Experts, please explain why decay is a good thing for a currency

[insidertradingeverywhere]

Bitcoin has built in decay: inflation, high mining costs - whatever you want to call it - it's decay basically.

So the coin which should be used as a currency is unable to preserve value which makes it basically useless as currency because the main purpose of a currency is to hold some value relatively constant so it can be used in daily exchange of goods and services.

Please explain again why decay is an advantage for a currency and why anyone would accept a decaying currency in exchange for goods and services when presented with a choice between a more and a less decaying (and therefore volatile) currency.

Why would anyone choose the more decaying currency in an exchange of goods/services over a less decaying one - let alone invest in it?

Thanks for explaining again.

[deine mudder]

LOOOL.
Next up: Lepracoin

OP, this is bullseye. I expect great things from this thread.

[BitCoinNutJob]

Thanks for explaining again.

no problems, thanks for asking

[insidertradingeverywhere]

Thanks for explaining again.

no problems, thanks for asking

you didn't explain anything 

[BitcoinNational]

Add this idea:

The Bitcoin "Network" charges 10% fee to store value on the chain.  (this is the decay)

No matter if bitcoin is $1000 or $1 you lose 10% to mining inflation.

Other coins have fixed this decay issue.


My hope is that the PROs know this fallacy but see it as a necessary evil in order to fatten up a ASIC industry.  

Bitcoin has accomplished much.  It built the ASIC network.  It built the international system of exchanges.

But the tech and the networks are basically built up at this point, so from an investment point of view bitcoin only makes sense as a way to milk the newbies that can't math.

It is time to move forward with better constructed distribution algorithms that allow value to be held and aded without a constant suck from rent seeking miners.

Would you buy a house that is half completed?
No.
Would you take on the high risk of investing in a construction project that lasts 30+ years.
That's btc.

The solution is pulling all the ore (or at least 95% of it) out of the ground, this is the launch phase.
After that the markets can/will decide the value, but at least it won't suffer perpetual (30 year) decay.

[Erdogan]

There is no "decay". There is initial creation of coins in the system and initial distribution. "Decay" is bad. We need an unfucked money system.

[arbitrage001]

Bitcoin is an experiment. Any flaw discovered now will surely be corrected in next generation coin.

[BitcoinCharlie]

Bitcoin is an experiment. Any flaw discovered now will surely be corrected in next generation coin.

It already has, if you have time, please check out Unobtanium. No inflation!

https://bitcointalk.org/index.php?topic=527500.5380

Thanks!

[Possum577]

It's only "decaying" for as long as new coins can be mined, no?

[CoinCube]

Insidertrading. I would not call myself an expert but I answered your question recently in another thread. I will post that answer here.

Observe the case of an investor who is capable of making investments over his lifetime with a average annual return of x percent annually while operating in an economy that is growing at y percent each year and a monetary unit that is debased at z percent.

Scenario #1: x > y (Return on investment exceeds average economic growth)

In Scenario #1 the investor is capable of achieving average real returns greater then the average growth in the economy. In this scenario the investors decision is easy and he should always invest. The investor is the upper elite in terms of productivity and will always be better off investing regardless of currency debasement.

Scenario #2 0 < x < y (Return on investment is below average economic growth)

As you pointed out productivity is power-law distributed. Therefore it is mathematically impossible for the majority of humanity to fall into scenario #1. Most of humanity are and always will be be in a situation where their investments on average generate a real return that is less then the average growth rate of the economy.

The ideal outcome for humanity is that investors in this situation make these net positive but lower return investments. The growth rate y is not a single value but rather the aggregated sum of the growth vectors over all the individuals in the economy. If investors in scenario #2 do not invest the value of y and prosperity overall is reduced.

The majority of humanity in scenario #2 face a free rider deliema. In the extreme situation of z = 0 (no debasement) they are decisivly better off not investing and letting the overall growth in the economy increase their purchasing power. In this situation instead of making net positive investments the majority of humanity gain most by parasitizing the gains of the upper elite and prosperity overall is reduced.

This delima can be solved by introducing a non zero debasement rate z. As we raise the debasement rate individuals lose the incentive to be free riders. At a debasement rate of z = y all inverstors in scenario #2 like those in scenario #1 have a positive incentive to make net positive investments. Money loses the ability to parasitize on the gains of the productive. Furthermore money at this debasement rate maintains its ability to act as a store of value. Meaning that with a debasement rate of z = y a saver who chooses to defer consumption will still be able to purchase a like basket of goods and services in the future.

Now lets examine the situation where z > y and debasement rate is set in excess of the underlying economic growth. All investors still have optimal incentives to invest. However, what changes is that individuals on the upper portion of the power-law distribution now gain purchasing power in excess of what they actually produce.

To understand why this is the case we need only look at the example of an investor achieving returns of y in a world where z = 2y (a world where an debasement is twice the rate of aggregate growth). Such an investor is achieving a growth rate that matches the average in the economy, however, his rewards do not reflect that.

If such an investor starts with initial capital C then his returns over n years can be calculated as follows

Return = C((1+y)^n * (1-z)^n)

You can plug in different numbers to see what the exact result will be for varying levels of growth and debasement. However, in all cases where the debasement exceeds the average economic growth z > y our investor who contributed an average share to the growth of the overall economy finds that his capital significantly depreciated over time. Where does that purchasing power go?  It is redistributed to the upper elite who while they are the most productive gain purchasing power in excess of what they produce.

Such an approach does in theory maximize growth I do not dispute that. Historically this idea has been referred to as trickle down economics. However, you need to be honest about what debasement in excess of the aggregate economic growth really is. It is certainly not needed to maximize individual incentives to invest. Instead it is simply a redistributive mechanism. It is a form of reverse socialism redistributing from the poor to the wealthy because they in theory can better put capital to productive use.

I agree that in the end the market will decide between competing alternatives. However, in any realistic economy, real or virtual, there is a demand for at least one good which is used as a store of value that and is not intended to be used but simply to transfer purchasing power across time. The Bubble Theory of Money dictates that the optimal strategy is for everyone to standardize on the same asset as a store of value, and for this asset to be one of intrinsically limited quantity.    
 
My thesis is that a market of rational investors will choose the monetary unit that maximizes individual incentives to make productive investments while minimizing redistributive transfer from the poor to the wealthy. That level is a debasement rate that matches the rate of aggregate economic growth. You can make the case that society will be better off with reverse socialism if the wealthy later pay back their ill gotten gains by returning a portion of them back to the poor perhaps via the establishment of a guaranteed minimum income or other welfare type programs. However, any such an arrangement would be very difficult to stabilize in light of the problems outlined in the OP. Furthermore it is emphatically not compatible with anonymity.

[pattu1]

Mild, predictable inflation is actually considered good for an economy.

[Milotyc]

Mild, predictable inflation is actually considered good for an economy.

Yep, this encourages people to spend their money.

Imagine a constant deflation; why buy that house now when it'll be cheaper tomorrow. Why buy a computer when you can buy 2 if you hold your cash two more months.

[HCLivess]

https://www.cryptsy.com/markets/view/nxt_usd

see this flat line? maybe buy this.

[legendster]

I am no expert, but I can see that you got a few things right there and a few things wrong.

So the coin which should be used as a currency is unable to preserve value which makes it basically useless as currency because the main purpose of a currency is to hold some value relatively constant so it can be used in daily exchange of goods and services.

Correct no argument.

Please explain again why decay is an advantage for a currency and why anyone would accept a decaying currency in exchange for goods and services when presented with a choice between a more and a less decaying (and therefore volatile) currency.

Why would anyone choose the more decaying currency in an exchange of goods/services over a less decaying one - let alone invest in it?

See inflation and decay are two different things.
In economics decay could be comparable to the Great depression of 1930's or the Financial Crisis of 2008.
In both these cases the decay was not only of the store of value but also the purchasing power of that stored value. If you wanted something that would normally cost $10, suddenly having $10 for you wasnt enough to buy that thing, not only because the price of the dollar fell but the cost for producing that thing significantly rose and that too globally.

Traditionally, inflation on the other hand is a necessary evil, without it there would be almost no value to your currency, just imagine, if you had 1 snickers bar, and provided you have grown up as a man that likes to share stuff with his family, you would naturally share, pieces of that Snicker bar with your family. Now provided everything in this equation remains the same but instead of 1 snicker bar you are given 10 snicker bar then you would have more bars to share with your family.

This situation ended up good for your family in the short run, every one got at least one or more bars but that bar's value was reduced. (even though neither of you are paying for it) So the next time you get 1 snicker bar it wont be enough because now your family expects at least 1 bar per member.

Same is the case with currency, if everyone had more money in their hands, the value for their money would be reduced.
If I remember correctly they even made an episode of Simpsons or Family guy on this topic.

Inflation by definition is the sustained and slight increase of surplus of money which directly results into the sustained increase of prices of goods and commodities.

Why is it necessary ? well that is a debated topic, say you wanted to buy a Horse, the price is $100

But by the time you collected $100 the price has inflated by 20% and the price is $120.

So now you would rather wait for the price to come down to $100 instead of working more harder to get that extra $20 fast enough so you can buy the Horse. So when you choose to rather wait for the price to come down, it has a deterrent effect on the whole economy, because you as a labor are choosing not to work in hopes of the price falling down again, hence, a steady inflation rate discourages this 'waiting around' and encourages people to work harder in order to afford what they want to buy, in this case the 'Horse'.

Offcourse the rate of work vs the rate of inflation would have a parabolic graph and you would be eventually be able to buy your horse.

JUST for reference this is a parabolic curve :



So according to the 'experts' inflation is necessary to keep business in profit and to keep the ratio of Potential Labor Force vs Actual Labor Force lower.

Basically Inflation = Profits in Business = More employment opportunities.

So inflation's relation with Bitcoin is also very similar but not the same, in bitcoin the amount of coins generated is limited so theoretically there is an inflation of bitcoin value overtime, as in the purchasing power of BTC is steadily increasing with the amount of bitcoins being minted (mined) is gradually decreasing.

Take Dogecoin for example, initially the price of the coin went 'TO THE MOON' but now the prices are steadily falling. Why ? because they decided to make unlimited amount of Dogecoins.

Its kinda like a pawn business. The rarer it is, the more valuable it gets.


Now if you ask WHY the price is falling ? well it has to do a lot with the frugal nature of economics, as many say economics is a part psychology.

I discussed this in another thread :

Good to hear that, people must buy at this low price, and then we can count some profits.
I'm sure that btc price will rise again sometime.

Oh you silly people, STOP THIS SILLINESS OF YOURS.

Bitcoin is not gold that you buy it and wait for it to rise in price because when it does rise all you silly guys would do is dump all the coins and create a bigger crash.

Just do day trade, Bitcoin is a currency so trade it like it is one and not some rare commodity.

^ No. One of the few reasons I hold is because I'm afraid I would screw up at day trading. :-)

That has always been the issue with Bitcoin traders, we are not trained to trade in FOREX. We are computer nerds trained in writing lines of codes. Cryptos need to be passed as currencies and more mainstream trading platforms need to recognize them.

What do you mean trade? in the markets or buy stuff with it?

And why it has to be what you say it has to be? It is what people make out of it. If people want to hold it they can do it freely. If you believe it will go up why would you buy some lame shit with it when you can use dollars.

LOL get your facts straight bro. I am not Hitler or Kim Jong-un I am not TELLING people to do anything.
I am just TELLING people the difference between the right and the wrong use of a currency.

By Trade I meant currency trading as in FOREX = Foreign exchange.

You can for sure tame a wild tiger cub and keep it as a pet, but you cant call it a true wild cat. I hope you get my point.

Bitcoin was meant to be a currency NOT a commodity, treat it like a commodity and it will burn you.


This is my reasoning of why the price of BTC is so volatile. Now dont interpret my post as a commandment. You are free to eat bitcoins or wipe your gf's ass with it or even wear it as a piece of clothing lol (by printing it)

A few days later at current prices ...

Bitcoin price now drop we can't see any increases . When will we see the big pump ?

Are increasing numbers of HYIP sites an indication of anything?  Do they drag the price down because people get ripped off?

I would think the opposite could be true.  It could be investment groups hedging a bet that btc will go up soon and the are trying to accumulate before the surge.

Bitcoin price now drop we can't see any increases . When will we see the big pump ?

who knows, might be nxt yr or maybe after 3yrs or more. Nobody really knows...

...

Mmm!!

And I thought that maybe I had timed my last purchase of gold for BTC badly when BTC was in the $300s.

Of course, I should have considered buying gold when BTC was in the $600 and $700s...

*  *  *

Looks like the Big Wave that hit was for sub-$250.  We will see in the coming weeks and months.  

I agree with some above comments that essentially NO ONE can predict BTC price well.  With charts or without.  Your guess is as good as mine.  Or the other way around maybe...

Well ,I anticipated the things a bit .
And yes no one can predict the precise price  up to decimals... Traders can say you the general trend ,the approximative lows and highs.

Then my final reply :

Remember when I pointed out that holding BTC for as a commodity is risky ?

This is exactly why I said it.

As soon as people are seeing that the price of their 'commodity' is falling, they are dumping the commodity in the market creating a huge back log of sell orders which creates a downward pressure on the graph essentially pulling down the market.

If everyone used btc as a currency to buy stuff and do margin trading like any other forex these crashes would have been much less significant. Keep in mind the price of BTC will rise with the increase in it's usage, holding btc for price rise is opposite of that.

So should you invest in a decaying currency ? NO, You should not be investing in ANY CURRENCY with intentions of holding it and selling it for a high value. A Currency is not a commodity and remember, with inflation the value of a commodity rises with the decrease in the purchasing power of your currency (virtual or real).

I hope this answers SOME of your questions and once again, I am not an expert so dont use my opinion as a yard stick.

[BitcoinNational]

Bitcoin has built in decay: inflation, high mining costs - whatever you want to call it - it's decay basically.

So the coin which should be used as a currency is unable to preserve value which makes it basically useless as currency because the main purpose of a currency is to hold some value relatively constant so it can be used in daily exchange of goods and services.

Please explain again why decay is an advantage for a currency and why anyone would accept a decaying currency in exchange for goods and services when presented with a choice between a more and a less decaying (and therefore volatile) currency.

Why would anyone choose the more decaying currency in an exchange of goods/services over a less decaying one - let alone invest in it?

Look what you did to the price of bitcoin shame on you!

[dscotese]

I'm very impressed with all the very erudite analysis this thread has produced.  It makes it all seem so simple and straightforward, what with the decay and the debasement and the inflation and the measuring of the value of snickers bars by people's expectations.  Amazingly insightful!  So I think what I've come away with is this: Why should you bother trying to understand people who use words in a way that is thousands of times more intelligent than you can handle?  Are you just looking for a path to become insane?  I think the best policy here is to shut down the brain, look at what others are doing and listen to what they tell you to do.  Follow their example blindly, and, for God's sake don't think!

Ok, admittedly, part of my conclusion has to be credited to public schooling.  They gave me letters near the start of the alphabet and a GPA of around 4, so I'm good.  I'm having some Coke with Obama, Krugman, and Yellen sometime tomorrow morning, so I might get to lick the bottoms of some of their shoes!  So exciting!

Honestly? Austrian Economics might help.

[legendster]

... Coke with Obama ...

There must be a racist joke in there somewhere..