The current Bitcoin economic model doesn't work

[BubbleBoy]

With Bitcoins, I see the great opportunity to create a currency that's both value standard and medium of exchange, but, unlike other currencies, you can adjust the supply dynamically to the demand exactly, since the number of transactions and the velocity of money can be calculated exactly.

While it's easy to find a party willing to receive the proceeds of seigniorage, how do you propose to diminish the monetary base in inflationary times ? A tax perhaps, so that besides loosing value, the money you hold are automatically taxed by the system ? Basically, rewarding those responsible for inflation (debtors) and punishing savers ? I think this would quickly lead to an inflationary spiral where everybody wants to get out of that pesky currency that looses value by the minute.

The only way to achieve what you are proposing would be if the receivers of seigniorage are committed to defend the currency during inflation, by selling for bitcoins the assets bough during expansion. I think it's fair to say that will never happen, so the best we can hope is for a non-deflationary currency, that could lose value at any moment if the market decides to abandon it.

PS: I'd very weary of using the equation of exchange without fully understanding what's being exchanged: the "goods" are MtGox dollars, for which there's no intrinsic demand inside the Bitcoin economy, and the price index is purely artificial, driven by the speculation that someday the economy will exchange other things besides dollars.

PPS: what you are seeing in the block-chain is not the velocity of money, but rather an artifact of how the system operates. There's no basis to use that for macroeconomic purposes since it would be easy to manipulate the apparent velocity for example by moving my BTC 1.000.000 from one wallet to another, all day long. If you don't trust the goverment published CPI, the only valid estimator of inflation is the price in bitcoins of one alpaca sock.

PPPS: let's agree not to call the current Bitcoin block chain a ponzi scheme, because it enrages the locals and is not exactly true. It's a speculative mania, where everybody is holding the inflated asset and nobody is yet getting rich (because if they were, the price would crash). When it does finally pop we can call it a ponzi scheme where there will be widespread evidence of early 'investors' cashing out early at the expense of later ones.

[1713485688]

1713485688

[cloud9]

PPPS: let's agree not to call the current Bitcoin block chain a ponzi scheme, because it enrages the locals and is not exactly true. It's a speculative mania, where everybody is holding the inflated asset and nobody is yet getting rich (because if they were, the price would crash). When it does finally pop we can call it a ponzi scheme where there will be widespread evidence of early 'investors' cashing out early at the expense of later ones.

Can we then call the housing bubble, the dot com bubble, the commodities bubble, and wall street crashes of 1928 and 1987, social security and public debt ponzi schemes as well?  Capitalist ponzi schemes? Doesn't some rate of exchange crash (suddenly inflates) because it was overvalued - and a sudden revaluation happens?

[cloud9]

With Bitcoins, I see the great opportunity to create a currency that's both value standard and medium of exchange, but, unlike other currencies, you can adjust the supply dynamically to the demand exactly, since the number of transactions and the velocity of money can be calculated exactly.

PS: I'd very weary of using the equation of exchange without fully understanding what's being exchanged: the "goods" are MtGox dollars, for which there's no intrinsic demand inside the Bitcoin economy, and the price index is purely artificial, driven by the speculation that someday the economy will exchange other things besides dollars.

Would MtGox dollars be traded at all in the Bitcoin economy if there were no "intrinsic" demand for it?  Doesn't the equation of exchange apply to any definable ecosystem where exchange happens, also with regards to the rate of exchange discovery happening on MtGox between bitcoin and LRUS$?  Isn't the %P (change in rate of exchange discovery) reflected in most trades of goods/services/other offered in exchange for Bitcoin here https://en.bitcoin.it/wiki/Trade ?  Also total bitcoins exchanged in past 24h at MtGox is 23,417.37BTC.  Total bitcoins sent over bitcoin network in past 24h in total is 468,263.71 BTC.  Total bitcoins in existence is 6,440,750 BTC.  (Source http://www.bitcoinwatch.com/ )

[BubbleBoy]

Can we then call the housing bubble, the dot com bubble, the commodities bubble, and wall street crashes of 1928 and 1987, social security and public debt ponzi schemes as well?

We could and in fact some people do. But as I've said, they are pushing the boundary of the definition. Going 'full ponzi' requires malicious intent and a clear setup where early depositors are sure to win and later ones are sure to loose.
When an asset bubble bursts the exists are random: it's perfectly possible for someone to go in at 15$/BTC, exit at 20$/BTC, and make a handsome profit, while someone who bought at 0.0005 will see all his imaginary wealth vanish because of bad timing. However there would be some amount of 'ponziing' going on (profiting on the expense of another), bubbles are zero sum by definition.
An example that comes to mind is Madoff's fund: you could sell at any time you wanted in profit, just like with Bitcoin, yet when it crashed people widely called it a ponzi scheme because of it's intent. In Bitcoin's case, I leave that to the reader.

[hugolp]

[quote author=cloud9 link=topic=57.msg171509#msg171509 date=1307294917it was a comment addressing this issue, and your comment on it being impossible to measure the demand for medium of exchange:

With Bitcoins, I see the great opportunity to create a currency that's both value standard and medium of exchange, but, unlike other currencies, you can adjust the supply dynamically to the demand exactly, since the number of transactions and the velocity of money can be calculated exactly. This would result in a currency that's a perfect value standard. Money supply can not be manipulated by governments, since it is coded into the system. Savors had more incentive to save, since their currency holdings would not be devaluated by inflation, giving more and cheaper capital for investments, giving the possibility of more economic growth.

I welcome everyone to work with me together to create an alternative crypto-currency, if the bitcoin community does not want to change its money supply system.

[/quote]

But you are not mesuring the demand for money (bitcoins), you are just keeping bitcoin nominally in line with dollars.

Again, how do you measure the demand for money?

PS: In the example you have eliminated the currency. The problem with that equation is that it does not take into account the changes in the valuation of the currency. But I dont want to discuss about the equation. I want you to answer how do you measure the demand for money.

[cloud9]

Can we then call the housing bubble, the dot com bubble, the commodities bubble, and wall street crashes of 1928 and 1987, social security and public debt ponzi schemes as well?

We could and in fact some people do. But as I've said, they are pushing the boundary of the definition. Going 'full ponzi' requires malicious intent and a clear setup where early depositors are sure to win and later ones are sure to loose.
When an asset bubble bursts the exists are random: it's perfectly possible for someone to go in at 15$/BTC, exit at 20$/BTC, and make a handsome profit, while someone who bought at 0.0005 will see all his imaginary wealth vanish because of bad timing. However there would be some amount of 'ponziing' going on (profiting on the expense of another), bubbles are zero sum by definition.
An example that comes to mind is Madoff's fund: you could sell at any time you wanted in profit, just like with Bitcoin, yet when it crashed people widely called it a ponzi scheme because of it's intent. In Bitcoin's case, I leave that to the reader.

Don't you risk bitcoin becoming inflationary instead of deflationary, no matter at which stage you adopt to hold some of the bitcoins issued at that stage?  And isn't capitalism = profiting on the expense of the losing counter party?  Why are there a pyramid with the all-seeing eye on top of it on the 1US$ dollar bill - and written "In God we trust" next to it?  Didn't everything not add up in Madoff's case because you got fraudulent promises instead of the underlying investment you were promised and were under the impression that you are investing in?  Are you promised anything more than a right to a share of the bitcoins in existence when you opt to hold some bitcoins at a certain value of exchange?  When the value of exchange changes in your favor or against your favor don't you have a profit or a loss to show on the value of your share of issued bitcoins?  Wouldn't it be up to each individual to decide whether bitcoin's properties of enabling fluid exchange over vast or small distances quite instantly and securely warrant / does not warrant a risk for profit / loss to be taken?  If this bitcoin venture, or any capitalist business venture, turned out successful at the value of exchange where you convinced yourself to opt in and proved to be profitable, or if it proves not to be so due to unforeseeable / uncontrollable circumstances or future events - isn't the responsibility on yourself and your financial advisor (whom you reimburse for their services) to do a due diligence evaluation of your options, risk profile, what you can afford to loose, etc., etc.?

[cloud9]

Again, how do you measure the demand for money?

A free market determines it by placing a premium on it (%P) negative (negative actually means better exchange value for the medium of exchange) or positive (poorer exchange value for the medium of exchange) against goods/services/other traded for it.  Rate of exchange discovery happens in the free market.

In the example I did not eliminate what you would call the currency - the currency, money, medium of exchange, pebbles, salt, gold, paper (call it what you like) was eggs!!!  Isn't the medium of exchange not the most commonly traded item in a definable system of exchange?

Or are you asking for a measurement of the supply of medium of exchange (money as you would call it) available for exchange for goods/services/other?

[hugolp]

Again, how do you measure the demand for money?

A free market determines it by placing a premium on it (%P) negative or positive against goods/services/other traded for it.  Rate of exchange discovery happens in the free market

And why are you deciding that the dollar is the only reference? And even if you include all the other currencies, how do you weight each currency?

You cant, but even if you did, you are not yet having a mesure of the demand for money, because the exchanges are not the only factor in the bitcoin economy creating demand for money.

Again, how do you measure the demand for money?

[cloud9]

Again, how do you measure the demand for money?

A free market determines it by placing a premium on it (%P) negative or positive against goods/services/other traded for it.  Rate of exchange discovery happens in the free market

And why are you deciding that the dollar is the only reference? And even if you include all the other currencies, how do you weight each currency?

You cant, but even if you did, you are not yet having a mesure of the demand for money, because the exchanges are not the only factor in the bitcoin economy creating demand for money.

Again, how do you measure the demand for money?

If you are talking about medium of exchange / bitcoin (when you say money), you don't have to do it this way, but I would take average growth / decline of P (ratio of value of exchange between medium of exchange and goods/services/other traded for the medium of exchange) over a certain period.  All goods/services/other value exchange rate with bitcoin from merchants, as well as other rates of exchange for bitcoin and MtGox's LRUS$ exchange rate try to have parity with each other through arbitrage.  Due to significant bitcoin trade volumes, I just assume that MtGox LRUS$ rate will be on parity or will be parity over a certain time period (adjust the time period for growth / decline fit to your liking).

If there is a premium on %P (negative value indicates better value attributed to medium of exchange) then there is a demand for the medium of exchange and it is quantified by the magnitude of %P.  If there is discount on %P (positive value indicates poorer value attributed to medium of exchange) then there is a surplus in the medium of exchange and it is quantified by the magnitude of %P.

[hugolp]

If you are talking about medium of exchange / bitcoin (when you say money), you don't have to do it this way, but I would take average growth / decline of P (ratio of value of exchange between medium of exchange and goods/services/other traded for the medium of exchange) over a certain period.  All goods/services/other value exchange rate with bitcoin from merchants, as well as other rates of exchange for bitcoin and MtGox's LRUS$ exchange rate try to have parity with each other through arbitrage.  Due to significant bitcoin trade volumes, I just assume that MtGox LRUS$ rate will be on parity or will be parity over a certain time period (adjust the time period for growth / decline fit to your liking).

And there you go, you are just doing some nasty approximations, because you have no way of determining the demand for money (bitcoins). Specially calculating the rise in prices is an utopy. Your system would probably do more harm than good.

There is also the problem of implementation that is basically imposible because you dont know if MtGox will exists in the future or if it will the majoritary exchange.

[cloud9]

And there you go, you are just doing some nasty approximations, because you have no way of determining the demand for money (bitcoins). Specially calculating the rise in prices is an utopy. Your system would probably do more harm than good.

If in two identical cities in all ways but this, city A and city B has the same number of supplies of bread loafs (staying fixed and nearly constant over time), and if you need to exchange three shiny disks out of your pocket for one bread in city A, and you need to exchange four shiny disks out of your pocket for one bread in city B - would you say the demand for bread is greater in city A or city B?

And now, substitute bread above with bitcoins, would you say the demand for bitcoins is greater in city A or city B?

[cloud9]

And there you go, you are just doing some nasty approximations, because you have no way of determining the demand for money (bitcoins). Specially calculating the rise in prices is an utopy. Your system would probably do more harm than good.

If in two identical cities in all ways but this, city A and city B has the same number of supplies of bread loafs (staying fixed and nearly constant over time), and if you need to exchange three shiny disks out of your pocket for one bread in city A, and you need to exchange four shiny disks out of your pocket for one bread in city B - would you say the demand for bread is greater in city A or city B?

And now, substitute bread above with bitcoins, would you say the demand for bitcoins is greater in city A or city B?

If in two identical cities in all ways but this, city A and city B has the same number of supplies of bitcoins (staying fixed and nearly constant over time), and you are able to exchange your one bread you are bringing to city A's fair for three bitcoins (in other words one bitcoin can be exchanged for 0.3333 of a bread), and you are able to exchange your one bread you are bringing to city B's fair for four bitcoins (in other words one bitcoin can be exchanged for 0.25 of a bread) - would you say the demand for bitcoins is greater in city A or city B?

City A:  P = 0.33333 breads / bitcoin
City B:  P = 0.25 breads / bitcoin

%P moving from City B to City A:  (0.25 - 0.33333) / 0.25 = -33.33% (Deflationary, medium of exchange or bitcoin gained in value)
%P moving from City A to City B:  (0.33333 - 0.25) / 0.33333 = 25% (Inflationary, medium of exchange or bitcoin reduced in value)

So the inverse of demand for bitcoins, if number of bitcoins stays constant, is measured by %P (where %P negative is better for bitcoins held, and %P positive is worse for bitcoins held and the magnitude indicates measurement of demand) is greater when you move from City A to City B than when you move from City B to City A.

[hugolp]

And there you go, you are just doing some nasty approximations, because you have no way of determining the demand for money (bitcoins). Specially calculating the rise in prices is an utopy. Your system would probably do more harm than good.

If in two identical cities in all ways but this, city A and city B has the same number of supplies of bread loafs (staying fixed and nearly constant over time), and if you need to exchange three shiny disks out of your pocket for one bread in city A, and you need to exchange four shiny disks out of your pocket for one bread in city B - would you say the demand for bread is greater in city A or city B?

And now, substitute bread above with bitcoins, would you say the demand for bitcoins is greater in city A or city B?

And this has any resamblance with what happens in reality how?

[cloud9]

And there you go, you are just doing some nasty approximations, because you have no way of determining the demand for money (bitcoins). Specially calculating the rise in prices is an utopy. Your system would probably do more harm than good.

If in two identical cities in all ways but this, city A and city B has the same number of supplies of bread loafs (staying fixed and nearly constant over time), and if you need to exchange three shiny disks out of your pocket for one bread in city A, and you need to exchange four shiny disks out of your pocket for one bread in city B - would you say the demand for bread is greater in city A or city B?

And now, substitute bread above with bitcoins, would you say the demand for bitcoins is greater in city A or city B?

And this has any resamblance with what happens in reality how?

I tried to give you a constructive answer.  Maybe a Eureka moment will come.

[hugolp]

I tried to give you a constructive answer.  Maybe a Eureka moment will come.

Hopefully and then you will realize you can not calculate the demand for money because nobody is able to access the needed information.

Btw, you can keep trying to explain how you can calculate the demand for money. Its entertaining.

[Marxian]

There's no problem with money being created with commodities.

Generally, that's true. Paper money is made of many material ingredients, means of production and labour. But for Bitcoin this is a problem. The value produced (production costs) per dollar banknote is about 4 cents, whether the note has an exchange value of $1 or $100. But to produce a Bitcoin always costs a Bitcoin. Do you see the problem? Let's make a thought experiment. We assume the dollar was a currency money like Bitcoin. To print a $1 note would cost $1, to print a $2 note $2 and so on. So the only purpose of printing money would be to pay the printer for printing it. The same holds true for Bitcoin. It is impossible that there ever would be given one Bitcoin to the society because the society would have to pay one Bitcoin to the miners to receive one Bitcoin. As I said, the entire model is pointles. We would create a society of miners and hoarders. If the Bitcoin model succeeded – which is impossible because the inevitable crash will stop its expansion –, every person on the planet would work in the hardware or electricity industry.

That's not in my proposed system. In my proposed system your money doesn't gain value over time (nor does it lose value, for that matter). Therefore you have no reason to hoard nor a reason to squander. You'll just spend as you normally see fit without worrying the money's value will jump up and down in a crazy unpredictable manner.

In your model the currency is neither inflationary nor deflationary. I know this and I don't know why you mention this because it is not related to the restrictions on money creation. You still don't explain how the economy can grow, how the society can pay for any goods. It can't because it has to spend all its money on its money.

That's exactly the beauty of my proposal: The amount of money produced actually depends on the amount of electricity sacrificed.

More accurate: The value of money produced equals the value of capital sacrificed, with capital being composed of means of production (hardware), used up materials and labour. How could this be desirable? Such a society puts all its efforts into producing its currency. And all it can buy for it is its currency.

[mouse]

Such a society puts all its efforts into producing its currency. And all it can buy for it is its currency.

Today I made my first real world profit from mining; about $150US.To do this, I'm guessing I've spent a LOT more than the government would have to print $150. Now I'm at the point where I'm thinking I should invest this back into more mining (currently i just mine on my 'gaming rig' for fun, but I could buy more powerful cards) and so I have a moral dilemma. You (and others) have noted some great truths about the flaws in bitcoin. But I can't leave now. Why would I? I'm rational, and so while I can still make money I should. But I'm also (somewhat less) moral. This is all a terrible waste of resources, and the cost to mint the final 21 millionth bitcoin is going to be unfathomable.

*Edit*
Also, isn't a system like this going to breed immense distrust? Imagine when we're at the point where solving a block will generate enough wealth to retire you, your family, and all their friends for a number of generations. I can see more than one pool operator running away with the spoils....
Also, does anyone really think that society will allow itself to spend the majority of the earth's computer power on minting money instead of, say, curing cancer, or pretty much any other worthwhile cause?

[marcus_of_augustus]

*Edit*
Also, isn't a system like this going to breed immense distrust? Imagine when we're at the point where solving a block will generate enough wealth to retire you, your family, and all their friends for a number of generations. I can see more than one pool operator running away with the spoils....
Also, does anyone really think that society will allow itself to spend the majority of the earth's computer power on minting money instead of, say, curing cancer, or pretty much any other worthwhile cause?

At present the number of graphic cards doing mining is a small fraction of those ever produced. Hard money that provides efficient transmission of monetary information and resource allocation is arguably the most worthwhile cause you can think of for computing power and information technologies in general.

[dayfall]

and so while I can still make money I should. But I'm also (somewhat less) moral. This is all a terrible waste of resources, and the cost to mint the final 21 millionth bitcoin is going to be unfathomable.

Well, if the Banks would stop claiming they have money when they really don't.  AND when the governments stop printing ever increasing amounts of cash.  AND the credit card companies lower their swipe fees.  THEN yes.

Honest banks and honest governments can't survive in this environment.  So, it has to be forced by us.  Because of proof of work, laws are the best weapon against Bitcoin.

I do worry about the miners just up and running but I still think they will remain honest to continue to get profits.   They can only do it once anyhow. 

[DrSammyD]

There's no problem with money being created with commodities.

Generally, that's true. Paper money is made of many material ingredients, means of production and labour. But for Bitcoin this is a problem. The value produced (production costs) per dollar banknote is about 4 cents, whether the note has an exchange value of $1 or $100. But to produce a Bitcoin always costs a Bitcoin. Do you see the problem? Let's make a thought experiment. We assume the dollar was a currency money like Bitcoin. To print a $1 note would cost $1, to print a $2 note $2 and so on. So the only purpose of printing money would be to pay the printer for printing it. The same holds true for Bitcoin.

No, the purpose of printing/mining a bitcoin is to make the block chain more secure and to facilitate transactions. As such you are paid based on how efficient you are at it. If you are more efficient than your competition, then you are paid more than what it cost you. If you are exactly as efficient as your competition, you are paid exactly what it cost you (assuming perfect competition, but which is impossible, so payment will be more than your costs, once investments in production no longer outweigh opportunity cost). If you are less efficient than your competition, then you are paid less than what it cost you (again with the possibility that you might be able to eek out a profit if you're close enough to the mean).

It is impossible that there ever would be given one Bitcoin to the society because the society would have to pay one Bitcoin to the miners to receive one Bitcoin. As I said, the entire model is pointles. We would create a society of miners and hoarders. If the Bitcoin model succeeded – which is impossible because the inevitable crash will stop its expansion –, every person on the planet would work in the hardware or electricity industry.

You know, other than the fact that as fewer and fewer people make food to go into electrical engineering, then food prices start skyrocketing. LOL.