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Author Topic: A modest amount of inflation should be part of bitcoin  (Read 16326 times)
infra172
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April 24, 2011, 07:31:31 PM
 #21

You have no idea what you're talking about. 

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April 24, 2011, 08:18:01 PM
 #22

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Bitcoins are only really worth anything through their ability to buy something with BTC. Anything else is pure speculation, and again, I have no facts or empirical observations to back this up but purely as an outside observer it seems like there's a lot more speculation than actual trade going on.

The daily turn over on the forex market is 4 trillion USD. That's like a third of the outstanding federal government debt speculated upon each and every single day. And that doesn't stop you from using USD. What should be stopping you is inflation.

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April 24, 2011, 09:09:36 PM
 #23

Do you see the same problems for gold that you see for bitcoins? Rather, does the outside observer see these problems with gold as well?

My guess is probably, but gold has the advantage of it's already established as a measure of worth. I personally would level almost all the criticism most people poke at Bitcoin at gold too, were it not already established. As you pointed out, it's pretty rough buying something for gold from most people... and you can't eat it. But for some unknown reason, gold is considered to have worth because it's almost universal in someone's willingness to buy it from you.

A more fitting question to ask, I think, is this: is gold worth what the market says it's worth right now? Industrial uses aside, gold too is only worth the equivalent of your ability to convince someone else to take it off your hands.

The USD is only worth anything because as a matter of policy people are already convinced to take it off your hands.

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As long as there are people who exchange other currencies for bitcoins, bitcoin doesn't really need to be able to make purchases.

Isn't the intention to make a global peer2peer currency for the exact purpose of making purchases though?  Maybe I misunderstood the purpose of Bitcoin, but a circle-jerk for investments with no real purchasing power didn't really strike me as the ultimate goal.

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One could also argue that anything is speculation. If I hold on to my federal reserve notes today, will they be worth as much tomorrow? Does it matter that I can purchase goods with them or not when the price of goods can change as quickly as, well, the price of gas!

Almost certainly not, but again you don't really see anyone holding onto USD do you (putting $1k into a tin can in your backyard is about the silliest thing you could do with it)?

You have no idea what you're talking about. 

That's constructive. Cheesy

The daily turn over on the forex market is 4 trillion USD. That's like a third of the outstanding federal government debt speculated upon each and every single day. And that doesn't stop you from using USD. What should be stopping you is inflation.

And of those currencies traded on Forex, are any of them not mandated by policy of one or more countries, or are not already entrenched as having worth? Barring having some authority telling you you must accept it as payment, or having an established-and-widely-accepted imaginary value, Bitcoin is already "pushing shit up hill".

Having more and more people accept it as a form of payment would help it become actually useful, which it seems to me is an effort that's choked if someone mines BTC as part of a pool, buys some services off a merchant, then the merchant decides to speculate on the BTC's worth and sits on the coins.

Again, from an outsider's perspective it seems like Bitcoin is 5% actual usable currency, and 95% people saying "these are going to be worth a buttload one day" without actually doing anything to advance them toward being useful. If that's a correct assumption, what can be done to fix it? If it's an incorrect assumption, what can be done to convince outsiders?

Arguing that it doesn't matter as long as speculators will continue buying it for USD... doesn't that sound kind of bubble-ish?

^_^
infra172
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April 24, 2011, 09:48:58 PM
 #24

Being constructive isn't the goal. If you're advocating theft, I'm not going to help you "construct" anything.

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April 24, 2011, 10:08:03 PM
 #25

And of those currencies traded on Forex, are any of them not mandated by policy of one or more countries, or are not already entrenched as having worth? Barring having some authority telling you you must accept it as payment, or having an established-and-widely-accepted imaginary value, Bitcoin is already "pushing shit up hill".

Having more and more people accept it as a form of payment would help it become actually useful, which it seems to me is an effort that's choked if someone mines BTC as part of a pool, buys some services off a merchant, then the merchant decides to speculate on the BTC's worth and sits on the coins.

Again, from an outsider's perspective it seems like Bitcoin is 5% actual usable currency, and 95% people saying "these are going to be worth a buttload one day" without actually doing anything to advance them toward being useful. If that's a correct assumption, what can be done to fix it? If it's an incorrect assumption, what can be done to convince outsiders?

Arguing that it doesn't matter as long as speculators will continue buying it for USD... doesn't that sound kind of bubble-ish?

My point was that there is a buttload of dollars, euros, yens and god knows what else going from hand to hand everday for sole purpose of extra some wealth in the process, and yet it isn't hurting the stability of those currency at all, even though this buttload is about 90% of all the usd, eur and yen traded each and every day. So in regard of this long term, real life example, the spending and speculating pattern of Bitcoin is not different from those of government enforced currencies, which proves 2 things: That this speculation doesn't will not stop vendors from joining, and that Bitcoin is functioning properly as a currency.

As for the bubble part, that is indeed true, but keep in mind that any new business will know a bubbling growth until it reaches its actual load capacity on the market.

Also Bitcoin goal is not necessarily to attract vendors and entrench itself in an everyday use. That would be a nice consequence, but the primary goal is to be a proper store of value. Look at gold for an example.

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marcus_of_augustus
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April 24, 2011, 10:48:23 PM
 #26

Some of these arguments are switching between effects associated with different time scales. At present, Bitcoin IS inflating, at a huge rate in fact, around 33% this year and 25% next year. The deflationary "currency dividend" that seems to be hated is not going to be enjoyed until out into the far future. At least base your arguments on either the current state or a future one specifically.

In the long term, most of the speculation and sitting on coins going on now will abate when a more stable market value for bitcoin has been established. This may not happen for some time, i.e. when the current rate of inflation of bitcoin and growth of demand for bitcoin equilibriate.

Muddying the waters with mixed arguments pertaining to effects from vastly different time scales is pointless.

Also we need a graph showing the projected inflation rate for bitcoin ... so when another noob comes and says "... but, but what about nasty deflation you can point them at the chart ...." and say, "get back to me in 20 years time and we'll see if it is problem."

Over-valuation due to speculation is a different matter.

elggawf
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April 25, 2011, 12:16:28 AM
 #27

Also Bitcoin goal is not necessarily to attract vendors and entrench itself in an everyday use. That would be a nice consequence, but the primary goal is to be a proper store of value. Look at gold for an example.

That's actually helpful to my understanding, as is moa's comment.

Again, I'm not advocating anything... I just hear outside criticisms of Bitcoin's approach, and a lot of the time it's dismissed without anyone actually explaining why the criticism isn't valid.

^_^
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April 25, 2011, 12:28:14 AM
 #28

If I were Satoshi...  I would have built a modest amount of inflation in to bitcoin.  "Modest inflation is what most people are comfortable and familiar with," I would have reasoned to myself, "so that's the right thing to do."

However... I'm not so sure that would have worked.  It is very nice to be able to say "bitcoins are valuable because they are rare, and they are rare because they are designed that way-- there will never be more than 21-million of them."  That is easy to understand, and gives bitcoins a clear advantage over existing currencies.


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April 25, 2011, 01:25:58 AM
 #29

Fixed money supply = Let the market determine prices

Inflationary money supply = Re-allocate wealth to an undeserving entity

Inflationary policy is the ant-market solution. And we all love free markets ;-)
Ian Maxwell
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April 25, 2011, 04:36:33 AM
 #30

So if the supply of gold were theoretically infinite, but limited at any one point in time, it would be a poor choice of currency? Not only a poor choice, in fact, but an anti-market choice?

And stored electrical energy (in the form of, say, batteries) would be a terrible form of currency because more could be generated? Again, not only a poor choice but an unfree one that redistributes wealth to the undeserving?

I really don't think this argument generalizes very well.

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April 25, 2011, 05:03:21 AM
 #31


A modest inflation of say 1% ?  would preserve the award mechanism to promote productivity for individuals/small groups,

I'm not sure if I missed it, but I'm really surprised that no one had pointed out that Bitcoin currently inflates at around 40% APR, and will continue to be inflationary for as long as some of us could hope to live.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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April 25, 2011, 05:06:59 AM
 #32


A modest inflation of say 1% ?  would preserve the award mechanism to promote productivity for individuals/small groups,

I'm not sure if I missed it, but I'm really surprised that no one had pointed out that Bitcoin currently inflates at around 40% APR, and will continue to be inflationary for as long as some of us could hope to live.

Interesting point...I forgot about that...

"We will not find a solution to political problems in cryptography, but we can win a major battle in the arms race and gain a new territory of freedom for several years.

Governments are good at cutting off the heads of a centrally controlled networks, but pure P2P networks are holding their own."
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April 25, 2011, 06:08:27 AM
 #33

What's wrong with everyone holding onto it?

While I don't feel strongly enough about it to argue in favor of inflation (I was just speaking about my layman's understanding of the argument behind it), my issue with this particular comment is simple:

Bitcoins are only really worth anything through their ability to buy something with BTC.

How does "everybody wants to hold on to them" == "Bitcoins can't be used to buy something" ?  If anything, deflation increases your ability to spend them because more people would like to have them.

Also, even if it is only exchanged with other currencies, it will be valuable exactly for that reason.  Once the BTC<-> fiat process is smoothed out a bit more, anyone in the world can sell goods to you in your local currency, buy bitcoins, and sell them for their local currency.  BTC <-> fiat conversions are still a bit pricey, but as volume goes up and more players enter the exchange market the price should come down.

My biggest concern is the investors who are just treating this as a bubble they can ride.  If they pump it up too quickly, we could have a mess on our hands.  But the protocol would probably survive even that scenario, but it would be a bumpy ride.  The saving grace is that there are lots of early miners with thousands of coins that can sacrifice a small portion of their future trillions of USD to keep things sane.

As we slide down the banister of life, this is just another splinter in our ass.
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April 25, 2011, 06:17:06 AM
 #34


A modest inflation of say 1% ?  would preserve the award mechanism to promote productivity for individuals/small groups,

I'm not sure if I missed it, but I'm really surprised that no one had pointed out that Bitcoin currently inflates at around 40% APR, and will continue to be inflationary for as long as some of us could hope to live.

Interesting point...I forgot about that...


hmm, and by that time one may hope people have become more altruistic and have no problem acting for the greater good in deflation or we may have switched to something else anyway.

I can also hope some sort of mixed economy will emerge with resource based system principles at the bottom for infrastructure etc. It would also provide materials into the open market with pricing set more by scarcity, recycling and pollution factors rather than just how easy it is to dig out of the ground.
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April 25, 2011, 06:51:08 AM
 #35

I assume you are answering to me, but I have no idea what your point is.

So if the supply of gold were theoretically infinite, but limited at any one point in time, it would be a poor choice of currency? Not only a poor choice, in fact, but an anti-market choice?

Gold is practically close enough to a fixed supply to make it good money. The inflation part isn't necessary and only serves to redistribute wealth to gold miners.

And stored electrical energy (in the form of, say, batteries) would be a terrible form of currency because more could be generated? Again, not only a poor choice but an unfree one that redistributes wealth to the undeserving?

I'm not sure what your trying to communicate, but yes, I think that electrical energy would make a bad currency.

I really don't think this argument generalizes very well.

If new currency is created, it has to be distributed into the economy. This process necessarily distorts the market all just for the sake of some useless and unachievable goal of stable prices.
Ian Maxwell
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April 25, 2011, 06:58:33 AM
 #36

Let me try again.

So if the supply of gold were theoretically infinite, but limited at any one point in time, it would be a poor choice of currency? Not only a poor choice, in fact, but an anti-market choice?

Gold is practically close enough to a fixed supply to make it good money. The inflation part isn't necessary and only serves to redistribute wealth to gold miners.

My question is whether this aspect of gold is unfair. Do people with gold deserve to see the supply remain fixed, and gold miners are cheating them out of their dues?

And stored electrical energy (in the form of, say, batteries) would be a terrible form of currency because more could be generated? Again, not only a poor choice but an unfree one that redistributes wealth to the undeserving?

I'm not sure what your trying to communicate, but yes, I think that electrical energy would make a bad currency.

Again, my question is not about electrical energy itself (though I do think sealed battery packs would make good trade items in a collapse scenario). Is the ability to make more batteries unfair to people who have batteries now? Would only an anti-market zealot support battery inflation?

Yes, the fact that there's more gold / energy / carrots will reduce the trade value of other gold / energy / carrots. I agree that this is unfortunate for people holding large carrot reserves, but why is it anti-capitalist?

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April 25, 2011, 07:23:07 AM
 #37

Let me try again.

So if the supply of gold were theoretically infinite, but limited at any one point in time, it would be a poor choice of currency? Not only a poor choice, in fact, but an anti-market choice?

Gold is practically close enough to a fixed supply to make it good money. The inflation part isn't necessary and only serves to redistribute wealth to gold miners.

My question is whether this aspect of gold is unfair. Do people with gold deserve to see the supply remain fixed, and gold miners are cheating them out of their dues?

And stored electrical energy (in the form of, say, batteries) would be a terrible form of currency because more could be generated? Again, not only a poor choice but an unfree one that redistributes wealth to the undeserving?

I'm not sure what your trying to communicate, but yes, I think that electrical energy would make a bad currency.

Again, my question is not about electrical energy itself (though I do think sealed battery packs would make good trade items in a collapse scenario). Is the ability to make more batteries unfair to people who have batteries now? Would only an anti-market zealot support battery inflation?

Yes, the fact that there's more gold / energy / carrots will reduce the trade value of other gold / energy / carrots. I agree that this is unfortunate for people holding large carrot reserves, but why is it anti-capitalist?

Bitcoins, gold: hold value
carrots/energy/batteries: decay in a relatively short time span
That's where the analogy breaks down.... when you put a real orange in your fake apple basket.

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April 25, 2011, 08:03:40 AM
 #38

One of the arguments often cited in favor of a fixed supply is the trust it creates. There are no more than 21 million bitcoins, therefore you know precisely what fraction of the money supply you own. This "certainty" is opposed to the unstability caused by central bankers inflating the money supply at unpredictable rate.

I think that this story misses a critical point.

Every year, bitcoins will be lost, for various reasons (backup mistakes, people not caring about a few bitcent, people dying, etc). The loss rate might be a very small fraction of the total, it is nonetheless a cumulative effect, meaning that the number of lost coins increases over time. And since the supply is fixed, the fraction of lost bitcoins will increase over time.

In principle, this should not be a problem, because bitcoins are divisible. Indeed, as somebody mentioned, the whole bitcoin economy could run on one single bitcoin. This is not a technical problem, indeed. It is, however, an uncertainty problem. Indeed, there is no way to know whether a bitcoin has been lost, or whether it is just sat upon. As time passes, the amount of lost bitcoins will increase, and so will the uncertainty about that amount.

This uncertainty is a major problem for the market. It means that we traded the unpredictability of central bank policies for an unpredictability of the size of the actual money supply. We did not create something more stable. As time passes, uncertainty can only grow, causing bubbles and abrupt price changes.

A small amount of inflation should prevent this. Of course, it will not prevent the loss of bitcoins, but it will ensure that the fraction of bitcoins that have been lost remains capped. If the bitcoin loss rate is 1%/year, a controlled inflation rate of 2%/year will ensure precisely that. It will ensure that the consequences of somebody losing their wallet today will be bounded in the future.

Another benefit of a fixed inflation rate is that we will not need to switch to an unproven model based solely on transaction fees.

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April 25, 2011, 08:46:18 AM
 #39

One of the arguments often cited in favor of a fixed supply is the trust it creates. There are no more than 21 million bitcoins, therefore you know precisely what fraction of the money supply you own. This "certainty" is opposed to the unstability caused by central bankers inflating the money supply at unpredictable rate.

I think that this story misses a critical point.

Every year, bitcoins will be lost, for various reasons (backup mistakes, people not caring about a few bitcent, people dying, etc). The loss rate might be a very small fraction of the total, it is nonetheless a cumulative effect, meaning that the number of lost coins increases over time. And since the supply is fixed, the fraction of lost bitcoins will increase over time.

In principle, this should not be a problem, because bitcoins are divisible. Indeed, as somebody mentioned, the whole bitcoin economy could run on one single bitcoin. This is not a technical problem, indeed. It is, however, an uncertainty problem. Indeed, there is no way to know whether a bitcoin has been lost, or whether it is just sat upon. As time passes, the amount of lost bitcoins will increase, and so will the uncertainty about that amount.

This uncertainty is a major problem for the market. It means that we traded the unpredictability of central bank policies for an unpredictability of the size of the actual money supply. We did not create something more stable. As time passes, uncertainty can only grow, causing bubbles and abrupt price changes.

A small amount of inflation should prevent this. Of course, it will not prevent the loss of bitcoins, but it will ensure that the fraction of bitcoins that have been lost remains capped. If the bitcoin loss rate is 1%/year, a controlled inflation rate of 2%/year will ensure precisely that. It will ensure that the consequences of somebody losing their wallet today will be bounded in the future.

Another benefit of a fixed inflation rate is that we will not need to switch to an unproven model based solely on transaction fees.


I could see a small fixed amount making sense (on a different block chain), but I won't support anything with a percentage inflation rate.

A, IMHO better solution, would be to have a once a year reclamation of all bitcoins that have not been in a transaction in the past year.  Everyone can just send any stale coins in their wallet to a new address.  The reclaimed coins would added up and divided by 87600 blocks per year, and added to the block rewards. (Divide by 87840 on leap years.)  Then we reclaim the certainty. (Which inflation doesn't really give you anyway, since loss rate is unknown without enforcing something like reclamation.  You're counterbalancing, but you don't know how much counterbalancing you should do.)

This could be added on at any point, as long as it is widely publicized that you need to move your coins at least once a year.

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April 25, 2011, 11:00:10 AM
 #40

Let me try again.

So if the supply of gold were theoretically infinite, but limited at any one point in time, it would be a poor choice of currency? Not only a poor choice, in fact, but an anti-market choice?

Gold is practically close enough to a fixed supply to make it good money. The inflation part isn't necessary and only serves to redistribute wealth to gold miners.

My question is whether this aspect of gold is unfair. Do people with gold deserve to see the supply remain fixed, and gold miners are cheating them out of their dues?

And stored electrical energy (in the form of, say, batteries) would be a terrible form of currency because more could be generated? Again, not only a poor choice but an unfree one that redistributes wealth to the undeserving?

I'm not sure what your trying to communicate, but yes, I think that electrical energy would make a bad currency.

Again, my question is not about electrical energy itself (though I do think sealed battery packs would make good trade items in a collapse scenario). Is the ability to make more batteries unfair to people who have batteries now? Would only an anti-market zealot support battery inflation?

Yes, the fact that there's more gold / energy / carrots will reduce the trade value of other gold / energy / carrots. I agree that this is unfortunate for people holding large carrot reserves, but why is it anti-capitalist?

It's different for currency which can be created at zero cost, like bitcoins and dollars. These are abstract things, so creating more of them is not like creating more batteries. It's more like stretching an inch. You can't apply arguments about commodities to currencies. Straw man.
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