Block Reward changing to 25 BTC in November-December 2012

[dree12]

At the time of writing (2012-02-03 3:00 UTC), we are at block 165105. By block 210000, the block subsidy, or the portion of miner profits that is produced to mint bitcoins and serve as an extra bonus to miners, is scheduled to fall to 2500000000 of the smallest bitcoin units, or commonly 25 BTC. This gives less than 45000 blocks remaining before the subsidy falls. Although the technical effects are well-documented, the economic effects remain unknown. As we approach the date 2012-12-10, the current halving target if blocks continue being produced at 10 minutes every block, speculation should heat up. However, the consensus among Bitcoin speculators is that the effect of the reduction is already priced in.

Miners currently on average earn 0.05 BTC per block in transaction fees. This means that the current block subsidy, 50 BTC, makes up 99.9% of the total block reward. If no drastic changes to average transaction fees occur between now and the targeted date, this change will be a big blow to miners. Since many miners are very reluctant to turn down their rigs even when unprofitable, the difficulty is likely to only drop by a small amount as the total block reward nearly halves.

Luckily, even under a conservative economic appreciation model, transaction fees are likely to increase. While miners are happily chewing away on an average reward of 50.05 BTC per block now, the reward after halving may have taken a dip down to 25.10 BTC, still a drastic reduction.

One cannot ignore the difficulty decrease that is predicted as a result of the drop of subsidy, however it must be pointed out that even as the mining reward is only worth 20% of that in June 2011, the difficulty is 200% of that time. For this reason, mining is likely going to turn unprofitable shortly after the drop. Anticipating the drop, some dormant miners are likely to turn rigs on to complete their mining career for the time being, likely causing continued difficulty increases leading up to the change.

Pools, especially PPS ones and other pools which calculate reward based on 50 BTC, should begin preparing for this change. This means that PPS pools will drop their reward to half of what it is now in around ten months.

A 51% attack if difficulty does drop cannot be ruled out. Although unlikely, if the hashing power of the network does drop to a half of what it was before the change, it will be half as difficult for a 51% attack to be undertaken. Rapid growth in the Bitcoin economy before December, which is a possibity that cannot be ruled out, will also effectively prevent 51% attacks.

Bitcoin, in its current form, has not yet undergone such a severe change in block subsidy, and it never will undergo one of the same severity again.

Original post:

Unless something crazy happens, by now it is next to impossible having a block reward earlier than mid-November and later than late December. The current targeted time is 2012-12-09, but there is likely to be at least a small wiggle to a certain direction. If Bitcoin continues growth, the date may land in November, and otherwise could be as late as late December. With only 55970 blocks left until the block reward change, the difficulty will change only 26 more times before the block reward change. I am leaning to the side that the reward change has not yet been priced in, so prices of Bitcoin will increase considerably. Unfortunately, mining shares are likely to go down.

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[ZodiacDragon84]

If mining goes down though, so too does the difficulty, yes?

[proudhon]

Unless something crazy happens, by now it is next to impossible having a block reward earlier than mid-November and later than late December. The current targeted time is 2012-12-09, but there is likely to be at least a small wiggle to a certain direction. If Bitcoin continues growth, the date may land in November, and otherwise could be as late as late December. With only 55970 blocks left until the block reward change, the difficulty will change only 26 more times before the block reward change. I am leaning to the side that the reward change has not yet been priced in, so prices of Bitcoin will increase considerably. Unfortunately, mining shares are likely to go down.

Why will bitcoin prices increase because of this?

[Miner99er]

Supply gets cut from 7200 BTC a day to 3600 BTC a day. Should mess with supply and demand some.

Edit: Honestly, I'm a miner more than a trader... but I'm wondering what the block reward going to 25 BTC/Block would do myself.

[Littleshop]

It is so hard to tell.  Some think the price will go up (even double) but I tend to doubt that.  I think there will be a rise as supply is cut, but enough people holding coins will sell before then.  So I think mining is going to be much less profitable. 

[antares]

Unless something crazy happens, by now it is next to impossible having a block reward earlier than mid-November and later than late December. The current targeted time is 2012-12-09, but there is likely to be at least a small wiggle to a certain direction. If Bitcoin continues growth, the date may land in November, and otherwise could be as late as late December. With only 55970 blocks left until the block reward change, the difficulty will change only 26 more times before the block reward change. I am leaning to the side that the reward change has not yet been priced in, so prices of Bitcoin will increase considerably. Unfortunately, mining shares are likely to go down.

Why will bitcoin prices increase because of this?

because shortly before the block rewards, people will speculate on the price increasing due to the lowered supply, thus creating another (not self-sustaining) bubble. then idiots that didn't learn from getting zhoutung'd for the last 20 times will ruin it again.

[proudhon]

It is so hard to tell.  Some think the price will go up (even double) but I tend to doubt that.  I think there will be a rise as supply is cut, but enough people holding coins will sell before then.  So I think mining is going to be much less profitable. 

I don't think it matters much at all what the block reward is.  The exchange rate is mostly a function of the demand for the coins already mined, and if the demand isn't much different then from what it is now, I wouldn't expect the price to be much higher than it is now.

[runeks]

Why are people talking about lowered supply? The supply isn't lowered by halving of the block reward. The rate at which the supply increases just gets cut in half. I see no reason that it will cause any significant spike in the price - unless, of course, that we expect it to cause a significant spike.

[miscreanity]

I don't think it matters much at all what the block reward is.  The exchange rate is mostly a function of the demand for the coins already mined, and if the demand isn't much different then from what it is now, I wouldn't expect the price to be much higher than it is now.

Exactly, it's an issue of Bitcoin's stock to flow. That's a process, not an instantaneous event.

For argument, let's say there are 8,000,000 BTC in existence and 8,000 are generated every 2 weeks. The valuation of the 8mm matters more than that of the smaller 8k - if there's demand for the 8k, it won't affect the 8mm very much at all due to the sheer magnitude difference. You can think of it like throwing a rock into a lake - small ripples may occur, but the water level certainly won't be cut in half.

A more likely scenario is that solo miners may begin to drop off, as well as some smaller mining operations. It will gradually become less viable to expend the resources to compete with larger operations that gain benefits from economy of scale. This is also a process that will occur over a period of time, probably while the exchange rate for Bitcoin rises against other currencies.

[Cluster2k]

The block reward was 50 btc when we hit $32 in June, and it was 50 when we touched $2 in December.  The block reward has no impact on the price.  It may however have an impact on miner profitability.

[Sargasm]

The block reward was 50 btc when we hit $32 in June, and it was 50 when we touched $2 in December.  The block reward has no impact on the price.  It may however have an impact on miner profitability.

You cannot say for certain because the block reward was never 25.   Certainly it is hard to surmise how it could affect price, but that will remain to be seen.  If the market for btc slows down because miners are providing a constant stream of new coins, it almost certainly would affect price.  It's basic economics.

To what degree, that remains to be seen.

[Qoheleth]

Mining costs are buffered from affecting price by the Difficulty.
What if the Difficulty doubled tomorrow? Smart miners would turn off their rigs until the difficulty returned to one where they'd make a profit.
The way I see it, it's the same with a bounty cut. Some miners will no longer be profitable, so their rigs will turn off, so the total network hashrate will decline, so the difficulty will decline until miners can be profitable again.

The only effect I can see the bounty cut having on price is that there are fewer bitcoins for miners to sell, so the ask volume will decline a little. But I'm not convinced that that phenomenon will have anything more than a minor effect on the price.

[runeks]

The 7200 BTC minted daily (compared to the 3600 after the block reward halves) should also be seen in light of the current trading volume of the bitcoin economy. If half of the miners currently sell the BTC they earn from mining, it's 3600 BTC per day. Even if all miners sell their mined coins, it's still only 7200 BTC sold per day. Selling 7200 BTC currently, the price would drop from 5.25 to 5.04. That's a 4% decrease in price. But that's a daily 4% decrease. If only 3600 BTC were to be sold each day (after the reward halves) the downward price pressure resulting from miners exchanging their newly minted coins for dollars would only - at the current market situation - cause the exchange rate to drop to 5.08 BTC. A 3% decrease in price, per day.

So the result of a halving of the block reward will be a smaller downward pressure on the price from miners only selling half the amount of BTC that they were selling before. But the effects of this are impossible to determine without knowing how many BTC are bought per day (and kept), as this would have the opposite effect on the price. The magnitude of these two opposing forces seems to determine the effect a 25 BTC block reward will have on BTC prices.

[FreeMoney]

So the result of a halving of the block reward will be a smaller downward pressure on the price from miners only selling half the amount of BTC that they were selling before. But the effects of this are impossible to determine without knowing how many BTC are bought per day (and kept), as this would have the opposite effect on the price. The magnitude of these two opposing forces seems to determine the effect a 25 BTC block reward will have on BTC prices.

Exactly. The supply is only half of the equation. If buyers of coins are very price sensitive then when less becomes available they'll just buy less, a slightly higher price will stop them in their tracks. If they don't care much about the price their demand could push prices very high assuming we're somewhat balanced when 7200 are coming in yanking out half of the new will have a big effect.

[Mageant]

It find it interesting that this will happen right around the end of the Mayan Calendar (Dec. 21st).
Maybe this will signal the breakthrough.

[Qoheleth]

If the fork I choose fades and dies, I'll be done with the Bitcoin project for good. The rules about the supply are one of the reasons I'm here. I suspect many others feel the same way.

I'm not entirely sure a deflationary currency is the correct endgame - I'm worried about hoarding, and the money supply's ability to sanely match pace with the goods and services whose value it must represent.

But I do think that forking the blockchain just to get your 50BTC instead of your 25BTC would set an awful precedent: that the power held by the miners to choose the "real" blockchain need not be restricted by the standards of the community, nor need deviations be motivated by a pressing need (such as might one day arise if my worries pan out). The current "new feature negotiation" drama aside, I hope the mining community at large (read: the large pools) is sensible enough to avoid going down that route.

[SaintFlow]

To me post like these are a strong bearish sign.

The reward change is more then 10 months down the road.

And alot can happen in 10 months

[kjj]

Just to clear up a few things.

The 21 million coin limit isn't in the source code anywhere.  What is in the code is a subsidy that is cut in half every 210,000 blocks.  Actually, it is an integer right-shift instead of a division, so some of the shifts take slightly more than half of the subsidy away.  The sum of the sequence as the subsidy shifts to zero is what gives the limit just under 21 million coins.  So, changing the coin generation system would require more than just commenting out the subsidy calculation.

And a few miners can't just decide to keep cranking out 50 BTC blocks and expect the rest of the network to just accept them.  Not at 51% of the hashing power, not at 70%, and not at 100%.  They would need to create a whole new network of nodes that accept them as valid.  The miners have a lot of power, but they can't force the network to accept invalid blocks as valid.

Also, we aren't approaching the end of the Mayan calendar any more than we were approaching the end of the Julian calendar in 999 AD.  They just didn't bother adding another digit on to their system, and didn't survive long enough to need to.

[Sargasm]

The 7200 BTC minted daily (compared to the 3600 after the block reward halves) should also be seen in light of the current trading volume of the bitcoin economy. If half of the miners currently sell the BTC they earn from mining, it's 3600 BTC per day. Even if all miners sell their mined coins, it's still only 7200 BTC sold per day. Selling 7200 BTC currently, the price would drop from 5.25 to 5.04. That's a 4% decrease in price. But that's a daily 4% decrease. If only 3600 BTC were to be sold each day (after the reward halves) the downward price pressure resulting from miners exchanging their newly minted coins for dollars would only - at the current market situation - cause the exchange rate to drop to 5.08 BTC. A 3% decrease in price, per day.

So the result of a halving of the block reward will be a smaller downward pressure on the price from miners only selling half the amount of BTC that they were selling before. But the effects of this are impossible to determine without knowing how many BTC are bought per day (and kept), as this would have the opposite effect on the price. The magnitude of these two opposing forces seems to determine the effect a 25 BTC block reward will have on BTC prices.

You're not accounting for the additional trades that take place with the extra coins.

If those freshly sold coins account for a greater amount of coins traded daily, the affect they have may be disproportionate.

Being that there may be millions of untraded, unused coins sitting out there...

[Bro]

nerds will not fork

nerds have faith in bitcoin

nerds control the intrawebs

nerds are legion

[FreeMoney]

Just to clear up a few things.

The 21 million coin limit isn't in the source code anywhere.  What is in the code is a subsidy that is cut in half every 210,000 blocks.  Actually, it is an integer right-shift instead of a division, so some of the shifts take slightly more than half of the subsidy away.  The sum of the sequence as the subsidy shifts to zero is what gives the limit just under 21 million coins.  So, changing the coin generation system would require more than just commenting out the subsidy calculation.

And a few miners can't just decide to keep cranking out 50 BTC blocks and expect the rest of the network to just accept them.  Not at 51% of the hashing power, not at 70%, and not at 100%.  They would need to create a whole new network of nodes that accept them as valid.  The miners have a lot of power, but they can't force the network to accept invalid blocks as valid.

Also, we aren't approaching the end of the Mayan calendar any more than we were approaching the end of the Julian calendar in 999 AD.  They just didn't bother adding another digit on to their system, and didn't survive long enough to need to.

This. Plus even if you manually add in a 21M cap, you'll get: 50, 50, 50, 50, 50, 50, 0

Seems like trouble.

[paraipan]

Just to clear up a few things.

The 21 million coin limit isn't in the source code anywhere.  What is in the code is a subsidy that is cut in half every 210,000 blocks.  Actually, it is an integer right-shift instead of a division, so some of the shifts take slightly more than half of the subsidy away.  The sum of the sequence as the subsidy shifts to zero is what gives the limit just under 21 million coins.  So, changing the coin generation system would require more than just commenting out the subsidy calculation.

And a few miners can't just decide to keep cranking out 50 BTC blocks and expect the rest of the network to just accept them.  Not at 51% of the hashing power, not at 70%, and not at 100%.  They would need to create a whole new network of nodes that accept them as valid.  The miners have a lot of power, but they can't force the network to accept invalid blocks as valid.

Also, we aren't approaching the end of the Mayan calendar any more than we were approaching the end of the Julian calendar in 999 AD.  They just didn't bother adding another digit on to their system, and didn't survive long enough to need to.

This. Plus even if you manually add in a 21M cap, you'll get: 50, 50, 50, 50, 50, 50, 0

Seems like trouble.

more like 50, 50, 0, 0, 0, 0 ... allot of angry "late" adopters in the process, if you ask me

[phelix]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

[Piper67]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

Feel free to go and make one, then.

It will lack the elegance of Bitcoin, which is what drew me in in the first place.

[mp420]

I think the halving of block reward will push price upwards. Not because of anything related to the money supply size and so on, but because there are many non-technically-oriented traders around, who are unsure if Bitcoin is fundamentally a scam, and I think it will boost their confidence in Bitcoin when they see the halving of the reward with their own eyes.

[phelix]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

Feel free to go and make one, then.

It will lack the elegance of Bitcoin, which is what drew me in in the first place.

lolcust did it already. geistgeld? tenebrix? both?

my point was that even if the miners would really pull off a trick like that (and I don't think they will) it would not destroy bitcoin.

[kjlimo]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

Feel free to go and make one, then.

It will lack the elegance of Bitcoin, which is what drew me in in the first place.

lolcust did it already. geistgeld? tenebrix? both?

my point was that even if the miners would really pull off a trick like that (and I don't think they will) it would not destroy bitcoin.

Yes, go read the alternate cryptocurrrency forums.  Many forks have already been made... not many people are "adopting" them.  I own many alt currencies myself, but the market still hasn't rushed to switch to them.

We'll just need to wait 10 months to see what the block reward does to the world of bitcoin.

[runeks]

If the fork I choose fades and dies, I'll be done with the Bitcoin project for good. The rules about the supply are one of the reasons I'm here. I suspect many others feel the same way.

I'm not entirely sure a deflationary currency is the correct endgame - I'm worried about hoarding, and the money supply's ability to sanely match pace with the goods and services whose value it must represent.

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

You are obviously correct that an inflationary currency is useful. We all use one every day. The question is though, if a Bitcoin-like, distributed digital currency can ever be "inflationary". I think any Bitcoin-like currency cannot be necessarily inflationary without being too prone to manipulation. If we want bitcoins to decline in value, we need to peg the bitcoin supply to our economies. How would you do that?

To some it may sound good in theory, but I don't think it's possible in practice. A distributed digital currency like Bitcoin needs to have a pre-determined, finite supply, or it will not work.
So my point is not that bitcoins need to be deflationary for economic reasons, but more so that it needs to be so for technical reasons.

Without a central authority to control the supply of a currency, how can we ever ensure that a currency stays inflationary? We can't. And since Bitcoin by definition excludes a central authority, bitcoins can't be an "inflationary currency".

Pricing stuff in bitcoins is easy: <price in BTC> = <price in USD> / <USD per BTC exchange rate>

[SgtSpike]

If the fork I choose fades and dies, I'll be done with the Bitcoin project for good. The rules about the supply are one of the reasons I'm here. I suspect many others feel the same way.

I'm not entirely sure a deflationary currency is the correct endgame - I'm worried about hoarding, and the money supply's ability to sanely match pace with the goods and services whose value it must represent.

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

You are obviously correct that an inflationary currency is useful. We all use one every day. The question is though, if a Bitcoin-like, distributed digital currency can ever be "inflationary". I think any Bitcoin-like currency cannot be necessarily inflationary without being too prone to manipulation. If we want bitcoins to decline in value, we need to peg the bitcoin supply to our economies. How would you do that?

To some it may sound good in theory, but I don't think it's possible in practice. A distributed digital currency like Bitcoin needs to have a pre-determined, finite supply, or it will not work.
So my point is not that bitcoins need to be deflationary for economic reasons, but more so that it needs to be so for technical reasons.

Without a central authority to control the supply of a currency, how can we ever ensure that a currency stays inflationary? We can't. And since Bitcoin by definition excludes a central authority, bitcoins can't be an "inflationary currency".

Pricing stuff in bitcoins is easy: <price in BTC> = <price in USD> / <USD per BTC exchange rate>

I disagree.  If you have a supply with constant rate, that constant rate will eventually meet the rate of lost coins + worldwide GDP growth.  At that point, the currency would be neither inflationary or deflationary.  It would be stagnate, which is really what the "perfect" currency would look like.

BUT, the problem with that idea is that it does not offer enough incentive to early adopters.  And a lack of early adopters means a lack of adopters, period, as we've seen with Tenebrix and other attempted alternate cryptocurrencies.

[miscreanity]

Bitcoin's decimal expansion is effectively inflationary. That inflation is limited by the number of decimals it can be expanded to, which is currently 8. The system itself does not determine the extent of decimal expansion; that results from market forces. As Bitcoin gains wider adoption its value will rise, prices will fall, and the decimal will periodically be moved to the next point.

There's a good chart that I often use to explain the process. Comparing this mechanism to gold, it's like using ounces, half-ounces, quarter-ounces, tenth-ounces and then grams. Being physical, gold is limited to how far it can be divided and remain functional; we can't exchange individual atoms. Being completely abstract, Bitcoin is only limited by the necessary protocol changes that would allow further decimal expansion.

It's possible that market forces will make the change gradual, otherwise a full decimal shift could cause a sudden drop in prices of up to 90% depending on overall economic growth. An inflationary currency definitely affords a smooth level of expansion to match real growth, but may not be necessary. I think we'll have to get much closer to the 21mm unit limit before anything empirical can be determined.

[runeks]

I disagree.  If you have a supply with constant rate, that constant rate will eventually meet the rate of lost coins + worldwide GDP growth.  At that point, the currency would be neither inflationary or deflationary.  It would be stagnate, which is really what the "perfect" currency would look like.

I don't understand. What would ensure that some pre-defined rate of growth of a currency will match the rate of lost coins plus world GDP growth?

[SgtSpike]

I disagree.  If you have a supply with constant rate, that constant rate will eventually meet the rate of lost coins + worldwide GDP growth.  At that point, the currency would be neither inflationary or deflationary.  It would be stagnate, which is really what the "perfect" currency would look like.

I don't understand. What would ensure that some pre-defined rate of growth of a currency will match the rate of lost coins plus world GDP growth?

It will EVENTUALLY match that.

Say you had a 50 coin block reward, lost coins averaged .5% per year, and GDP averaged 3% per year.

The first year, you will have generated 2,628,000 coins, and, on average, 13k of those would be lost.
The second year, you would have generated another 2,628,000 coins, and, on average, 26k of those would be lost.
Etc, etc, etc.

It would take quite a number of years, but eventually, you would reach a point where the number of coins generated would equal the number of coins lost (on average).  That point would be when 525,600,000 coins are in circulation.

Add in GDP, and you'd actually be deflating if you had that many coins in circulation.  So, the GDP-corrected coin count would be 75,085,714 coins in circulation.  Although there'd be more coins than that joining the economy, the effective money supply would remain the same, since the velocity would be faster.  Hard to explain.  But the effective value of currency per GDP would remain the same.

It's not perfect by any means, but it would average out to be stagnate, which would mean an ideal amount of investment and debt vs savings.  A deflationary currency encourages too much saving, and an inflationary currency encourages too much debt/spending.

[runeks]

I don't understand. If 50 BTC are produced every 10 minutes, and world GDP growth is 3% per year, bitcoins would, eventually, become deflationary. The first years they'd be inflationary, up until the point where the number of coin generated in a year equals 3% of the current supply. At this point it'd be stagnant because it matches GDP growth. After this, the supply would grow at less than 3% per year (the rate decreasing year by year) and it'd be deflationary. Right?

I mean, you could just design the protocol so that supply increases by 3% each year. But that would require that we can predict the average GDP growth far into the future. That's obviously not possible.

It seems to me that everyone is free to implement an inflationary currency on top of Bitcoin. You simply buy 1M bitcoins, and the derived currency (let's call it IBTC for Inflationary Bitcoin) would decrease in value by x% each year. Whenever someone wants to perform a transaction, you exchange the IBTC for bitcoins. The first year you'd get 1 BTC for every IBTC you have. The next year you'd get 0.98 BTC for every IBTC, the next year 0.96 BTC for every IBTC, and so on and so forth at an ever decreasing exchange rate, in order to ensure inflation. It's easily doable. I doubt that people would be interested in this currency though. I sure wouldn't. But it seems like a good test to determine the usability of an inflationary currency vs. a deflationary one.

[hazek]

Bitcoin's decimal expansion is effectively inflationary. That inflation is limited by the number of decimals it can be expanded to, which is currently 8. The system itself does not determine the extent of decimal expansion; that results from market forces. As Bitcoin gains wider adoption its value will rise, prices will fall, and the decimal will periodically be moved to the next point.

Precisely, except under this type of an inflationary system ALL the savers benefit, while under a fiat currency central bank's inflation those who get the new money first(government, government contractors, big banks and big crops) benefit and the small savers get punished. This is THE problem humanity has today.

[hazek]

A deflationary currency encourages too much saving, and an inflationary currency encourages too much debt/spending.

I'm fascinated how people so easily make bullshit bogus statements like this probably merely repeating something they heard or read somewhere from someone else. How the fk do you know what a deflationary currency encourages? Did you do an experiment to confirm your hypothesis? And if not, why the pretense this is a fact of reality. Pisses me off.

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

[miscreanity]

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

A true deflationary currency would be one in which the money supply contracts, so it would have to start at an arbitrary amount and then basically self-destruct (inflation self-destructs by dilution/overabundance). As an example, food would fit this definition because it perishes over time.

Yes, gold is inflationary, as is Bitcoin. The distinction is that Bitcoin approaches an absolute limit whereas discovery of a large supply or mining gold on the moon could continue expansion of its unit base indefinitely.

I think I see what you're trying to get at: gold and Bitcoin inflate less than overall economic expansion grows. So it isn't the currency deflating, there is simply a divergence between the growth rates. In effect, that simulates a deflationary environment - the presentation is the same, but the reasons are different.

This chart illustrates that sequence of events:

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.

A significant change occurs when market forces shift the Bitcoin decimal. Let's take another look:

Annual Potato Yield	>Total Bitcoins	>Value in Bitcoins	>Decimal Shift	Value of 1 Bitcoin
100	1,000	10.000	none to hold 10.0	1.0
1,000	1,000	1.0000	>1 to hold 10.0	1.0
10,000,000	1,000	0.0001	>5 to hold 10.0	1.0

The end result is that anyone holding 1 Bitcoin at the beginning would still have 1 Bitcoin, only now smaller fractions of a Bitcoin are needed to conduct everyday transactions. The currency remains functional in regard to price stability while existing units are not devalued, meaning that savers neither harm the system nor are harmed by it.

In a fiat system, savers are actually the enemy because stockpiling puts strain on price stability and if the stored fiat is ever disbursed in size, it can cause sizeable price disruption. For an example, imagine that a major foreign holder of US debt (bonds and the like) decided to sell; several billion dollars flooding back into the system without an immediate, commensurate balance of trade reaction would be the same as printing that money into existence. Prices of goods and services would be affected within a year, potentially causing further chain reactions that could destabilize the entire system.

What is the universal response to an inflatable money supply that is experiencing excessive demand (i.e. a liquidity crisis)? Inflation is the only answer in the end. By inflating, the decimal point is moved to the left instead of the right. We've seen this with numerous national currencies which introduce a 'new' X fiat currency, just like the old one only several zeros have been lopped off. A 100.00 denomination becomes 1.00 for a left shift of 2 places. That dilutes existing units (savings) in order to maintain price stability.

Using a money supply that is essentially fixed, and is indefinitely divisible, completely negates that problem. Gold is the same, but can only do well to certain point because it is physical, offering practical usage down to about a gram denomination. While it is theoretically possible to use gold held in custodianship to lower the limits on practical usage, that returns to issues of trust regarding financial institutions.

Bitcoin also virtually eliminates the management concerns involved with trust (there will still be weak points, notably the developers, hashing power concentration and cryptographic security). The only real questions that remain (aside from those mentioned) are of eventual widespread adoption and whether the decimal expansion will be sufficiently smoothed by market forces. Therefore, a complementary inflationary currency might not be necessary.

It's hard for those with minimal understanding of their own financial system to grasp these distinctions, and even harder for those that have made it their livelihood and gospel in understanding the existing paradigm. All economic arguments against Bitcoin so far have been bunk. The shift in recognition will be a gradually accelerating process, much like this excellent analysis.

[miscreanity]

This is what I think will happen.

I agree with you that a decline in mining would affect the exchange rate in Bitcoin's favor, but there are other factors as well - capital flows from larger economies' currencies could very easily cause another spike in demand for Bitcoins which would result in an equally large rise in the exchange rates.

CPU->GPU->FPGA->ASIC certainly looks to be a natural progression for Bitcoin's future.

[miscreanity]

Who knows, we may even be looking at quantum processors in another three or four years. I have no doubt that advances in technology will help to explode the hashing power of the network. People that have bet against Moore's Law et al have been proven wrong time and again.

But what I have observed since early on about the way hashing power reacts to price leads me to expect a kind of herky-jerky delayed reaction to halving.

CPU->GPU->FPGA->ASIC->?

Fixed

Ah, yes - the delayed reaction. Have to agree there as well. I still see external capital inflows amplifying those processes until Bitcoin has gone mainstream, so things will probably be more pronounced and volatile than anyone would expect for quite a while no matter what. Lots of factors to consider.

"The greatest shortcoming of the human race is our inability to understand the exponential function."
Albert A. Bartlett, Ph.D
Professor of Physics at the University of Colorado at Boulder

[chsados]

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

A true deflationary currency would be one in which the money supply contracts, so it would have to start at an arbitrary amount and then basically self-destruct (inflation self-destructs by dilution/overabundance). As an example, food would fit this definition because it perishes over time.

Yes, gold is inflationary, as is Bitcoin. The distinction is that Bitcoin approaches an absolute limit whereas discovery of a large supply or mining gold on the moon could continue expansion of its unit base indefinitely.

I think I see what you're trying to get at: gold and Bitcoin inflate less than overall economic expansion grows. So it isn't the currency deflating, there is simply a divergence between the growth rates. In effect, that simulates a deflationary environment - the presentation is the same, but the reasons are different.

This chart illustrates that sequence of events:

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.

A significant change occurs when market forces shift the Bitcoin decimal. Let's take another look:

Annual Potato Yield	>Total Bitcoins	>Value in Bitcoins	>Decimal Shift	Value of 1 Bitcoin
100	1,000	10.000	none to hold 10.0	1.0
1,000	1,000	1.0000	>1 to hold 10.0	1.0
10,000,000	1,000	0.0001	>5 to hold 10.0	1.0

The end result is that anyone holding 1 Bitcoin at the beginning would still have 1 Bitcoin, only now smaller fractions of a Bitcoin are needed to conduct everyday transactions. The currency remains functional in regard to price stability while existing units are not devalued, meaning that savers neither harm the system nor are harmed by it.

In a fiat system, savers are actually the enemy because stockpiling puts strain on price stability and if the stored fiat is ever disbursed in size, it can cause sizeable price disruption. For an example, imagine that a major foreign holder of US debt (bonds and the like) decided to sell; several billion dollars flooding back into the system without an immediate, commensurate balance of trade reaction would be the same as printing that money into existence. Prices of goods and services would be affected within a year, potentially causing further chain reactions that could destabilize the entire system.

What is the universal response to an inflatable money supply that is experiencing excessive demand (i.e. a liquidity crisis)? Inflation is the only answer in the end. By inflating, the decimal point is moved to the left instead of the right. We've seen this with numerous national currencies which introduce a 'new' X fiat currency, just like the old one only several zeros have been lopped off. A 100.00 denomination becomes 1.00 for a left shift of 2 places. That dilutes existing units (savings) in order to maintain price stability.

Using a money supply that is essentially fixed, and is indefinitely divisible, completely negates that problem. Gold is the same, but can only do well to certain point because it is physical, offering practical usage down to about a gram denomination. While it is theoretically possible to use gold held in custodianship to lower the limits on practical usage, that returns to issues of trust regarding financial institutions.

Bitcoin also virtually eliminates the management concerns involved with trust (there will still be weak points, notably the developers, hashing power concentration and cryptographic security). The only real questions that remain (aside from those mentioned) are of eventual widespread adoption and whether the decimal expansion will be sufficiently smoothed by market forces. Therefore, a complementary inflationary currency might not be necessary.

It's hard for those with minimal understanding of their own financial system to grasp these distinctions, and even harder for those that have made it their livelihood and gospel in understanding the existing paradigm. All economic arguments against Bitcoin so far have been bunk. The shift in recognition will be a gradually accelerating process, much like this excellent analysis.

+1 I say, good show!   

[hazek]

It's hard for those with minimal understanding of their own financial system to grasp these distinctions, and even harder for those that have made it their livelihood and gospel in understanding the existing paradigm. All economic arguments against Bitcoin so far have been bunk. The shift in recognition will be a gradually accelerating process, much like this excellent analysis.

Outstanding post, sir!

[labestiol]

"The greatest shortcoming of the human race is our inability to understand the exponential function."
Albert A. Bartlett, Ph.D
Professor of Physics at the University of Colorado at Boulder

I discovered this guy watching this video :
http://www.albartlett.org/presentations/arithmetic_population_energy_video1.html

It is a MUST watch !

[hazek]

"The greatest shortcoming of the human race is our inability to understand the exponential function."
Albert A. Bartlett, Ph.D
Professor of Physics at the University of Colorado at Boulder

I discovered this guy watching this video :
http://www.albartlett.org/presentations/arithmetic_population_energy_video1.html

It is a MUST watch !

I strongly agree! That lecture is one of the most important arithmetic lesson one could possibly learn from, especially when you daily hear our overlord saying their target inflation is 2% annually.

[Technomage]

Great post by miscreanity. You are a valuable asset to this community.

[SgtSpike]

I don't understand. If 50 BTC are produced every 10 minutes, and world GDP growth is 3% per year, bitcoins would, eventually, become deflationary. The first years they'd be inflationary, up until the point where the number of coin generated in a year equals 3% of the current supply. At this point it'd be stagnant because it matches GDP growth. After this, the supply would grow at less than 3% per year (the rate decreasing year by year) and it'd be deflationary. Right?

Yeah, that's true...

Bitcoin's decimal expansion is effectively inflationary. That inflation is limited by the number of decimals it can be expanded to, which is currently 8. The system itself does not determine the extent of decimal expansion; that results from market forces. As Bitcoin gains wider adoption its value will rise, prices will fall, and the decimal will periodically be moved to the next point.

Precisely, except under this type of an inflationary system ALL the savers benefit, while under a fiat currency central bank's inflation those who get the new money first(government, government contractors, big banks and big crops) benefit and the small savers get punished. This is THE problem humanity has today.

But, you forget about lost coins and GDP, which will make Bitcoin deflationary.  Technically, it is not inflationary or deflationary, but when you account for lost coins, as well as GDP growth, it will end up acting like a deflationary currency.

A deflationary currency encourages too much saving, and an inflationary currency encourages too much debt/spending.

I'm fascinated how people so easily make bullshit bogus statements like this probably merely repeating something they heard or read somewhere from someone else. How the fk do you know what a deflationary currency encourages? Did you do an experiment to confirm your hypothesis? And if not, why the pretense this is a fact of reality. Pisses me off.

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

Also, leave the personal insults out.  It reflects poorly on your character, and doesn't really compel me to respond to your inquiries.

[SgtSpike]

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

A true deflationary currency would be one in which the money supply contracts, so it would have to start at an arbitrary amount and then basically self-destruct (inflation self-destructs by dilution/overabundance). As an example, food would fit this definition because it perishes over time.

Yes, gold is inflationary, as is Bitcoin. The distinction is that Bitcoin approaches an absolute limit whereas discovery of a large supply or mining gold on the moon could continue expansion of its unit base indefinitely.

I think I see what you're trying to get at: gold and Bitcoin inflate less than overall economic expansion grows. So it isn't the currency deflating, there is simply a divergence between the growth rates. In effect, that simulates a deflationary environment - the presentation is the same, but the reasons are different.

This chart illustrates that sequence of events:

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.

A significant change occurs when market forces shift the Bitcoin decimal. Let's take another look:

Annual Potato Yield	>Total Bitcoins	>Value in Bitcoins	>Decimal Shift	Value of 1 Bitcoin
100	1,000	10.000	none to hold 10.0	1.0
1,000	1,000	1.0000	>1 to hold 10.0	1.0
10,000,000	1,000	0.0001	>5 to hold 10.0	1.0

The end result is that anyone holding 1 Bitcoin at the beginning would still have 1 Bitcoin, only now smaller fractions of a Bitcoin are needed to conduct everyday transactions. The currency remains functional in regard to price stability while existing units are not devalued, meaning that savers neither harm the system nor are harmed by it.

In a fiat system, savers are actually the enemy because stockpiling puts strain on price stability and if the stored fiat is ever disbursed in size, it can cause sizeable price disruption. For an example, imagine that a major foreign holder of US debt (bonds and the like) decided to sell; several billion dollars flooding back into the system without an immediate, commensurate balance of trade reaction would be the same as printing that money into existence. Prices of goods and services would be affected within a year, potentially causing further chain reactions that could destabilize the entire system.

What is the universal response to an inflatable money supply that is experiencing excessive demand (i.e. a liquidity crisis)? Inflation is the only answer in the end. By inflating, the decimal point is moved to the left instead of the right. We've seen this with numerous national currencies which introduce a 'new' X fiat currency, just like the old one only several zeros have been lopped off. A 100.00 denomination becomes 1.00 for a left shift of 2 places. That dilutes existing units (savings) in order to maintain price stability.

Using a money supply that is essentially fixed, and is indefinitely divisible, completely negates that problem. Gold is the same, but can only do well to certain point because it is physical, offering practical usage down to about a gram denomination. While it is theoretically possible to use gold held in custodianship to lower the limits on practical usage, that returns to issues of trust regarding financial institutions.

Bitcoin also virtually eliminates the management concerns involved with trust (there will still be weak points, notably the developers, hashing power concentration and cryptographic security). The only real questions that remain (aside from those mentioned) are of eventual widespread adoption and whether the decimal expansion will be sufficiently smoothed by market forces. Therefore, a complementary inflationary currency might not be necessary.

It's hard for those with minimal understanding of their own financial system to grasp these distinctions, and even harder for those that have made it their livelihood and gospel in understanding the existing paradigm. All economic arguments against Bitcoin so far have been bunk. The shift in recognition will be a gradually accelerating process, much like this excellent analysis.

Ok, I can agree with you on the technical definition of deflation, and that Bitcoin doesn't fit that technical definition.  But, my point is, Bitcoin is (or would be) deflationary according to currency available per capita, or currency available per GDP.  Effective deflation is what matters.

[hazek]

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

You are right this definitely is a simple and also fallacious logic. The Bitcoin economy has so far shown the complete opposite of your simple logic!

Also, leave the personal insults out.  It reflects poorly on your character, and doesn't really compel me to respond to your inquiries.

I get furious with people who just spout BS they merely heard being spouted by some other human being having zero evidence and facts to back it up. And it's this kind of irresponsible lack of critical thinking and lack of respect for the scientific method that has the whole world convinced of soo many ridiculous beliefs such as religions, statism and the con that is fiat money and central/fractional reserve banking.

[hazek]

Effective deflation is what matters.

Matters to who? You?

In case you're interest, to me it's irrelevant. What actually really matters to me is that my purchasing power isn't being stolen by some third party counterfeiting the currency.

[SgtSpike]

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

You are right this definitely is a simple and also fallacious logic. The Bitcoin economy has so far shown the complete opposite of your simple logic!

Also, leave the personal insults out.  It reflects poorly on your character, and doesn't really compel me to respond to your inquiries.

I get furious with people who just spout BS they merely heard being spouted by some other human being having zero evidence and facts to back it up. And it's this kind of irresponsible lack of critical thinking and lack of respect for the scientific method that has the whole world convinced of soo many ridiculous beliefs such as religions, statism and the con that is fiat money and central/fractional reserve banking.

The Bitcoin economy is laughable.  It has zero correlation with the real world economy.  The Bitcoin economy will show growth or shrinkage according to whether more or fewer people use it - it has nothing to do with GDP or monetary velocity, etc.  The real effects of a deflationary money supply (which Bitcoin isn't yet, since new coins are still being generated) wouldn't be seen unless Bitcoin saw massive adoption.

I am not "spouting BS I merely heard being spouted by some other human being."  Seriously, if you don't agree with my ideas, that's fine.  But don't say that I am spouting off what I heard from someone else, when I am not.  Don't say that I am not critically thinking, when I am critically thinking.  Don't say I lack respect for the scientific method, when I do have respect for the scientific method.

If you want to refute what I say, then refute it.  But don't say I am wrong just because you think I am wrong, without any sort of logic or evidence to back it up.

Effective deflation is what matters.

Matters to who? You?

In case you're interest, to me it's irrelevant. What actually really matters to me is that my purchasing power isn't being stolen by some third party counterfeiting the currency.

Matters with regards to economics.  If you have too much saving in an economy, you stifle economic growth.  And a deflationary currency encourages too much saving.  If you want to have a national economy with very little investment in new ideas because of lack of incentive to make investments, then that's fine.  All I am saying is, compared to the economy we have today (which is actually over-invested because of inflation), we would see far less innovation and progress if a deflationary currency was used.

[dree12]

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

You are right this definitely is a simple and also fallacious logic. The Bitcoin economy has so far shown the complete opposite of your simple logic!

The Bitcoin economy has thus far been hyperinflationary by a money supply perspective.

In game theory, one defines utility as the value of an asset such that two assets worth the same as one have the sum of utility same as the utility of the one. Under this simplified definition, money has current utility equal to the greatest utility that can be purchased with it. If deflationary economies are common, this does encourage postponing postponable spends.

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

Economically, a reduced demand leads not to higher prices but to lower ones. This pseudo-deflationary-spiral (or QDS, as I like to refer to it as) increases the purchasing power of currency.

[SgtSpike]

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

Economically, a reduced demand leads not to higher prices but to lower ones. This pseudo-deflationary-spiral (or QDS, as I like to refer to it as) increases the purchasing power of currency.

Yeah, I agree.  Perhaps I extrapolated too far on that statement.  I was thinking along the lines of a deflationary currency causing lower demand, companies producing fewer goods in response to that lowered demand, companies having poorer economies of scale, and thus, having to charge higher prices for the same goods.  But you're right, you also have the effect of lower demand lowering prices, just from a supply/demand curve standpoint.  And that effect is probably greater than the effect of lowered economies of scale.

[hazek]

If you want to refute what I say, then refute it.  But don't say I am wrong just because you think I am wrong, without any sort of logic or evidence to back it up.

I'm sorry but seeing how it is you who is making these wild claims about how currencies work and what kind of currency Bitcoin is and how it's all going to work out or not, the burden of proof for all these wild claims lies solely with you. I don't have to prove a damn thing. I'm perfectly comfortable pointing out that you're merely making statements without any evidence pretending as if you're teaching us some sort of facts of reality.

[hazek]

There you go again..  

Matters with regards to economics.  If you have too much saving in an economy, you stifle economic growth.  And a deflationary currency encourages too much saving.  If you want to have a national economy with very little investment in new ideas because of lack of incentive to make investments, then that's fine.  All I am saying is, compared to the economy we have today (which is actually over-invested because of inflation), we would see far less innovation and progress if a deflationary currency was used.

SAYS WHO?! HOW DO YOU KNOW ALL THIS?! FKING STOP SPREADING BS WITHOUT EVIDENCE. Did you know that there's an entire economic school of thought out there that completely DISAGREES with every single word you just wrote there? Stop making bogus statements and start supporting them with evidence and proof otherwise please, just STFU.


You know people, according to SgtSpike savings are BAD! So you better not save, you better not think of using money that has properties which will cause it to appreciate cause you're going to destroy the economy. Unless of course you're saving in a depreciating currency, then by all means, save away!

What utter nonsense.

[Qoheleth]

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

You are right this definitely is a simple and also fallacious logic. The Bitcoin economy has so far shown the complete opposite of your simple logic!

Hmm. The problem is that at the moment, Bitcoin's exchange rate is highly variable. Nobody can actually tell whether the money supply is growing faster or slower than the economy. If they did, you wouldn't have arguments on this very board about what the "fundamental" value of 1BTC is.

In real-world economies, you don't normally see that kind of volatility. I suspect that this has to do with a combination of (1) real-world economies' sizes being easier to determine, thanks to taxes and import/export laws and so forth, and (2) the immaturity of the economy making it harder to derive a "fundamental" BTC price from the market price (the significant percentage of Mt. Gox volume coming from Bitcoinica speaks to the degree to which speculation is ruling the exchanges right now).

But the upshot is that whether or not people would choose to save instead of spend if they know their money will appreciate, they can't know that in Bitcoin today. Their money may or may not appreciate on the short-term scale. Maybe tomorrow the price of Bitcoin goes up to $10! Maybe it goes back down to $3! There's no confidence in Bitcoin prices except in those people who "believe it will succeed", who are looking 10 years down the line (too far for Keynesian theories of hoarding to apply, whether or not Keynesian economics accurately describes reality). So the current economic growth doesn't really work as a counterexample when talking about how the Bitcoin economy will behave when it "matures".

It'd be better to talk about the examples of emerging economies in the real world. But I'm not familiar enough with the topic to provide good examples there.

[SgtSpike]

If you want to refute what I say, then refute it.  But don't say I am wrong just because you think I am wrong, without any sort of logic or evidence to back it up.

I'm sorry but seeing how it is you who is making these wild claims about how currencies work and what kind of currency Bitcoin is and how it's all going to work out or not, the burden of proof for all these wild claims lies solely with you. I don't have to prove a damn thing. I'm perfectly comfortable pointing out that you're merely making statements without any evidence pretending as if you're teaching us some sort of facts of reality.

It's basic economics.  Read any economics textbook, and it'll show you the same thing.

There you go again..  

Matters with regards to economics.  If you have too much saving in an economy, you stifle economic growth.  And a deflationary currency encourages too much saving.  If you want to have a national economy with very little investment in new ideas because of lack of incentive to make investments, then that's fine.  All I am saying is, compared to the economy we have today (which is actually over-invested because of inflation), we would see far less innovation and progress if a deflationary currency was used.

SAYS WHO?! HOW DO YOU KNOW ALL THIS?! FKING STOP SPREADING BS WITHOUT EVIDENCE. Did you know that there's an entire economic school of thought out there that completely DISAGREES with every single word you just wrote there? Stop making bogus statements and start supporting them with evidence and proof otherwise please, just STFU.


You know people, according to SgtSpike savings are BAD! So you better not save, you better not think of using money that has properties which will cause it to appreciate cause you're going to destroy the economy. Unless of course you're saving in a depreciating currency, then by all means, save away!

What utter nonsense.

Again, it's basic economics.  I learned this stuff in Economics 101.  Maybe you didn't take such a class.  It's like 1+1 = 2.  Anyone with common sense would agree that that formula is true, just like anyone with common sense would agree that a smarter investment with regards to a deflationary economy is an investment in the currency itself.

But, since you insist on me citing sources...

"Moreover: deflation results in gross imbalances in the economy: delayed consumption and capital investment and an increasing debt burden (in real, deflation-adjusted terms) adversely affect manufacturing, services, and employment. Government finances worsen as unemployment rises and business bankruptcies soar. Sovereign debt (government bonds) - another form of highly-liquid, "safe" investment - is thus rendered more default-prone in times of deflation."
http://www.globalpolitician.com/print.asp?id=6556

"When deflation occurs, the prices of goods and services are decreasing, so the primary goal for investors during deflationary times is to hold cash since its relative value is increasing.  One approach to holding cash includes placing money in money market funds or short term treasury bonds."
http://www.money-zine.com/Investing/Investing/Inflation-and-Deflation/

"3. May decrease investment and lending if cash holdings are seen as preferable (aka hoarding)"
http://en.wikipedia.org/wiki/Deflation

"Here, the risk-adjusted return of assets becomes negative in nature, thereby encouraging the purchasers and investors to gather money, rather than investing it in solid and assured securities. This leads to the formation of a theoretical condition known as Liquidity Trap. Liquidity trap is regarded as a critical condition as it stagnates the economy, where the nominal rate of interest becomes zero or close to zero."
http://www.economywatch.com/inflation/deflation/effects.html

Satisfied now?  I'm not just making this stuff up.  A deflationary currency WOULD and DOES stifle the economy.

[SkRRJyTC]

Funny how the entire technology industry seems to do just fine despite being hugely deflationary.  A $1000 PC today costs $500 next year... and yet people still buy. Funny huh?

[Technomage]

Funny how the entire technology industry seems to do just fine despite being hugely deflationary.  A $1000 PC today costs $500 next year... and yet people still buy. Funny huh?

Exactly.

It's actually very healthy in many ways to have a deflationary environment, which can't be understood by someone who relies on the "economics 101" as it is taught today. I would never have supported Bitcoin so strongly if the monetary model wasn't exactly what it is. Bitcoin is the first real currency that will put the Austrian school to the test and I'm confident that it'll pass the test. This will not be the problem that kills Bitcoin.

It will undoubtedly lead to a smaller economy than we have now but people will be less in debt and they will have a much more solid foundation in their personal economies. This would apply to all levels of the economy, from governments to companies and regular people. I embrace this change, people should invest money in projects that they support from other perspectives than money. Investing only based on maximum return is an old way of thinking, investing to things that matter and actually produce meaningful things is the way to go.

Consider the amount of useless crap the economy produces today, the amount of absolutely unproductive development that is done... the amount of money that is invested in stuff that is only produced because they have enough money to create a marketing campaign convincing enough to manipulate people to buy them. This behaviour will have less reinforcement in a more deflationary environment because first of all consumers will consume less crap that they don't really need and investors will think differently because they have to.

The economy wouldn't die but it certainly would be different. Consumption and development would be focused more on things that 1) consumers feel they really need and 2) what investors and enterpreneurs feel they want to develop and produce. As long as the effective deflation isn't on hyper mode, and there is no reason to believe it would with the exception of short periods of rapid userbase inflation, there will still be a lot of consuming and a lot of investing.

Simply hoarding will give you a small increase in your purchasing power, a good investment will still make you much more than that. I could go on forever but the bottom line is that not only is a monetary system like this helpful in correcting our overly materialistic way of life but it will lead to healthier and more meaningful ways of spending money. And on top of everything, it will actually help save our planet. Less consumption = good.

[hazek]

It's basic economics.  Read any economics textbook, and it'll show you the same thing.  I learned this stuff in Economics 101.  

Well well, so you are merely repeating what you heard or read from someone else pretending as if you're teaching some facts of reality. What if your precious "basic economics" has it all wrong? What then dear sir?


Please. You can shove those basic 101 economics up where the sun don't shine. Those same basic economics are what enable these huge socialistic and oppressive governments, it's those same basic economics that enable the governments around the globe to wage all these different wars, it's those same basic economics that enable wealth distribution through the invisible hand of inflation via fiat money created out of thin air by a small number of people, benefiting their friends who get it first and growing the wealth disparity bigger and bigger, it's those same basic economics that are what caused and are exacerbating the current depression and it's those same basic economics that completely failed to see it coming.

Here's an interesting thing though, not all economic thought is the same. The Austrian school of economic thought for instance strongly disagrees with the basic economics you hold so dearly, it perfectly predicted this crisis we're in right now and it's aftermath and has completely different solutions to the problem. So while your glorious basic economics has zero evidence of credibility and a long resume of disastrous failures, forgive me if I take a big steamy dump on it, and listen to the other theory that got it exactly right in every single case so far.

Satisfied now?  I'm not just making this stuff up.  A deflationary currency WOULD and DOES stifle the economy.

BULLSHIT. Citing other people saying what you're repeating after them IS NOT EVIDENCE.

[molecular]

It's simple logic.  Why would I spend money today if it'll be worth twice as much tomorrow?  I'll hold out and spend money only when absolutely necessary, and so will most other people.  This would lead to economic restriction, lack of consumer spending, and ultimately, higher prices on your everyday goods.  We'd end up spending the same money on fewer goods, effectively lowering the purchasing power of our currency.

That "simple logic" obviously fails: people are buying computers like mad although they can buy twice as many next year with the same amount of money and computers are not "absolutely necessary" to have (for most).
Another way to see it: saving is "spending later", so some poeple that have saved in the past, will spend today.

Also: any amount of a money can support any size economy given that the money is divisible enough.

So people "saving" (which is just spending later) will not harm the economy. Prices will simply adjust by free market forces: if (all else equal)...

• demand for money (not wealth) increases => people cut spending and/or sell stuff => demand for products decreases => prices of products fall
• demand for money (not wealth) decreases => people spend more and/or reduce selling of stuff => demand for products increases => prices of products rise

I hope the rage of hazek (are you hayek with a non-austrian keyboard?) wont come down on me, I will try to substantiate my claims upon request.

[hazek]

Half jokingly but still, I'm starting to get the feeling SgtSpike is payed to spread the status quo economics 101 propaganda BS over here.

[hazek]

I hope the rage of hazek (are you hayek with a non-austrian keyboard?) wont come down on me, I will try to substantiate my claims upon request.

Of course not, what you said makes perfect sense and you backed it up with real world evidence.

I just get a rage fit at zombies who don't investigate their beliefs and just blindly repeat something someone else taught them with zero evidence to back it up. It's the attitude more so than the person. And since the majority of people at no fault of their own weren't taught any critical thinking skills in school, just like I wasn't, I really don't have any patience left to give BS credibility by elevating my way of communicating to a civilized debate so I just end up in a rage.

[hazek]

At least you have a disclaimer right there in your sig! 

How nice of you to notice! 

[waspoza]

Simply hoarding will give you a small increase in your purchasing power, a good investment will still make you much more than that. I could go on forever but the bottom line is that not only is a monetary system like this helpful in correcting our overly materialistic way of life but it will lead to healthier and more meaningful ways of spending money. And on top of everything, it will actually help save our planet. Less consumption = good.

Quoted only last part, but +1 goes to entire post.

[arepo]

If you want to refute what I say, then refute it.  But don't say I am wrong just because you think I am wrong, without any sort of logic or evidence to back it up.

I'm sorry but seeing how it is you who is making these wild claims about how currencies work and what kind of currency Bitcoin is and how it's all going to work out or not, the burden of proof for all these wild claims lies solely with you. I don't have to prove a damn thing. I'm perfectly comfortable pointing out that you're merely making statements without any evidence pretending as if you're teaching us some sort of facts of reality.

It's basic economics.  Read any economics textbook, and it'll show you the same thing.

There you go again..  

Matters with regards to economics.  If you have too much saving in an economy, you stifle economic growth.  And a deflationary currency encourages too much saving.  If you want to have a national economy with very little investment in new ideas because of lack of incentive to make investments, then that's fine.  All I am saying is, compared to the economy we have today (which is actually over-invested because of inflation), we would see far less innovation and progress if a deflationary currency was used.

SAYS WHO?! HOW DO YOU KNOW ALL THIS?! FKING STOP SPREADING BS WITHOUT EVIDENCE. Did you know that there's an entire economic school of thought out there that completely DISAGREES with every single word you just wrote there? Stop making bogus statements and start supporting them with evidence and proof otherwise please, just STFU.


You know people, according to SgtSpike savings are BAD! So you better not save, you better not think of using money that has properties which will cause it to appreciate cause you're going to destroy the economy. Unless of course you're saving in a depreciating currency, then by all means, save away!

What utter nonsense.

Again, it's basic economics.  I learned this stuff in Economics 101.  Maybe you didn't take such a class.  It's like 1+1 = 2.  Anyone with common sense would agree that that formula is true, just like anyone with common sense would agree that a smarter investment with regards to a deflationary economy is an investment in the currency itself.

But, since you insist on me citing sources...

"Moreover: deflation results in gross imbalances in the economy: delayed consumption and capital investment and an increasing debt burden (in real, deflation-adjusted terms) adversely affect manufacturing, services, and employment. Government finances worsen as unemployment rises and business bankruptcies soar. Sovereign debt (government bonds) - another form of highly-liquid, "safe" investment - is thus rendered more default-prone in times of deflation."
http://www.globalpolitician.com/print.asp?id=6556

"When deflation occurs, the prices of goods and services are decreasing, so the primary goal for investors during deflationary times is to hold cash since its relative value is increasing.  One approach to holding cash includes placing money in money market funds or short term treasury bonds."
http://www.money-zine.com/Investing/Investing/Inflation-and-Deflation/

"3. May decrease investment and lending if cash holdings are seen as preferable (aka hoarding)"
http://en.wikipedia.org/wiki/Deflation

"Here, the risk-adjusted return of assets becomes negative in nature, thereby encouraging the purchasers and investors to gather money, rather than investing it in solid and assured securities. This leads to the formation of a theoretical condition known as Liquidity Trap. Liquidity trap is regarded as a critical condition as it stagnates the economy, where the nominal rate of interest becomes zero or close to zero."
http://www.economywatch.com/inflation/deflation/effects.html

Satisfied now?  I'm not just making this stuff up.  A deflationary currency WOULD and DOES stifle the economy.

have you ever, once, had the thought that perhaps economics textbooks have a strong Keynesian bias?

don't patronize people it's unforumly

[SgtSpike]

Funny how the entire technology industry seems to do just fine despite being hugely deflationary.  A $1000 PC today costs $500 next year... and yet people still buy. Funny huh?

Exactly.

It's actually very healthy in many ways to have a deflationary environment, which can't be understood by someone who relies on the "economics 101" as it is taught today. I would never have supported Bitcoin so strongly if the monetary model wasn't exactly what it is. Bitcoin is the first real currency that will put the Austrian school to the test and I'm confident that it'll pass the test. This will not be the problem that kills Bitcoin.

It will undoubtedly lead to a smaller economy than we have now but people will be less in debt and they will have a much more solid foundation in their personal economies. This would apply to all levels of the economy, from governments to companies and regular people. I embrace this change, people should invest money in projects that they support from other perspectives than money. Investing only based on maximum return is an old way of thinking, investing to things that matter and actually produce meaningful things is the way to go.

Consider the amount of useless crap the economy produces today, the amount of absolutely unproductive development that is done... the amount of money that is invested in stuff that is only produced because they have enough money to create a marketing campaign convincing enough to manipulate people to buy them. This behaviour will have less reinforcement in a more deflationary environment because first of all consumers will consume less crap that they don't really need and investors will think differently because they have to.

The economy wouldn't die but it certainly would be different. Consumption and development would be focused more on things that 1) consumers feel they really need and 2) what investors and enterpreneurs feel they want to develop and produce. As long as the effective deflation isn't on hyper mode, and there is no reason to believe it would with the exception of short periods of rapid userbase inflation, there will still be a lot of consuming and a lot of investing.

Simply hoarding will give you a small increase in your purchasing power, a good investment will still make you much more than that. I could go on forever but the bottom line is that not only is a monetary system like this helpful in correcting our overly materialistic way of life but it will lead to healthier and more meaningful ways of spending money. And on top of everything, it will actually help save our planet. Less consumption = good.

I appreciate a response like this.  Well thought out, with sound logic and reasoning behind it.  You and I may disagree, but at least you have legitimate reasons for disagreeing with me.  And it sounds like we do agree on some of the basics (the fact that the economy would be vastly different than it is today, for example).

The technology example is a good one too.  I don't have a rebuttal against that at this time.

All hazek (and a few others in this thread) are doing is saying I'm wrong without anything to back it up.  I'm done responding to them until they come up with legitimates response to everything I have already posted.

[miscreanity]

Thanks for the compliments; there are a lot of strong thinkers in the Bitcoin community. Much of what I've put together is based on prior ideas from the likes of Martin Armstrong, Jim Sinclair, FOFOA, Ray Kurzweil, et al.

But, you forget about lost coins and GDP, which will make Bitcoin deflationary.  Technically, it is not inflationary or deflationary, but when you account for lost coins, as well as GDP growth, it will end up acting like a deflationary currency.

Lost coins are a short-term factor, but long-term they shouldn't be an issue. As hashing power rises, it should become progressively easier to find a particular hash sequence to allow lost coins to be used. This would be akin to recycling or exploring sunken shipwrecks for treasure: it isn't economically practical today, but very likely will be in a not-too-distant future.

Ok, I can agree with you on the technical definition of deflation, and that Bitcoin doesn't fit that technical definition.  But, my point is, Bitcoin is (or would be) deflationary according to currency available per capita, or currency available per GDP.  Effective deflation is what matters.

Yes, that's what I was moving toward with this (aside from lost units):

... gold and Bitcoin inflate less than overall economic expansion grows. So it isn't the currency deflating, there is simply a divergence between the growth rates. In effect, that simulates a deflationary environment - the presentation is the same, but the reasons are different.

So you're right - in general we don't use the term deflation in isolation, but in relation to other asset classes (including population). Sometimes the uses get conflated, so it can help to separate them. Of course, Bitcoin's asymptotic limit is much more rigid than that of gold and closer to being truly deflationary in all senses.

The Bitcoin economy has thus far been hyperinflationary by a money supply perspective.

Yes, and it says a lot when the adoption rate in external capital inflows have been able to push the exchange rate up regardless of the hyperinflation.

The problem is that at the moment, Bitcoin's exchange rate is highly variable.

...

It'd be better to talk about the examples of emerging economies in the real world.

Good observation - businesses can't project for future orders without a stable financial platform. This is why fiat works so well for price stability by matching economic growth.

I consider gold's history to be the most relevant proxy for Bitcoin's development. Gold wasn't always used as savings - it started out as a transactional currency or conduit for transfer of other assets, just as Bitcoin is performing now. Since gold wasn't immediately useful as food or for tools, it served best as a means of acquiring things that would make life easier. Mostly very high net-worth individuals held it for wealth storage until relatively recently.

There's some further technical analysis comparison in addition to this chart:

Bitcoin is the first real currency that will put the Austrian school to the test and I'm confident that it'll pass the test.

It's just a shame many Austrian economists consider Bitcoin to be little more than a curiosity doomed to failure, generally because of anachronistically arbitrary assumptions based on the commodity origins of money. Maybe that's because of so much time spent applying mathematics practically while being wary of the purely abstract?

Also: any amount of a money can support any size economy given that the money is divisible enough.

That's key - and it's been attempted before with earlier e-currencies, but Bitcoin finally hit on the magic formula.

e-gold:Myspace as Bitcoin:Facebook

[muyuu]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

I think this would be the best solution... however it would be such a fundamental change I'm afraid it might as well bring bitcoin down as a whole. I wish it was devised like that in the first place.

I will elaborate.

If the community can change something as fundamental as this - other changes discussed to date are more understandable: they respond to the problem that we know for a fact that bitcoin won't scale long term as is, thus they were completely predictable in a broad sense - that would simply destroy one of bitcoin's main premises: predictable money supply. Basically, it would set such a precedent that we wouldn't know whether we may or may not have an exponentially inflated currency in a few years time. All it takes is 51% agreement by miners. And 51% of the miners is just agreement between the main 2~4 pools. This makes the whole direction of the system dependent on the will of people. Worse even, the will of relatively few influential people. That would be bitcoin's main premise blown out of the water right there.

But it's true that constantly increasing money supply is a lot more stable and less inflationary than ANY constant-proportion increasing of money supply (which means exponential growth no matter how small the %). Constantly adding 50 BTC per block would still be less inflation long term than having it fixed to 1%, or to 0.1%, or to 0.00000001%. Yet most people would agree that "this is no inflation at all." But obviously, that's long term. As long as bitcoin is young, this 50 BTC per block means a big chunk of the available money supply.

A $1000 PC today costs $500 next year... and yet people still buy. Funny huh?

I'm willing to experiment this deflationary theory but I honestly believe it won't work. The main reason is "currency elasticity." Anywhere you hear about bitcoin's value you have it referenced to a fiat currency. Typically US$. Bitcoin doesn't work as good money, people must immediately replenish their reserves in something else because there is nowhere near enough stability in the real market to have a high % of exposure to bitcoin. Computers are not so easily substituible. If they were, I would convert my computer to cash with no loss at night and convert the cash back into a slightly better computer just before I need to use it again. But that's simply not possible. I have stuff installed, there is a set up and there is a friction every time you buy and sell. That right there is the main difference and why deflationary spirals are so destructive to an economy. The problem is the world can afford to substitute/phase out bitcoin rendering our coins near-zero real value.

[Qoheleth]

Simply hoarding will give you a small increase in your purchasing power, a good investment will still make you much more than that.

It took me a while to fully process this claim, because at first glance it seemed to me like it might not work out.

If the money supply is constant (M = 21 Million BTC, forever and ever) then each Bitcoin will have an intrinsic value of something like V/M, where V is the total value of all the "stuff" being exchanged in the Bitcoin economy. Any "good investment" is, in essence, putting your money behind some attempt to create new V - which claims that, with a certain capital C, you can create a certain value dV. If you invest, that's the rate of return you'll get - dV/C. Whereas, if you just bury your money in the ground, you'll get... the total increase of value the entire economy has produced, divided by your share of the money. So at first glance
you have dV/C versus (avg dV/C * V)/V, which means that unless you can invest in something better than the average investment, it'd be better to just hoard.

But really, not every ounce of value in the economy is being used to generate more value; if it was, there'd be no point! Rather, some is being used as capital, and some is being consumed - the kind of things whose value is in feeding people, maintaining the places they stay, protecting them, and making them happy. So as long as your investment isn't worse than average by a factor of (V/C), I think the math works out.

Huh. That's pretty neat, actually.

Lost coins are a short-term factor, but long-term they shouldn't be an issue. As hashing power rises, it should become progressively easier to find a particular hash sequence to allow lost coins to be used. This would be akin to recycling or exploring sunken shipwrecks for treasure: it isn't economically practical today, but very likely will be in a not-too-distant future.

I really, really don't like this. If the private key to an address with "lost" BTC can be broken, so can the private key to an address with held BTC - money being used today, with an unambiguous owner. If you're basing your hopes on someone breaking the underlying cryptographic problems that make Bitcoin work...

[hazek]

.

You and I may disagree, but at least you have legitimate reasons for disagreeing with me.

Basically no matter what anyone around here says, this guy knows what are the facts of reality when it comes to economic theory and there's no convincing him otherwise hence why I didn't bother even trying.  

[molecular]

Lost coins are a short-term factor, but long-term they shouldn't be an issue. As hashing power rises, it should become progressively easier to find a particular hash sequence to allow lost coins to be used.

I think you're misinterpreting something here. Some explanations:

• Finding a hash (more correctly "solution nonce") does not allow spending of coins. I think you mean "finding of a private key"?
• finding the private key to an address (necessary to recover lost coins or steal coins from someone) is not the same operation as mining. Neither does it somehow happen as a byproduct of mining
• Even if that was the case, it would be like mining at mind-boggling difficulty... just not feasable.
• it would still be magnitudes more profitable to just simply mine for transaction fees (assuming mining subsidy is zero and all bitcoins mined) than to try to find keys to lost (or not-lost) coins. Even with half a million BTC on a single address. Therefore everyone with hardware on his hands will mine, not search the sea-floor for lost coins.
  

[kjj]

Lost coins are a short-term factor, but long-term they shouldn't be an issue. As hashing power rises, it should become progressively easier to find a particular hash sequence to allow lost coins to be used.

I think you're misinterpreting something here. Some explanations:

• Finding a hash (more correctly "solution nonce") does not allow spending of coins. I think you mean "finding of a private key"?
• finding the private key to an address (necessary to recover lost coins or steal coins from someone) is not the same operation as mining. Neither does it somehow happen as a byproduct of mining
• Even if that was the case, it would be like mining at mind-boggling difficulty... just not feasable.
• it would still be magnitudes more profitable to just simply mine for transaction fees (assuming mining subsidy is zero and all bitcoins mined) than to try to find keys to lost (or not-lost) coins. Even with half a million BTC on a single address. Therefore everyone with hardware on his hands will mine, not search the sea-floor for lost coins.
  

People have a hard time understanding just how big 2^256 is.

Say that bitcoin was totally distributed down to the satoshi level.  That is, all 21 million coins exist and have been spread around so that each 0.000 000 01 BTC was stored by a different keypair.  Got that?  2.1 * 10¹⁵ different key pairs.  Your job is to find one of them.

On average, how many random numbers do you have to try before you find one?

57896044618658097711785492504343953926634992332820282019728792

You are better off mining.

[miscreanity]

Finding a hash (more correctly "solution nonce") does not allow spending of coins. I think you mean "finding of a private key"?

Yes, thank you for clarifying - solution nonce/private key is what I should've said

From our perspectives here and now, 2^256 does seem incalculably enormous. So did multiple gigabytes of memory when 640k was supposed to be Moore than anyone would need. Consider the breakthroughs occurring on a regular basis with graphene as a potential successor to silicon for ICs and rapid advances in quantum computing.

Even if the Bitcoin protocol eventually shifts to another algorithm old coins that have been lost will still remain in the system, so long as there is some form of backward compatibility. Should there be widespread adoption, a single full BTC could be worth an enormous amount of relative wealth. For familiarity and simplicity, let's hypothetically assume a 1x10^15 USD size global economy (1 quadrillion dollars) that has fully transformed to a Bitcoin economy (pick any date, let's say 2020).

1,000,000,000,000,000 / 21,000,000 = ~47.6mm USD/BTC

Assuming 0.5% loss at that point means there will be:

21,000,000 * 0.005 = 105,000 lost BTC

That's a good number of Bitcoins that would be worth a lot of money in the above scenario.

1x10^15 * 0.005 = $5,000,000,000,000 equivalent

For a potential bounty of $5 trillion today, you can bet there'd be dozens of contestants vying for the prize(s). Even at 100th the reward ($10 trillion), the pot would still be worth $50 billion, and System D is estimated to be a $10 trillion USD market that could conceivably adopt Bitcoin very readily. It would only be a matter of time before some enterprising mathematician(s) decided to tackle the conundrum; after all, people have worked on far more difficult solutions for free.

You could call it a lottery for people who can do math. There may even be countdowns as the last 'lost coins' are reclaimed, allowing the protocol to sever the backward compatible cruft and forge ahead with renewed freedom.

An alternative would be that a parallel, more advanced system is developed, letting the existing Bitcoin platform languish to a point where it becomes susceptible to other attacks. The residual wealth could then be extracted before it collapses entirely. Hypothetically.

Kurzweil offers an analysis of the powerful returns from aggregate advances in technology. Everything has held quite accurately so far, and it certainly does seem that the pace has accelerated even from the Internet's rise during the 1990s.

We just have to keep the curve in mind...

"The greatest shortcoming of the human race is our inability to understand the exponential function."
Albert A. Bartlett, Ph.D
Professor of Physics at the University of Colorado at Boulder

I discovered this guy watching this video :
http://www.albartlett.org/presentations/arithmetic_population_energy_video1.html

It is a MUST watch !

Getting way out there, I've also speculated on the possibility that generalized Bitcoin systems could lay the foundation for a super-intelligence which we may need to merge with or face extinction, so maybe this monetary stuff won't even hold that much importance. All that, and I have a normal haircut

[kjj]

1x10^15 * 0.005 = $5,000,000,000,000 equivalent

57896044618658097711785492504343953926634992332820282019728792

Do you see the difference in scales?

57,896,044,618,658,097,711,785,492,504,343,953,926,634,992,332,820,282,019,728,792 5,000,000,000,000

If old coins are ever recovered, it will be because of amazing breakthroughs in cryptography, not through better calculating machines.

[molecular]

Finding a hash (more correctly "solution nonce") does not allow spending of coins. I think you mean "finding of a private key"?

Yes, thank you for clarifying - solution nonce/private key is what I should've said

From our perspectives here and now, 2^256 does seem incalculably enormous. So did multiple gigabytes of memory when 640k was supposed to be Moore than anyone would need. Consider the breakthroughs occurring on a regular basis with graphene as a potential successor to silicon for ICs and rapid advances in quantum computing.

Ok, I suspected this might happen, you make me pull out numbers

I'm not denying moores law, let's assume something similar is effective for computational power and the computational power doubles every year (it's probably a little less, but I'll go with that). Let's further assume that checking wether a given nonce is a solution requires the same amount of computation as checking wether a given private key unlocks a bitcoin address.

Ther current bitcoin networks' hashing power is 1THash/s, that's 2^40 hashes/s. Let's further assume miners are willing to pause mining for 2 weeks (2^20 seconds) to "look for old coins". This means ⁽under the assumptions) in these 2 weeks we could, with current hashing power, check 2^62 keys in 2 weeks.

Let's assume we have a list of potential addresses with lost (or to-be-stolen) coins of 1 million addresses (2^20). Now keep in mind comparing 2 values takes time, so we have to run through the whole list for every potential key. Let's assume, though, this doesn't cost us any time and we can check a private key simultaneously for the whole list (I might be confusing something about "checking if private key works for address, don't know ecdsa that well, but the thoughts and calculations wills till be valid).

How many years of doubling compute power will it take until we can recover the coins within a 2 week period? 256-62 = 194 years.

So actually, yes, I have to agree with you (if my assumptions hold and calculations are correct), at some point in roughly 200 years it will become feasable to scan the ocean floor for lost coins.

If my assumptions hold and calculations are correct, I'd guess around 150 years from now, our grand*12-children will change the signature algorithm and require "old coins" to be transferred to the new algorithm (there will be a grace period, let's say 25 years). After these 25 years passed we will finally know how many coins were lost and the treasure hunt for ancient coins may begin, a second gold- (or rather bitcoin-) rush.

[dree12]

Lost coins are a short-term factor, but long-term they shouldn't be an issue. As hashing power rises, it should become progressively easier to find a particular hash sequence to allow lost coins to be used.

I think you're misinterpreting something here. Some explanations:

• Finding a hash (more correctly "solution nonce") does not allow spending of coins. I think you mean "finding of a private key"?
• finding the private key to an address (necessary to recover lost coins or steal coins from someone) is not the same operation as mining. Neither does it somehow happen as a byproduct of mining
• Even if that was the case, it would be like mining at mind-boggling difficulty... just not feasable.
• it would still be magnitudes more profitable to just simply mine for transaction fees (assuming mining subsidy is zero and all bitcoins mined) than to try to find keys to lost (or not-lost) coins. Even with half a million BTC on a single address. Therefore everyone with hardware on his hands will mine, not search the sea-floor for lost coins.
  

People have a hard time understanding just how big 2^256 is.

Say that bitcoin was totally distributed down to the satoshi level.  That is, all 21 million coins exist and have been spread around so that each 0.000 000 01 BTC was stored by a different keypair.  Got that?  2.1 * 10¹⁵ different key pairs.  Your job is to find one of them.

On average, how many random numbers do you have to try before you find one?

57896044618658097711785492504343953926634992332820282019728792

You are better off mining.

Imagine that every person in the world generates an address every month, which is preety conservative. Because RIPLIB160 offers 160 bits of entropy, a single address has 2^160 possible values at maximum. This means that after 1461501637330902918203684832716283019655932542976 (2^160) addresses are generated, the next address is guarenteed to be a collision.

Assume that thus far, 0 addresses have been generated and the world's population is 7 billion. Assume the world's population increases by 1% every year. Therefore, the formula for amount of addresses generated each year is:

Code:

1.01^year * 8.4*10^10

And the forumla for cumalative addresses, by summation of a power series, is:

Code:

8.4*10^10 * (100 * 1.01^year - 100)

It is easy to verify that in 8155 years, a collision will occur even without anyone trying to make one.

This post is tounge-in-cheek, please do not try to correct it. There is an assumption in here I would never under normal circumstances make, so it is not necessary to point out the major flaws in this analysis. Let the other people figure it out for themselves.

[westkybitcoins]

I hope the rage of hazek (are you hayek with a non-austrian keyboard?) wont come down on me, I will try to substantiate my claims upon request.

Of course not, what you said makes perfect sense and you backed it up with real world evidence.

I just get a rage fit at zombies who don't investigate their beliefs and just blindly repeat something someone else taught them with zero evidence to back it up. It's the attitude more so than the person. And since the majority of people at no fault of their own weren't taught any critical thinking skills in school, just like I wasn't, I really don't have any patience left to give BS credibility by elevating my way of communicating to a civilized debate so I just end up in a rage.

Don't get so worked up. You'll just increase your blood pressure and die early.

Sorry... I don't have time to provide citations.

[hazek]

I hope the rage of hazek (are you hayek with a non-austrian keyboard?) wont come down on me, I will try to substantiate my claims upon request.

Of course not, what you said makes perfect sense and you backed it up with real world evidence.

I just get a rage fit at zombies who don't investigate their beliefs and just blindly repeat something someone else taught them with zero evidence to back it up. It's the attitude more so than the person. And since the majority of people at no fault of their own weren't taught any critical thinking skills in school, just like I wasn't, I really don't have any patience left to give BS credibility by elevating my way of communicating to a civilized debate so I just end up in a rage.

Don't get so worked up. You'll just increase your blood pressure and die early.

Sorry... I don't have time to provide citations.

Thanks for the advice  Btw I like your signature!

[mikerbiker6]

Bump

[jamesc760]

Why the bump?

This is an old, obsolete thread.

Next halving, to 12.5 BTC, is not due until late 2015 or early 2016.

[bitcoinsrus]

Why the bump?

This is an old, obsolete thread.

Next halving, to 12.5 BTC, is not due until late 2015 or early 2016.

+1

[mikerbiker6]

yeah, thought that would be funny.

[RoadTrain]

Actually it's interesting that previous halving coincided with a price bump that eventually leaded to an April bubble.

Is it a mere coincidence? A reason or an excuse for a bubble?

[Bitcoin BEAR]

Actually it's interesting that previous halving coincided with a price bump that eventually leaded to an April bubble.

Is it a mere coincidence? A reason or an excuse for a bubble?

Definitely just a reason to bubble.
This was public knowledge and should have been well priced in long before we got to it. The next halving is a ways away, so it has little influence over price as of yet, but it will eventually cause a boom as long as Bitcoin doesn't die first.
NO, I'm not saying Bitcoin is doomed, just that a lot can happen in 2 years so you don't know.

[Rival]

Halving in August 2016 if things keep going the way they are.

120,000 more blocks or so to go.

It will be here before we know it.

[painlord2k]

Halving in August 2016 if things keep going the way they are.

120,000 more blocks or so to go.

It will be here before we know it.

Current estimate is August but, depending on the increasing of hashing, it could be July (even the end of June).

When the pricing of the next halving will start to creep in the price we will start to see the real fireworks.
The current inflation rates of USD and BTC are in favor of USD (6% year inflation against 11% year inflation for BTC) and the price is driven by adoption (more users, more uses, better features).
When the BR drop to 12.5 BTC/block, the internal inflation rate of the BTC will be around 4.5% (and surely no more than 5.5% as the hashing would need to increase 20% every 12 days).

My understanding of economics and politics tell me the Fed and other Central Banks (CBs) like the ECB, BoJ, BoC can not reduce the printing of new currency under the 6% year (and probably can not go under 10% for  an extended time period). If they do so, they get an economic implosion by bank's defaults and massive deflationary depression. No politician and no central banker will want this under his watch, so they will delay it knowing they will no pay the cost of delaying the resolution of the crisis.

As we see increasing inflation in the monetary mass and credit deflation, bitcoin will become increasingly appetible to economic actors.
When Bitcoin will be inflating slower than USD, its exchange rate will soar continuously as people exchange increasing quantity of USD for BTC and give back their USD to banks to pay back their debts with a devaluing currency.

[Pente]

Actually it's interesting that previous halving coincided with a price bump that eventually leaded to an April bubble.

Is it a mere coincidence? A reason or an excuse for a bubble?

I am convinced mining puts a lot of downward pressure on bitcoin prices. I think most have to sell what they mine to cover costs.

So when the block reward halved, the downward pressure was cut in half.

[dree12]

Actually it's interesting that previous halving coincided with a price bump that eventually leaded to an April bubble.

Is it a mere coincidence? A reason or an excuse for a bubble?

I am convinced mining puts a lot of downward pressure on bitcoin prices. I think most have to sell what they mine to cover costs.

So when the block reward halved, the downward pressure was cut in half.

There is an argument that all mined coins are sold: every mined coin must fulfil someone's demand, be it a buyer or the miner itself. So even miners who keep the coins are buying less than they otherwise would have—the mined coins are being sold to themselves.

This means that every mined coin either increases the supply (by sale on the market) or reduces the demand (by fulfilling the miner's own demand). So the amount of coins mined is a big deal! The question then becomes, has the market priced all this in?

[mikerbiker6]

Actually it's interesting that previous halving coincided with a price bump that eventually leaded to an April bubble.

Is it a mere coincidence? A reason or an excuse for a bubble?

I am convinced mining puts a lot of downward pressure on bitcoin prices. I think most have to sell what they mine to cover costs.

So when the block reward halved, the downward pressure was cut in half.

There is an argument that all mined coins are sold: every mined coin must fulfil someone's demand, be it a buyer or the miner itself. So even miners who keep the coins are buying less than they otherwise would have—the mined coins are being sold to themselves.

This means that every mined coin either increases the supply (by sale on the market) or reduces the demand (by fulfilling the miner's own demand). So the amount of coins mined is a big deal! The question then becomes, has the market priced all this in?

What do you mean by, 'has the market priced all this in'.

I am convinced mining puts a lot of downward pressure on bitcoin prices. I think most have to sell what they mine to cover costs.

So when the block reward halved, the downward pressure was cut in half.

agreed

[21pilot]

what is the exact date for the next change of block rewards?
I know it is in (late?) 2016, but would like to know the exact date.

[FeedbackLoop]

what is the exact date for the next change of block rewards?
I know it is in (late?) 2016, but would like to know the exact date.

There is no exact date. But look up at what block it happens and then divide by the recent averaged block time (lets say over a couple of months). If the hashrate maintains the rate of increase then the date that you get will be close to the actual date.
 

[21pilot]

what is the exact date for the next change of block rewards?
I know it is in (late?) 2016, but would like to know the exact date.

There is no exact date. But look up at what block it happens and then divide by the recent averaged block time (lets say over a couple of months). If the hashrate maintains the rate of increase then the date that you get will be close to the actual date.
 

where do I find the information at what block number the decrease should happen? thank you anyways for your help

[bitcoinsrus]

what is the exact date for the next change of block rewards?
I know it is in (late?) 2016, but would like to know the exact date.

There is no exact date. But look up at what block it happens and then divide by the recent averaged block time (lets say over a couple of months). If the hashrate maintains the rate of increase then the date that you get will be close to the actual date.
 

where do I find the information at what block number the decrease should happen? thank you anyways for your help

http://bitcoinclock.com/
Reward-Drop ETA: 2016-08-18 03:57:50 UTC (116 weeks, 5 days, 17 hours 30 min) from now
<2.24 years from this moment reward halves

[tuneman1980]

I'm eagerly counting down to the block reward halving with http://cryptocoinstats.com/supplytracker.php?s=tt

LTC: 1 year, 3 months, 7 days, 21 hours, and 43 minutes    
BTC: 2 years, 2 months, 25 days, 17 hours, and 30 minutes

I anticipate large price increases like there was with Bitcoin.

[21pilot]

I anticipate large price increases like there was with Bitcoin.

at current prices there must be an influx of 1,89 million $ per day if all mined BTC are sold immediately...
after the block reward change only 945k $ per day would be needed in order to maintain the price.

Therefore I completely agree with you that a BTC price increase is basically the lock of the century
(assuming that the price doesn´t reach new heights well before the block reward change or some major
event like a flaw in the bitcoin protocol or something similar)

thank you guys!