
The Evolving Economics of Bitcoin, Gold and Fiat Currencies - brakmic
http://www.cmegroup.com/education/featured-reports/evolving-economics-of-bitcoin-gold-currencies.html
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ploggingdev
> A digital currency that replaces fiat currencies as a medium exchange cannot
> have a fixed supply. In fact, central banks, like the Federal Reserve, might
> even create their own cryptocurrencies but ones that are designed to
> optimize economic growth. It will probably need to have constant money
> supply growth and preferably money supply growth that matches economic needs
> and not some algorithm’s hard, mathematical constraint.

Finally someone acknowledges this reality. I've brought this up multiple times
in Bitcoin discussions and never heard one good argument to backup the claims
that Bitcoin can became a mainstream p2p fiat replacement for the masses all
while having a 21 million coin limit.

~~~
IIAOPSW
Thank you so much! I'm tired of all the goddamn Philistine's that have
dunning-kurger'd themselves into thinking that deflationary currency is a good
idea and inflation is a central bank conspiracy.

That said

>It will probably need to have constant money supply growth and preferably
money supply growth that matches economic needs and not some algorithm’s hard,
mathematical constraint

Why not have a "hard math" algorithm which looks at the trade volume in the
blocks and adjusts accordingly.

~~~
colordrops
Can you explain to us idiots why a growing money supply is necessary? I've
heard various reasons but none convincing.

~~~
pimmen
It depends on if we want our output of valuable stuff (not just consumer
products, but homes, health care, education and research) to grow or not. If
we want them to grow, we need a growing money supply.

If not, you won't spend your money on any of those things, and if you don't
spend your money on it, the demand goes down and less of the stuff is
produced. The reason you won't spend your money today is because you'll get
more tomorrow, so why not buy it tomorrow? And why spend your money tomorrow
when you'll get more stuff the day after tomorrow?

And if most people aren't spending their money, you don't get any money
either, because you only get money by someone else wanting what you produce
(or wanting what your investment produces). Then you'll spend even less of
your money, because now that you're strapped for cash, you _really_ need to
wait until the prices drop to maximize your purchase power.

It's the main reason we have near zero interest rates across the West years
after 2008; that crisis was deep and we need to drive up inflation to kick
start the economy for real and make the growth more equal.

~~~
moduspol
This is a strong argument and I feel like it makes sense.

Doesn't it rely on the premise that "we" (as a society) are deciding what
currency all of us will use? I think what you're saying is totally true, but
as a single rational person, I'd rather store my savings in something that is
not (by design) decreasing in value.

People could always theoretically do this with gold, but it's not quite the
same since gold has its own risks (like it being lost or stolen), ongoing
costs (to protect it), and is trickier to trade.

Bitcoin is still in its early phases and another cryptocurrency may surpass it
at some point, but if we don't already, it's likely people will have
increasingly easy access to currency that is algorithmically constrained (like
Bitcoin). Won't people rationally flock to such currencies, and if that's the
case, won't it be difficult to encourage spending / investment using a minorly
inflationary currency?

~~~
dragonwriter
> but as a single rational person, I'd rather store my savings in something
> that is not (by design) decreasing in value.

That's one of the reasons currency decreases in value, it's a deliberate
effort to get people to use just about anything else as a store of value.

> Won't people rationally flock to such currencies

Supply constraints combined with utility to drive demand (whether a supply
constrained “currency” has the latter is another question) makes for a good
store of value—investment—but that's orthogonal to utility as a currency.

~~~
FooHentai
That last point is really key I think - If people flock to a currency as a
means of growing their holdings value then it's not really a currency, it's an
investment vehicle.

That argument has been levelled and Bitcoin, and I personally agree with it.
It explains the adoption boom up to this point, and off the back of it it's
possible to fairly confidently predict a bust when returns fail to
materialize. Right now returns are based on adoption coupled with increasingly
constrained supply.

~~~
siffinleex
It is both a currency and a means of investment, all currencies are, even
inflationary fiat currencies, the people who get in first when interest rates
are high can earn a lot of interest before the currency is eventually devalued
by the controllers.

In theory, when bitcoin reaches a saturation point of adoption, the value of
bitcoin won't increase anymore (it can't if there is no more demand). At this
stage deflation would technically have stopped and the currency is matured.

This should lead to a much more stable economy than we have now, where people
aren't encouraged through the use of cheap credit to make emotional purchases
for things they don't need, sure the economy might not "grow" at the same rate
but the growth would be a more precise representation of what people truly
needed (instead of just being a big party). Maybe people would even lead more
stable responsible lives.

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indescions_2017
Bitcoin comparison with Gold has become gospel. And with it a typical upper
bound on the price estimate of a single coin in the ~$100K range. The
assumption is that the total Gold market is about $10T globally and Bitcoin
will displace some percentage of that. With the current Bitcoin market
valuation based on exchange rate approaching $1T and 25% or so mining
complete.

But a much better estimation might arise from looking at global consumer
demand for Digital Payments. By the year 2020 its conceivable that we are at
1T digital transactions. At an average value of $10 each, we are again
speaking of roughly the size of the total market for Gold.

The million dollar question is: What percentage of all digital transactions
globally will be made in BTC?

Approaching the problem from the FinServ lens, rather than FinTech, can
radically alter your view ;)

~~~
immad
Bitcoin is valued at $110b with 16.66m mined out of 21m. So ~80% mined [1]

1 -
[https://coinmarketcap.com/currencies/bitcoin/](https://coinmarketcap.com/currencies/bitcoin/)

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throwaway5752
"The phenomenal increase in the value of bitcoins, by 6,000,000%, over the
past seven years, has taken the investing world by storm. CME Group will
launch Bitcoin futures in the fourth quarter of 2017."

This is promote an upcoming product.

~~~
nikcub
Their ads are _everywhere_ \- took me a while to notice that it's the same CME
that run all of those expensive video ads that have that scammy "get rich
working from home" feel to them.

Their user acquisition cost must be $1k+ because barely a day passes that I
don't see them somewhere - and it's a pretty broad base they deliver to since
I use multiple profiles / incognito windows

~~~
pelario
Why the downvotes?

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neilwilson
No clue at all what money is, or about.

Yet another 'money is a commodity' view that just doesn't fit reality.

Money is a representation of credit. That's actually what we use it for.

[https://medium.com/modern-money-matters/crypto-
shilling-8799...](https://medium.com/modern-money-matters/crypto-
shilling-87995d1d89b0)

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thisisit
The whole article in a single sentence: "However volatile they may be, the
reason why gold and bitcoin are perceived as stores of value is simple: their
money supply doesn’t grow quickly and, in the case of bitcoin not at all, some
day."

Ergo, bitcoin is like gold. Hence, should be valued as gold.

~~~
bluGill
No, gold has one advantage over bitcoin: in the worst case scenario (where you
survive, though a couple religions let you take it with you) it is a physical
thing that is somewhat pretty to wear as a ring on your finger.

Bitcoin and the like are entirely based on the idea that somebody else will
want them as currency forever. Gold is based on somebody will want ti for
either currency or jewelry forever. That gives gold a slight edge.

I don't know if it is significant, but it is a factor.

~~~
KomradeKeeks
Gold is also a pretty good conductor of electricity

~~~
bluGill
Gold is at best Okay. There is a common belief that gold is a good conductor,
but it has too high resistance. Look at the table
[https://en.wikipedia.org/wiki/Electrical_resistivity_and_con...](https://en.wikipedia.org/wiki/Electrical_resistivity_and_conductivity)
gold is 5 on the list, well behind copper (which is what we use), and only
barely ahead of aluminum.

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genericacct
Finally a way to short bitcoin without having to worry about counterparty
risk!

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josh2600
Did the CME group just call bitcoin dramatically undervalued??

~~~
vslira
"While there is no logical reason to suppose that bitcoin should have the same
value as gold, if it did, each bitcoin should be worth approximately $285,000,
45 times the current market price. As such, one might wonder: is bitcoin still
vastly undervalued even after a 6,000,000% rally?"

Only if btc's total worth equates gold's. Which is a possibility, for better
or for worse

~~~
lsd5you
Yes but we don't have to industrialise the asteroid belt to dump equivalent
quantities of crypto-currency into the market ...

~~~
empath75
Bitcoin is currently using 0.12% of the world's electricity production --
enough to power 2 million homes.

~~~
rihegher
which helps mines roughly 7,740,000 USD worth of new bitcoins per day, I'm not
sure how sustainable this is.

~~~
ifdefdebug
I ask myself: is there a limit for a drawdown without return in bitcoins? - as
in, if the value goes under a certain threshold, it's not profitable any more
to "mine it up" again and the blockchain falls dry... or could they just lower
the difficulty of mining in order to prevent that?

~~~
biafra
The Bitcoin network cannot know or should it care about a fiat exchange rate.
Which currency should it look at? Dollar? Euro? Why? If the block frequency of
ten minutes is not met, the difficulty is automatically adjusted after 2016
blocks (ca. 2 weeks) up or down.

~~~
ifdefdebug
I think miners have to know and care about a fiat exchange rate, at least
until electricity can be paid for in BTC. So that's where I thought a
threshold for miners running their equipment without losing money might come
from - and thus a never-come-back dropdown limit. I really don't know, just
curious. But probably automatic adjustment takes care of this, as you said.

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jiggunjer
Again the flawed gold comparison. You can still trade gold after the miners
stop mining.

~~~
thriftwy
Nothing prevents you from mining yourself and still confirming transactions if
you're the last Bitcoin user in the world.

~~~
jiggunjer
Common sense prevents me. How much value will it still have if there is a
single miner? The integrity of the blockchain is ensured by the number of
miners.

Also the gold analogy is still flawed.

~~~
thriftwy
> The integrity of the blockchain is ensured by the number of miners.

No it is not. Even if you are a single miner you won't be able to pass
incorrect transactions, such as moving other people's money or create coins
out of nowhere.

~~~
jiggunjer
51% attack?

~~~
thriftwy
You don't seem to understand how 51% attack works. It allows you to roll back
correct transactions, but it does not allow you to perform incorrect
transactions.

~~~
jiggunjer
I never claimed otherwise. The ability to manipulate history affects the chain
integrity. Perhaps integrity isn't the right word. Consistency?

------
dreamdu5t
What’s clear from all these comments is that economic theory is bankrupt and
impotent at explaining or predicting anything. It’s quite odd constantly
hearing why bitcoin can’t work or whether it can be labeled a currency
according to academic theory X, yet reality doesn’t care.

Bitcoin is amazing simply for showing us that monetary economists have no
clothes. They’re astrologists that use math.

~~~
matt4077
Nobody is saying that bitcoin can't reach new heights every day. All it needs
is enough idiots to buy.

What they are saying is that it has exactly zero chances at becoming a serious
rival to the US$ or other currencies as a medium of exchange.

And that prediction still seems pretty accurate, considering there's just
about exactly almost no transactional volume happening in bitcoin. It's also
now more expensive than credit card fees for anything <$100, and it takes much
longer than PayPal or Apple Pay or cache. It's also not really anonymous, but
of course everyone always knew that. It's so risky to store your private keys
on anything with ethernet the real pros print them and put them in bank safes.
It's about as decentralised and bottom-up democratic as you can be when you're
basically living at the mercy of the Chinese government, which, by the way,
has shown that autocratic governments can shut it down with less effort than
it took Obama to kill a fly.

~~~
andr3w321
"What they are saying is that it has exactly zero chances at becoming a
serious rival to the US$ or other currencies as a medium of exchange."

There is definitely a non zero percent chance of this happening. How much %
chance is debatable, but it's certainly >0.

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Jeff_Brown
> Some fiat currencies lose their value slowly, others do so quickly. That
> loss of value is precisely what makes them useful. Without the fear of
> inflation, holders of currency tend to hoard rather than spend it. Hoarding
> currency depresses economic growth and creates financial instability.

Economist here. That relationship is not clear. A currency skyrocketing in
value induces suboptimal willingness to delay spending, yes, but one
plummeting in value induces a similarly suboptimal willingness to spend too
early.

Moreover, a depressed economy can cause deflation, rather than the reverse:
Sluggish economic activity implies weak aggregate demand (people not buying a
lot of stuff), which can lead prices to fall.

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derekmhewitt
This was an interesting article, thanks for sharing it.

But as an average consumer and amateur investor (at best) I'm much more
interested in using Bitcoin (and other digital currencies) as a medium of
exchange rather than as a store of value. For short term transactions (ex:
exchange fiat for bitcoin -> transfer bitcoin to recipient) digital currencies
offer a very fast, secure, and simple method for transferring value across
borders that would traditionally take much longer than a few ticks of the
blockchain. And over that shorter term their value is relatively stable and
suitable as a medium for such exchanges.

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etr-strike
I believe a fixed supply of currency is beneficial when determining price. The
ability of an institution to secretly change the amount of a currency used to
measure price introduces yet another variable into the valuation equation.

Additionally, when the dollar was fixed on the gold standard, employers needed
to be upfront and honest with their employees. When they needed to cut wages,
employees knew it was happening. Much of the labor movement and union
formation happened because employers needed to be honest about what they were
doing.

I've yet to hear a convincing argument that inflation is good for me.

~~~
sordidasset
But the fed doesn't change the dollar's value in secret. Indeed, wages are
worth less now, but it's not because employers are having back-room chats with
the central bank.

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anonemouse145
> Bitcoin isn't Fiat currency. > Bitcoin Cash doubles the number of coins in
> an instant, and future updates could do more, and the market value of each
> coin increases rather than halving.

Choose one.

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TheGrassyKnoll
> "...the Federal Reserve, might even create their own cryptocurrencies..."
    
    
      If that happens, wouldn't demand for Bitcoin take a hit ?

~~~
tradersam
I don't think so. It would be the government legitimizing the industry, yet
the need for non-government controlled currencies would still be extant.

