The Bitcoin Bubble and the Future of Currency(medium.com)
medium.com
The Bitcoin Bubble and the Future of Currency
https://medium.com/money-banking/2b5ef79482cb
25 comments
> Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3]
The USD and the Euro, in comparison to BTC, are magnificently stable.
Sure USD/Eur changed in relative value by 100% over the course of 6 years after the inception of the Euro. That's very stable for a new currency, especially in contrast to bitcoin. The BTC/USD rate has changed by 400% over the past 30 days.
The USD and the Euro, in comparison to BTC, are magnificently stable.
Sure USD/Eur changed in relative value by 100% over the course of 6 years after the inception of the Euro. That's very stable for a new currency, especially in contrast to bitcoin. The BTC/USD rate has changed by 400% over the past 30 days.
I don't think even bitcoin enthusiasts are saying bitcoin will be stable in the near future. Only that once it's widely adopted and reaches its growth potential or near it, it will then be stable.
If it is to be adopted widely, at some point it has to go from being distributed among a few million, to being distributed among a few billion. The continual price rise will correlate with that adoption continuing to happen.
So yeah, I understand all these arguments about volatility, but the reason they don't bother me is because they don't seem to point out anything bad about bitcoin in principle, in the long-term, they only point out the negative aspects of using it as a currency while its undergoing its adoption phase. I don't think there's actually any argument that using bitcoin as a currency right now isn't going to work as well as dollars/euros.
If it is to be adopted widely, at some point it has to go from being distributed among a few million, to being distributed among a few billion. The continual price rise will correlate with that adoption continuing to happen.
So yeah, I understand all these arguments about volatility, but the reason they don't bother me is because they don't seem to point out anything bad about bitcoin in principle, in the long-term, they only point out the negative aspects of using it as a currency while its undergoing its adoption phase. I don't think there's actually any argument that using bitcoin as a currency right now isn't going to work as well as dollars/euros.
In the short term, 90% of bitcoin's value is driven by speculation of future adoption, as you say. If it does become widely adopted, it should be far less volatile than it is today, but it will remain more volatile than well-managed fiat like the dollar, since the supply of bitcoin is inelastic and therefore cannot react to fluctuations in demand. So, it might end up looking more like gold, rather than a "demented Internet stock", but it'll never be as stable as the dollar is today.
All I'm saying is that right now, while it's being adopted, growth and volatility are the same thing.
Sentiments along the lines of: "For bitcoin to be adopted, it should be stable first" don't make sense, because adoption (demand) drives the instability. That statement is the equivalent of saying "For bitcoin to grow, it should not be growing."
Sentiments along the lines of: "For bitcoin to be adopted, it should be stable first" don't make sense, because adoption (demand) drives the instability. That statement is the equivalent of saying "For bitcoin to grow, it should not be growing."
>but it'll never be as stable as the dollar is today.
That's right, and it's a feature, not a bug.
That's right, and it's a feature, not a bug.
Well said. I've had enough of this inflation.
The poorer you are, the less likely you have money in any investment that is yields better results that inflation.
The richer you are, the more likely you have your money both diversified and invested with good ROI.
The poorer you are, the less likely you are to have wealth to protect from inflation. If wages would keep pace with inflation, there would be no problem at all. To my mind, there is a wage problem for the poor, not an inflation problem.
Those that do have wealth to protect should be encouraged to use it for productive investments. Mild inflation is one way to do that, and it is healthy. Massive inflation to fund overseas adventurism on the other hand, is not healthy.
As the author of this piece correctly points out, deflation leads to hording behavior. In a world where everyone used bitcoin, the wealth disparity would only grow faster.
Those that do have wealth to protect should be encouraged to use it for productive investments. Mild inflation is one way to do that, and it is healthy. Massive inflation to fund overseas adventurism on the other hand, is not healthy.
As the author of this piece correctly points out, deflation leads to hording behavior. In a world where everyone used bitcoin, the wealth disparity would only grow faster.
Inflation helps for capital and labor. It forces capital to be involved, and it lets labor be devalued. Wages are extremely sticky, but only nominally.
Wage increases always lag inflation. In a market a with huge labor surplus, wages may lag longer than many can tolerate.
Elasticity of supply and inflation rate are two completely orthogonal concepts. A deflationary currency can still have elastic supply, and an inflationary currency can still have inelastic supply.
Elasticity simply refers to whether the supply can react to price. In bitcoin's case, it cannot, since the supply is determined by an algorithm.
Elasticity simply refers to whether the supply can react to price. In bitcoin's case, it cannot, since the supply is determined by an algorithm.
Bitcoins look interesting but the current price shift caused by interest in them is disturbing. Mining on anything but a current generation AMD card isn't worth the electricity and the advent of ASIC cards is going to make mining on any consumer hardware pointless. So you can't mine and you can't buy without exposing yourself to a lot of risk right now. Given the current bubble is based on people joining the game , that is a risky proposition for bitcoins as a whole.
You forget people can join the game by just accepting BTC as payment for their goods and services.
Since I actually pay taxes (you know, that thing adults do), I doubt that this will work for me.
Adults who understand taxes know that if they receive payment in something other than dollars, whether it's foreign currency, gold, bitcoins, or barter goods, it's up to them to pay taxes on the dollar value of it.
Right, and that is the point: even if you accept Bitcoin payments, you still need to eventually get USD. Ultimately, this is why I believe that Bitcoin cannot survive with the Bitcoin exchanges.
Right, and that is the point: even if you accept Gold payments, you still need to eventually get Euro. Ultimately, this is why I believe that Gold cannot survive with the Gold exchanges.
How many markets are using gold as currency?
You don't have to get dollars for the whole amount, you just have to report the dollar value of your earnings to the IRS, and pay your taxes in dollars.
That's a shame. I guess you'll just have to stay poor with the rest of the patronizing adults.
How do you set the value of the goods you're selling?
Assuming you manage your life with some other currency (USD), you would ideally want something that has reasonable value when converted to your other currency.
Assuming you manage your life with some other currency (USD), you would ideally want something that has reasonable value when converted to your other currency.
I think there's too much wishful thinking in your analysis, first people that are really rich are only interested in two things, one is that their wealth do not lose value, they will go to bitcoin, private equity, platinum, dollars, North Korean wons, stocks, fixed income titles, futures, whatever only to have this as a guarantee. The second is to increase their wealth.
Now your post appears to talk about the first point, which I agree, I only do not see how you jump to the conclusion that bitcoin is more stable than Swiss francs for example, stability is the guarantee that you'll not lose money if you trade all your wealth from one state to another, I do not see how bitcoin guarantees that (no store of value does), the only real alternative to not lose value is diversification, put your money in as many different things as you possibly could, never let a bank have more than 20% of your entire cash money, buy as many different investments as you could, precious metals, stocks, solid bonds and let them be on safes or clearing houses that's not attached to a bank.
And most important stay away from banks from countries with large public debt.
Now your post appears to talk about the first point, which I agree, I only do not see how you jump to the conclusion that bitcoin is more stable than Swiss francs for example, stability is the guarantee that you'll not lose money if you trade all your wealth from one state to another, I do not see how bitcoin guarantees that (no store of value does), the only real alternative to not lose value is diversification, put your money in as many different things as you possibly could, never let a bank have more than 20% of your entire cash money, buy as many different investments as you could, precious metals, stocks, solid bonds and let them be on safes or clearing houses that's not attached to a bank.
And most important stay away from banks from countries with large public debt.
I wouldn't own Libyan dinars unless I lived in Libya. Since I don't live on the Internet, I won't own Bitcoins.
Many people pays their loans in Yens or other currencies just to save money. Argentinians for example are best know for putting all savings in american dollars.
Multinational corporations use foreign currencies as a hedge against exchange rate fluctuations. Speculators win and lose big on bets re: exchange rates. Owning foreign currency can make sense for a variety of reasons.
And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.
And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.
> Multinational corporations use foreign currencies as a hedge against exchange rate fluctuations
Because they have business there, so in a sense they do live there.
> And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.
Maybe that's the logic leap I have to take to use bitcoins: I don't consider that I buy things from the Internet, I use the Internet to buy things from stores. Maybe when we have a Snow-Crash-type Metaverse I'll start using virtual currencies :)
Because they have business there, so in a sense they do live there.
> And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.
Maybe that's the logic leap I have to take to use bitcoins: I don't consider that I buy things from the Internet, I use the Internet to buy things from stores. Maybe when we have a Snow-Crash-type Metaverse I'll start using virtual currencies :)
You don't live in a gold mine either, but I bet you wouldn't mind owning gold. Same thing with Bitcoin, no?
I can't go into a store and buy a suit with gold, so it's not a useful medium of exchange for me. If gold, or bitcoins, fell out of the sky and into my lap, I certainly wouldn't mind. But given the same value of gold, bitcoins, or dollars, dollars tend to be the most convenient for me.
the only issue with them is that little by little they lose more and more of their purchasing power so you should either invest or use all immediately
I don't own gold either.
I can't wait to see the face of doomsayers once Planetary Resources (or other company) starts mining gold from asteroids. I'm sure Gold's intrinsic value will hold up, with the increased supply...
I can't wait to see the face of doomsayers once Planetary Resources (or other company) starts mining gold from asteroids. I'm sure Gold's intrinsic value will hold up, with the increased supply...
> Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.
If we needed to buy everything in the US but store all of our wealth in Euros, this would be the right comparison. But since we don't, "stability" means low and predictable inflation for the Euro and the dollar. The exchange rate matters for Bitcoin because wages, goods, and services are all denominated in non-Bitcoin currency. Look at inflation over the same period and you'll see that the dollar really is a "bastion of stability" (in that narrow sense, the Euro is too... but the Euro's got other problems beyond the scope of this discussion that make me reluctant to vigorously defend its stability).
If we needed to buy everything in the US but store all of our wealth in Euros, this would be the right comparison. But since we don't, "stability" means low and predictable inflation for the Euro and the dollar. The exchange rate matters for Bitcoin because wages, goods, and services are all denominated in non-Bitcoin currency. Look at inflation over the same period and you'll see that the dollar really is a "bastion of stability" (in that narrow sense, the Euro is too... but the Euro's got other problems beyond the scope of this discussion that make me reluctant to vigorously defend its stability).
You're presenting a strawman. The choice for Lybians and Syrians isn't between their local currency and Bitcoins, it's between the local currency, Bitcoin and one of the first-world currencies. And people in the third world have been choosing to hold USD for decades.
In fact your comparison exposes the biggest problem with Bitcoin: it's a solution in search of a problem. The USD has a long track record as the best managed currency in the world. The 70's stagflation debacle was a minor hiccup by world standards, and the current quantitative easing policy is nothing. Why would anyone in their right mind convert their dollars into Internet funny money? I mean, sure, back in 2009 when Bitcoin started, people were panicking having witnessed the Lehman collapse and TARP. But now we know the world isn't coming to an end, so why bother?
In fact your comparison exposes the biggest problem with Bitcoin: it's a solution in search of a problem. The USD has a long track record as the best managed currency in the world. The 70's stagflation debacle was a minor hiccup by world standards, and the current quantitative easing policy is nothing. Why would anyone in their right mind convert their dollars into Internet funny money? I mean, sure, back in 2009 when Bitcoin started, people were panicking having witnessed the Lehman collapse and TARP. But now we know the world isn't coming to an end, so why bother?
This is not true, or at the very least, only true of the higher echelons of society. I can't speak about Libya, but in Argentina there are currently currency controls against USD. As a (non-politically connected) Argentinian citizen it is incredibly difficult to hold USD right now. This btw is not new, it happens every time Argentina goes into its ~9 year bust cycle.
I think the issue is that you are speaking from a position of comfort from the US. Of course USD seems fine to you, the US suffers the least in all these recessions. But for people outside the US, they often see their entire life's savings vanish. In Argentina inflation is not something that is only academically talked about, it has a real effect on every day life, the government understands this (and exploits it), and thus works hard to prevent everyone from fleeing the currency. Bitcoin does offer a real new alternative in this regard. Whether it will prove to be any better is admittedly an open question, but the idea that USD is some saving grace for foreigners is naive.
I think the issue is that you are speaking from a position of comfort from the US. Of course USD seems fine to you, the US suffers the least in all these recessions. But for people outside the US, they often see their entire life's savings vanish. In Argentina inflation is not something that is only academically talked about, it has a real effect on every day life, the government understands this (and exploits it), and thus works hard to prevent everyone from fleeing the currency. Bitcoin does offer a real new alternative in this regard. Whether it will prove to be any better is admittedly an open question, but the idea that USD is some saving grace for foreigners is naive.
You're incorrect about me. I live in a country that went through hyperinflation a few decades ago, and I was born in another country whose currency was wiped out in the late 90's. In both of these places society responded by converting de facto to US dollars. People would stuff their mattresses with dollars and prices for anything other than groceries would be named in dollars. Sure Bitcoin offers an alternative if you live under a regime that can tell you what kind of currency you can hold, but wouldn't that sort of a regime also crack down on holders of Bitcoin if that were to catch on?
P.S. Correct me if I'm wrong, but didn't Argentina go through a dollarization phase at some point?
P.S. Correct me if I'm wrong, but didn't Argentina go through a dollarization phase at some point?
The trick in Argentina's case is that they have fixed the exchange rate to USD at an unfair amount and have enacted capital controls restricting the movement of currency into and out of the country. This is basically for the purpose of preventing people from trading their money into USD.
Brief Economist coverage here: http://www.economist.com/blogs/americasview/2011/11/argentin...
There was a decade in which pesos were directly convertible to USD at 1:1 exchange. That system collapsed when the government became insolvent.
Brief Economist coverage here: http://www.economist.com/blogs/americasview/2011/11/argentin...
There was a decade in which pesos were directly convertible to USD at 1:1 exchange. That system collapsed when the government became insolvent.
With regard to your experience with hyperinflation -- why do you thus think it is a solved problem? Surely there are some advantages to encrypted digital wallets over "stuffing dollars in a mattress" in the same way that emails are better than snail mail. At the very least it is nice to have multiple alternatives.
With regard to "dollarization" in Argentina - Yes, and it should serve as another counterexample to your point. During the 90s when everything was fine Argentina "backed ever peso with a dollar". At stores no one cared if you used dollars or pesos as they were 1-to-1. (Similar to how the US used to back every dollar with gold). Then when things went south they "undollarized" (once again robbing people of their money as devaluation soon followed).
And sure, a country could crack down on holders of Bitcoin too. But the point is that it is a lot harder to catch someone purchasing with bitcoin, or even holding bitcoin, than it is to catch someone with dollars in their mattress or trying to buy something in a physical black market with physical dollars. Its really hard to catch someone with bitcoin "on hand" in general.
With regard to "dollarization" in Argentina - Yes, and it should serve as another counterexample to your point. During the 90s when everything was fine Argentina "backed ever peso with a dollar". At stores no one cared if you used dollars or pesos as they were 1-to-1. (Similar to how the US used to back every dollar with gold). Then when things went south they "undollarized" (once again robbing people of their money as devaluation soon followed).
And sure, a country could crack down on holders of Bitcoin too. But the point is that it is a lot harder to catch someone purchasing with bitcoin, or even holding bitcoin, than it is to catch someone with dollars in their mattress or trying to buy something in a physical black market with physical dollars. Its really hard to catch someone with bitcoin "on hand" in general.
In this case though the real problem you're dealing with is that the Argentine government has enacted capital controls (from an outsider perspective, it looks like this is to force people to use pesos while they monetize away their spending). I think if a lot of people were trying to move their money out of the country using bitcoins the government would crack down on that too.
Just out of curiousity, is it easier for Argentines to get Bitcoins than USD? I find BTC really hard to get even in the United States.
Just out of curiousity, is it easier for Argentines to get Bitcoins than USD? I find BTC really hard to get even in the United States.
I think (or perhaps predict?) that Bitcoin will require I higher level of sophistication to control, if for no other reason than it is new. Not to mention that the countries we are talking about in these scenarios are probably less sophisticated in these matters to begin with, coupled with the fact that there are no central authorities to deal with when it comes to Bitcoin. Argentina can't just go to the "big Bitcoin banks" and tell them not to accept their citizens' business.
At the end of the day, when a currency becomes worthless people start trading in something else, whether that be USD or cigarettes (like in post-war Germany). The attraction of Bitcoin is that it is basically tailor made for this and additionally is accepted by people outside your country.
Only time will tell of course. My point is simply that it is not just trivially "just another currency" where all the same rules apply. That being said -- it may crash and fail for completely unrelated reasons.
At the end of the day, when a currency becomes worthless people start trading in something else, whether that be USD or cigarettes (like in post-war Germany). The attraction of Bitcoin is that it is basically tailor made for this and additionally is accepted by people outside your country.
Only time will tell of course. My point is simply that it is not just trivially "just another currency" where all the same rules apply. That being said -- it may crash and fail for completely unrelated reasons.
What about AUD, EUR or other stable currencies? Is this policy unique to USD?
[deleted]
Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3]
Are these movements different than a historical norm? You provide numbers with no context - it seems as if a movement of 100% in 6 years is meant to be shocking because 100% is a big number.
Are these movements different than a historical norm? You provide numbers with no context - it seems as if a movement of 100% in 6 years is meant to be shocking because 100% is a big number.
Bitcoin's deflationary nature makes me very nervous about it long term. I'd be a lot more okay with it if there were some sort of built-in inflation or arbitrage mechanism. However, outside of that argument, I think there's a more fundamental problem.
As it stands, the total cap of 21 million bitcoins comes to 2.1e15 'satoshis.'
Meanwhile, total global economic output is around $7.9e14 USD.
Essentially, if bitcoins were to be 'the' global currency at today's level of global GDP, the smallest unit of bitcoin allowed would be worth around $0.37 or $0.38, a value much too large for minimum granularity of currency. (Likewise, 1 bitcoin would be worth ~ $37.5 million USD.)
Now most assume bitcoin will never be the global currency of choice. But even so, it seems to me that the 21 million cap is far too small.
In any case, the so-called 'bubble' has every chance of inflating even larger because even if bitcoin traffic were 1% of GDP, you're still talking maybe 700 times the current bitcoin monetary base.
That means a reasonable 'target' for a bitcoin valuation in USD might even be well above the current price.
I'm not sure where things will go from here, but I'm sure it'll be interesting.
As it stands, the total cap of 21 million bitcoins comes to 2.1e15 'satoshis.'
Meanwhile, total global economic output is around $7.9e14 USD.
Essentially, if bitcoins were to be 'the' global currency at today's level of global GDP, the smallest unit of bitcoin allowed would be worth around $0.37 or $0.38, a value much too large for minimum granularity of currency. (Likewise, 1 bitcoin would be worth ~ $37.5 million USD.)
Now most assume bitcoin will never be the global currency of choice. But even so, it seems to me that the 21 million cap is far too small.
In any case, the so-called 'bubble' has every chance of inflating even larger because even if bitcoin traffic were 1% of GDP, you're still talking maybe 700 times the current bitcoin monetary base.
That means a reasonable 'target' for a bitcoin valuation in USD might even be well above the current price.
I'm not sure where things will go from here, but I'm sure it'll be interesting.
You're implicitly assuming that everyone holds all of their BTC for one year before spending them.
To illustrate, let's assume that BTC are used for all transactions, but no one holds them. Everyone holds dollars, or euros, or gold, or whatever. When they need to make a transaction they hop on an exchange, buy some BTC, and buy their cup of coffee with the BTC. Then the coffee-seller unloads his new BTC immediately and holds gold or silver or tulip bulbs as his store of value.
Given a reasonably automated system, each transaction might take 1 minute. This means that you need 79 trillion _dollar-minutes_ per year, or about $150 million at any given moment. Dividing this by 21 million BTC gives a price of about $7.15 per BTC.
Even if people do hold all of their liquid value in BTC, they aren't going to hold it all for a year before spending it. A more realistic estimate might be 79 trillion $ * 3 days -- most people and businesses are operating pretty hand-to-mouth. 237 trillion dollar-days per year comes out to $648 billion at any given moment. This does give a fairly appealing target price for BTC-optimists, about $31k per BTC, and puts the upper bound on the value of a satoshi at $0.0003.
To illustrate, let's assume that BTC are used for all transactions, but no one holds them. Everyone holds dollars, or euros, or gold, or whatever. When they need to make a transaction they hop on an exchange, buy some BTC, and buy their cup of coffee with the BTC. Then the coffee-seller unloads his new BTC immediately and holds gold or silver or tulip bulbs as his store of value.
Given a reasonably automated system, each transaction might take 1 minute. This means that you need 79 trillion _dollar-minutes_ per year, or about $150 million at any given moment. Dividing this by 21 million BTC gives a price of about $7.15 per BTC.
Even if people do hold all of their liquid value in BTC, they aren't going to hold it all for a year before spending it. A more realistic estimate might be 79 trillion $ * 3 days -- most people and businesses are operating pretty hand-to-mouth. 237 trillion dollar-days per year comes out to $648 billion at any given moment. This does give a fairly appealing target price for BTC-optimists, about $31k per BTC, and puts the upper bound on the value of a satoshi at $0.0003.
You make a good point in noting that I didn't address the issue of short term holding and possible frequent circulation. It would certainly seem to make the valuation of a bitcoin smaller.
That said, I can't think of a back-of-the-envelope type calculation that I'm happy with, though I'll grant that my crude calculation is likely too high.
Does anybody have any idea what the rate of bitcoins being 'stranded' is?
That said, I can't think of a back-of-the-envelope type calculation that I'm happy with, though I'll grant that my crude calculation is likely too high.
Does anybody have any idea what the rate of bitcoins being 'stranded' is?
Why make a "realistic estimate" without reference to actual figures?
US GDP ~$15 trillion USD (notes and coins) >$1 trillion; USD (M1 aggregate) >$2 trillion
i.e. a dollar gets "spent" on activities that contribute to GDP between 7 and 15 times a year, depending on what aggregate you count as a dollar (of course the actual picture is complicated by a lot more non-productive transfers not counted in GDP)
Velocity of circulation (the ratio of national income to money supply) in real world economies is a surprisingly low number, and whilst Bitcoins are a little more efficient to transact with than electronic bank interchanges, they're also not designed to be inflationary to encourage turnover.
US GDP ~$15 trillion USD (notes and coins) >$1 trillion; USD (M1 aggregate) >$2 trillion
i.e. a dollar gets "spent" on activities that contribute to GDP between 7 and 15 times a year, depending on what aggregate you count as a dollar (of course the actual picture is complicated by a lot more non-productive transfers not counted in GDP)
Velocity of circulation (the ratio of national income to money supply) in real world economies is a surprisingly low number, and whilst Bitcoins are a little more efficient to transact with than electronic bank interchanges, they're also not designed to be inflationary to encourage turnover.
Deflation is a good thing
Why?
I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)
I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)
The article makes a decent case that it is not. Care to elaborate?
Price deflation or money deflation?
Price deflation is a good thing. I'm typing on something which is a "living" proof of these.
Price deflation is a good thing. I'm typing on something which is a "living" proof of these.
If a specific good becomes cheaper because the means of production become more efficient, that's awesome.
If everything is becoming cheaper because everything is getting more efficient, that's super awesome.
If things are getting "cheaper" because the currency is becoming more valuable, that is a disaster. You have society-wide rent-seeking instead of wealth creation.
If everything is becoming cheaper because everything is getting more efficient, that's super awesome.
If things are getting "cheaper" because the currency is becoming more valuable, that is a disaster. You have society-wide rent-seeking instead of wealth creation.
Well, that's exactly my point. In a system with a fixed money supply (all things equal) the only way to have price deflation is to have greater output, greater productivity.
Now tell me again, how this is awful?
EDIT: As for the rent seeking.. If you hold your money for a while, while the productivity soars, then after a while you can buy more stuff, but only because the stuff has become cheaper.
As a fraction of total buying power you are still were you were before. Do you really call it rent-seeking?
Now tell me again, how this is awful?
EDIT: As for the rent seeking.. If you hold your money for a while, while the productivity soars, then after a while you can buy more stuff, but only because the stuff has become cheaper.
As a fraction of total buying power you are still were you were before. Do you really call it rent-seeking?
If the economy today is 10 billion quatloos, and it grows to 11 billion quatloos next year, you would also want the money supply to grow by 10% over the same period of time.
Capital can make money because it increases productivity. If you use your 10,000 quatloos to buy a machine that makes a worker more productive, your reward comes from the interest on that. Everyone can increase the value of their savings if everyone does this.
If everyone is hiding their quatloos in the mattress, there is no input of capital to increase productivity. Yet a deflationary spiral exactly encourages people to hide their quatloos in their mattress. Why bother taking even minimal market risks when you can make 10% from the growth of the rest of the economy?
And economies can grow not just from increased productivity.
EDIT: As a fraction of total buying power you are still were you were before.
This is a really, really, really bad idea.
If I have shillings equal to 5% of GDP, and I put myself into cryosleep for 100 years, there is no reason I should expect my uninvested shillings to still have 5% of GDP. This is a child's view of an economy.
Capital can make money because it increases productivity. If you use your 10,000 quatloos to buy a machine that makes a worker more productive, your reward comes from the interest on that. Everyone can increase the value of their savings if everyone does this.
If everyone is hiding their quatloos in the mattress, there is no input of capital to increase productivity. Yet a deflationary spiral exactly encourages people to hide their quatloos in their mattress. Why bother taking even minimal market risks when you can make 10% from the growth of the rest of the economy?
And economies can grow not just from increased productivity.
EDIT: As a fraction of total buying power you are still were you were before.
This is a really, really, really bad idea.
If I have shillings equal to 5% of GDP, and I put myself into cryosleep for 100 years, there is no reason I should expect my uninvested shillings to still have 5% of GDP. This is a child's view of an economy.
What does exactly happen when an economy grows from 10 billion quatloos to 11 billion quatloos?
Until you tell me that, we are measuring woomdums in quatloos and while that can be kind of fun.. it not very rewarding.
If you speaking about physical output.. than the only way achieve this is to learn to produce woomdums cheaper.. Then there is no harm in selling them cheaper.
So do I want the money to grow to a degree that it will anihiliate the increase in productivity? Certainly not.
Until you tell me that, we are measuring woomdums in quatloos and while that can be kind of fun.. it not very rewarding.
If you speaking about physical output.. than the only way achieve this is to learn to produce woomdums cheaper.. Then there is no harm in selling them cheaper.
So do I want the money to grow to a degree that it will anihiliate the increase in productivity? Certainly not.
> If I have shillings equal to 5% of GDP, and I put myself into cryosleep for 100 years, there is no reason I should expect my uninvested shillings to still have 5% of GDP. This is a child's view of an economy.
Can your elaborate? Actually it an argument against the idea that hoarding gives some kind rent. It doesn't.
But again, can you elaborate? If own 5% of land and go to a cryosleep for a hundred years, how much of that do you expect to own when you wake up?
Can your elaborate? Actually it an argument against the idea that hoarding gives some kind rent. It doesn't.
But again, can you elaborate? If own 5% of land and go to a cryosleep for a hundred years, how much of that do you expect to own when you wake up?
(I'm going to have to stop with this comment. Maybe you can find someone else willing to go over the basics of wealth with you.)
If you were to just abandon your land, there is no reason to expect it to belong to you when you come back 100 years later.
Instead, say you set up a corporation and hire people to use the money made renting it out to pay for taxes and management on it. You might still own the land in 100 years. Or not, if the people you left in charge of it couldn't manage it well enough. But people got to use the land in the meantime, so there was economic activity being assisted by your asset.
This would not, of course, give you any claim on any new land that is made, like new landfill in Boston.
Bitcoins sitting out on the chain while you are sleep do not provide any benefit to growing the economy. They have not bought any factory equipment. They have not trained any workers. They have not invented any new technology.
Any system in which people can end up with the same portion of an economy after sitting both their labor and their capital out on the sidelines for 100 years is fundamentally broken. Exactly how is an exercise for the reader, but like anyone purporting to have a perpetual motion machine, while the exact problem may be different from machine to machine, the laws of physics mean that there is some definite failure in it.
If you were to just abandon your land, there is no reason to expect it to belong to you when you come back 100 years later.
Instead, say you set up a corporation and hire people to use the money made renting it out to pay for taxes and management on it. You might still own the land in 100 years. Or not, if the people you left in charge of it couldn't manage it well enough. But people got to use the land in the meantime, so there was economic activity being assisted by your asset.
This would not, of course, give you any claim on any new land that is made, like new landfill in Boston.
Bitcoins sitting out on the chain while you are sleep do not provide any benefit to growing the economy. They have not bought any factory equipment. They have not trained any workers. They have not invented any new technology.
Any system in which people can end up with the same portion of an economy after sitting both their labor and their capital out on the sidelines for 100 years is fundamentally broken. Exactly how is an exercise for the reader, but like anyone purporting to have a perpetual motion machine, while the exact problem may be different from machine to machine, the laws of physics mean that there is some definite failure in it.
> Any system in which people can end up with the same portion of an economy after sitting both their labor and their capital out on the sidelines for 100 years is fundamentally broken.
Assertions. Words. Some of those strong..
To be frank, I'm disappointed, but.. I'll manage that, no need to worry.
Assertions. Words. Some of those strong..
To be frank, I'm disappointed, but.. I'll manage that, no need to worry.
In a system with a fixed money supply (all things equal) the only way to have price deflation is to have greater output, greater productivity.
Uh, what the hell gave you that idea? Another way would be people hoarding cash, making the rest of it more valuable -> deflationary spiral.
Uh, what the hell gave you that idea? Another way would be people hoarding cash, making the rest of it more valuable -> deflationary spiral.
First you have missed the all things equal caveat, second people hoarding cash will not lead to a deflationary spiral, who give that idea?
It will lead to a new equilibrium. The greater the cash balances and lower the prices the greater the temptation to spend, and to break the spiral.
It will lead to a new equilibrium. The greater the cash balances and lower the prices the greater the temptation to spend, and to break the spiral.
Why spend when you can buy tomorrow even cheaper? A deflationary currency is not a good idea.
This is why I don't have a computer, or phone, or any other electronic gadgets. The prices are falling so quickly that every time I think about getting one, I decide to put it off for a few months so I can get a better one instead.
(And before you ask, I'm posting this using pen and paper with IP-over-carrier-pigeon.)
(And before you ask, I'm posting this using pen and paper with IP-over-carrier-pigeon.)
Oh for god's sake. Is the entire world monochrome to you?
It doesn't have to stop all purchases to have a negative economic effect.
It doesn't have to stop all purchases to have a negative economic effect.
a) Time preference (I guess you have a phone, even if..)
b) Marginal utility of every extra unit of money decreases when a person holds more of them. Couple that with falling prices and you have the killer of deflationary spiral.
A nice theory, though. The deflationary spiral one. But just a theory. Never happened.
b) Marginal utility of every extra unit of money decreases when a person holds more of them. Couple that with falling prices and you have the killer of deflationary spiral.
A nice theory, though. The deflationary spiral one. But just a theory. Never happened.
Uh, what? Were you asleep in History class?
"but then a deflationary spiral started in 1931."
https://en.wikipedia.org/wiki/Great_Depression
"but then a deflationary spiral started in 1931."
https://en.wikipedia.org/wiki/Great_Depression
Well, I disagree, with the interpretation of events known as Great Depression as a deflationary spiral.
Yes, there was a deflationary event. As there were many before, and the last one before in 1920-1921, when the wholesale prices fall by a whopping 40%. But a deflationary event does not make a deflationary spiral.
There were also a lot silly activism both from the part of the Hoover and Roosevelt. The later speaking, beside other things about outright nationalization, and driving thus the busyness investment into ground..
So a lot happened than which make the Great Depression Great but deflationary spiral is not THE explanation.
Yes, there was a deflationary event. As there were many before, and the last one before in 1920-1921, when the wholesale prices fall by a whopping 40%. But a deflationary event does not make a deflationary spiral.
There were also a lot silly activism both from the part of the Hoover and Roosevelt. The later speaking, beside other things about outright nationalization, and driving thus the busyness investment into ground..
So a lot happened than which make the Great Depression Great but deflationary spiral is not THE explanation.
a) That's a downward pressure on sales any way you paint it.
b) Obviously this is why the well-off never want any more.
You have no concept of history or the problems associated with a gold standard do you?
You have no concept of history or the problems associated with a gold standard do you?
> You have no concept of history or the problems associated with a gold standard do you?
I think that's not applicable to bitcoin since it's as comfortable to pay with microbitcoins as with bitcoins.
I think that's not applicable to bitcoin since it's as comfortable to pay with microbitcoins as with bitcoins.
a) Now, that's a different assertion from the original one. (People will stop buying stuff). I'm glad we agree on this one. Ain't gonna happen.
b) Are saying the well-off never squander money on stupid things?
Is the last sentence some kind of "ad hominem"? Because, it would be a pity.
b) Are saying the well-off never squander money on stupid things?
Is the last sentence some kind of "ad hominem"? Because, it would be a pity.
Berkshire Hathaway BRK-A doesn't seem to have been harmed by not being watered-down.
It's not a currency either.
The protocol is malleable (the majority of miners need to agree on changes) and can be migrated to use sub-Satoshi units if necessary.
So bitcoin miners as a whole become a de-facto central bank based on majority adoption?
That's actually a very interesting possibility.
That's actually a very interesting possibility.
Yes the "central bank" in bitcoin is essentially a diffuse network of trust established via a large network of people.
And we know for a fact that it's not possible to manipulate large networks of people in an organized manner...
Certainly it's easier to do that than to manipulate a small group of mostly hidden individuals with severe conflicts of interest.
How is consensus reached? Who has the 'final say' to merge in the patches necessary to make such a fundamental change?
You know, open source.
I can decide not to take the new version or I can even fork it.
The majority decides, democracy like.
Wouldn't a fork lead to decreased value for everyone...?
Correct.
It's happening right now where the majority of the world's ISPs and companies are switching over to IPv6 (as a comparison).
Why is 37 cents too large for the granularity of a currency?
In 1913 terms, 37 cents of today's money was the equivalent of 2 cents, only double their smallest coinage.
Would you really be upset if any particular transaction was rounded up or down by 18 cents? Yes, if you're buying a single gumball, the price might be a little high today. But you let me know when gumball machines start taking bitcoins. For anything else, a resolution of +-18 cents is perfectly acceptable.... over any reasonable number of transactions, the round ups and round downs will come out to the same value anyway.
In 1913 terms, 37 cents of today's money was the equivalent of 2 cents, only double their smallest coinage.
Would you really be upset if any particular transaction was rounded up or down by 18 cents? Yes, if you're buying a single gumball, the price might be a little high today. But you let me know when gumball machines start taking bitcoins. For anything else, a resolution of +-18 cents is perfectly acceptable.... over any reasonable number of transactions, the round ups and round downs will come out to the same value anyway.
> And in any event, bitcoin is never going to work as a global payments system. Not only does it suffer from having a slow-growing money supply and a metastasizing transactions file which has to live on every user’s computer, it also encourages destructive computer hacking. The way that the money supply grows, in the bitcoin system, is by people harnessing the power of hundreds or thousands of computers to solve very complicated mathematical tasks, earning bitcoins for doing so along the way. And the easiest and cheapest way of doing that is to do so illegally, by stealth: set up a “botnet” of hacked computers to do your bidding for you. The incentives, here, are very bad indeed.
I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?
I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?
> I'm not an expert, but I thought that these days you basically need specialized hardware/GPUs and a traditional botnet isn't going to get you that far. Am I right?
How many computers within that botnet will have the appropriate GPU? That's not counting the computing power of the network as a whole either; Imagine something like BitcoinMiner@Botnet. I think it could easily be lucrative enough to make it worthwhile.
How many computers within that botnet will have the appropriate GPU? That's not counting the computing power of the network as a whole either; Imagine something like BitcoinMiner@Botnet. I think it could easily be lucrative enough to make it worthwhile.
The largest known bot net had ~30,000,000 computers at that scale CPU's work just fine. Not that it's the only thing to do with a bot-net of that size, but it's clearly a lower-bound where if your not doing a denial of service attack or sending spam you might as well mine bit-coins.
Assuming the average CPU runs around 2 Mhash/s that's 60,000,000 Mhash/s which is the equivalent of about 75,000 ModMiner Quad @800Mhash/s which would cost 75 million, so you would probably still top the mining charts.
Assuming the average CPU runs around 2 Mhash/s that's 60,000,000 Mhash/s which is the equivalent of about 75,000 ModMiner Quad @800Mhash/s which would cost 75 million, so you would probably still top the mining charts.
Modest CPUs produce bitcoins very slowly. So, there is an incentive to create a botnet to harness the power of thousands of CPUs to mine bitcoins.
https://en.bitcoin.it/wiki/Mining_hardware_comparison
https://en.bitcoin.it/wiki/Mining_hardware_comparison
There is no point in even putting together a botnet with thousands of CPUs anymore, a couple of FPGAs or an ASIC based solution would run rings around that botnet. Ok, an ASIC will cost a bit of money and a botnet is free but the difference in performance is such that only a very large botnet would be worth it and those can probably be monetized more effectively in other ways.
Botnets make a ton more money by just ad-clicks anyway. I bet its more beneficial to fraudulently ad-click with botnets than it is to mine bitcoins.
You are right. CPUs are already useless for mining. Currently, GPUs can still mine their share (but running a GPU miner on a botnet is a risk; computers become very noisy, hot and slow, which increases the detection rate). But as the first ASICs have started shipping (or have they?) this is expected to change very soon, and the only way to make a profit with mining will be with custom hardware. This rules out botnets pretty effectively.
If botnets are free to operate, then won't they still be used? They're only less efficient than ASICs if you have to pay for electricity, right?
Botnets are usually rented out. So there is an opportunity cost, when the nodes and their computational/network resources could be used for more profitable activities.
I did a back of the napkin calculation the other day to see if a botnet could reasonably reach the 50% computing power required to overwrite transactions. The largest known botnet (BredoLab @ 30,000,000 bots) with modest hardware could have potentially done it. This computational power is a multiple of the combined computing power of the top 100 supercomputers in existence today.
Of course, botnets are frequently on older machines, so the actual computational power of BredoLab probably wouldn't have been enough. Also, as popularity increases, this will become less reasonable.
Of course, botnets are frequently on older machines, so the actual computational power of BredoLab probably wouldn't have been enough. Also, as popularity increases, this will become less reasonable.
And also, anticipated by Satoshi, was that the long tail of smaller botnets that would be unable to double spend would take to bitcoin mining because it would be more profitable, so increasing security and making it much harder for a single large botnet to take over.
There eventually wont be much point to mining when the cap is reached, then there will be a point to process blocks for their transaction fees. You are also right about the hardware issue, plus there are other more profitable ways to use a botnet. There is also just a general problem with the argument that it incentivises botnets, they are their own incentive, anything that needs bandwidth, cpu power, and stolen information will be much easier with a botnet.
Again this deflation misunderstanding...
Deflation is (might be) a problem with money as a wealth-storage facility; it's not a problem for a wealth-transfer technology. People get confused about this because government-issued currencies serve both purposes. Let's untangle them.
As a money transfer tool, you convert your wealth into BTC, spend them, and the receiver converts them back into his own currency (or other liquid commodity) of choice. If both conversions occur fast enough, you're both protected from BTC fluctuations. That's what non-speculators will do as long as the BTC remains highly volatile; by doing so, they keep the BTC liquid against their wealth-storing currencies.
As a speculative tool, what makes BTC valuable is the fact that you can buy actual stuff with it. The value of the BTC will adjust so that the active BTCs (those already mined and regularly exchanged, rather than stored for speculation) will represent the value necessary for the liquid trade of BTC-priced goods. In the long term, an investment in BTC is indexed on the BTC economy. Since the cumulated value of all BTC-traded goods can't indefinitely grow faster than the actual economy, the value of a BTC can't indefinitely grow faster than a derivative indexed on the world's economic health.
Conclusion: the BTC will asymptotically converge, either toward 0, or toward very-large-spread indexes such as S&P500.
Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected. When you make wealth by hoarding a deflationary money, you bet that a government will reward you for not lending your wealth to someone who will put it to work. Nobody can make BTC do that: if less BTC-purchasable wealth is available, the liquid portion of BTCs lose value, and so does the speculative portion, thus counteracting the deflationary trend.
And anyway, when was the last time economists accurately predicted anything but the past? :)
Deflation is (might be) a problem with money as a wealth-storage facility; it's not a problem for a wealth-transfer technology. People get confused about this because government-issued currencies serve both purposes. Let's untangle them.
As a money transfer tool, you convert your wealth into BTC, spend them, and the receiver converts them back into his own currency (or other liquid commodity) of choice. If both conversions occur fast enough, you're both protected from BTC fluctuations. That's what non-speculators will do as long as the BTC remains highly volatile; by doing so, they keep the BTC liquid against their wealth-storing currencies.
As a speculative tool, what makes BTC valuable is the fact that you can buy actual stuff with it. The value of the BTC will adjust so that the active BTCs (those already mined and regularly exchanged, rather than stored for speculation) will represent the value necessary for the liquid trade of BTC-priced goods. In the long term, an investment in BTC is indexed on the BTC economy. Since the cumulated value of all BTC-traded goods can't indefinitely grow faster than the actual economy, the value of a BTC can't indefinitely grow faster than a derivative indexed on the world's economic health.
Conclusion: the BTC will asymptotically converge, either toward 0, or toward very-large-spread indexes such as S&P500.
Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected. When you make wealth by hoarding a deflationary money, you bet that a government will reward you for not lending your wealth to someone who will put it to work. Nobody can make BTC do that: if less BTC-purchasable wealth is available, the liquid portion of BTCs lose value, and so does the speculative portion, thus counteracting the deflationary trend.
And anyway, when was the last time economists accurately predicted anything but the past? :)
Gold was also deflationary, when it was used as a medium of exchange, so you can't say that "Economists' understanding of deflation is based on government-controlled currencies, where manipulations are expected."
Well, you can, but you'd be wrong.
Well, you can, but you'd be wrong.
> "A few days ago, the value of all the bitcoins in the world blew past $1 billion for the first time ever"
Can somebody help me understand something? Might be very basic, and perhaps I should understand this already, but...
How is it possible for the "value of all the bitcoins in the world" to be anything, in truth?
I understand that this comes from saying "1 BTC is selling on average for $X USD, and there are X Bitcoins in circulation, therefore the total market size is $1BN"
But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them. Nobody would pay $1BN for all of them, because that would render them all worthless.
Even if 10% of them were sold in one day, surely the value would drop precipitously, therefore slashing the total "value" of all the bitcoins to maybe half or a tenth of its current estimation.
So I ask again, how can the "value of all the bitcoins in the world" be any figure, let alone $1BN?
Can somebody help me understand something? Might be very basic, and perhaps I should understand this already, but...
How is it possible for the "value of all the bitcoins in the world" to be anything, in truth?
I understand that this comes from saying "1 BTC is selling on average for $X USD, and there are X Bitcoins in circulation, therefore the total market size is $1BN"
But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them. Nobody would pay $1BN for all of them, because that would render them all worthless.
Even if 10% of them were sold in one day, surely the value would drop precipitously, therefore slashing the total "value" of all the bitcoins to maybe half or a tenth of its current estimation.
So I ask again, how can the "value of all the bitcoins in the world" be any figure, let alone $1BN?
Evaluating assets based on "Market Cap" is a standard financial analysis technique. This is nothing more than the marginal value of a security (i.e. what it's trading for this very moment) times the number of shares.
You are right, the article uses sloppy terminology. You are also right that you couldn't actually sell all those bitcoins for $1bm. Nonetheless, this is standard financial language you have to take at face value.
You are right, the article uses sloppy terminology. You are also right that you couldn't actually sell all those bitcoins for $1bm. Nonetheless, this is standard financial language you have to take at face value.
It's called mark to maket accounting, for example suppose I have 2 Bitcoin and will like to know what is their value, I see the market price and multiply by what I have, like you said.
This is why people say that the current amount of bitcoin multiplied by their value makes more than $1 billion dollars.
EDIT: Of course, you can't sell it all by the current market price since supply will be then much higher than demand and price will go down
This is why people say that the current amount of bitcoin multiplied by their value makes more than $1 billion dollars.
EDIT: Of course, you can't sell it all by the current market price since supply will be then much higher than demand and price will go down
[deleted]
> Nobody would pay $1BN for all of them, because that would render them all worthless
Not to nitpick, but do you mind elaborating on how so? As long as there's still demand for bitcoints, you could argue that they are worth approx. infinitively more.
Bitcoins will still be a scarce good. The demand will determine if they're worthless.
A recent (perhabs a bit far fetched) example of this is the bad loans in CDOs. Although they were rendered worthless, they increased in value because those who had insurances on the value of CDOs going bad, still had to buy the actual CDO in order to exchange it for cash. This happend because more insurances existed at AIG for the CDOs, than actual CDOs - thus an increase in demand at fixed supply so to speak.
Not to nitpick, but do you mind elaborating on how so? As long as there's still demand for bitcoints, you could argue that they are worth approx. infinitively more.
Bitcoins will still be a scarce good. The demand will determine if they're worthless.
A recent (perhabs a bit far fetched) example of this is the bad loans in CDOs. Although they were rendered worthless, they increased in value because those who had insurances on the value of CDOs going bad, still had to buy the actual CDO in order to exchange it for cash. This happend because more insurances existed at AIG for the CDOs, than actual CDOs - thus an increase in demand at fixed supply so to speak.
Look at it this way: You print 1 billion klapinat0r bills. You're the only one who owns any and they're not backed by any other asset such as gold. What would one of those bills be worth? Why would it be worth anything? Why would there be any demand?
That's assumes you are starting from no one having any to one person having them all. If someone had 1 billion in demand for bitcoins it would drive the price up, some would sell hoping to cash out, but others probably more would save seeing this big new interest as a sign of increasing value. You can't count out the sociology and the theater of it. Or other external forces like unstable/untrustworthy national currencies, or the value of relative anonymity.
I'm not saying there is, I'm saying there could be.
Say I owe money in those bills for instance :)
Say I owe money in those bills for instance :)
It would then be up to the owner to figure out how to make them valuable and I suspect the owner would have a very difficult time. With only one owner, there could be no trading and hence, no market value.
[deleted]
> But... knowing that they are not underwritten or backed, surely they're only "worth" what somebody will pay for them.
I don't understand how this is any different from a fiat currency. The value of bitcoins are currently being quantified by its exchange rate in USD. Sure, someone could buy all BTC and drive its exchange rate (and thus its value) down. Someone could also print more USD which would create a mass inflation and the exchange rate would be driven up. The exchange rate of all currencies would all be driven up, and the value of USD would go down.
I don't understand how this is any different from a fiat currency. The value of bitcoins are currently being quantified by its exchange rate in USD. Sure, someone could buy all BTC and drive its exchange rate (and thus its value) down. Someone could also print more USD which would create a mass inflation and the exchange rate would be driven up. The exchange rate of all currencies would all be driven up, and the value of USD would go down.
> someone could buy all BTC and drive its exchange rate (and thus its value) down
If someone buys it like crazy, why would the price go down?
> Someone could also print more USD...
The use of the word "also" here is wrong since btcs can't be "printed" by "someone" like the dollar.
If someone buys it like crazy, why would the price go down?
> Someone could also print more USD...
The use of the word "also" here is wrong since btcs can't be "printed" by "someone" like the dollar.
> If someone buys it like crazy, why would the price go down?
If someone has all the bitcoin in the world, why would anyone want some?
If someone has all the bitcoin in the world, why would anyone want some?
You couldn't... All the money in the world wouldn't be enough to accomplish this.
Really, I'm not sure it's that different than a commodity commonly held principally as a store of value.
It's the same type of gamesmanship that explains why Facebook was worth 100B at one point: the marginal price is multiplied by the number of units outstanding. There is no guarantee that every BTC can be cashed out at the current price (or even for a nontrivial price) in much the same way as how Dorsey can't dump his entire twitter stake at the current valuation of twitter.
Perhaps "market cap" is a better word.
Same things are true for any currency, this is partly why they work. We can trust because we have common interest in the solvency of any commonly used currency. A dollar is only worth what someone will give you for it.
"A dollar is only worth what someone will give you for it."
Dollars also have value because they can be used to pay taxes and settle other debts in the United States. It is not like people woke up one morning thinking that the US dollar was a great currency to use; it has actual utility.
Dollars also have value because they can be used to pay taxes and settle other debts in the United States. It is not like people woke up one morning thinking that the US dollar was a great currency to use; it has actual utility.
>How is it possible for the "value of all the bitcoins in the world" to be anything, in truth?
Only because you can sell/trade it.
Only because you can sell/trade it.
"The first is just that it’s a bubble, and any chart which looks like the one at the top of this post is bound to end in tears at some point."
Wow very scientific, over time any hockey stick can look like a bump in the road.
Wow very scientific, over time any hockey stick can look like a bump in the road.
Yes, what you said. Bitcoin is just getting started, so it seems reasonable to think that the slope from "none" to "some" might be both bumpy and steep. Does anybody know of a good source of data for the exchange rates of other currencies when they were in their infancies? That could make an interesting comparison.
I don't know whether bitcoin is in a bubble or not (it does seem likely), but the rising slope of a sigmoid graph can also look exponential until you get out further in time.
I don't know whether bitcoin is in a bubble or not (it does seem likely), but the rising slope of a sigmoid graph can also look exponential until you get out further in time.
Let's enumerate the grand possibilities filtered by an increasing bitcoin value versus dollars (without predicting small-time-scale changes):
- Bitcoins will grow to a peak and then decrease to a much smaller value
- Bitcoins will continue to increase and then plateau to their real market value (which later on, in hindsight, everyone will claim has always been very rational.) This will make them take a share in between the available global currencies, and then everyone will continue life normally.
- Bitcoins will be continue to increase in value such that no one can ignore them anymore. This will effectively destroy the old notion of currency and push economy into a totally new realm.
I really hope it's at least the second option. I am not sure I want the last option to be true, since I haven't invested in Bitcoins enough yet.
On the speculative side: The way I see it is, Bitcoin is currently feeding on an open field of existing wealth. It hasn't even started to be used as a currency of exchange, as many have said. When that starts happening on a wider scale, there's really nothing that will stop Bitcoin from eating the whole market of currencies, and becoming the defacto coin of exchange (except the ridiculous large spans of time that are required for verification).
- Bitcoins will continue to increase and then plateau to their real market value (which later on, in hindsight, everyone will claim has always been very rational.) This will make them take a share in between the available global currencies, and then everyone will continue life normally.
- Bitcoins will be continue to increase in value such that no one can ignore them anymore. This will effectively destroy the old notion of currency and push economy into a totally new realm.
I really hope it's at least the second option. I am not sure I want the last option to be true, since I haven't invested in Bitcoins enough yet.
On the speculative side: The way I see it is, Bitcoin is currently feeding on an open field of existing wealth. It hasn't even started to be used as a currency of exchange, as many have said. When that starts happening on a wider scale, there's really nothing that will stop Bitcoin from eating the whole market of currencies, and becoming the defacto coin of exchange (except the ridiculous large spans of time that are required for verification).
More possibilities:
- Govt's try to crack down on BTC. The usual asperger reaction "haha, it's mathematically unbreakable" is followed by a tug-of-war and probably ends with taxes levied on exchanges and merchants.
- BTC become a speculator's haven like penny stocks, the endless boom/bust cycles driving out merchants (except for drugs) and consumers
- The protocol weaknesses overwhelm BTC (e.g. it takes hours for any transaction to clear) - scaling P2P is goddamn hard.
- Govt's try to crack down on BTC. The usual asperger reaction "haha, it's mathematically unbreakable" is followed by a tug-of-war and probably ends with taxes levied on exchanges and merchants.
- BTC become a speculator's haven like penny stocks, the endless boom/bust cycles driving out merchants (except for drugs) and consumers
- The protocol weaknesses overwhelm BTC (e.g. it takes hours for any transaction to clear) - scaling P2P is goddamn hard.
The shape of the graph proves it's a bubble? I don't own any bitcoins, but this kind of silly fud makes me think I should buy some...
Generally in financial time series, any exponential growth is indicative that something is growing "too fast." It has a better than "pure luck" shot at being right eventually when applied to stocks, but is misapplied when used on fiat currency....There is no constancy underlying the asset.
Of course...in order to prove something was a bubble you'd have to define "bubble" which is surprisingly hard.
Of course...in order to prove something was a bubble you'd have to define "bubble" which is surprisingly hard.
It's only hard to define what a bubble is if you're an armchair economist. Traditionally a bubble can be defined as:
"A single asset class that rises in price sharply and continually for years due to some underlying cause. This cause is usually central bank inflation. But a particular asset market, for reasons unknown, becomes the focus of this flow of funds. Other markets do not. This is what makes it a bubble."
"A single asset class that rises in price sharply and continually for years due to some underlying cause. This cause is usually central bank inflation. But a particular asset market, for reasons unknown, becomes the focus of this flow of funds. Other markets do not. This is what makes it a bubble."
>This cause is usually central bank inflation
I hope you misplaced your quotes because this is by no means part of the definition, nor is it true. Bad central bank policy can indirectly contribute to bubbles, but inflation and bubbles are two orthogonal concepts.
>for reasons unknown
Actually in a bubble the reason is almost always known. An economist friend of mine put it well: "there is always an underlying story attached to a bubble that is believable and often true". The tech bubble of 2000 for example had a true story behind it: that tech was going to change the world and mint several world-changing companies.
I hope you misplaced your quotes because this is by no means part of the definition, nor is it true. Bad central bank policy can indirectly contribute to bubbles, but inflation and bubbles are two orthogonal concepts.
>for reasons unknown
Actually in a bubble the reason is almost always known. An economist friend of mine put it well: "there is always an underlying story attached to a bubble that is believable and often true". The tech bubble of 2000 for example had a true story behind it: that tech was going to change the world and mint several world-changing companies.
I don't think that definition helps much[1].
For one, arguing that the cause is usually central bank inflation would eliminate a great deal, including the dutch tulip bubble.
What about bubbles that took place before central banks existed or were powerful?
What about bubbles that had nothing to do with inflation like the tech bubble?
Must other markets remain stagnant to satisfy this definition of bubble? What if one market goes up a little, and another goes up a lot?
If there is an underlying cause, how can the movement be "for reasons unknown"?
Can bubble tendencies occur in only one direction? Is it not possible to have a bubble in negativity towards something?
[1] I may be an armchair economist, but my armchair is located at a large academic institution.
For one, arguing that the cause is usually central bank inflation would eliminate a great deal, including the dutch tulip bubble.
What about bubbles that took place before central banks existed or were powerful?
What about bubbles that had nothing to do with inflation like the tech bubble?
Must other markets remain stagnant to satisfy this definition of bubble? What if one market goes up a little, and another goes up a lot?
If there is an underlying cause, how can the movement be "for reasons unknown"?
Can bubble tendencies occur in only one direction? Is it not possible to have a bubble in negativity towards something?
[1] I may be an armchair economist, but my armchair is located at a large academic institution.
Located at a large academic institution? I had not realized the weight of your authority. Please forgive my naive pedestrian musings ;)
"What about bubbles that took place before central banks existed or were powerful?"
Quoting wikipedia: The term "bubble", in reference to financial crises, originated in the 1711–1720 British South Sea Bubble, and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself. This was one of the earliest modern financial crises; other episodes were referred to as "manias", as in the Dutch tulip mania.
https://en.wikipedia.org/wiki/Economic_bubble
I am a bit rushed and cannot respond to all your questions immediately, but I will say that definitions are tricky things, and I admit there are many nuances we can spend years exploring.
"What about bubbles that took place before central banks existed or were powerful?"
Quoting wikipedia: The term "bubble", in reference to financial crises, originated in the 1711–1720 British South Sea Bubble, and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself. This was one of the earliest modern financial crises; other episodes were referred to as "manias", as in the Dutch tulip mania.
https://en.wikipedia.org/wiki/Economic_bubble
I am a bit rushed and cannot respond to all your questions immediately, but I will say that definitions are tricky things, and I admit there are many nuances we can spend years exploring.
A bubble is chronic over-investment, characterized by a positive price feedback loop, i.e. people buying for futureprice appreciation on the basis of past price appreciation.
Note that he's not talking about the company's value (in dollars).
He's structured his entire business around the idea that successful startups have values (in dollars) that follow that trend.
Please quote the section of the essay that says startups should aim to have exponential growth in their value, since I can't seem to find it (I see a statement like that for revenue, which is different).
Regardless of what I think about Bitcoin's longterm significance in the world. I feel this spike in Bitcoins's price might just be Russian mobsters making their money back after the Cyprus nonsense. The timing between the two events is just too convenient and this whole run-up smells like a classic pump and dump from my dot-com trading days.
I thought a lot of that money was accounted for coming out of branches of Cypriot banks that remained open in the UK and Russia.
Not saying that bitcoin isn't where some or a lot of it ended up, but the black market was basically the first adopter of bitcoin, and black markets (and pornographers) are traditionally early adopters of any new technology.
Sort of the price we pay.
Doesn't mean it's a pump and dump. If it is where international criminal syndicates (who probably have more economic power than some nations) decide to bank long term in bitcoins it might actually be a stabilizing force.
Not saying that bitcoin isn't where some or a lot of it ended up, but the black market was basically the first adopter of bitcoin, and black markets (and pornographers) are traditionally early adopters of any new technology.
Sort of the price we pay.
Doesn't mean it's a pump and dump. If it is where international criminal syndicates (who probably have more economic power than some nations) decide to bank long term in bitcoins it might actually be a stabilizing force.
The fact that Bitcoin is deflationary isn't a big deal because you don't need to use it as a unit of account in order to use it as a cheap, fast, and reliable way to transfer value globally. You just need easy ways to convert to and from Bitcoin at either end of payments. Systems like ripple.com will automate this process to a large degree.
>Those strengths are also weaknesses. No one wants to risk losing millions of dollars worth of currency overnight, just because they were outsmarted by some computer hacker.
Why do people keep repeating this crap as a reason for the impending failure of Bitcoin? People didn't abandon cash or even banks because of John Dillinger.
Why do people keep repeating this crap as a reason for the impending failure of Bitcoin? People didn't abandon cash or even banks because of John Dillinger.
You may want to read up a little. People did and do abandon banks en masse if they suspect their money is not safe.
"The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. As the FDIC celebrates its 75th anniversary, we present a historical perspective on the rich history of protecting consumers."
http://www.fdic.gov/about/history/index.html
http://en.wikipedia.org/wiki/Bank_run
"The FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. As the FDIC celebrates its 75th anniversary, we present a historical perspective on the rich history of protecting consumers."
http://www.fdic.gov/about/history/index.html
http://en.wikipedia.org/wiki/Bank_run
Yeah, I've heard of the FDIC, it's no magic bullet, and it wasn't created to insure people getting mugged in the street.
"rather than burying $1,000 under a black volcanic rock in a dry stone wall next to an old oak tree"
Shawshank Redemption.
Shawshank Redemption.
The next example was of Rep William Jefferson. http://articles.chicagotribune.com/2006-05-29/news/060529020...
I liked the article until he got to this point...
"Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million."
This defies everything he previously wrote. If there is a bubble, and it pops, you have inflation. If each Bitcoin can only purchase a tenth of what it previously purchased, that's heavy duty inflation. If people stop using it outright and the value drops to zero, then you have hyperinflation. Just having a finite money supply isn't enough. (And this is coming from someone who has read Milton Friedman)
"Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million."
This defies everything he previously wrote. If there is a bubble, and it pops, you have inflation. If each Bitcoin can only purchase a tenth of what it previously purchased, that's heavy duty inflation. If people stop using it outright and the value drops to zero, then you have hyperinflation. Just having a finite money supply isn't enough. (And this is coming from someone who has read Milton Friedman)
The big graph on top looks nice, but it really annoys the physicist in me. There should at least be another in logarithmic scale, so we can actually see how the value is rising.
Here you go (from source): http://blockchain.info/charts/market-cap?showDataPoints=fals...
Thanks. It looks pretty exponential this way.
"But trusting someone else to look after your coins requires the very trust that bitcoin was designed to circumvent."
Bitcoin is decentralized and doesn't rely on trusted parties, but that doesn't mean you can't or shouldn't rely on trusted parties if you choose.
I fully expect most people will use a Bitcoin bank/wallet service/whatever, the problem is most of them are amateurs right now. It turns out these are essentially banks, and need bank level security.
Bitcoin is decentralized and doesn't rely on trusted parties, but that doesn't mean you can't or shouldn't rely on trusted parties if you choose.
I fully expect most people will use a Bitcoin bank/wallet service/whatever, the problem is most of them are amateurs right now. It turns out these are essentially banks, and need bank level security.
> Banks and central banks are given an important job to do, are regulated and scrutinized, and can be held responsible for their actions.
If only.
If only.
> how are you meant to do business in a place where an item costing one unit of currency is worth $10 one day and $20 the next
I think this is only really a problem if you need to convert between the two very frequently, no? If bitcoin grows enough, it seems like this may not be such an issue.
I think this is only really a problem if you need to convert between the two very frequently, no? If bitcoin grows enough, it seems like this may not be such an issue.
Is there a way to short bitcoin?
You can look for a natural short, attempting to reason something that is intrinsically linked. A good place to start would be the last bitcoin crisis and crash, and how did the gold market (for example) respond if at all.?
Most likely we have no good data and you'd be making educated guesses.
Most likely we have no good data and you'd be making educated guesses.
Yes.
Bitfinex - The place to trade bitcoins - Easy - Secure - Margin trading, lending market, bitcoins exchange: https://www.bitfinex.com/
ICBIT - Bitcoin Derivatives Market and Exchange: https://icbit.se/
Goodluck.
Bitfinex - The place to trade bitcoins - Easy - Secure - Margin trading, lending market, bitcoins exchange: https://www.bitfinex.com/
ICBIT - Bitcoin Derivatives Market and Exchange: https://icbit.se/
Goodluck.
Bitfinex is incorporated in Hong Kong. Let us suppose you make a $10,000 wager with them, and they take your money and close your account and ignore your emails.
How do you suppose to get your $10,000 back? Hint: you won't.
"ICBIT currently is in process of incorporating in an offshore jurisdiction."
Even better.
How do you suppose to get your $10,000 back? Hint: you won't.
"ICBIT currently is in process of incorporating in an offshore jurisdiction."
Even better.
Is this becoming a joke or something? In every god damn Bitcoin thread there is a very smart person who always asks the same question. If you are so serious about it why not just use Google?
https://encrypted.google.com/search?hl=en&q=is%20there%2...
there you go.
https://www.hnsearch.com/search#request/all&q=way+to+sho...
FYI asking this question does not make you seem like a financial genius nor is it a witty reply.
https://encrypted.google.com/search?hl=en&q=is%20there%2...
there you go.
https://www.hnsearch.com/search#request/all&q=way+to+sho...
FYI asking this question does not make you seem like a financial genius nor is it a witty reply.
It is a legitimate question, though, with an answer that is yes you can, in theory, but no large markets currently support it, and the ones that do don't allow naked shorts.
As mentioned elsewhere in the thread, two that allow shorting look pretty sketchy.
So I guess it sort of is a joke. When do the markets for bitcoins start acting like actual markets instead of hype machines for bitcoins?
As mentioned elsewhere in the thread, two that allow shorting look pretty sketchy.
So I guess it sort of is a joke. When do the markets for bitcoins start acting like actual markets instead of hype machines for bitcoins?
It can't be a bubble if it's not inflated. There's no real inflation in bitcoin there is though deflation which is a great thing. It's how all monetary systems should be
Interesting article... but what blew me away was the page itself. Is this a CMS or a custom job? It looks fantastic.
There are a couple of core points that this article seems to get completely wrong about bitcoin. I'm certainly no expert, but quotes like:
> the perfect digital currency: they’re frictionless, anonymous[...]
seem to suggest that the author has read a lot about bitcoin (by other authors), but not investigated that deeply. (As for the content: It's bogus mainly because they're at best pseudo-anonymous, or rather: Actual anonymous payment via bitcoin takes a lot of effort to conceal. And it may only be frictionless for now - looking at the way transaction fees develop in the future is one of the most exciting concepts about it, to me.)
> Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities.
I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad?
I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.
> And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.
Again, wouldn't the result just be that you only hire people who create more value than deflation? And wouldn't "nobody paying anybody anything" eventually cause inflation?
Finally, a lot of the arguments employed seem rather shoddy.
This is the argument against being your own bank:
> In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal.
This is the argument trying to discredit bitcoins principle of mistrust:
> Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto.
So far so half-good...
It’s nihilistic[...].
Nope, does not follow.
> I do have hope that in the future, someone, somewhere, is going to learn from bitcoin’s mistakes, and build a better system.
The author seems to suggest that this is his conclusion, but I thought that was the main idea in bitcoin itself. That it's artificial limit is a rather clear "we will have to come up with something better by then". Not as a "we will never need more bitcoins than this many".
I may be wrong here, but didn't Satoshi set up bitcoin precisely to be a testing ground? Beta Software? The author seems to be a little too occupied putting words in his mouth to actually read the concepts. Instead, he claims that Satoshi wants bitcoin "to be the perfectly anonymous payment mechanism for a digital world". I don't think that's true.
> the perfect digital currency: they’re frictionless, anonymous[...]
seem to suggest that the author has read a lot about bitcoin (by other authors), but not investigated that deeply. (As for the content: It's bogus mainly because they're at best pseudo-anonymous, or rather: Actual anonymous payment via bitcoin takes a lot of effort to conceal. And it may only be frictionless for now - looking at the way transaction fees develop in the future is one of the most exciting concepts about it, to me.)
> Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities.
I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad?
I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.
> And they certainly don’t spend it on hiring people — no matter how productive their employees might be, they’d still be better off just holding on to that money and not paying anybody anything.
Again, wouldn't the result just be that you only hire people who create more value than deflation? And wouldn't "nobody paying anybody anything" eventually cause inflation?
Finally, a lot of the arguments employed seem rather shoddy.
This is the argument against being your own bank:
> In Hollywood, if you show someone counting out huge sums of cash, that’s an easy way for the director to say that he’s a criminal.
This is the argument trying to discredit bitcoins principle of mistrust:
> Bitcoin, in that sense, is anti democratic. It’s based on mistrust rather than trust, it refuses to take any responsibility onto itself – indeed, it doesn’t even have a self to take responsibility onto.
So far so half-good...
It’s nihilistic[...].
Nope, does not follow.
> I do have hope that in the future, someone, somewhere, is going to learn from bitcoin’s mistakes, and build a better system.
The author seems to suggest that this is his conclusion, but I thought that was the main idea in bitcoin itself. That it's artificial limit is a rather clear "we will have to come up with something better by then". Not as a "we will never need more bitcoins than this many".
I may be wrong here, but didn't Satoshi set up bitcoin precisely to be a testing ground? Beta Software? The author seems to be a little too occupied putting words in his mouth to actually read the concepts. Instead, he claims that Satoshi wants bitcoin "to be the perfectly anonymous payment mechanism for a digital world". I don't think that's true.
> Inflation is bad, but deflation is worse. [...] People hoard their cash, and spend it only begrudgingly, on absolute necessities. I see how that is very different from the way capitalism works at the moment. But, conceptually, would it really be that bad?
Would it be better to have government responsible for most investment ? I don't really care about consumers hoarding their cash - they'll buy the things they really need or want. But I am concerned if investors are better served by hoarding than by demand deposits or any other kind of debt instrument. This could drive up interest rates to unprecedented levels. Higher interest rates mean higher cost of goods and thus higher costs for consumers.
Would it be better to have government responsible for most investment ? I don't really care about consumers hoarding their cash - they'll buy the things they really need or want. But I am concerned if investors are better served by hoarding than by demand deposits or any other kind of debt instrument. This could drive up interest rates to unprecedented levels. Higher interest rates mean higher cost of goods and thus higher costs for consumers.
Higher interest rates will correlate to higher inflation.
So on the contrary, Bitcoins are a deflationary economy. Deposits will have a negative interest rate (ie: holding your money in a bitcoin bank will correlate to fees), and borrowing BTC means you only will have to return bits of it. (ie: if I borrow 100 BTC from you today, I only will have to repay you 75 BTC two months from now).
It is only fair, as people learn to expect BTC to keep growing in price.
I don't think its a very healthy economy to be in, but its a completely different endgame scenario than what you describe.
So on the contrary, Bitcoins are a deflationary economy. Deposits will have a negative interest rate (ie: holding your money in a bitcoin bank will correlate to fees), and borrowing BTC means you only will have to return bits of it. (ie: if I borrow 100 BTC from you today, I only will have to repay you 75 BTC two months from now).
It is only fair, as people learn to expect BTC to keep growing in price.
I don't think its a very healthy economy to be in, but its a completely different endgame scenario than what you describe.
> (ie: if I borrow 100 BTC from you today, I only will have to repay you 75 BTC two months from now
Interest is almost* always non-negative. I'll only lend you those 100 BTC if you pay me something more than I'll have if I didn't lend them.
That makes a BTC based economy more prone to hoarding, and less prone to investing (what is clearly a bad thing), and also more prone to hoarding and less prone to spending (what economists think is a bad thing - I have no idea why).
* The exceptions to this rule are not systemic, normaly appearing in times of disruption. You can't base an economy on them.
Interest is almost* always non-negative. I'll only lend you those 100 BTC if you pay me something more than I'll have if I didn't lend them.
That makes a BTC based economy more prone to hoarding, and less prone to investing (what is clearly a bad thing), and also more prone to hoarding and less prone to spending (what economists think is a bad thing - I have no idea why).
* The exceptions to this rule are not systemic, normaly appearing in times of disruption. You can't base an economy on them.
Why would I hold BTC in a bank that charges me for that service? I can hold them with complete safety in my wallet. The reason interest rates will rise is that there is essentially a base interest rate paid to people who hoard BTC due to deflation. In order to attract investors, I would have to offer an interest rate that exceeds the risk-adjusted return on capital for simple hoarding. Since that risk is effectively 0, and the deflation rate may be high, the interest rate I offer would need to be very high.
Indeed. But inside a deflationary economy, it is impossible for banks to make money off of deposits by lending them to someone else. So I dare say that banks cannot remain solvent with BTCs, the economics don't make sense.
That said, plenty of people are "banking" with online BTC wallets. Instawallet, Coinbase, etc. etc. The economics for these services work against them, and they are hopelessly doomed to failure.
That said, plenty of people are "banking" with online BTC wallets. Instawallet, Coinbase, etc. etc. The economics for these services work against them, and they are hopelessly doomed to failure.
I'm really no expert on finance, which is why I put up my question as that.
Your reply actually raised more questions than it answered. I get that high interest rates are bad for a market that is built mostly on credit and I can kinda-sorta see how that would slow down an economy. But I don't see how that completely eliminates investment.
At some point, people have to exchange goods. People have labor to provide and goods to sell and services that they need provided and goods to buy. How is credit the only thing that enables that? Or is the argument that only credit enables it at the level that we see in current day capitalism?
Your reply actually raised more questions than it answered. I get that high interest rates are bad for a market that is built mostly on credit and I can kinda-sorta see how that would slow down an economy. But I don't see how that completely eliminates investment.
At some point, people have to exchange goods. People have labor to provide and goods to sell and services that they need provided and goods to buy. How is credit the only thing that enables that? Or is the argument that only credit enables it at the level that we see in current day capitalism?
Its a simple matter really. If twice as many people are eating twice as much food, you'll need to print twice as much money to keep prices stable. Otherwise, the price of food will double.
The central bank prints money. That is a fact. What people forget is the fact that this is useful to an economy. The central bank can abuse its power, and inflate away your cash holdings. (ie: print too much money). That is why BTC are pegged at 21 Million coins.
So the question now is, what will an economy based off of a heavily depreciating asset look like. What are the risks?
The central bank prints money. That is a fact. What people forget is the fact that this is useful to an economy. The central bank can abuse its power, and inflate away your cash holdings. (ie: print too much money). That is why BTC are pegged at 21 Million coins.
So the question now is, what will an economy based off of a heavily depreciating asset look like. What are the risks?
Don't forget that bitcoin can be broken down into arbitrarily small fractions. It caps, but it can still grow by being traded in increasingly smaller values. Which I don't think we really have an economic model for.
And yeah, the author seems to miss a lot of the things in the bitcoin website. The whole thing presumes there are unforeseen consequences, that something will replace or complement it, and that it will be remarkably volatile for some time. It is first in breed and very well aware of that.
And yeah, the author seems to miss a lot of the things in the bitcoin website. The whole thing presumes there are unforeseen consequences, that something will replace or complement it, and that it will be remarkably volatile for some time. It is first in breed and very well aware of that.
> Don't forget that bitcoin can be broken down into arbitrarily small fractions.
Yeah, I too found that to be conspicuously missing in the article.
Yeah, I too found that to be conspicuously missing in the article.
>I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.
With productivity steadily rising in the developed countries it's gonna be tricky employing 6 billion people. as an example: if all the farmers were as productive as US farmers, we'd need to employ about 0.3% to feed the world. a lot of the "useless" products and services (think about the back office of your local government, which is printing documents, scanning them again and the typing them into a computer form) actually employs a large part of the population - have you thought about the implications if 90% of the population is not required to work?
We need inflation, we need people who keep spending their money and hence we'll ultimately need some sort of devaluation. A possible scenario: inflation will be introduced by new cryptocurrencies, which broaden the monetary base. hence it's ultimately the consumers who will steer the rate of inflation (and the adoption of new crypto currencies) and that seems to me like the most democratic thing that ever happened to a currency.
With productivity steadily rising in the developed countries it's gonna be tricky employing 6 billion people. as an example: if all the farmers were as productive as US farmers, we'd need to employ about 0.3% to feed the world. a lot of the "useless" products and services (think about the back office of your local government, which is printing documents, scanning them again and the typing them into a computer form) actually employs a large part of the population - have you thought about the implications if 90% of the population is not required to work?
We need inflation, we need people who keep spending their money and hence we'll ultimately need some sort of devaluation. A possible scenario: inflation will be introduced by new cryptocurrencies, which broaden the monetary base. hence it's ultimately the consumers who will steer the rate of inflation (and the adoption of new crypto currencies) and that seems to me like the most democratic thing that ever happened to a currency.
> I think an economy that builds on people buying loads of crap they don't need is at least comparatively bad. We certainly seem to have a problem with using more than we need from the planet.
It's an issue with macro economics, not the individual. Sure, having people buy less useless stuff is great, but they all still need to agree on a medium for exchange, else doing anything with currency becomes impossible. Individuals buying and selling goods and services don't make currency markets, money flowing through the exchanges does. Market prices are set mostly based on leading indicators from these transactions. When a currency starts deflating, these numbers start looking bad. This is when things start to snowball. Currency worth more tomorrow than today? Stop exchanging BTC for USD(or any other currency). Investments going south and BTC doing well due to scarcity? Then pull out of the markets and hoard BTCs. Market crashed? Get all your BTC out of the bank. At a certain point it all falls apart and everyone is left holding worthless digital currency. This happened before with the great depression and has been studied in great detail. Hence the movement away from the gold standard. Again, very little of this has anything to do with buying TVs and stereos(micro vs macro economics). People don't really need currency to do that anyways. Currency is needed for the exchange of derivatives(specifically debt, AKA loans).
It's an issue with macro economics, not the individual. Sure, having people buy less useless stuff is great, but they all still need to agree on a medium for exchange, else doing anything with currency becomes impossible. Individuals buying and selling goods and services don't make currency markets, money flowing through the exchanges does. Market prices are set mostly based on leading indicators from these transactions. When a currency starts deflating, these numbers start looking bad. This is when things start to snowball. Currency worth more tomorrow than today? Stop exchanging BTC for USD(or any other currency). Investments going south and BTC doing well due to scarcity? Then pull out of the markets and hoard BTCs. Market crashed? Get all your BTC out of the bank. At a certain point it all falls apart and everyone is left holding worthless digital currency. This happened before with the great depression and has been studied in great detail. Hence the movement away from the gold standard. Again, very little of this has anything to do with buying TVs and stereos(micro vs macro economics). People don't really need currency to do that anyways. Currency is needed for the exchange of derivatives(specifically debt, AKA loans).
The problem: debt currencies from nation-states are slowly going obsolete. Very slowly, so don't jump the gun on a bad idea.
Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. People say land was wealth before industry, but "owning" it just means having the means to defend it (which could, in modern times, be a legal claim; no one wants most land enough to take it by force) so what you really needed was the metal to fund an army. You were rich if you had gold and could defend the land you had and get more if needed.
Between 1800 and ~2075, wealth is debt from an establishment like a nation state or corporation. Being rich means that you can call in favors. You use this debt to build an industrial or business process that gives you a good return on investment. You don't need to own the gold; you just need a certificate saying you had the legal right to it or that someone owes it to you.
In 2025, wealth is going to be access to talent. I'm writing a monstrously large blog series and the penultimate post (21 of 22) is going to hint at the economics of that. I'm afraid to get too specific; that might compromise a startup idea that's been percolating in my mind for a few years and might be ripe in the mid-late 2010s. But we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it. The new currency (post-2075, I'd guess, because people are conservative when it comes to money; metal and debt currencies aren't going out of business any time soon) will be some proof-of-work model related to technical talent but I've got no idea what it will look like.
How to define money in that world is an open question. That said, I don't think we need to get rid of fiat currencies just yet; I don't know what would replace them.
With BitCoin, there's no intrinsic value. Someone else could create a ZitCoin with similar structure but not that stupid enforced deflation designed to enrich the first entrants. Now it's a red-ocean with a zillion copycats, so we have ZitCoin and FitCoin (for gym memberships) and PitCoin (for dog breeders) and LitCoin (for getting drunk) and a couple of other *itCoins too crude to mention. Now it's just about branding; most of these alternative currencies (which are too volatile to be real currencies) fail.
There's this idea that BitCoin is going to become the next Black Lotus (a $1000 Magic card) but the vast majority of Magic cards have lost value (and all of the cards from the copycat TCGs that flooded the market in '90s). I remember when Shivan Dragons were $25 because a 5/5 flying creature for 6 mana was badass. Last I checked, they were about $2. The thing about a Black Lotus is that (a) it's extremely scarce and indivisible unlike BTC, and (b) there's actually something you can do with it, which is play a powerful Magic card legally.
Until you can get 3 mana of any color out of a BitCoin, or drop it from at least 12 inches and destroy permanents based on table position, I'm going to be skeptical.
Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. People say land was wealth before industry, but "owning" it just means having the means to defend it (which could, in modern times, be a legal claim; no one wants most land enough to take it by force) so what you really needed was the metal to fund an army. You were rich if you had gold and could defend the land you had and get more if needed.
Between 1800 and ~2075, wealth is debt from an establishment like a nation state or corporation. Being rich means that you can call in favors. You use this debt to build an industrial or business process that gives you a good return on investment. You don't need to own the gold; you just need a certificate saying you had the legal right to it or that someone owes it to you.
In 2025, wealth is going to be access to talent. I'm writing a monstrously large blog series and the penultimate post (21 of 22) is going to hint at the economics of that. I'm afraid to get too specific; that might compromise a startup idea that's been percolating in my mind for a few years and might be ripe in the mid-late 2010s. But we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it. The new currency (post-2075, I'd guess, because people are conservative when it comes to money; metal and debt currencies aren't going out of business any time soon) will be some proof-of-work model related to technical talent but I've got no idea what it will look like.
How to define money in that world is an open question. That said, I don't think we need to get rid of fiat currencies just yet; I don't know what would replace them.
With BitCoin, there's no intrinsic value. Someone else could create a ZitCoin with similar structure but not that stupid enforced deflation designed to enrich the first entrants. Now it's a red-ocean with a zillion copycats, so we have ZitCoin and FitCoin (for gym memberships) and PitCoin (for dog breeders) and LitCoin (for getting drunk) and a couple of other *itCoins too crude to mention. Now it's just about branding; most of these alternative currencies (which are too volatile to be real currencies) fail.
There's this idea that BitCoin is going to become the next Black Lotus (a $1000 Magic card) but the vast majority of Magic cards have lost value (and all of the cards from the copycat TCGs that flooded the market in '90s). I remember when Shivan Dragons were $25 because a 5/5 flying creature for 6 mana was badass. Last I checked, they were about $2. The thing about a Black Lotus is that (a) it's extremely scarce and indivisible unlike BTC, and (b) there's actually something you can do with it, which is play a powerful Magic card legally.
Until you can get 3 mana of any color out of a BitCoin, or drop it from at least 12 inches and destroy permanents based on table position, I'm going to be skeptical.
Your point about copycats is moot. There's already a number of offshoots of bitcoin and they don't seem to matter.
Creating Zoogle, Foogle, Poogle and Loogle is kind of trivial at this day and age, and many people have a go at doing that. None of which seem to take away anything from Google.
Creating Zoogle, Foogle, Poogle and Loogle is kind of trivial at this day and age, and many people have a go at doing that. None of which seem to take away anything from Google.
Oh sure, and Bitcoin will always be the first.
That said, do you remember the first search engine? I don't. I'm sure I could look it up, but it's irrelevant.
There will be demand for something like a cryptocurrency. I doubt it will be Bitcoin. Once people realize that it was set up to transfer wealth to early adopters, they're going to hate it and Bitcoin will have a real brand-image problem. It might overcome that; who knows? I'm just saying that it's too speculative to take it seriously as a currency.
That said, do you remember the first search engine? I don't. I'm sure I could look it up, but it's irrelevant.
There will be demand for something like a cryptocurrency. I doubt it will be Bitcoin. Once people realize that it was set up to transfer wealth to early adopters, they're going to hate it and Bitcoin will have a real brand-image problem. It might overcome that; who knows? I'm just saying that it's too speculative to take it seriously as a currency.
It's not just the first, but the biggest so far. A more fair comparison would be the concepts of ebay, credit score, etc that benefit from massive network effects and then become the defacto standard.
People can get over the idea of wealth transfer to early adopters if they find some unique benefits that they can't get with other currencies. That said, you're right. It's still in the early nascent stages and could just as easily be another betamax.
People can get over the idea of wealth transfer to early adopters if they find some unique benefits that they can't get with other currencies. That said, you're right. It's still in the early nascent stages and could just as easily be another betamax.
Bitcoin is not even the first digital currency, but perhaps the first of its kind.
I don't understand why people are so fazed about Bitcoins. As you said, all the juicy profits go to the early adopters. I have a problem with that.
Actually, I think Bitcoin and Magic: the Gathering tell us something. Talent generates value, and sometimes that value is realized in an asset that has currency-like properties.
Why's a dollar valuable? It's debt from a powerful nation state.
Why is the Black Lotus valuable? Richard Garfield deployed his talents to making a game that people really wanted to play, and the BL is a scarce, in-game resource.
Why is BTC valuable? Someone deployed computational talent to make a cryptocurrency work. It's non-trivial work, and I'd probably take a BitCoin course on Coursera to really get into the guts of how the problem is solved.
I don't like BTC. I don't like the enforced deflation that, as we've noted, give the profits away to the ones who get in early, and create what has the potential to be an enormous asset bubble. (No one can predict such things; it could go to $1000 or $10,000 before it finally crashes, but I'm pretty damn sure its long-term destination is zero.)
I saw this with Magic and it sucked. That time, though, it wasn't intentional. They didn't take "the power 9" out of print to payoff early adopters on the secondary market; they did it to balance the game. No one expected, at that time, that these cards would eventually be worth over $1000 each. (Now I feel like an idiot; when I got into Magic, Moxen were out of print but only $100-125. Unaffordable for a teenager; a computer science textbook, at 29.)
So there are already processes that turn talent into a currency, but those are one-shot. It'd be more interesting to see a continuous, reliable proof-of-work system to turn talent into currency that isn't beholden to some corporation.
However, this is complicated by the fact that talent is intermittent. Proof-of-work systems work for commodity work (concave) but talent shines on the convex. Convexity is the defining economic problem of the 21st century, and for more than you'd ever want to read on this topic, start here:
http://michaelochurch.wordpress.com/2013/04/03/gervais-macle...
Why's a dollar valuable? It's debt from a powerful nation state.
Why is the Black Lotus valuable? Richard Garfield deployed his talents to making a game that people really wanted to play, and the BL is a scarce, in-game resource.
Why is BTC valuable? Someone deployed computational talent to make a cryptocurrency work. It's non-trivial work, and I'd probably take a BitCoin course on Coursera to really get into the guts of how the problem is solved.
I don't like BTC. I don't like the enforced deflation that, as we've noted, give the profits away to the ones who get in early, and create what has the potential to be an enormous asset bubble. (No one can predict such things; it could go to $1000 or $10,000 before it finally crashes, but I'm pretty damn sure its long-term destination is zero.)
I saw this with Magic and it sucked. That time, though, it wasn't intentional. They didn't take "the power 9" out of print to payoff early adopters on the secondary market; they did it to balance the game. No one expected, at that time, that these cards would eventually be worth over $1000 each. (Now I feel like an idiot; when I got into Magic, Moxen were out of print but only $100-125. Unaffordable for a teenager; a computer science textbook, at 29.)
So there are already processes that turn talent into a currency, but those are one-shot. It'd be more interesting to see a continuous, reliable proof-of-work system to turn talent into currency that isn't beholden to some corporation.
However, this is complicated by the fact that talent is intermittent. Proof-of-work systems work for commodity work (concave) but talent shines on the convex. Convexity is the defining economic problem of the 21st century, and for more than you'd ever want to read on this topic, start here:
http://michaelochurch.wordpress.com/2013/04/03/gervais-macle...
>"we're now in a world (convexity) where capital is scarce in comparison to the talent that can do something with it."
Is this really a new condition?
>"The new currency... will be some proof-of-work model related to technical talent"
So other types of talent will all be secondary to technical talent? That would be quite a revolution, even with a 65-year timeframe.
Is this really a new condition?
>"The new currency... will be some proof-of-work model related to technical talent"
So other types of talent will all be secondary to technical talent? That would be quite a revolution, even with a 65-year timeframe.
Is this really a new condition?
Actually, yes. In less than 20 hours (probably) I'm going to release a gigantic blog post (the 2nd-to-last in my Gervais/MacLeod series; I'm finishing that up because I have technical projects I want to start and will probably be starting a new job soon) that gets into the economics of it.
Essentially, convexity pertains to work that's hard and where the maximal possible performance isn't well-defined. Now, Sharpe Ratio (ratio of yield to risk) is an affine exponential that decays as the work gets harder. In other words, it's exponentially favorable for easiness on concave work, but for convex work (no matter how difficult) the yield/risk curve is almost constant.
Old, industrial work: favor concavity because the limiting factor is how much capital you have to put at risk. Though convex work has more yield, it's yield-per-risk is unfavorable.
If work is concave, we can define "perfect completion" (it's a commodity) and machines can be programmed to do it. So they're pushing us out of that. The convex work is all that's left for humans. It won't all be technical; there is convex service work.
Financial risk (not smart people with good ideas) was the limiting factor for old-style industrial processes, but all that concave work is being given over to machines by the convex labor of programming them. With convex work in the technological era, the Sharpe Ratio is constant and irrelevant. Your limiting factor, instead, is the time and attention of the highly talented people capable of doing (usually specialized) convex work.
Check my blog in about 6-18 hours and there'll be more on this topic than you'd ever want to see.
Actually, yes. In less than 20 hours (probably) I'm going to release a gigantic blog post (the 2nd-to-last in my Gervais/MacLeod series; I'm finishing that up because I have technical projects I want to start and will probably be starting a new job soon) that gets into the economics of it.
Essentially, convexity pertains to work that's hard and where the maximal possible performance isn't well-defined. Now, Sharpe Ratio (ratio of yield to risk) is an affine exponential that decays as the work gets harder. In other words, it's exponentially favorable for easiness on concave work, but for convex work (no matter how difficult) the yield/risk curve is almost constant.
Old, industrial work: favor concavity because the limiting factor is how much capital you have to put at risk. Though convex work has more yield, it's yield-per-risk is unfavorable.
If work is concave, we can define "perfect completion" (it's a commodity) and machines can be programmed to do it. So they're pushing us out of that. The convex work is all that's left for humans. It won't all be technical; there is convex service work.
Financial risk (not smart people with good ideas) was the limiting factor for old-style industrial processes, but all that concave work is being given over to machines by the convex labor of programming them. With convex work in the technological era, the Sharpe Ratio is constant and irrelevant. Your limiting factor, instead, is the time and attention of the highly talented people capable of doing (usually specialized) convex work.
Check my blog in about 6-18 hours and there'll be more on this topic than you'd ever want to see.
It just sounds like you meant to say "capital is ABUNDANT in comparison to the talent." Capital being scarce in comparison to the talent has been the case for decades if not centuries.
>"With convex work in the technological era... your limiting factor, instead, is the time and attention of the highly talented people"
Right, not capital, which is why I thought it odd you said capital was scarce in comparison to talent. I think you meant abundant.
>"With convex work in the technological era... your limiting factor, instead, is the time and attention of the highly talented people"
Right, not capital, which is why I thought it odd you said capital was scarce in comparison to talent. I think you meant abundant.
I got hung up on the same issue.
Good catch. Thanks!
Cool, glad I wasn't just dumb or crazy :-) And I look forward to the blog posts.
About 20 minutes and I'll kick it out. Had a great productive spell in a cafe.
Over 15 kilowords, though. I doubt many people will read it in 1 sitting. :)
ETA: http://michaelochurch.wordpress.com/2013/04/03/gervais-macle...
Over 15 kilowords, though. I doubt many people will read it in 1 sitting. :)
ETA: http://michaelochurch.wordpress.com/2013/04/03/gervais-macle...
Material wealth, before 1800, was usually a metal. It had legible value anywhere so you could use it to defend or attack the means of production: land. [....] You were rich if you had gold and could defend the land you had and get more if needed.
...because weapons made out of gold work so very well?
...because weapons made out of gold work so very well?
No, but a gold coin buys a lot of swords and pays a lot of soldiers.
This was typically because gold was required to pay taxes.
This was typically because gold was required to pay taxes.
"The commodity value of bitcoins is rooted in their currency value, but the more of a commodity they become, the less useful they are as a currency."
Yep..
Yep..
[deleted]
Yes, it's true. As of right now, there are 182 official currencies worldwide[1], most of which you've never heard of in your life, and many of which have total market capitalization lower than Bitcoin.[2] Others are subject to extreme sociopolitical, economic, or military-conflict risks. Would you rather own bitcoins, which are traded globally, or, say, Libyan dinars, North Korean wons, Syrian pounds, etc.?
Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3]
If Bitcoin survives the horrific economic crises in countries like Spain, Greece, and Cyprus, and the even more horrific military conflicts in countries like Syria and Sudan, it will continue gaining credibility as the currency of last resort -- the global digital commodity that will survive even if your country or economy goes to hell.
--
Edit: changed "most currencies in existence" to "many currencies in existence," which is what I actually intended to write.
--
PS. I posted this on the other thread linking to the same article: https://news.ycombinator.com/item?id=5486100
--
[1] http://en.wikipedia.org/wiki/List_of_circulating_currencies_...
[2] http://reason.com/24-7/2013/04/01/at-1b-bitcoin-holds-more-v...
[3] https://www.google.com/finance?chdnp=1&chdd=1&chds=1...