The Big Question: 21 Million Coins (yes, I know its been asked before)

[Boussac]

If prices do fall, then the deflation may induce economic actors to "hold out for a better price," slowing the pace of spending.

The "textbook" deflationary spiral happens when "scarcity of money" combines with price deflation, further accelerating it.
Trouble is for economists, it's the first time in history there is money (bitcoin) that is indefinitely divisible (even beyond the granularity of satoshis).
So there is no such thing as scarcity of money in bitcoin.
As a result, if worst comes to worst, we have deflation of prices but no "spiral" in the classical sense.

In the absence of a spiral, there is room for an equilibrium point because we have opposite forces: slowing the pace of spending will reduce the attractiveness of bitcoins as a medium of exchange, reducing the value of bitcoins since the attractiveness of bitcoins as a store of value can be considered fairly inelastic in relation to the medium of exchange function.
In other words, if the value of bitcoins (determining the face value of goods and services in bitcoin) is the sum of two components e + s (where e represents the value as a medium of exchange, s as store of value), we have yet to see a proof that the is a unique equilibrium point where e = 0 knowing that s has an upper limit (our capacity of saving is obviously limited).

[Etlase2]

The "textbook" deflationary spiral happens when "scarcity of money" combines with price deflation, further accelerating it.
Trouble is for economists, it's the first time in history there is money (bitcoin) that is indefinitely divisible (even beyond the granularity of satoshis).
So there is no such thing as scarcity of money in bitcoin.

So what you're saying is pennies were scarce during the great depression? Do you even think about what you're saying?

[Boussac]

The "textbook" deflationary spiral happens when "scarcity of money" combines with price deflation, further accelerating it.
Trouble is for economists, it's the first time in history there is money (bitcoin) that is indefinitely divisible (even beyond the granularity of satoshis).
So there is no such thing as scarcity of money in bitcoin.

So what you're saying is pennies were scarce during the great depression? Do you even think about what you're saying?

No that's not what I am saying. Do you read before you write ?

[Etlase2]

Ok then, so if pennies had been infinitely divisible, the great depression would have been averted then. Is that what you're saying?

[Boussac]

First of all, yes, pennies were hoarded during the great depression.
Second, yes the effects of the depression would have been alleviated with more complementary currencies such as bitcoin, had they been available at the time.
In the absence of internet, cities started then issuing local "fiat" currencies that were beneficial to the local economies but insufficient in scope.
Wall Street lobbyist after WWII made sure that a law be passed forbidding cities from issuing local currencies.

[Etlase2]

First of all, yes, pennies were hoarded during the great depression.

Got a source? What were people using as currency? Only barter? Isn't one of the main arguments that a deflationary spiral isn't possible in bitcoin because "people will still buy bread"?

Second, yes the effects of the depression would have been alleviated with more complementary currencies such as bitcoin, had they been available at the time.

Nobody asked this question, and this is not what you said in your post. You're right though, if it looks like deflation is getting out of control, people will start bailing on bitcoin and this fact may actually help bitcoin be saved from itself. But, that means bitcoin isn't a particularly good medium of exchange.

In the absence of internet, cities started then issuing local "fiat" currencies that were beneficial to the local economies but insufficient in scope.

Nobody asked this question.

Wall Street lobbyist after WWII made sure that a law be passed forbidding cities from issuing local currencies.

Source?


Anyways, you don't have a very good understanding of what effect a major deflationary event has on a currency. Debts cannot be repaid (credit shrinks), bankruptcies run amok, unemployment skyrockets, etc. Allowing it to be used in smaller and smaller amounts does not solve anything. To think that it would... whatever, not like I've come to expect more around here.

[Boussac]

Anyways, you don't have a very good understanding of what effect a major deflationary event has on a currency. Debts cannot be repaid (credit shrinks), bankruptcies run amok, unemployment skyrockets, etc. Allowing it to be used in smaller and smaller amounts does not solve anything. To think that it would... whatever, not like I've come to expect more around here.

Your analysis is flawed because you consider bitcoin like central money when it is meant to be a complementary currency: no suggestion to issue bitcoin-denominated debt (silly idea) or to end the dollar (other silly idea).
No such thing as deflationary "event"..
Divisibility is a benefit that is leveraged by velocity: bitcoin provides increased velocity by removing unnecessary frictions (something I did not repeat because it is obvious for most people )

[Etlase2]

If there is no bitcoin debt, there will be no significant bitcoin industry. There will be no real demand from businesses for bitcoins. Why would they bother accepting bitcoins when they have to spend the same amount or more (vs. CCs) just to get the currency they actually need? And overall the costs will probably be much higher since people need to pay those same fees to actually buy the currency. You seem to suggest that bitcoin is just a payment processor with a few extra benefits, namely those that hold get to profit when there is an activity spike. Everyone who actually uses will face lots and lots of fees.

A lot of people around here think that it will take down "gubment fiat." Or at least put a big chink in its armor. Or at least they hope so. If it can't even attempt that, then it is relegated to online porn, drugs, laundering, and other black and grey market type stuff.

And as far as velocity, MoonShadow made a pretty good point which I agree with:

Bitcoin will find it's own velocity, eventually.  After which time whatever effects on overall prices that bitcoin's ever changing velocity has will be lost in the daily transaction noise, too small an effect for anyone to define nor care about.

[Qoheleth]

So where is that growth coming from? Short answer, from invested capital.

That is incorrect: Invested capital moves human effort towards some endeavor, but that endeavor may well fail and produce nothing at all.

The overall success rate of human adventures is what will give you the true growth rating.

Granted. The "average investment" is the standard here, with that average including investments that produce nothing. But the other side of the equation isn't all the money - just all the money used for investment.

So I guess the question is, do you think you're smart enough, or that your bank/mutualfund/&c is smart enough, to make an investment that is at least (all invested money)/(all money in the economy) as good as the average? Personally I don't think that that's a weird thing to expect, especially assuming that they hedge properly.

If there is no bitcoin debt, there will be no significant bitcoin industry. There will be no real demand from businesses for bitcoins. Why would they bother accepting bitcoins when they have to spend the same amount or more (vs. CCs) just to get the currency they actually need?

Well, first off, the money necessary to cash out bitcoins is less than CCs by a significant margin if you're running a business and can wait a week or two for the money to get through the pipeline; going through Mt. Gox + Dwolla has fees of (25c for Dwolla + 0.6% for MtGox + 5c network transaction fees) which is going to work out to much less than the 3%-ish charged by the Big Two credit card companies. And if you're worried about exchange rate volatility, you can always use Bitcoinica to hedge (about 1.4% fees, which still puts you in a better position than using credit cards).

But if you can get enough people accepting Bitcoin as a transaction processor, you stop having to cash out; you can just spend the coins again. And if you can get enough people who you can count on accepting Bitcoin for the foreseeable future, then that's currency confidence and all of a sudden it isn't just a transaction processor anymore.

[Etlase2]

Well, first off, the money necessary to cash out bitcoins is less than CCs by a significant margin if you're running a business and can wait a week or two for the money to get through the pipeline; going through Mt. Gox + Dwolla has fees of (25c for Dwolla + 0.6% for MtGox + 5c network transaction fees) which is going to work out to much less than the 3%-ish charged by the Big Two credit card companies. And if you're worried about exchange rate volatility, you can always use Bitcoinica to hedge (about 1.4% fees, which still puts you in a better position than using credit cards).

Have you ever exchanged one money for another before? Have you ever noticed you get 2-4% less than the forex conversion rate? Yeah, there is no magical cure with bitcoin that is going to prevent the profit of currency exchange. And I'm not even talking about what MtGox charges, I'm talking about what the people actually selling will charge in an established market. Sure, really large businesses will be able to get better pricing, but the same is true for credit cards.

But if you can get enough people accepting Bitcoin as a transaction processor, you stop having to cash out; you can just spend the coins again.

Again, this is not the case. There needs to be an actual reason for someone to demand bitcoin. Businesses need to be able to pay their bills and salaries in it. If the bitcoin economy cannot expand via debt, and the act of taking on debt is a dodgy affair with deflation, you are not going to have many investment opportunities in bitcoin. This leaves black & grey markets as I mentioned.

And if you can get enough people who you can count on accepting Bitcoin for the foreseeable future, then that's currency confidence and all of a sudden it isn't just a transaction processor anymore.

And if you followed the rest of the conversation about why a deflationary spiral won't happen.... confidence will flow right out of the currency at the beginnings of any spiral, and you can be quite sure that no one will want to take on bitcoin debt again after.

Bitcoin will never get far as a medium of exchange when the people willing to take on debt are burdened further whenever the market expands. This leaves it as probably a good store of value, but a very so-so payment processor, and a niche medium of exchange.

[Qoheleth]

Have you ever exchanged one money for another before? Have you ever noticed you get 2-4% less than the forex conversion rate? Yeah, there is no magical cure with bitcoin that is going to prevent the profit of currency exchange. And I'm not even talking about what MtGox charges, I'm talking about what the people actually selling will charge in an established market. Sure, really large businesses will be able to get better pricing, but the same is true for credit cards.

Then why is it not happening right now? Why can I convert dollars to bitcoins, and then back to dollars, and only pay 1.5% for the round trip?

This isn't a rhetorical question; I'm actually curious. If converting your money always costs about 3%, is there a reason why aren't we seeing that in the wild?

[istar]

Go straight out to a couple of mom and pop stores and ask them out of curiosity how much they pay in bank fees.

Dont be surprised if they tell you they lose something like $1000 a month in banking fees.

There is your huge incentive to start using Bitcoin.

Ofcourse the no chargeback.

The only problem right now is that business dont know about Bitcoin, or think of Bitcoin as a serious project.
That will change with time.

And about the exchange fees.

There are plenty of ways to get Bitcoin without exhanging them.
Selling things, services etc.

And if they have to spend 2.5% to exchange Bitcoins.
Well it only need to increase 2.5% in value for them to make a profit.

They could pay services or work done in Bitcoin.

Bitcoin is designed to increase in value over time that is also an incentive for business to accept Bitcoins.

Another incentive is that Bitcoin works a bit like giftcards, thus the first business that deals in Bitcoins,
ties customers to them if they give change in Bitcoin.



 

[MoonShadow]

Have you ever exchanged one money for another before? Have you ever noticed you get 2-4% less than the forex conversion rate? Yeah, there is no magical cure with bitcoin that is going to prevent the profit of currency exchange. And I'm not even talking about what MtGox charges, I'm talking about what the people actually selling will charge in an established market. Sure, really large businesses will be able to get better pricing, but the same is true for credit cards.

Then why is it not happening right now? Why can I convert dollars to bitcoins, and then back to dollars, and only pay 1.5% for the round trip?

This isn't a rhetorical question; I'm actually curious. If converting your money always costs about 3%, is there a reason why aren't we seeing that in the wild?

We are.  Search the forum for OTC.

[Qoheleth]

And if they have to spend 2.5% to exchange Bitcoins.
Well it only need to increase 2.5% in value for them to make a profit.

This argument seems like an awful idea to me. You can't base a currency's usefulness on expectations that its value will appreciate.

Have you ever exchanged one money for another before? Have you ever noticed you get 2-4% less than the forex conversion rate? Yeah, there is no magical cure with bitcoin that is going to prevent the profit of currency exchange. And I'm not even talking about what MtGox charges, I'm talking about what the people actually selling will charge in an established market. Sure, really large businesses will be able to get better pricing, but the same is true for credit cards.

Then why is it not happening right now? Why can I convert dollars to bitcoins, and then back to dollars, and only pay 1.5% for the round trip?

This isn't a rhetorical question; I'm actually curious. If converting your money always costs about 3%, is there a reason why aren't we seeing that in the wild?

We are.  Search the forum for OTC.

Why on earth would a business - even a small business - trade their coins OTC at a 3% commission when they could do it on an exchange for a quarter of the fees?

Edit: I mean, I can see why individuals would do so; setting up the Gox<->Dwolla<->Bank pipeline is a hassle, requires identity documents, and it can take up to a month to get it working. For such people, the convenience of OTC makes sense. But if you're already running a business, it seems like the fixed cost of setup effort is completely overshadowed by the marginal savings of only paying 1.5% to instantly process a payment.

[MoonShadow]

This leaves it as probably a good store of value, but a very so-so payment processor, and a niche medium of exchange.

That is an interesting perspective, and it may very well prove true.  Yet, Bitcoin was designed to be cash on the Internet, and thus in person transactions are actually an expansion of the protocol in the same way that Paypal is an expansion of the 'protocol'  for fiat currencies on the Internet.  So even if Bitcoin is always a niche medium of exchange, that's still a huge niche.

[MoonShadow]

And if they have to spend 2.5% to exchange Bitcoins.
Well it only need to increase 2.5% in value for them to make a profit.

This argument seems like an awful idea to me. You can't base a currency's usefulness on expectations that its value will appreciate.

Have you ever exchanged one money for another before? Have you ever noticed you get 2-4% less than the forex conversion rate? Yeah, there is no magical cure with bitcoin that is going to prevent the profit of currency exchange. And I'm not even talking about what MtGox charges, I'm talking about what the people actually selling will charge in an established market. Sure, really large businesses will be able to get better pricing, but the same is true for credit cards.

Then why is it not happening right now? Why can I convert dollars to bitcoins, and then back to dollars, and only pay 1.5% for the round trip?

This isn't a rhetorical question; I'm actually curious. If converting your money always costs about 3%, is there a reason why aren't we seeing that in the wild?

We are.  Search the forum for OTC.

Why on earth would a business - even a small business - trade their coins OTC at a 3% commission when they could do it on an exchange for a quarter of the fees?

I have no idea.  I was just responding to the simple question, "why haven't we seen this in the wild?"

[Qoheleth]

We are.  Search the forum for OTC.

Why on earth would a business - even a small business - trade their coins OTC at a 3% commission when they could do it on an exchange for a quarter of the fees?

I have no idea.  I was just responding to the simple question, "why haven't we seen this in the wild?"

Ah, okay. So we have seen it in the wild, just not in the use cases that are relevant to "Bitcoin as a payment processor".

[miscreanity]

Why on earth would a business - even a small business - trade their coins OTC at a 3% commission when they could do it on an exchange for a quarter of the fees?

Edit: I mean, I can see why individuals would do so; setting up the Gox<->Dwolla<->Bank pipeline is a hassle, requires identity documents, and it can take up to a month to get it working. For such people, the convenience of OTC makes sense. But if you're already running a business, it seems like the fixed cost of setup effort is completely overshadowed by the marginal savings of only paying 1.5% to instantly process a payment.

From the perspective of a (progressive) business owner there are several reasons, of which a major one is the potential of reporting requirements for the major Bitcoin exchanges. This can lead to a frightening and expensive mess of legal uncertainty if an authority decides that Bitcoin is taxable and demands exchange transaction history. The contemporary equivalent would be a retroactive tax with an arbitrary amount, payable immediately and with possible penalties applied retroactively as well.

The benefits that Bitcoin offers in borderless transaction accessibility remain more than worthwhile, and if the legal issues can be mitigated or avoided altogether by using OTC, a 3% or even greater fee can easily be less than what it would cost to remain tax compliant (esp. considering tax payments and the cost/effort expended to insure the appropriate amount is paid).

For a company the size of IBM or Volkswagen, such practices would have to be disclosed to shareholders. That would subject those companies to tax obligations. Fully private companies with no requirement for disclosure would be able to take advantage of OTC benefits, developing a large margin of profitability over public corporations.

These "dark pools" already exist and are growing very rapidly. How do you think the Bitcoin exchange price has managed to stay steady for the past few months? ... but I've already said too much

[Etlase2]

That is an interesting perspective, and it may very well prove true.  Yet, Bitcoin was designed to be cash on the Internet, and thus in person transactions are actually an expansion of the protocol in the same way that Paypal is an expansion of the 'protocol'  for fiat currencies on the Internet.  So even if Bitcoin is always a niche medium of exchange, that's still a huge niche.

I'm not sure of the point you're trying to make with cash on the internet. Businesses accept CCs online, and they still pay a fee. If online businesses want to accept BTC and convert it to something else, they're going to pay a fee.

And not that you are the only one guilty of this, but I'm tired of the "but bitcoin is this" statements whenever it seems to apply in the most beneficial way to make a point. Lots of people believe bitcoin is the second coming of currency, and I'm just pointing out that it is going to have an incredibly difficult if not impossible time trying to fulfill that role. No, the deflation aspect and 21 million limit don't really mean anything if bitcoin is mostly just a payment processor with a few speculative nerds hoping to make money on volatility here and there.


As far as 3% for currency exchange vs the current 1.5ish mtgox fee, convenience does always come into play. If BTC is popular enough for banks to do the conversion for businesses, then they may well pay the extra percent or so. I don't know how easy or hard it is to become a forex trader and what the fees are like there (and how many int'l businesses bother with it instead of a bank? no idea) and it's hard to predict how the exchange situation will play out with bitcoin in the future, so it's hard to predict what businesses/people will typically be paying for this service. You have to keep in mind though that it is unlikely that many people will be paid in BTC, so they will be buying it and there is the fee involved there too. How much that fee matters depends on how often each coin gets used in trade before being exchanged, which is impossible to predict. Without a fully up and down bitcoin economy, I don't see it being that often. Regardless, it is unlikely people will be seeing any "massive savings over credit cards" in pricing by using bitcoin.

[PrintCoins]

I think an assumption here is

Fixed monetary quantity = deflation.

The increase or decrease in money value is not entirely based upon scarcity.

A major factor in inflation is monetary velocity (how much the money flows around). If all holders of bitcoin suddenly started using bitcoins for the majority of their transactions, we would face rapid inflation.

Also, whatever equation you use to quantify the value of money goes out the window once it hits perception. How people view a currency is more important to its value than anything else.

Yes, people might hold bitcoins for some time as the price goes up, but if it doesn't go up forever, and starts to flatline, people will want to start getting rid of it, and this will cause a feedback loop that might make it so people will jump ship as fast as they can.

In the end, without some large economic event, I think bitcoins are fairly stable, and will just get more stable over time. That means they will become a pretty piss poor investment, especially if they end up only deflating at <5% annually. Investing in revenue generating businesses would end up being more lucrative. Also, investing in things that would provide immediate happiness would be more valuable.

Only about 7200 per day are being produced right now, and I am sure speculators are already adjusting their valuations for output halving (it is not like it is a surprise). So we are looking at moving from $36000 per day to $18000 per day in "quantitate easing." With the number of people in bitcoin, I consider that to mean that for all purposes, we have practically reached the end of money production.

So here you are. The train has basically reached the $21M quantity. Look around you, because at this point, I think speculators are going to get bored soon, and move on to some other new beanie baby. We have some stuff you can buy and sell, and it makes a great currency for gambling and buying drugs. I see a super bright future in its use in games, and if the USD ever falls apart, bitcoin and precious metal holders will be laughing all the way to the bank (not to say they will be rich, but just that they have weathered a storm). Bitcoins will go up and down in value, but really I think it is pretty much in the right ballpark now. The economy will grow one storefront at a time, and hopefully it will be a boring useful part of the economy, and not a long dead fad.