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Author Topic: The Big Question: 21 Million Coins (yes, I know its been asked before)  (Read 8166 times)
Technomage
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May 10, 2012, 10:11:22 PM
 #101

There is a major problem with the "deflation is doom" arguments that should be pointed out. From the consumption side it's very clear of course, people do buy things even in a deflationary situation which is evident even with goods that are not required for staying alive. Computers, smartphones, tablets etc. These are in a much sharper deflationary spiral than Bitcoin is likely to ever be and still those industries are doing fine.

With loans and investments this is usually not that simple but in fact it actually is. One just has to start thinking about WHY would deflation happen in the first place. One reason is population growth, or user growth. This is the main reason why the value of bitcoins has grown until now but let's assume we have 21 million coins and everyone is using Bitcoin. Then it's growing with the real population growth rate which is a small yearly percentage and it's going to actually turn to negative in a few decades (most population growth prediction models indicate this) which will actually cause a small inflationary pressure.

Regardless that will be a small factor. What we're left with is economic growth. Now, how does economic growth happen? With loans and investments. How will we manage to even get into a situation where nobody loans or invests because we have deflation, when there is no way for a deflationary situation to happen unless we first have economic growth?! The answer is, we can't. This is actually a paradox, deflation can't happen without economic growth (assuming the user base is fairly stable) which generally doesn't happen without loans and investments.

The answer in length is that in an economy with a fixed money supply debt and new loans will become increasingly expensive with increased economic growth. This will of course reduce loan-taking which will calm down the economic growth which will reduce deflation which will again decrease the price of loans and so on. In reality there will be an equilibrium of course so it doesn't actually go up and down all the time.

The point of this exercise was to show that it's not set in stone that the value of bitcoins just rise all the time. We simply might not have economic growth and then it will certainly not deflate. Which will keep money fairly cheap. If we start experiencing degrowth, money will get increasingly cheap making loan based investments much safer.

The likely result of this is that in a Bitcoin economy lot less unsound investments are made because you don't have inflation keeping those investments alive by keeping the debt cheap. Thus we will have a much healthier economy in a large number of ways. People will consume less because there are incentives to wait. People will save more money because saving is actually a sound possibility. People will take on less debt especially during deflation because debt is more expensive and more risky.

It won't end in a deflationary spiral. It won't kill the economy since people will still continue to buy whatever they need. Investments continue to be made, less if the economy is growing a lot, more if it's not growing. As evoorhees said, production, not consumption, is the driving force of this type of economy. Investments will also be more sound because the possibility of deflation will make loans much riskier than they are now. This will lead to a more stable economy with less ups and downs which is generally a good thing.

As a final note I'd like to add that this whole issue of investments becoming more difficult during deflation and economic growth applies really well only to loan based investments. Investments based on savings is still smart even if the economy is growing a bit. It has to be growing and thus Bitcoin deflating at a very high rate for a good savings based investment to become unprofitable. At that point the growth will stall at the latest and deflation will start decreasing.

So it's actually possible for the economy to grow and keep deflating even if loan based investments are difficult, if there is still a good market for high profit investments, which can then be funded from savings. In any case all types of loans and investments become increasingly profitable if economic growth stalls or starts degrowing.

Deflation while the economy is growing really can't be that bad, the whole notion is ridiculous. And what other ways are there for Bitcoin to deflate? The money supply is fixed, the supply is not going to deflate with the exception of lost coins. User base will eventually be fairly stable, right now the situation is complex because the supply is still in its high inflation phase but user base has grown sharply. The value of bitcoins rising and prices going down in a growing Bitcoin economy has not been a bad thing though, in fact we have seen Bitcoin merchants get more activity during user growth simply because people are trying out payments in this new economy.

I haven't really seen any good arguments yet for a sustained deflation problem that applies to Bitcoin. Keep them coming though. Bitcoin is a good experiment for an economy with a fixed money supply by the way. We'll find out if it works or not.

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May 10, 2012, 10:34:25 PM
 #102

FRB is also a fairly interesting topic. Bitcoin banks can use FRB to an extent of course but only within their own accounts. The reserve requirements would naturally have to be a hell of a lot bigger than now because the "hard currency" would move in and out of the bank much more than it does in regular fiat banks.

This is because Bitcoin users can have individual hard currency accounts (Bitcoin wallets on their computers), while in fiat-land hard currency (money issued from central banks) only moves when a transfer is made from a bank to another bank. All transactions within the same bank, which are common in the traditional economy (but would be much less common in a Bitcoin economy simply because using banks and depositing to them is not "mandatory" in the same way) are simply the bank moving the debt based money around their own database, while not touching the hard currency at all.

So in a Bitcoin economy I would expect there to actually be some banks with no FRB, or 100% reserves and banks with a variety of different reserve requirements. The lower the reserve requirement the more risks are involved regarding bank runs.

The day to day transfers of hard currency (actual bitcoins) would likely be so high that even the biggest risk takers would have significantly higher reserves than the most sound banks in our mainstream economy. People could choose however, from banks that give you a high interest rate (because they use lower reserves and are able to loan out more) and banks that use a 100% reserve or close. The risks involved with those high interest deposits would be much higher of course.


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May 12, 2012, 11:44:47 AM
 #103

Well, it's not entirely correct that Bitcoin is infinitely divisible. In order to use smaller units than satoshis directly in the Bitcoin protocol, it requires an incompatible change. The Bitcoin protocol internally calculates in satoshis as integers. Other than that, it's right. Even when we use nanotechnology (see http://www.rfreitas.com/Nano/TangibleNanomoney.htm), gold cannot be transacted in units smaller than an atom. Bitcoin can be modified for any arbitrarily low smallest unit.

You are right, the correct statement would be:
 bitcoin divisibility can be increased indefinitely by way of a new client version release to handle transactions using further decimals. Or ?


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