On Hoarding

[ihrhase]

There is one, at least, participant in this forum that is concerned with hoarding of BC, please allow me to explain why this is not an issue, not because it will not have negative effects if it does, but more likely it will not occur.

What we must keep in mind is there is yet a coherent value model for BC, when I first got here many were assuming cost equals value, which simply is not true, I have said it time and time again, value is not based on cost, but rather on the demand for a commodity, right now there is little to no demand for BC.  There may be in the future, but that is speculative and is related to a few factors which relate to the general utility of BC as a medium of exchange.

BC as a commodity has no value without a commodity that may be exchanged for BC, there is no other use for BC than a medium of exchange.  Commodities with an inherent value have an ordinal utility within themselves, that is, they have an industrial, commercial or consumer use, you cannot compare BC to land capital, other capital or commercial goods because of this fact.

The other way a commodity can retain value is through government fiat, that is legal tender laws, basically by the forced use of particular monies, these monies retain their utility because other options are illegal and the basic coercive threat maintains their usage.

BC does not fall within either group of commodity, its value is determined by its ability to out-compete its substitutes, it must therefore be used as a medium of exchange for goods in order to have a value.

Hoarding is deleterious to the ability of BC to out-compete its substitutes, as it will raise relative prices in BC and the exchange rate to other currencies, while other currencies will not be incurring the same price explosion.  As opposed to legal tenders, there being no government fiat coercing utility people will abandon BC if the substitutes are more beneficial.  In the end, the hoarder who keeps BC as an investment in the future value of BC gambles with his money.  If he does not use them, sell them or lend them to someone who will use them at interest and just pulls them from the market the lacking availability of BC will diminish the value as there is no other use than as a medium of exchange.  The increase in price, $ purchasing value, coupled with a stable commodity price structure, of BC will be an indicator to the wily entrepreneur that something is wrong, and these people will stop using BC first.  This will start a chain reaction that will give the illusion of the desired result in the "stock" market numbers, the same boom in $ value of BC without corresponding increase in production available to be traded in BC is a business cycle bubble.  If the hoarder at this point does not cash out immediately, which is relatively difficult, he will be holding BC in the bust, and therefore lose out.

This is also leaving out the whole world of whether it is more profitable to a "hoarder" to lend his BC at interest to producers, invest in productive business himself as a shareholder or to use them in the market for consumer goods than it is to just sit on anonymous internet blips that have no value inherent to themselves...

Lending at interest
I know there are people who like to boo and hiss usury, but it is a natural market phenomenon based on  production, charging above the natural interest rate is a side effect of time preference, get over the communist propaganda please.

If I were to be a hoarder, let us say I have control of 60% of all BC, and have no intention to use them, why would I not lend them at interest?  If there is a market demand for BC, and I have BC, it makes no sense that I would not take advantage of the market demand, it is like saying that a producer has no impetus to sell his products, when he can just sit on them indefinitely.  Why does the stereo manufacturer sell stereos?  If he produces $1000 stereos, by the hoarding logic, holding them instead of selling them will make him wealthier and increase the value of his stereos this is not the case for stereos, nor BC.

No, lending is more practical than holding BC in the hopes for increased value.  Predatory interest rates will be curtailed by the free nature of the market, as anyone can lend BC so long as they have a surplus of BC beyond their usage, there will be large amounts of competition in this field, which will lower lending interest rates.

Investment
If I am holding 60% of all BC, why does in not make sense to invest in businesses?  If I believe that there is a good business, even if they are not looking for shareholders, why would I not want to attempt to purchase a minority share of that business and receive a dividend based on their profits?  In the long run, I would benefit more buy purchasing 1% of a business than not at all, not only because of the real gains in BC over time, but because the value of BC will increase when there is more products available in BC, there will be more demand for the very bitcoins in my coffers, a net gain at the natural interest rate.

Spending
Is the argument that I will sit upon my digital throne, resting atop my digital blips?  Would I be enjoying some superiority because I am wealthier in BC than others?  If this image is just silly to you, well you are correct, if you still at this point believe hoarding is a good idea, this is exactly what you are claiming.  If I have 60% of all BC, what is the point, how do I benefit from my majority stock of BC if I do not acquire consumer goods with them, or sell them to people who will?

The hoarding mentality can only be directed at BC that is not being used, which at this stage of BC can be all of us who hold any, as there is not very much that can be bought through BC.  However as the BC marketplace fills with goods and services, we will see a decrease in nominal prices and an increase in the BC/$ ratio.  This will only occur if people are spending BC, if they are holding them businesses will not accept BC when they can accept any other media of exchange.

If BC's value is based on exchanging them for goods, how exactly is the hoarder protecting his BC's value if he does not allow them to be exchanged?  Any way you slice it, exchanging BC for goods and services is how BC has value, hoarding them negates this and therefore negates the purpose of hoarding...

I am sorry to say to the developers of BC that this may not be the finished product, they may go through many trials before a viable economy is derived from a counter-economic currency, we should persevere to make this one work, but keep in mind it is a learning experience and it may fail...

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[FreedomFirst]

This post is right on the money.

[hugolp]

I am checking the bitcoin forums to get myself familiarized with the thing and not ask question that have alredy been asking, and I have to say this is by far the best post I have read so far.

Everybody should read this.

[scepticus]

"If I were to be a hoarder, let us say I have control of 60% of all BC, and have no intention to use them, why would I not lend them at interest? "



what you have overlooked is that if you are hoarding 60% of BC and lending them out at significant +ve rates of interest it would be almost impossible for your borrower to find the BC required to repay the principal of your loan plus the interest, so you wouldn't lend, because you would not be able to find a borrower worthy enough.

That is the problem with hoarding.

[Bitcoiner]

"If I were to be a hoarder, let us say I have control of 60% of all BC, and have no intention to use them, why would I not lend them at interest? "



what you have overlooked is that if you are hoarding 60% of BC and lending them out at significant +ve rates of interest it would be almost impossible for your borrower to find the BC required to repay the principal of your loan plus the interest, so you wouldn't lend, because you would not be able to find a borrower worthy enough.

That is the problem with hoarding.

Why can't the borrower sell services to the lender? OTOH, other people can borrow from the lender and the borrower can sell services to them. Any debt can eventually be paid off as the money cycles through.

[RHorning]

I think it would be very useful for those who think hoarding could ultimately be profitable for the hoarder should at least try to read this article:

http://en.wikipedia.org/wiki/Nelson_Bunker_Hunt

Also, read the associated links to sources used to create this article.  Basically, this guy tried to "corner" the silver market and ended up buying up a substantial fraction of the world's silver reserves.  Ultimately, he and his brother both ended up losing billions of dollars when the market finally collapsed.

I completely agree with the original poster's sentiments on this issue, and hoarding bitcoins is ultimately self-defeating for the reasons given and many more.  Particularly at this stage of the game, it is to the advantage of everybody to spend bitcoins and push them out into the market place to offer liquidity.

There is also the danger of losing bitcoins through calamities happening to your computer or wallet.  Yes, that can be recovered (for the most part), but it can be a problem that at the moment only makes it worse for the hoarder than it is for the rest of the network.

[scepticus]

the inflation/deflation and hoarding vs spending and austrian vs keynsian debate is eternal and to be honest rather tedious.

in simple terms, consider a set of scales. on one side is money and on the other is everything else.

http://upload.wikimedia.org/wikipedia/commons/thumb/c/ce/Balanced_scales.svg/400px-Balanced_scales.svg.png

now to those who prefer perpetually deflation currency: you get this
http://pea.petersburg.k12.va.us/modules/groups/homepagefiles/cms/944086/Image/unbalanced-scales.png

and for the keynesians: this

http://upload.wikimedia.org/wikipedia/commons/b/b0/Unbalanced_scales-too-far-right.png

note that for the last two I could swap the pictures and you would still not be able to tell the difference between a monetary system that 'targets' deflation and one that 'targets' inflation. Both are unbalanced and both are as wrong as the other.

unless both the quantity and circulation of money is in balance with the real economy it will end badly. the unbalanced scale views of money whether keynsian or austrian are both simply products of extreme ideology both of which are incompatible with what people actually need and want from their money.

in the end money is only used to settle debts so fundamentally debt/credit is what needs to be balanced and the means of clearing between them (money) is a means to an end (balanced clearance of debts and somothing of deferred consumption), not an end in itself.

So I suggest focus on debt dynamics first (e.g. ripplepay) and then determine what form(s) of money help lubricate that clearing process.

[Bitcoiner]

the inflation/deflation and hoarding vs spending and austrian vs keynsian debate is eternal and to be honest rather tedious.

in simple terms, consider a set of scales. on one side is money and on the other is everything else.



now to those who prefer perpetually deflation currency: you get this


and for the keynesians: this



note that for the last two I could swap the pictures and you would still not be able to tell the difference between a monetary system that 'targets' deflation and one that 'targets' inflation. Both are unbalanced and both are as wrong as the other.

unless both the quantity and circulation of money is in balance with the real economy it will end badly. the unbalanced scale views of money whether keynsian or austrian are both simply products of extreme ideology both of which are incompatible with what people actually need and want from their money.

in the end money is only used to settle debts so fundamentally debt/credit is what needs to be balanced and the means of clearing between them (money) is a means to an end (balanced clearance of debts and somothing of deferred consumption), not an end in itself.

So I suggest focus on debt dynamics first (e.g. ripplepay) and then determine what form(s) of money help lubricate that clearing process.

Are you confusing monetary deflation with price deflation? Because Bitcoin is neither inflationary nor deflationary, in a monetary sense (once most of the coins have been created; for now it is somewhat inflationary). At the most, you can say it is mildly deflationary from loss of coins, but it is too early to tell how much of an impact that will have. If it is predictable, then interest rates can take that into account.

[Bitcoiner]

As a footnote, the Austrians is not one of monetary deflation in normal times nor as a proscribed policy. Their position is that credit bubbles should be allowed to bust, but money should otherwise be honest and stable; that is, neither inflationary nor deflationary.

[kiba]

As a footnote, the Austrians is not one of monetary deflation in normal times nor as a proscribed policy. Their position is that credit bubbles should be allowed to bust, but money should otherwise be honest and stable; that is, neither inflationary nor deflationary.

Money can't be neutral. It's like saying oils are dishonest for being inflationary. The correct view is that the free market should determine the amount of money that is available.

[scepticus]

all fixed quantity money schemes must be deflationary by definition under conditions of economic growth.

"The correct view is that the free market should determine the amount of money that is available."

I agree. Which is why money can't and won't be shackled to any given commodity, whether bitcoins or gold or seashells.

price deflation and monetary deflation are equivalent when viewed from the point of view of the scales that weigh money against everything else, which is all that most people care about. The same applies to monetary inflation and price inflation.

suggester is correct when he describes a deflating money supply as a bubble - its a bubble in money. Likewise inflation is a bubble in assets. A bubble is a bubble.

The narrative that suggests that if you cause the scales to tilt full swing in one particular direction or another then everything will be well is a delusion whether it is peddled by austrians or keynsians.

That much should be obvious to anyone except an austrian or keynsian fanatic.

[kiba]

The narrative that suggests that if you cause the scales to tilt full swing in one particular direction or another then everything will be well is a delusion whether it is peddled by austrians or keynsians.

That much should be obvious to anyone except an austrian or keynsian fanatic.

An Austrian would consider many types of deflation a good thing, but it doesn't mean that they consider all inflation a bad thing.

[scepticus]

a bubble is a bubble. bubbling money will soon destroy itself the same way bubbling assets come to a sticky end.

P2P credit, cryptocurrency and so on are supposed to be decentralising forces that act to dampen bubbles in money or assets, which is why it is always a shame to see these initiatives corrupted by bubble-thinking.

the idea of perpetually divisible, deflating bitcoins is bubble thinking - being the polar oppositie of the recent bubbles doesn't alter that.

[Edit: the hard coded coin limit embedded in the bitcoin concept is a clear example of centralisation. The centralisation is determined by fiat at the beginning and then embedded into the code]

[kiba]

[Edit: the hard coded coin limit embedded in the bitcoin concept is a clear example of centralisation. The centralisation is determined by fiat at the beginning and then embedded into the code]

Satoshi cannot decide what clients people get to use. It's not centralization. It's a universal consensus.

[Bitcoiner]

all fixed quantity money schemes must be deflationary by definition under conditions of economic growth.

"The correct view is that the free market should determine the amount of money that is available."

price deflation and monetary deflation are equivalent when viewed from the point of view of the scales that weigh money against everything else, which is all that most people care about. The same applies to monetary inflation and price inflation.

That much should be obvious to anyone except an austrian or keynsian fanatic.

I also agree that the correct view is that the free market should determine it. However, I am curious how you can see price deflation and monetary deflation as equivalent. Do you want to explain why this is, and how you arrived at this conclusion? Furthermore, I'm not clear on how you see monetary stability a bad thing, and you are implying that it is.

[Bitcoiner]

The narrative that suggests that if you cause the scales to tilt full swing in one particular direction or another then everything will be well is a delusion whether it is peddled by austrians or keynsians.

That much should be obvious to anyone except an austrian or keynsian fanatic.

An Austrian would consider many types of deflation a good thing, but it doesn't mean that they consider all inflation a bad thing.

It's my experience that someone throwing around phrases like "fanatic" has already made up his own ideas in his mind. Still, we can try to have a reasonable discourse

[Anonymous]

The narrative that suggests that if you cause the scales to tilt full swing in one particular direction or another then everything will be well is a delusion whether it is peddled by austrians or keynsians.

That much should be obvious to anyone except an austrian or keynsian fanatic.

An Austrian would consider many types of deflation a good thing, but it doesn't mean that they consider all inflation a bad thing.

It's my experience that someone throwing around phrases like "fanatic" has already made up his own ideas in his mind. Still, we can try to have a reasonable discourse

Ive been selling online for a few years so Ive got some war wounds from different payment processors. Ive been using bitcoins to trade for a little while now and as far as I can tell it is the best payment method I've come across.The fact it allows a more personal relationship with your customer rather than a monolithic entity you need to deal with that takes large fees for little effort is the strongest point in its favor.I dont know if this makes me a fanatic or not.

I would say if your mind is frozen and you cant see the other side of the coin it can end up blinding your vision.Im no expert on economics so I prefer to let the market decide what is best without any distortion to market signals.This allows you to make better decisions.Bitcoins are purely market driven.

[scepticus]

I also agree that the correct view is that the free market should determine it. However, I am curious how you can see price deflation and monetary deflation as equivalent. Do you want to explain why this is, and how you arrived at this conclusion? Furthermore, I'm not clear on how you see monetary stability a bad thing, and you are implying that it is.

if you presume that price deflation is OK and monetary deflation is bad, presumably you'd also hold that monetary inflation is bad and price inflation is OK?

[joechip]

all fixed quantity money schemes must be deflationary by definition under conditions of economic growth.

"The correct view is that the free market should determine the amount of money that is available."

I agree. Which is why money can't and won't be shackled to any given commodity, whether bitcoins or gold or seashells.

The issue y'all are discussing around but not addressing is the issue of how much money needs to be available?  The market will always adjust the exchange rate to reflect changes in the supply and demand of money... up or down.  Rothbard went over this 30 years ago, and it's pretty simple.  Economic growth does not necessarily imply an increase in the demand for money, it's a fallacy to assume that.  It is the need to move money physical distances which eventually caused the demise of the gold coin standard.

If there is not enough of a given currency at any moment to clear a market something else will arise to temporarily allay the shortfall... credit money.  This is a market-driven process.  If the currency is nearly-infinitely divisible, like bitcoins and unlike physical gold, then this issue is obviated fairly quickly by allowing the exchange rate to rise resulting in smaller units of currency being transacted.  Monetary deflation and price deflation are not equivalent in any way, and they cannot be conflated (which is what scepticus is attempting to do).  One is a cause and the other is a potential effect.  They may be linked in a causal way but they cannot be substituted for one another.  All discussion which does this is nonsensical noise.

Commodity money bears with it the opportunity cost of its creation which is the natural brake on its generation.  It is not, as the Monetarists (ie. Friedmanites) would argue wasted capital in the service of producing that which confers no net good (one of Mises' definitions of money... the commodity whose production confers no net economic good)  It is providing that which the market demands... more money. 

If Bitcoin were to be successful enough to warrant greater fungibility than the current 8 orders of magnitude, then I'll happily cross that potential market bottle-neck when it arises.  This is would be an example of extreme price deflation without any necessitating monetary deflation.

[joechip]

The hoarding argument is the oldest Monetarist/Keynesian shibboleth in the book. It's nonsense.  You can't eat money.  Humans have time-preferential needs which require they be met.  Keynes' deflationary sprial is a silly reductio ab adsurdum argument in which he assumes people will hoard their money to the point of self-immolation. 

Nonsense.  The truth is, like everything else, once the price moves low enough people will see the arbitrage and use their money to satisfy their needs. 

The only long-term issue I can see is the attrition rate of lost Bitcoins at the end of the deployment cycle due to lost wallet files.  But, given that we have nearly 17 orders of magnitude of resolution baked into the system, I don't see how that is really much of a practical concern.