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Author Topic: Value of bitcoin denominated shares will eventually approach 0?  (Read 6892 times)
unk
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May 16, 2011, 07:42:18 AM
 #21

you're talking as if people have no way of diversifying away from their operational 'fiat' currencies to avoid inflation or achieve other investment goals. that's just not true. nobody is currently forced to invest in stocks to avoid inflation. people decide, to the extent they're making conscious decisions, that that is one effective way to do so. they choose others as well, such as real estate, diversified portfolios of commodities, and so forth.

being paid in a currency that experiences inflation or demurrage does not make investment decisions less rational, and no serious economist i've encountered thinks it does. there's no reason it should. because people are not forced to experience inflation in their long-term holdings currenly, bitcoin's strength is not that it lets people escape that fate. it provides an additional way of doing it, and hopefully that way turns out to be convenient for people.

now, as to the more specific question in this discussion: the reason to invest in a company, rather than merely to 'save' bitcoins, is to experience either bitcoin-denominated capital appreciation or an income stream in bitcoins. shares denominated in bitcoins could theoretically do both, just as shares denominated in 'fiat' do today. people are complicating the analysis by switching their frames of reference, accidentally, between 'fiat' currencies and bitcoin.

to see why the discussion here doesn't actually pose a problem for bitcoin-denominated investments, imagine if there were only bitcoins. i work and acquire a savings of 1000 of them, which is more than i need to pay for my current expenses. so i contemplate an investment decision to accommodate my future wants: i can put 200 of them in a company that i expect to grow. if i keep the 200 bitcoins, i'll still have 200 in the future. if the company grows, i expect it will be able to turn 200 into 205, through its income-producing activities. whether it pays that gain out as a dividend or simply impounds it into the share price is no more relevant to the fundamental economic picture in a bitcoin economy than it is today, nor is it relevant that in ten years after my contemplated investment, a bitcoin is expected to buy more than it currently does. the question is simply what risk i want to accept for what reward; i can have 200 at a 100% chance (except for the loss of my wallet), or more (and perhaps less) if i take some risk.

now, sure, the riskfree rate of return can influence my investment decisions, but the picture isn't fundamentally different from today in the way people are imagining. the proper comparison is between 'dollar savings + interest versus dollar-denominated investment' and 'deflationary bitcoin savings versus bitcoin-denominated investment'. there's no special complication for bitcoins here.
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May 16, 2011, 04:13:19 PM
 #22

being paid in a currency that experiences inflation or demurrage does not make investment decisions less rational, and no serious economist i've encountered thinks it does. there's no reason it should. because people are not forced to experience inflation in their long-term holdings currenly, bitcoin's strength is not that it lets people escape that fate. it provides an additional way of doing it, and hopefully that way turns out to be convenient for people.

People are not forced to experience inflation as long as they invest, just like you say, but unlike you say this is exactly what makes the investment less rational. The constant pressure to invest somewhere, anywhere, especially as you can get free money from the government to do so (see the Fed's quantitative easing), must necessarily lead to more investment than the market would naturally desire.

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May 16, 2011, 09:29:03 PM
 #23

but why do you think the presence of inflationary currencies encourages more investment (in, say, the stock market) than there would be without their existence as an option? i just don't follow the logic.

think of dollars as providing a convenient payments system in the united states (and a few other places) in exchange for the possibility of inflation, physical damage, and loss of value through counterfeit. why does that option as a store of value, however imperfect it is, encourage investment that would otherwise not be undertaken?

nothing forces the dollar's use as a long-term store of value. exactly the same thing is true of bitcoin.
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May 16, 2011, 10:09:04 PM
 #24

but why do you think the presence of inflationary currencies encourages more investment (in, say, the stock market) than there would be without their existence as an option? i just don't follow the logic.

think of dollars as providing a convenient payments system in the united states (and a few other places) in exchange for the possibility of inflation, physical damage, and loss of value through counterfeit. why does that option as a store of value, however imperfect it is, encourage investment that would otherwise not be undertaken?

nothing forces the dollar's use as a long-term store of value. exactly the same thing is true of bitcoin.
It's simple math to figure out why an inflationary currency encourages more investment than a deflationary currency.

Think of it this way.  Assume the real estate market is doing well, and land value grows at a rate of 10% per year.  Also assume that we have a highly inflationary dollar, which inflates at a rate of 100% per year.

I have $100,000, with which I purchase a piece of land on January 1st, 2011.  At Dec 31st, 2011, the value of the land, in Jan 1st dollars, would be $110,000.  But since the dollar inflated 100% during the course of the year, my land is now worth $220,000.  Assuming I had held the money, I would still only have $100,000 at Dec 31st, and could now buy much less land than I could at the beginning of the year.  This is why an inflationary currency encourages investment - because asset values can match inflation rates, causing the asset holder to gain money.

Now think of a second example.  I have purchased the same land at the same price, and land values are still rising at 10% per year, but the currency DEFLATES at a rate of -50% per year.

At Dec 31st, the value of the land, in Jan 1st dollars, would be $110,000.  But since the dollar deflated 50% during the course of the year, my land is now worth only $55,000.  Assuming I had held the money, I would still have $100,000.  This is why a deflationary currency discourages investment - because asset values can match deflationary rates, causing the asset holder to lose money.
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May 16, 2011, 10:21:51 PM
 #25

i think you're making a mistake right out of the gate by assuming there is 'an inflationary currency' or 'a deflationary currency'. instead, there are just different currencies, commodities, shares in companies, goods, services, real estate, etc.

they all compete as long-term stores of value.

that's already true before bitcoin. bitcoin simply adds a new option to the mix.

maybe what you mean is that a shift in network effects away from inflationary currencies as operational currencies will make it easier, practically or psychologically, for many people to store value by default. or something like that. but that's a rich, complicated, psychological, empirical point, and it's very difficult to decide if it's true or not.
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May 16, 2011, 10:26:33 PM
 #26

i think you're making a mistake right out of the gate by assuming there is 'an inflationary currency' or 'a deflationary currency'. instead, there are just different currencies, commodities, shares in companies, goods, services, real estate, etc.

they all compete as long-term stores of value.

that's already true before bitcoin. bitcoin simply adds a new option to the mix.

maybe what you mean is that a shift in network effects away from inflationary currencies as operational currencies will make it easier, practically or psychologically, for many people to store value by default. or something like that. but that's a rich, complicated, psychological, empirical point, and it's very difficult to decide if it's true or not.
I think I am NOT making a mistake by assuming there is an inflationary currency.  Aside from during recessions/depressions, every single currency in use in the world today is inflationary.  Many economists believe that a small amount of inflation is necessary for a healthy economy (in order to encourage purchase of consumer goods and investment, as I have already shown).  Whether that investment and purchasing is entirely necessary or not remains to be seen.  It may be possible for an economy to survive, just with less GDP, on a deflationary currency.

Bitcoins are deflationary, and there is no way around that.  That's what happens when you have a limited supply that slowly gets smaller (lost wallets, etc).
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May 16, 2011, 10:49:00 PM
 #27

you've misunderstood me. what i was saying is that the mistake i believe you're making is to assume a currency rather than multiple ones. i'm not disputing that most present currencies are inflationary or that bitcoins are deflationary, but my point is that nobody has to use any of them as long-term stores of value.

if it helps, i can rephrase what i said to:  'i think you're making a mistake right out of the gate by assuming there is a single currency. instead, there are just different currencies, commodities, . . .'

another way to say it: when you own real estate, you're out of the dollar, bitcoins, francs, oil, and pork bellies (to the extent of your real-estate purchase). the dollar doesn't float into your real-estate purchase, even if that's what you bought it in. from your perspective as a real-estate holder, there isn't 'a' currency. there are just many possible currencies you can use once you sell it.
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May 16, 2011, 10:59:13 PM
 #28

you've misunderstood me. what i was saying is that the mistake i believe you're making is to assume a currency rather than multiple ones. i'm not disputing that most present currencies are inflationary or that bitcoins are deflationary, but my point is that nobody has to use any of them as long-term stores of value.

if it helps, i can rephrase what i said to:  'i think you're making a mistake right out of the gate by assuming there is a single currency. instead, there are just different currencies, commodities, . . .'

another way to say it: when you own real estate, you're out of the dollar, bitcoins, francs, oil, and pork bellies (to the extent of your real-estate purchase). the dollar doesn't float into your real-estate purchase, even if that's what you bought it in. from your perspective as a real-estate holder, there isn't 'a' currency. there are just many possible currencies you can use once you sell it.
Taking all of your previous posts in context with this one, I see your point now.  You are saying, what is the difference between a "deflationary asset" (if you allow me to use that term) and a deflationary currency, as they could both be used to store wealth.

I think this kind of proves my point though.  If a deflationary currency is available to store wealth, then there will be less wealth storage in assets that help produce GDP.  Less wealth storage = less investment.  Even though there may be more investment overall, including investment in the deflationary currency, there will be less economical investment, or investment in companies and goods that promote the economy.  Investing in a currency doesn't help give people jobs or promote the exchange of money for goods and services, so such investments would be detrimental to GDP.

This is why most economists will tell you that a small amount of inflation is necessary for an economy to succeed.  Without it, a lack of investments in new projects and ideas will stifle the economy.
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May 17, 2011, 12:08:31 AM
 #29

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.

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May 17, 2011, 03:26:15 AM
 #30

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.
Even independent economists will tell you the same thing.  And it just makes sense, really.  If you have less incentive to place your extra funds into investments, then fewer investments will be made.  With fewer investments come larger barriers to entry and startup costs that have to be paid by the company founder.  With fewer companies comes fewer jobs.
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May 17, 2011, 03:46:02 AM
 #31

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.
Even independent economists will tell you the same thing.  And it just makes sense, really.  If you have less incentive to place your extra funds into investments, then fewer investments will be made.  With fewer investments come larger barriers to entry and startup costs that have to be paid by the company founder.  With fewer companies comes fewer jobs.

More investment does not mean better investment. Only endeavors that make people better off should be using resources.

A good currency is a guide for telling people what is creating wealth and what is not. 

More jobs is not necessarily a good thing. If there is a way to accomplish something with less work is that worse?

I think there should be exactly the number of jobs that people want. Currently we have mega distortions. People being forbidden from doing certain things and forced to do other things or pay a certain amount and not another. This results in the loss of jobs that people actually want which is tragic.

But the answer is to let people be free to work as they like or need to and not to do things like manipulate the currency so they are too poor to stop working.

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May 17, 2011, 03:50:17 AM
 #32

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.
Even independent economists will tell you the same thing.  And it just makes sense, really.  If you have less incentive to place your extra funds into investments, then fewer investments will be made.  With fewer investments come larger barriers to entry and startup costs that have to be paid by the company founder.  With fewer companies comes fewer jobs.

More investment does not mean better investment. Only endeavors that make people better off should be using resources.

A good currency is a guide for telling people what is creating wealth and what is not. 

More jobs is not necessarily a good thing. If there is a way to accomplish something with less work is that worse?

I think there should be exactly the number of jobs that people want. Currently we have mega distortions. People being forbidden from doing certain things and forced to do other things or pay a certain amount and not another. This results in the loss of jobs that people actually want which is tragic.

But the answer is to let people be free to work as they like or need to and not to do things like manipulate the currency so they are too poor to stop working.
Hard to argue with that reasoning... good thoughts.
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May 17, 2011, 04:11:45 AM
 #33

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.
Even independent economists will tell you the same thing.  And it just makes sense, really.  If you have less incentive to place your extra funds into investments, then fewer investments will be made.  With fewer investments come larger barriers to entry and startup costs that have to be paid by the company founder.  With fewer companies comes fewer jobs.

More investment does not mean better investment. Only endeavors that make people better off should be using resources.

A good currency is a guide for telling people what is creating wealth and what is not. 

More jobs is not necessarily a good thing. If there is a way to accomplish something with less work is that worse?

I think there should be exactly the number of jobs that people want. Currently we have mega distortions. People being forbidden from doing certain things and forced to do other things or pay a certain amount and not another. This results in the loss of jobs that people actually want which is tragic.

But the answer is to let people be free to work as they like or need to and not to do things like manipulate the currency so they are too poor to stop working.
Hard to argue with that reasoning... good thoughts.

Thanks. I know it's not standard stuff. It's always hard to think of the fundamentals of mainstream society being wrong.

I've been reading Bitcoin comments all over the web today and it's amazing to see how angrily some people dismiss it without even thinking. I love the idea that people will end up getting paid according to how open they were to figuring out that this will work.

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May 17, 2011, 12:56:28 PM
 #34

Heh, I totally agree with how the stupid fiat system force people to invest into stupid things.

I am glad I found bitcoin, before that I was wondering where to stuff all my fiat money (currently devaluing 7% yearly... while government papers give 5% yearly interest rates...).

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May 21, 2011, 04:54:07 AM
 #35

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.
Even independent economists will tell you the same thing.  And it just makes sense, really.  If you have less incentive to place your extra funds into investments, then fewer investments will be made.  With fewer investments come larger barriers to entry and startup costs that have to be paid by the company founder.  With fewer companies comes fewer jobs.

More investment does not mean better investment. Only endeavors that make people better off should be using resources.

A good currency is a guide for telling people what is creating wealth and what is not. 

More jobs is not necessarily a good thing. If there is a way to accomplish something with less work is that worse?

I think there should be exactly the number of jobs that people want. Currently we have mega distortions. People being forbidden from doing certain things and forced to do other things or pay a certain amount and not another. This results in the loss of jobs that people actually want which is tragic.

But the answer is to let people be free to work as they like or need to and not to do things like manipulate the currency so they are too poor to stop working.

@SgtSpike: Doesn't that mean then that as investments decrease the number of goods and services provided will decrease in proportion to BitCoins. Therefore causing inflation until some equilibrium is achieved, though this process may be quite painful. Furthermore with FreeMoneys analysis, it seems to me the optimal thing would be the complete opposite of what Keynsians recommend, constant deflation. I understand in the USA in the 19th century they experience massive growth but with deflation on average.
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May 21, 2011, 05:03:02 AM
 #36

We do talk about "putting X in BTC", but this isn't really what happens from a global perspective. Nothing gets inside anything except from one person's perspective. When I trade USD for BTC. It feels like I'm putting my dollars into BTC, but obviously someone else is taking out the exact same amount at the exact same time. Nothing is lost or sitting idle. The same is true if I work for bitcoins. My work still accomplishes the exact same amount regardless of how I take my pay.

The reason most economists say that inflation is good is that it funds the government that pays them. It's really easy to overlook things when your livelihood depends on it.
Even independent economists will tell you the same thing.  And it just makes sense, really.  If you have less incentive to place your extra funds into investments, then fewer investments will be made.  With fewer investments come larger barriers to entry and startup costs that have to be paid by the company founder.  With fewer companies comes fewer jobs.

More investment does not mean better investment. Only endeavors that make people better off should be using resources.

A good currency is a guide for telling people what is creating wealth and what is not. 

More jobs is not necessarily a good thing. If there is a way to accomplish something with less work is that worse?

I think there should be exactly the number of jobs that people want. Currently we have mega distortions. People being forbidden from doing certain things and forced to do other things or pay a certain amount and not another. This results in the loss of jobs that people actually want which is tragic.

But the answer is to let people be free to work as they like or need to and not to do things like manipulate the currency so they are too poor to stop working.

@SgtSpike: Doesn't that mean then that as investments decrease the number of goods and services provided will decrease in proportion to BitCoins. Therefore causing inflation until some equilibrium is achieved, though this process may be quite painful. Furthermore with FreeMoneys analysis, it seems to me the optimal thing would be the complete opposite of what Keynsians recommend, constant deflation. I understand in the USA in the 19th century they experience massive growth but with deflation on average.

Deflation isn't magic. It is not the case that deflation--->goodness all the time. One could cause dollar deflation by murdering people and lighting their money on fire. This would not be good. 

Deflation caused by a fixed money supply and ever increasing wealth and productivity is totally not a problem.

Deflation is an effect of a healthy economy, it does not make a healthy economy.

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May 21, 2011, 04:18:40 PM
 #37

Well, you've a "terrible flaw" here:

Quote
Shareholders of company A start selling their stock to buy from company B

If BTC has double the price then, unless company A still produces 50 BTC anyway, its shares will be down to 0.5. So investors in A wouldn't gain anything on the rally over B, and most likely would loose a lot, as within the selling rally the price would keep dropping at a fast pace.
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May 22, 2011, 12:24:03 PM
 #38

So you discovered the problem with deflation...
It makes BTC good way to store value...
Terrible to invest with...

You don't want to borrow deflating currency...
Because you will have hard time paying back...
You don't want to lend deflating currency...
Because you will not receive all money back...

Buying stock=lending money in a way...
Everyone see this is bad idea...
Keep hoarding your bitcoins...
Lower risk and better payoff...

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May 22, 2011, 12:29:33 PM
 #39

So you discovered the problem with deflation...
It makes BTC good way to store value...
Terrible to invest with...

You don't want to borrow deflating currency...
Because you will have hard time paying back...
You don't want to lend deflating currency...
Because you will not receive all money back...

Buying stock=lending money in a way...
Everyone see this is bad idea...
Keep hoarding your bitcoins...
And selling only what it is necessary to sell...
Lower risk and better payoff...

Adjusted for viable economy.
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May 22, 2011, 06:07:44 PM
 #40

I understand that with a fixed monetary base the cause of deflation will be growth.
The money holders will gain an average of the total growth, but some investments would have a greater gain (while others would have a lower one).
But why must the money holders have that gain without financing the economy nor taking any risk?
Isn't it a positive externality?
The "service" they're providing is preventing the investments with the lower expected yields from happening, not necessarily the riskier ones. Note that without printing you can't say that there's not enough resources to end all projects.
Using the typical example of the houses, maybe there's bricks, workers and demand for building 4 houses, but only 3 are financed because the fourth one would have take the rent prices down making the housing market (in that village) less profitable than just holding the money.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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