Hyperdeflation, own half the world by headstart - don't you care at all?

[dark.w]

Hi there,

so I stumbled over the concept of bitcoins some time ago and I must admit, at first glance it is really appealing. It has some properties that are very much desirable for a currency - anonymous, decentral, protected from inflation.

But looking a bit more into details, there are major drawbacks. All of you are very aware of the upcoming deflation. And you don't care at all? Or do you all hope to have jumped the train early enough to profit from this deflation? Deflation ruins economy and stops the currency from circulating, because spending is just unwise, since you could get much more goods for you bitcoin a bit later.

And what about the guys who were able to easily mine tons of bitcoins in the early days? They own a considerable fraction of all existing bitcoins. If bitcoins become the new world currency, they will literally own half the world - or rather one quarter? Do you think that's fair, acceptable at all? For me it isn't.

So for these two reasons, I feel it is not a good idea to support bitcoins. All of you guys in this forum, and quite some smart guys among you seem to disagree. I'd like to know why.  

[DeathAndTaxes]

Deflation doesn't stop economies.  Computers get cheaper every year thus nobody buys computers right.  Might as well wait forever for cheaper ones.  Oh wait they do.  Computers, movies, games, HDTVs, ipods, ipads, digital cameras, renewable energy products (PV solar, wind turbines, etc), and essentially all electronics all get cheaper with time.  Obviously they are the slowest and most stagnant part of the global economy right.

For someone to "own half the world" they would need to
a) mine half the coins - which is impossible.
b) never sell not when the coins the have are worth $10K, not when they are worth $10M, not when they are worth $10B.
c) risk losing everything by a & b.

I can see it now.

"Fuck no I am not selling my stash.  It is only worth $82 billion.  Billions is for suckers I am living in my mom's basement until it is worth trillions.  Trillions is the smart money. ..... NO MOM I CAN'T TAKE OUT THE TRASH.  I am trying to become the worlds first trillionaire".

[realnowhereman]

But looking a bit more into details, there are major drawbacks. All of you are very aware of the upcoming deflation. And you don't care at all? Or do you all hope to have jumped the train early enough to profit from this deflation? Deflation ruins economy and stops the currency from circulating, because spending is just unwise, since you could get much more goods for you bitcoin a bit later.

Yeah; I always defer my consumption of food and water because I know I'll be able to get them cheaper next week.

The computer I'm typing this on cost a quarter (without even taking inflation into account) of a computer I bought 10 years ago.  It's about 50 times as powerful.  Which of those two computers would you say I (and everyone else who buys computers) didn't actually buy because of deflation?

(price) Deflation and inflation both each have positive and negative effects.  For every buyer there is a seller, for every saver there is a borrower.  Deflation is no worse than inflation.  There are some other things to consider when deflation comes about because of a reduction in money supply (which is where deflation has got its bad name).  But the world has never seen a currency like bitcoin -- deflation that comes about from the strength of the currency, rather than from contraction of an economy.

And what about the guys who were able to easily mine tons of bitcoins in the early days? They own a considerable fraction of all existing bitcoins. If bitcoins become the new world currency, they will literally own half the world - or rather one quarter? Do you think that's fair, acceptable at all? For me it isn't.

Fair?  What is fair?  Where can I see this rule book you seem to have about how many bitcoins the early miners should be allowed to keep in order to maintain "fairness"?  Who says it is bitcoin's job to enforce your arbitrarily chosen scale of fairness?

Bitcoin wouldn't be in the position it is now without those early adopters.  It will not be in the position it comes to in the future (assuming success) without our efforts/support now.  There is a reward for taking those risks; for seeing the opportunity before others.  

So for these two reasons, I feel it is not a good idea to support bitcoins. All of you guys in this forum, and quite some smart guys among you seem to disagree. I'd like to know why.  

Don't support bitcoins: that's fine.  I have no wish to persuade you to act against your thoughts.  Your choice is simply another datapoint in the final outcome.  Perhaps sufficient market participants will agree with you and bitcoin will never be a success... of course then there will be no deflation so your reasons for not joining will have been wrong.

On the other hand; if enough market participants don't agree with you, then they will all profit and you won't.

In essence: that's why early adopters are going to be rewarded.  No one knows which of these two outcomes is going to happen.  You pays your money and you makes your choice...

[MoonShadow]

<sigh>

Another newbie who believes he actually understands how money works.

[Emery]

Early adopters are making a risky investment and doing work that if successful, later participants will benefit from at little or no cost to themselves. Keep in mind this is all voluntary, if the central banks of prevailing currencies want alter the money supply, participants don't have much say or much of an exit. With bitcoin the inflation is known to participants from the offset, and no one has to use bitcoin.

[Haplo]

I know how money works ^_^.

Runaway price deflationary spirals don't actually result from currency deflation, but rather from an accumulation of toxic assets by banks, which are then forced to halt lending which throws a wrench in the normal operation of businesses. People lose trust in banks and businessmen, and because they are uncertain about their own financial future they then refrain from discretionary spending and beat each other up at Chuck-E-Cheez. In other words, the US economy.

When prices deflate for other reasons, for example more goods are produced, foreign exchange appreciation, and so on, businesses do the opposite: cab drivers run their air conditioning, gyms give you extra perks, and everyone is more than happy to give you extra value for your koin.

[OgNasty]

And what about the guys who were able to easily mine tons of bitcoins in the early days? They own a considerable fraction of all existing bitcoins. If bitcoins become the new world currency, they will literally own half the world - or rather one quarter? Do you think that's fair, acceptable at all? For me it isn't.

I am assuming you don't support any currency for the same reason, correct?

OR

Do you feel this situation is in some way different than our current fiat currencies?

[BrightAnarchist]

Hi there,

so I stumbled over the concept of bitcoins some time ago and I must admit, at first glance it is really appealing. It has some properties that are very much desirable for a currency - anonymous, decentral, protected from inflation.

But looking a bit more into details, there are major drawbacks. All of you are very aware of the upcoming deflation. And you don't care at all? Or do you all hope to have jumped the train early enough to profit from this deflation? Deflation ruins economy and stops the currency from circulating, because spending is just unwise, since you could get much more goods for you bitcoin a bit later.

And what about the guys who were able to easily mine tons of bitcoins in the early days? They own a considerable fraction of all existing bitcoins. If bitcoins become the new world currency, they will literally own half the world - or rather one quarter? Do you think that's fair, acceptable at all? For me it isn't.

So for these two reasons, I feel it is not a good idea to support bitcoins. All of you guys in this forum, and quite some smart guys among you seem to disagree. I'd like to know why.  

You're confusing falling prices with credit contraction ( deflation ). These are two totally different concepts. Credit contraction does indeed ruin economies, usually after a massive bubble created by central banking. But falling prices do not; falling prices is a blessing and one of the great benefits of economic growth combined with sound money.

[dark.w]

Thanks for your answers (except for the Troll that is). 

DeathAndTaxes and realnowhereman point out that deflation in electronic devices doesn't stop us from buying it. There is some point to that, however let me point out
a) part of the equation here is innovation and not pure deflation: I can't buy the same $1000 PC of 10 years ago for $15 today (assuming approximately 33% deflation per anno) and I don't want to; I want to buy the way faster one that was not even remotely available 10 years ago in the same space and energy envelope, no matter how much I would have been willing to spend.
b) deflation actually does slow down economy in the IT business; there is tons of stuff that I would buy now, if I expected no more innovation and no more falling prices.

More generally, you guys argue that nowadays deflation is usually the result of an economic depression and not its cause. But no government or central bank has ever voluntarily caused a deflation, because they are pretty sure it will cause a huge depression in turn. Sure realnowhereman will still buy water and food, but who with a sane mind would still buy e.g. a house or car if you get two houses or two cars for the same money 18 month later?

But for the sake of arguments, let's assume for a moment, that 33% deflation per anno is acceptable. Where would bitcoin be 10 years from now at that rate? $5 * 64 = $320 per bitcoin, 20 million coins mined, total value $6400 million - sounds like a lot, is just $1 per human being. In other words irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there.

Or do you expect the monetary base of bitcoin to be broadened by book money at banks? BrightAnarchist and Haplo point to credits and bank assets as reasons for current crisis. But I guess you would not put your bitcoins on a bank account, because that would give up most of bitcoins advantages?

[DeathAndTaxes]

2 houses 18 months later?  really?

That would assume an annual deflation rate of 40%.  How about deflation rate of 4%.  Why buy a house today if you could get 2 hours in 30 years?  I don't know maybe because you could own a house today?  Also monetary deflation doesn't mean all prices will fall equally.  If everyone thought buying a house was a bad idea then enough people wouldn't and prices wouldn't fall as much.  Less new homes would be built and relative to monetary deflation prices would RISE (in real terms not nominal ones).  When that happens you rent will be rising too.  Eventually an equalibrium will be established where buying a home (even if you could buy 2 for the same price in x years) would be preferable to paying more and more of your income in rent.

"But for the sake of arguments, let's assume for a moment, that 33% deflation per anno is acceptable."

Lets assume a quadrillion % population growth per second is acceptable.  Humans would kill themselves off in less than a minute.  Yup human race is fatally flawed.  How about you assume something less asinine than 33% deflation?  Yes hyper deflation is bad, so is hyper inflation? Would 33% inflation be better?

Why is the finish line 10 years from now?  How about 15% price deflation over the next decade, 10% over the next two decades and 5% of the next two decades.

That's a $12B monetary base.  Larger than most nations in the world. 

[dark.w]

Ok, so you agree with me that 40% or 33% deflation is quite deadly.

How about deflation rate of 4%.

Where would bitcoin be 10 years from now at that rate? $5 * 1.5 = $7.5 per bitcoin, 20 million coins mined, total value $150 million. In other words totally irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there. 

[DeathAndTaxes]

$150M monetary base is larger than some nations.   To put it into a useful context Paypal for example only processed $5B in transactions last year.  With a velocity of 10 (money changing hands 10x annually) $150M monetary base could support $1.5B in transactions.

If 30% of Paypal is a nerd niche well I welcome the nerd niche.  Still for the last time why is 10 years the finish line?

Higher deflation is certainly possible in the short term but I put the finish line for Bitcoin at decades out.  Bitcoin is still inflating (printing money) although that rate of inflation is continually declining.  Rapid adoption in the short term could result in significant deflation however as the base grows the rate of adoption as a % of that base will slow and deflation will slow with it.

So as I indicated above if Bitcoin deflated at 15% for the next decade, 10% for the following 2 decades and 5% for the next 2 decades it would have a monetary base of $12B.   Hypothetically if 50 years from now Bitcoin had a $12B base and continued to deflate at 3% to 5% per year that would "kill the economy" or be a "nerd niche".

Well one can only hope for such killer deflation and niche status.

[MoonShadow]

Ok, so you agree with me that 40% or 33% deflation is quite deadly.

How about deflation rate of 4%.

Where would bitcoin be 10 years from now at that rate? $5 * 1.5 = $7.5 per bitcoin, 20 million coins mined, total value $150 million. In other words totally irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there. 

The price of the bitcoin going up isn't quite the same as deflation.  Bitcoin won't experience deflation until the block reward is reduced to near zero, which isn't going to be a real problem for at least a generation.  If the whole world is using bitcoins in thirty years, the value of a single bitcoin is going to be pretty high, but the actual deflation rate would likely be less than 0.5% annually.  Perhaps far less, if effective safeguards against lost address keypairs are developed.

An annual increase of the bitcoin value of 30%+ is indicative of a rapid growth in the bitcoin economy, exceeding the current inflation rate by at least that much.  Although the rigid nature of the bitcoin monetary base could act as a brake on economic growth, it's literally impossible for rapid growth to be "deadly" to the economy.

[MoonShadow]

$150M monetary base is larger than some nations.   To put it into a useful context Paypal for example only processed $5B in transactions last year.  With a velocity of 10 (money changing hands 10x annually) $150M monetary base could support $1.5B in transactions.

Most of us expect that the annual velocity of bitcoin to be much higher than fiat currencies, due to the relatively quick settlement rate of the bitcoin network.  Although most people get paid for their work weekly, with about a week delay on average, before they can again spend those funds themselves; it's actually possible for employees in a bitcoin economy to be paid daily and spend those same coins an hour later.  The higher velocity capable with bitcoin also means  that the bitcoin price is likely to be suppressed compared to a currency with a much lower velocity due to technical constraints.

For those who don't understand what I'm talking about; although cash is an instant form of settlement of trades, most transactions in modern economies are credit transactions.  Although such transactions are 'completed' instantly (based upon the credit of the buyer) they take up to 45 days or longer to be 'settled', during which time any real funds involved in the transactions are not available for further transactions.  Think about sending a paper check in the mail to pay a bill; the funds to pay the bill are supposed to be in your account before you write the check (otherwise it's "kiting" which is fraud) and mail the check.  The check must travel via mail to the company, then back to the bank, before the transaction is completed.  This is true even if the company credits your payment upon arrival or not.  But the company cannot use those funds when they credit you with the payment, they must wait until the check clears your bank and is on account at their bank.  As you can imagine, just a paper check can take weeks.  Businesses with merchant accounts at the credit card companies can get access to those funds faster (as in a couple of hours) because the credit card company can credit the merchant's account for an (assumed) valid CC transaction; however, such credit based transactions are not final for much longer due to rules and laws governing consumer credit protection.  So a merchant could re-spend his new funds pretty quickly, but if it turns out that he was burned he loses those funds after the fact, (chargebacks) and then finds himself in the debt of the CC company.  It doesn't take long before merchants start to maintain a standing reserve balance, just like one would do for a checking account.  The aggregate result of all these reserve accounts is a drop in velocity/increase in cash demand/increase in relative fiat currency value.  (Yes, the suppression of velocity can result in the increase in value of the currency, so long as the issuing institution is expected to still be able to follow through).

Since bitcoin is truly settled (as fast as) in one hour, those funds really can be re-spent without fear of chargebacks.  Thus reserve accounts are less necessary under bitcoin than under a credit based fiat economy, which was the only way to do online transactions up until this point. 

[realnowhereman]

Thanks for your answers (except for the Troll that is). 

DeathAndTaxes and realnowhereman point out that deflation in electronic devices doesn't stop us from buying it. There is some point to that, however let me point out
a) part of the equation here is innovation and not pure deflation: I can't buy the same $1000 PC of 10 years ago for $15 today (assuming approximately 33% deflation per anno) and I don't want to; I want to buy the way faster one that was not even remotely available 10 years ago in the same space and energy envelope, no matter how much I would have been willing to spend.
b) deflation actually does slow down economy in the IT business; there is tons of stuff that I would buy now, if I expected no more innovation and no more falling prices.

(a) is only adding to the evidence.  You were fully aware 10 years ago that your PC-in-ten-years would be better and yet you bought it anyway.  That's exactly the point.  Your need for a PC now was higher than the deflationary reward you got for waiting.

(b) that's as maybe -- your choice to spend or not to spend now is entirely yours, based on your own evaluation of current need.

More generally, you guys argue that nowadays deflation is usually the result of an economic depression and not its cause. But no government or central bank has ever voluntarily caused a deflation, because they are pretty sure it will cause a huge depression in turn. Sure realnowhereman will still buy water and food, but who with a sane mind would still buy e.g. a house or car if you get two houses or two cars for the same money 18 month later?

I think you've missed my point (which I expressed a little facetiously, so it's my fault).  All that deflation does is move the threshold for action.  Let's take your extreme example -- that in 18 months your money will be worth double.

During that 18 months, do you require the use of a house?  Do you require the use of a car?  Your argument is probably that "well, I'll make do with what I've got for 18 months".  But of course in 18 months that same logic will hold, you can have 4 cars in another 18 months -- so you'll stick with what you've got.  Eventually, the car you've got will not be sufficient for your needs.  You will have to buy a replacement.  Your choice of when that happens will be based on how much car you can buy for the money you have now and how much you desire the replacement.  Exactly as it is in a non-deflationary world.

Further: ask yourself where you would live during that 18 months while you wait to buy your two houses?  Rent?  Well that will reduce the money you have available to buy your two houses.  So much so that you will be able to afford one house in 18 months; not two.

I will accept that a huge sudden change in the inflation/deflation would be painful to adjust to for an economy.  But it is not the absolute percentage that is the problem though, it is the suddenness of change.

But for the sake of arguments, let's assume for a moment, that 33% deflation per anno is acceptable. Where would bitcoin be 10 years from now at that rate? $5 * 64 = $320 per bitcoin, 20 million coins mined, total value $6400 million - sounds like a lot, is just $1 per human being. In other words irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there.

This is a little unfair; this is mixing in bitcoin's market success with economic deflation.  If bitcoins had huge inflation (oh look, they do), they could still be worth more next year because of supply and demand.  To talk about bitcoin's deflationary properties, you really need to talk about it assuming it has become a huge success and is a recognised currency, with large market penetration (and that would mean you have to start with bitcoins worth about $10,000 each in ten years).

[Haplo]

But for the sake of arguments, let's assume for a moment, that 33% deflation per anno is acceptable. Where would bitcoin be 10 years from now at that rate? $5 * 64 = $320 per bitcoin, 20 million coins mined, total value $6400 million - sounds like a lot, is just $1 per human being. In other words irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there.

Or do you expect the monetary base of bitcoin to be broadened by book money at banks? BrightAnarchist and Haplo point to credits and bank assets as reasons for current crisis. But I guess you would not put your bitcoins on a bank account, because that would give up most of bitcoins advantages?

33% deflation would be insane. However, what you're probably referring to is currency appreciation, as the inflation rate falls and the value climbs. More realistically, the amount of deflation caused by lost coin, and the amount spent on transaction fees is probably less than 1% total. It would take 100 years or more for that to have a notable effect.

The effect of currency appreciation is largely unknown, however the main effect is numerical rather than real. That is, while it may appear that things you bought last year were expensive and you're "losing money" in nominal terms, you may still be making money in purchasing power terms. Again, the larger and more rapid the change, the more potential damage it can do to the BTC economy. You could compensate via inflation (a la governments), but that will only give you two problems instead of one. However, if the extent of the change is known, businesses can adjust their accounting to account, and as long as the change is either steady or short-lived, then the effect would largely be mitigated by individual action. As long as the currency isn't jumping up and down all the time, the economy can adjust.

About banks, BTC banks work much closer to the fundamentals of a real, legitimate bank than do any of the banking institutions which carry fiat. The banks can't inflate the currency (and therefore cannot create economic bubbles), don't have "prop trading desks", and usually don't have problems with solvency. There's no "credit default swaps" or anything like that, just straightforward lending mechanics. Also, unlike Goldman Sachs, if a BTC bank decides to rip off its customers, there's a considerable community backlash. It's not like they can get away with running a ponzi indefinitely, and there's nobody to bail them out if they do.

Aside from the occasional scam service (something which could be improved, I'm thinking about a Bit-Better-Business-Association) the worst I've seen in terms of bankruptcy is the WBX disaster, which seems to have happened because the guy running it wasn't too smart and got his AUD bank accounts scammed or something. The BTC end of the business remained secure the entire time, however, and the liquidation looks like it's being handled properly (and will probably finish years before they ever finish liquidating Lehman, which they still haven't).

Compare to MF Global. "Oops, sorry, the CDS holders get all your money. Too bad."
Honestly I don't believe a bank should even be allowed to list on a stock market. That's a huge conflict of interest, added to the multitude other conflicts of interest in the modern banking system, many of which are provided directly by the state(s) in order to shield them from otherwise corrective market forces (and pitchforks).

[darkice]

I'll personally liquidate my BTC to cover all my costs, then I migth wait and see, but not before which is usually 9-10 months of mining with usual setups.

[wogaut]

Thanks for your answers (except for the Troll that is). 

DeathAndTaxes and realnowhereman point out that deflation in electronic devices doesn't stop us from buying it. There is some point to that, however let me point out
a) part of the equation here is innovation and not pure deflation: I can't buy the same $1000 PC of 10 years ago for $15 today (assuming approximately 33% deflation per anno) and I don't want to; I want to buy the way faster one that was not even remotely available 10 years ago in the same space and energy envelope, no matter how much I would have been willing to spend.
b) deflation actually does slow down economy in the IT business; there is tons of stuff that I would buy now, if I expected no more innovation and no more falling prices.

More generally, you guys argue that nowadays deflation is usually the result of an economic depression and not its cause. But no government or central bank has ever voluntarily caused a deflation, because they are pretty sure it will cause a huge depression in turn. Sure realnowhereman will still buy water and food, but who with a sane mind would still buy e.g. a house or car if you get two houses or two cars for the same money 18 month later?

But for the sake of arguments, let's assume for a moment, that 33% deflation per anno is acceptable. Where would bitcoin be 10 years from now at that rate? $5 * 64 = $320 per bitcoin, 20 million coins mined, total value $6400 million - sounds like a lot, is just $1 per human being. In other words irrelevant to economy. However, you are used to live in a nerd niche, maybe you are comfortable staying there.

Or do you expect the monetary base of bitcoin to be broadened by book money at banks? BrightAnarchist and Haplo point to credits and bank assets as reasons for current crisis. But I guess you would not put your bitcoins on a bank account, because that would give up most of bitcoins advantages?

dark.w, welcome to the forums, your opinion will add a lot of color to the discussions here.
As you have already noticed, there are mostly Austrian Economists (how I hate that term, originating from Austria and knowing that it never got a stronghold there) and Monetary Libertarians here (at least those are the ones who shout loudest  )

One article you might want to look at is here:
http://realcurrencies.wordpress.com/2012/01/10/bitcoin-a-positive-step-in-monetary-reform/
While they are not technical about Bitcoin, there's a bit of economic discussion going on in the comments section.

You said "But no government or central bank has ever voluntarily caused a deflation, because they are pretty sure it will cause a huge depression in turn".
Actually sadly not true. The British tried to return to the gold standard under Churchill and got a major depression in turn; even Churchill admitted that in was a mistake to return to the gold standard, and they eventually abandoned it again. So the evidence for your statement is actually right there, it's just that Austrian Economics will always find a clever way to dispute it. 

One thing I'd like to point out that Bitcoin has been basically designed as a commodity like gold, and everybody likes to see commodity values rising.

Personally I'd like to see Bitcoins as currency, but most arguments really run down the commodity path (even if the term currency is used) and there's already evidence that people rather hold than circulate bitcoins (which you are right is not good for a currency as means of exchange) which would be preferable for an economy.

But I also believe that Bitcoins has many traits that are needed for a viable eCurrency, and it appears to be a human character trait to adopt something that promises an increase in value more easily.

I actually find the signature of Revalin quite revealing:
https://bitcointalk.org/index.php?action=profile;u=39897

So I'm supporting Bitcoin, but keep my mind open for other new eCurrencies that might come along.

And besides, most of my hobbies only cost me money, this one actually has the potential to pay for itself, at least right now. 

[Haplo]

You said "But no government or central bank has ever voluntarily caused a deflation, because they are pretty sure it will cause a huge depression in turn".
Actually sadly not true. The British tried to return to the gold standard under Churchill and got a major depression in turn; even Churchill admitted that in was a mistake to return to the gold standard, and they eventually abandoned it again. So the evidence for your statement is actually right there, it's just that Austrian Economics will always find a clever way to dispute it. 

One thing I'd like to point out that Bitcoin has been basically designed as a commodity like gold, and everybody likes to see commodity values rising.

Personally I'd like to see Bitcoins as currency, but most arguments really run down the commodity path (even if the term currency is used) and there's already evidence that people rather hold than circulate bitcoins (which you are right is not good for a currency as means of exchange) which would be preferable for an economy.

But I also believe that Bitcoins has many traits that are needed for a viable eCurrency, and it appears to be a human character trait to adopt something that promises an increase in value more easily.

Going from gold/silver to fiat is very, very easy; print money, forget about it. Going from fiat to gold/silver means the state somehow has to collect enough gold/silver to back their fiat, through some means like taxation. Also, depending on if the conversion rate is fixed or floating can cause various sorts of trouble. Without knowing the specifics of how the British tried to do it, it's impossible to say what they did wrong, and my history isn't that good .

Also, the point isn't necessarily that the value always rises, but that there's no central bank to interfere with the market's decision as to which way it should go. That, and an inflationary currency is like a company that continuously releases new IPOs. Every current shareholder loses money as more shares are created and eventually the stock is worth next to nothing (called stock dilution). That's probably the simplest and most direct way to think about it.

Finally, I've seen the "BTC hoarding" argument before, but given that it's only a few years old and still in its high-inflation stage, it's too early to make concrete statements like that. Additionally, from what I have read most recently, BTC trading patterns are stabilizing into smaller, more day-to-day transactions, and is not particularly being hoarded any longer. Since BTC has no commodity value (there's no commodity...) its value is primarily based on the trading community built around it, so it would be worthless if nobody actually bought or sold anything with it. While possible, it'd be pretty superfluous to use BTC just for FX trading. BTC is a currency built on pure voluntarism.

[Skrivitor]

My intention with bitcoin is to be a part of the new economic infrastructure.  My mining equipment may produce fiat currency if I choose to convert it, however I have more power keeping a nominal balance of coins and circulating the rest to support my infrastructure (paying my electricity bills, buying new equipment and even renting server space for other ventures).

I was trying to explain bitcoin to my girlfriend last night and she (as many others have done) jump to the conclusion that this is a network poised to consume the existing monetary systems.  That thinking misses a whole pile of intermediate steps (we had to have MySpace before we could understand Facebook). 

To me bitcoin is a way of bringing the value of information in line with the value of other commodities.  I can see a future where instead of paying for YouTube (for example) with advertising, a site could charge a small (micro or even nano) amount of BTC for watching a video on that site.  With Google Wallet, Paypal, Interac etc, BTC is a vector for those services that will become much more stable than the current fiat currencies (USD, CAD, EUR etc) which are reliant on political stability and individual countries economic output.

The bottom line is inflationary pressures in the USD, EUR, CAD, AUD, etc markets will be independant from bitcoin value.  BTC worth is more closely linked to electricity and infrastructure value which will likely become very small this year with FPGA technology.

Exciting times are ahead.