today the gold price is $1533 in 2011 dollars. The price will drop as mining gets improved and new deposits are discovered. There is no way back. Mining technology constantly improves and the amount of mined gold grows.

[Davis5]

Hi all,

I've only just heard about Bitcoin last week, and have been reading through this thread today.

It's funny to see Suggester's predictions from a year and a half ago come true, and it's going to be even funnier to see when a couple of people decide to cash out, then investors see the price drop a bit, then everyone decides to get out while they can and then entire system implodes... 

I thought about getting some Bitcoins a couple of days ago to start playing with them as I was interested in the concept, but after seeing how volatile they are and watching them go up 70% in the last 4 days, I wouldn't touch them with a ten foot pole, because the chances are that they'll go down 70% by next week, or more likely drop way past whatever their "true" value is, but who knows what that is at the moment.

Good luck guys. For those with a lot of coins, I hope you get out before the crash...

[Marxian]

You have it backwards. The time to mine one bitcoin is determined by the difficulty level, and the difficulty level is approximately determined by 1) the value of Bitcoins, 2) the number of Bitcoin users, and 3) the level of "mining enthusiasm".

The value of a bitcoin is the value of the means of production (hardware, network connection) that is transferred to the bitcoin + the value of the used electricity + the value of the necessary labour (some people must be paid to manage the servers etc.). With this formula you can calculate the value (in dollars, euros, …) of a coin which is produced today. Speculation makes the price fluctuate around this value.

How can you be sure there's enough USD or Euros?  If central banks determine there's not "enough" of their currency, they issue more and the value of each one is diluted

Not necessarily. If the value of the issued money equals the newly produced value, the value of one unit of money does not change. I don't want to defend our banking system. I only say that Bitcoin can't succeed in achieving a constant value of money (Bitcoin is deflationary) because with Bitcoin nobody can create money when needed.

Credit is entirely possible, as are banks.

Can you explain how? You need to create money "out of nothing" to grant a loan. In fact, debt is the source of money. Otherwise a bank could only give the money it has and only give it once. That would be pointless.

I think you greatly over-estimate the need for mining.  It seems to me that most of the mining going on is driven by enthusiasm, and is happening at a loss.  When the enthusiasm passes, the only mining will be done by people making a profit, and so there will be much more real economic activity in proportion to mining activity.

It's not my estimate. It is estimated that mining will continue until 2033. All Bitcoin owners (and thus the miners) definitely don't loose because of the annual increase in value of 19%. If the Bitcoin community grows this rate is even much bigger. Mining will continue as long as there are Bitcoins to mine or until the big crash comes.

[wareen]

I thought about getting some Bitcoins a couple of days ago to start playing with them as I was interested in the concept, but after seeing how volatile they are and watching them go up 70% in the last 4 days, I wouldn't touch them with a ten foot pole, because the chances are that they'll go down 70% by next week, or more likely drop way past whatever their "true" value is, but who knows what that is at the moment.

Of course Bitcoins are experimental and rather new - if you are looking for some low-risk investment then look elsewhere. On the other hand, most people seem to expect Bitcoin to either be hugely successful or fail completely. In the latter case the "real value" will eventually be zero of course but in the former, it is greatly undervalued right now.

If you think Bitcoin is worth at least something in the long run, then investing a bit in them is probably a good idea - even if you think the current price is too high.

[kjj]

Credit is entirely possible, as are banks.

Can you explain how? You need to create money "out of nothing" to grant a loan. In fact, debt is the source of money. Otherwise a bank could only give the money it has and only give it once. That would be pointless.

No, you don't need to create new money to make a loan.  You can loan money that you already have.