Some people here seem to think that this is temporary, that sometime in the future Bitcoin will stabilize into a glorious future global currency -- never mind the new class of cryptobarons it will have created from its inner circle, through shameless hoarding.
My question is, what then will happen when Bitcoin stabilizes, that is, when the time to new coin mined approaches practically infinity? Let's assume the global economy grows at 4% per year. Do Bitcoin's proponents believe a constant 4% deflation rate will be somehow compatible with capitalism? Why lend, why build new companies, when simply storing it is more than enough? Take shocks such as bubbles and demand-side crises. Could a economy based on Bitcoin survive them, and not crash inevitably into a deflationary spiral? I claim it won't.
The party line usually argues for the evils of inflation. What they don't understand, I think, is that capitalism, in its revolutionary (in the sense of production) facet, needs inflation, feeds from it. Inflation might screw lenders, and favor debtors, sure. But deflation is just the inverse: a gift for the leecherous rentier class, and a massive "fuck you" to entrepreneurs.
There are a few replies here that seem to be reacting negatively to the OP due to the tone of the submission instead of the content. To be clear, deflation is categorically bad for a currency. It's terrible, like great depression terrible. The reason it's bad is that deflation makes it more profitable to do nothing than to invest. When this happens, people react by not spending money. The market dies. While inflation can be bad, it's at least manageable. In fact, some inflation is actually heathly as it encourages investing.
If that doesn't make sense, think of it like this. Inflation is similar to nuclear fusion and deflation is like nuclear fission. When the former goes critical, you can just shut off the spigots and things more or less fix themselves(albeit with some collateral damage) without the whole system crashing. However, with the latter, there may be no fixing without dismantling everything and starting over.
Deflation is just one form of asset appreciation. If this line of reasoning were true then we would never see anyone selling anything that appreciates in value. But this is a very one-sided way to consider this scenario--it only takes into account the supply side. When the asset is appreciating, the demand side takes this into account as well and is willing to discount their asking price to take this into account. You saw this play out with real estate several years ago, and with gold more recently. It may blow out the bid/ask spread a bit, but eventually there will be people who need to sell their asset to buy something else, or there will be people who want the asset badly enough to pay what people are asking.
I think this argument can be discounted simply by looking at the current state of things--people are still spending bitcoins even though the recent appreciation dwarfs any built-in deflation. Sellers may need to discount their price to get people to pay in bitcoins, but even that doesn't seem to be happening yet.
One problem here is that you're considering the currency as an asset that should appreciate. The argument of most economists today is that currency should not appreciate because it encourages hoarding what is essentially a useless non-good, it's just a token for convenience of value transfer. If real goods appreciate, it's because the value offered by that good to the marketplace has increased, so the market pays a commensurately larger price. If currency appreciates on its own, people will want to hoard it, and will only spend it on things they deem highly valuable. Perhaps you can argue that this is better in the long run and would stop rampant consumerism, but it's pretty obvious that without rampant consumerism, many people would be making less money.
People aren't really spending bitcoins in a meaningful way. They're using it as a passthrough for the dollar, basically. I have a Bioshock Infinite key that I want to sell. Will let it go for 1.5 btc. Why won't this offer be taken up now, when just a couple of weeks ago it would've been considered a fair deal, and just a couple of months ago it would have been considered a GREAT deal?
You're just noting the difference between a centrally-managed currency and one that's not. The value of bitcoins tends to move quite a lot lately, so it's like trying to price something in AAPL stock or something right now--you have to peg the value to a slower-moving reference currency. (And that's typically how BTC-denominated goods are priced, for example on the Silk Road the product prices are pegged to the USD.)
But that's not to say that centrally-managed currencies don't fluctuate either, because they do--just, typically, in the other direction. If I tried to find a gas station that would sell me a gallon of gas for $2USD today I'd be out of luck, but 2-3 years ago I'd be able to go anywhere in America and get that deal.
>If I tried to find a gas station that would sell me a gallon of gas for $2USD today I'd be out of luck, but 2-3 years ago I'd be able to go anywhere in America and get that deal.
That illustrates that the price of oil fluctuates. The USD hasn't dropped in value by 50% in the last two years.
Most of currency is fluctuation is fluctuation relative to other currencies. If the price of the Icelandic krona plummets relative to USD and GBP, it doesn't mean that all the prices in Iceland immediately rise to compensate. People in Iceland are still paid in krona and buy things in krona for approximately the same number of krona.
But if the price of BTC rises suddenly, prices do suddenly decrease because at the moment it's just a proxy. There's no real internal market: there aren't people who are paid in BTC and have their savings account in BTC and make their mortgage payments in BTC and buy their food in BTC.
So BTC really isn't like other currencies. It's fluctuating massively even from an internal market perspective.
Let's look at a single-currency country first. Prices fall. Including wages. Credit is tight - money appreciates without being invested and borrowers have to repay debts in more expensive currency tomorrow, making them more likely to default [Fisher]. People with money benefit - the rich get richer and the banks hoard capital, refusing to make loans. Inflation fuels asset bubbles as the economy over-invests; deflation fuels the opposite as the economy starves itself.
Yes, we have seen deflation. The U.S. and U.K. both experienced crippling deflation in the 1930s . Before that, remember the American populist movement's "Cross of Gold" speech ? That wasn't a reaction to an inflationary gold standard. The euro zone offers a more contemporary view of the effects of deflation, as does my Switzerland .
Uncertainty in the future path of deflation that is more toxic than deflation per se. The U.S. grew through the Great Deflation in the 1870s and Japan has had mixed real effects from its almost two decade deflation [Morana]. Theoretically, if deflation proceeded at a steady clip, markets could accommodate (Milton Friedman advocated for an economy deflating at the real interest rate [Friedman]).
But what if we have two currencies, e.g. U.S. dollars and Bitcoin? Argentinians have a choice between black market (or "blue") dollars and an available but inflating peso. Tellingly, Argentinians buy dollars primarily for overseas vacations . This is an example of a bad currency (the peso) and a good (the greenback). The Argentinians still execute the bulk of their transactions in pesos, not dollars.
Deflation is not likely to be Bitcoin's death knell, but rather a ceiling on its usage. A deflating Bitcoin will crimp transaction demand for the currency as spenders shift preference to more easily borrowed and spent dollars. Sellers would respond in kind (or, alternatively, sellers who respond in kind would gain market share).
Caveat: if Bitcoins are treated as a financial asset, for speculating versus spending. If so, deflation would proceed un-checked, with speculators driving out the transaction value of the currency. That said, gold has survived both deflation and speculation, so this isn't a fatal blow either.
That would seem to be the case à la Fisher. But the evidence from Japan, a slowly, albeit steadily, deflating advanced economy is compelling.
From January 1995 to January 2010, Japan's CPI (2005=100) has fallen from 100.8797 to 99.5851, or or -0.08% per year. In that time, real wages grew 0.23% . Real GDP/capita at 0.61%. Hell, from 2010 to 2013 their CPI has fallen at 0.27% annually, but the hit has been mixed. Note that the Japanese monetary base (M2) has expanded at 2.5% annually from 1995 to 2010, so this is a demand-driven deflation, consistent with Morana. But the deflation we base our analysis on, the Great Depression, was similarly spurred by demand.
Similarly, Germany, through the Hartz reforms, engineered a wage deflation at the beginning of this century. Helping power the American recovery is wage deflation. The hope is austerity, structural re-alignment through deflation, will similarly fix peripheral Europe's bloated labour costs.
Yes, it appears people will take falling wages if forced. All this said, I do not believe a deflating national currency is the right model for Bitcoin. Instead, look to arguments levied as the world switched off gold, an international deflationary currency, to inflationary fiat ones.
 Own calculations from St. Louis Federal Reserve Economic Database
Bitcoin isn't that deflationary, and won't be at all until 2140.
When 2140 comes around, and all the bitcoin is mined, then it will only deflate at the rate which coin is "lost into the ether" from people losing their wallets, etc. I highly doubt the deflation rate will be anywhere near 1%.
Bitcoins are already rapidly deflating. The purchasing power of a Bitcoin today is a multiple of what it was a year ago. You can see this in its rapidly appreciating exchange value vis-à-vis the U.S. dollar.
That is one theory, and is the prevailing one. It is not necessarily correct.
Regardless, it is certainly a consumer's right to store their assets in something that is not inflationary, as most do. Is the population holding empty real estate or gold instead of currency really that much better for the economy? No.
Smart money will simply shift out of cash in an inflationary environment, and the value will not necessarily be productively invested.
An opposing viewpoint more thoroughly articulated:
And a population withholding investment capital when those (actually very heterogeneous) tools when they're for unsustainable business plans is better than one in which people have to invest in some business plan to preserve what they have.
It's really not as simple as "investment = good". It's good when it's for stuff that produces value. It's not good when it's invested for the sake of investing and ends up in the stocks of corrupt corporations and shady ventures.
Owning Real Estate (and making money off of it) entails taking care of it. People taking care of their land (so that it can appreciate in value) is a good thing. The typical Real Estate "investor" adds a ton of value to their home, not just through maintenance, but also additions (ie: a new deck).
This maintenance is true value added to the economy. True value that wouldn't have been added if the investor just left his cash in something else.
No one wants to buy a 30-year old home that had no maintenance on it. Unless you're a fan of buying homes with leaky roofs and a flooded basement...
You know, comparing a commodity against a currency isn't very sensible. I don't know many (sensible) people who say "I'm just going to keep a load of dollar bills under my bed" when it comes to investing (which is what your first link compares to gold).
The price of gold is so ridiculously inflated right now that it's insane to invest in it. For people back in 2000, it was a great idea, but now the price is high. The most basic rule of investing is buy low, sell high. It sounds like a stupid catch phrase, but even people like Warren Buffet have said that it's true.
You might be able to make a little bit of money, but unless the global economy collapses entirely, I doubt we'll see another major increase. Gold actually has gone down in value before, so it could easily happen again again.
I just noticed something: your links are "lying with statistics". Everyone knows that if you want to "prove" that Gold is a good investment, just start your graphs at 1970s.
After all, Gold reached a glorious bubble of inflation-adjusted $2200+ / ounce in 1970s, and has fallen since then. (yes, even with today's inflated prices, Gold is no where near its inflation-adjusted high).
Lets take a more reasonable graph of Gold, ehh? Something longer term... and see what happens to your trend.
And of course, ycombinator. You know... the angel fund / venture capitalist firm that runs this website? We're all here because of investors investing into technology. They do so because they believe they can ultimately make money with technology investments. At least, more so than Gold, Real Estate, or even Stocks.
"The startling news that Germany is repatriating its gold reserves from the United States and France has got precious metals speculators worried that this is the first major sign that trust between central banks across the globe could be deteriorating."
"How Much Gold Does China Really Have?... China is the world’s leading gold producer and also the world’s leading gold importer. And surprisingly their official gold holdings haven’t risen an ounce in over three years."
"Morgan Stanley and Goldman Sachs, the last two investment banks left standing, will become traditional bank holding companies, marking the end of an era for Wall Street.
The Federal Reserve's surprise announcement, which came at 2.30am London time, places the banks under the supervision the bank regulators and gives them easier access to credit to help them ride out the financial crisis."
Germans are bringing gold back into their own country, as opposed to holding it in other exchanges. They have neither increased nor decreased their supply.
China and India are world-class consumers of gold for jewelry, as expected of the world's most populous countries with a rising middle class. Gold is also used in microelectronic components. Chinese Banks on the other hand, have not increased their holdings according to your link. IE: China is not investing into Gold. They're using it.
As for Russian and Iraqi Central Banks buying up Gold between 2012 and today... well... they've already lost 10% on their investment as Gold has dropped in value between last year and today. I mean, if you wanna follow the example of Russian and Iraqi banks, you're welcome to do so. But I don't think anyone considers them a paragon of the investing world.
Why are Germany repatriating their gold? Why do they want it in their own hands? Why go through all that trouble instead of just selling? Why would they want to keep holding onto a "piss poor investment"?
Regarding China, the article's author believes that China has been accumulating gold. The last known official figure is from 2009 and since then imports continue to rise, which in the authors opinion, have been destined for the Central Bank.
As for Russia, they have been accumulating gold for a few years now, and it's right there in the article. "It owned 400 tonnes of gold at end of 2006... At the end of last year, the central bank held nearly 950 tonnes of gold".
If you want to dismiss gold as a "piss poor investment" that's fine, but not everyone shares your view or your investment objectives.
>Why are Germany repatriating their gold? Why do they want it in their own hands?
Kraut here. Quite easy to explain, really.
The tabloids and some politicians made up a story along the lines that none of our politicians or central bankers has ever had access to the gold stash in the US and that probably this stash no longer exists.
So as to calm down people, the German central bank has declared they will repatriate 700 tons of gold (out of ~2000t stored in the US, UK, and France).
This is a foolish statement no matter what the subject:
>dotcom stocks are a piss-poor investment
>railroads area piss-poor investment
>Apple is a piss-poor investment
All of these are true and false at some point. You can't make blanket statements like that. There are times when Gold as a store of value makes more sense than a central-bank inflated currency. There are times when the opposite is true.
What is certainly true is that Gold is a very good long-term store of value, and the prices of Gold relative to other things, such as a loaf of bread, a barrel of oil, a parcel of land are quite stable over a long period of time.
People often make the mistake of comparing Gold against fiat currencies and decide that Gold may be going up or down in value. What they don't do is look at Gold vs other things, which typically are rising in price just as fast as Gold.
Certainly one thing is for certain, putting your savings into a fiat currency is a very bad long term plan.
"What is certainly true is that Gold is a very good long-term store of value, and the prices of Gold relative to other things, such as a loaf of bread, a barrel of oil, a parcel of land are quite stable over a long period of time."
Gold is out there, sometimes swinging by 1,700% over a decade... while the CPI doesn't change any more than ~100% / decade.
Dollars (and investments measured in dollars: ie Inflation-protected Bonds like TIPS) retain their value better than Gold, while providing a more stable platform. A 10-year note at even 2% offers you 21% growth over 10 years... much better than the long "valleys" that Gold investments suffered across the last century. (And with historic rates sometimes hitting 14.56%, it was possible for 10-year notes to hit 370% growth over 10 years).
Gold doesn't grow in value in the long term. And as shown in Gold Volatility Index, Gold is also a very unstable investment historically.
In fact, Gold's volatility today is the same as the S&P 500 Index.
So it is just as volatile as stocks... while offering poor gains historically. Neither the conservative nor aggressive investor would want this kind of investment. That makes gold a "piss poor" investment in my books.
Pretty much every big economy is trying to inflate away its debts. The Bank of England recently revised their inflation target upwards. Now Japan's central bank is talking about doing the same thing. As far as the US goes: I've got two words for you: quantitative easing.
Meanwhile, most consumer price indices don't include the things which increase in price the most, like fuel and food. So the inflation numbers you're seeing are already artificially low.
In this kind of environment, it seems pretty likely that gold has further to climb.
Also, most stocks these days don't give dividends, which makes them pretty much equivalent to gold from an investor's perspective. Greater fool and all that.
Investing in just one thing is dumb, of course. But not investing in commodities and gold at all seems equally dumb.
When big banks were buying up US Treasuries constantly because they're worried about deflation... to the point where some bonds are offering a negative return... the switch of Monetary Policy that favors inflation is the obvious move. Notice: Gold Dropped in value since last year, while big investors continue to run towards the safety of US Treasuries... pushing yields to absolute lows. Why? Because during 2012, the major banks and investors were worried about deflation risk.
Buying commodities and gold when there is considerable deflation risk is dumb.
According to wikipedia: "The core CPI index excludes goods with high price volatility, such as food and energy. This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile and non-systemic. More specifically, food and energy prices are widely thought to be subject to large changes that often fail to persist and do not represent relative price changes."
The Core CPI is used to calculate "Core Inflation," which is the main thing that the Federal Reserve tries to monitor.
See http://en.wikipedia.org/wiki/Core_inflation. So although there are alternative CPIs which do include food and energy prices, they are not as important to the people making monetary policy in the United States.
I'm not really sure what you're trying to show with that graph of deflation probabilities. If I'm reading it right, the probability of deflation through 2017 is currently 0%. Since the year is currently 2013, the "probability of deflation between 2008 and 2012" is also 0%, since I just lived through those years, and... it didn't happen.
The reason why people were buying treasury bonds in 2008-2012 is because the rest of the economy was imploding and they wanted a safe port in the storm. I lived through those years and so did you. You ought to know this already.
I don't really know what else to say. If you think it's a good idea to buy a bunch of treasury bonds with super-low interest rates in 2013, knock yourself out! I think anyone with an ounce of sense can see that our government is going to inflate away its debts over the next few years. In the meantime, you'll be helping to keep USGov in the black, so... thanks, I guess.
So... what does "Core CPI" have to do with anything? I have never used that value in my argument, and have instead preferred CPI-U and CPI-W. These CPI are used for Social Security, Minimum Wage calculations, and so forth.
You're creating the ultimate strawman. You're ignoring the statistics I've presented (statistics using "real" CPI which include food values), and then criticizing statistics that I'm not using. Why don't you read my argument?
Second, even including food prices / energy prices, there were periods of deflation through 2008. Yes, I lived through those periods, do you know what happened to bond investments during that time? I got something like a 20% gain during that period of deflation while the rest of the market crashed.
Anyway, this is the free market. You can continue to invest into Gold if you think its best! We'll both know the answer in a year, so there's no real need to argue about it.
What does this have to do with anything? Let's ask wikipedia.
The Federal Reserve's policy of ignoring food and energy prices when making interest rate decisions is often confused with the Bureau of Labor Statistics' measurement of the CPI. The BLS publishes both a headline CPI which counts food and energy prices, and also a CPI for All Items Less Food and Energy, or "Core" CPI. None of the prominent legislated uses of the CPI excludes food and energy. However, with regard to calculating inflation, the Federal Reserve no longer uses the CPI, preferring to use core PCE instead.
So the people making the monetary policy decisions are ignoring food and energy prices, and hence, in my opinion, underestimating inflation.
Anyway, as someone else said in this thread, everything is a good investment at some period in time. The question is whether we are in that period of time.
> To be clear, deflation is categorically bad for a currency. It's terrible, like great depression terrible.
I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right? We've never (recently) been in a period of significant deflation, so how can we be so certain of its effects?
> deflation makes it more profitable to do nothing than to invest.
Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it.
People will still work, and spend what they need to. And there's a limit to how much a currency can deflate before it cycles back. And hell, how do we even know that inflationary/deflationary cycles are unhealthy? Even if it causes some businesses to die, maybe this improves an economy in the long term by churning things up a bit.
Good luck. You're swimming against a tide of people minted from education with the mindset of deflation bad, inflation good.
Of course, everyone likes deflation when it means they can buy more for less. Of course, if prices of things get so low that people start to purchase, then deflation will eventually reverse, unless you assume that deflation will continue forever until prices reach zero and everything is free. Of course, everyone force-fed a diet of Keynes assumes that hoarding relates to stuffing mattresses full of money instead of holding cash in banks, where the bank can lend the money out and still invest. They uncritically swallow the line that a central bank inflating at will is the best thing for an economy.
Inflation/deflation are just two phenomena with different winners and losers, the same as high/low currency values. Deflation favors lenders and savers, and inflation favors borrowers and spenders.
The inflationists always assume that the borrow/spend nexus is far more important than the lend/save. But of course saving drives all investment, so a period of deflation isn't necessarily a bad thing. In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion.
Once you clear your head of the foolish 'borrow and spend' mantra of the last 80 or so years, and realise that investment and production are more important than spending and consuming, it becomes obvious that a bit of mild deflation isn't necessarily the hobgoblin it is made out to be.
The simple fact is that no economy and social order has ever imploded due to deflation, but inflation has some pretty terrible economic and social effects when it gets out of control. Deflation, like any long position, can only ever go down to zero. Inflation, however, is like any short position and can go to infinity.
>"In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion."
Periods of asset deflation after over-investment/economic distortions may act as a balance, but it isn't "good". Having your net worth halved is crippling.
>"The simple fact is that no economy and social order has ever imploded due to deflation"
No economy implodes due to deflation or inflation alone. Countries like Germany or Zimbabwe had production capacity collapse. That led to printing money (to stave off deflation), which in turn led to hyperinflation. Too much money chasing too few goods, remember? In order to have too few goods, the country's production has to go into the toilet.
Saying deflation isn't bad flies in the face of many of the greatest economic minds we know, with tons of research and theory to back it up.
Careful with reading bias into what I have written.
I have not said deflation is good, or said that it is not bad.
I have merely stated it creates winners and losers, and that inflation isn't automatically better. The same as a 'high' or 'low' currency - the goodness or badness depends on the reference frame.
The assumption that inflation is automatically better is 'common knowledge' based on theories of economics developed that classify savings as bad, and spending as good, based on the assumption that deflation will cause consumption to be postponed, but which hand-waves away the problem of inflation bringing forward consumption with the trite statement of 'in the long run we are all dead'.
My point is that deflation isn't the bogeyman many have been trained to believe it is. Spending-based assumptions of economics have led the world down a garden path of unsustainable debt in the name of endless 'stimulus' and inflationary policies. Periods of mild deflation and creative destruction would have served the world better than endless shots of new cheap money.
>"The assumption that inflation is automatically better is 'common knowledge' based on theories of economics developed that classify savings as bad, and spending as good, based on the assumption that deflation will cause consumption to be postponed, but which hand-waves away the problem of inflation bringing forward consumption with the trite statement of 'in the long run we are all dead'."
That's only part of the argument.
Another part is that wages also must decrease with deflation (wages are an input price). And that's very difficult to pull off in a modern economy, and leads to unemployment. We are seeing that right now.
The fact of the matter is, we should be indifferent to either inflation or deflation, as long as we can see the changes coming and adjust quickly enough. In reality, we can't. Hence an ever-increasing money supply (to coincide with an ever-increasing demand for money) is the best bet.
>"based on theories of economics developed that classify savings as bad"
I've never encountered that argument.
>My point is that deflation isn't the bogeyman
Look at this thread. Look at Seeking Alpha. Look at Reddit. You think people are over-reacting to deflation? People everywhere are hyperventilating over out of control inflation, when, in fact, our current problems are associated with a deflationary event ($3.5TT wiped from the collective financial sector sheets).
>""Having your net worth halved" happens in the inflation scenario. Deflation increases your net worth."
Interesting. We've been in a positive inflation environment since I've been born, and my net worth has increased exponentially.
Deflation will increase the purchasing power of your money due to the fall in prices, but decrease the value of assets you own priced in that currency. Something people seem to be forgetting around here are that wages also fall during deflation, and that results in lower purchasing power and unemployment. Your "work" isn't worth as much anymore. You get paid less. Good deal!
What happened when the housing bubble collapsed and there was massive deflation in home prices? Did those people get wealthier? Did it become easier for other people to spend their dollars on homes at the new low prices? The answer is no and no.
Just because people hold money in bank does not mean that the banks will lend people money. In fact, after being bailed out with TARP, many banks did not turn around and increase the amount of lending that they were doing. However, most of them did pay back their lender (the Fed).
As with anything, too much of any extreme is bad. Too much inflation or too much deflation. But with fiat currency, it's natural to expect steady inflation over time -- especially if it's not tied to a commodity (e.g. after we got off the gold standard). That's because there's value in lending money to some enterprise, and that's the time value of money. Organizations with good credit (e.g. banks) issue and lend money to organizations with worse credit. So they will expect a return in the enterprise, and overall if they guess right, the enterprise will have returned principal + interest to the lender. If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest.
So it's like an elastic money supply that's being prodded by lenders / banks looking for a return.
> If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest.
The financial systems works different.
You seem to be conflating wealth and money. Money doesn't disappear from the system when someone fails to repay a loan. (Unless you are taking a rather wide, but still sane, definition of money, and hold that lending increases the money supply.)
No extra money needs to be printed to pay back all that interest. That's because central banks pay a dividend to their governments.
Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. On the contrary, governments like the US use their central banking system to do open market operations on bonds they issue to finance their operations, and usually have to pay interest on that debt. No?
>"I hear this argument a lot, but no nation that we know of has ever collapsed because of deflation, right?"
And which have collapsed from inflation? None, directly. Hyperinflation (and deflation) is an effect of an economy collapsing. Not a cause.
"Hyperinflation is often associated with wars, their aftermath, sociopolitical upheavals, or other crises that make it difficult for the government to tax the population, as a sudden and sharp decrease in tax revenue coupled with a strong effort to maintain the status quo can be a direct trigger of hyperinflation."
Note "decrease in tax revenue". Economic crisis > deflation > country can't pay the bills > hyper-inflates currency.
The Weimar Republic intentionally inflated their currency to reduce the WW1 reparations payments, which got out of control and reduced the value of the Mark to nothing.
Inflationary policies collapsed the tax base due to destroying the ability of the economy to function normally, not the other way around.
This is easily shown by the fact that as soon as the Weimar Republic re-introduced an asset-backed stable currency, the economic problems improved greatly, though there were deflationary periods after that caused by the massive economic upheaval.
Economic crisis, couldn't pay the bills, so they inflated the currency. Just like I said. Are you really going to argue that there was no war or aftermath, social upheaval or other crisis (like, say, debilitating war reparations) that led to hyperinflation? Crisis comes first.
So often Wiemar Germany is trotted out as the example of what can happen when the government prints excessively. "It can happen to you! Wheel-barrows full of money to buy bread!" The reality, the country and its economy was in shambles. Not because of inflation.
Your turn: point to an economy that was happily chugging along, and hyperinflation came out of nowhere and took it down.
>Investment won't ever stop, it just behaves more like a there is a minimum interest rate. No matter what the deflation is, I can still loan out $100 and expect $110 back within a year and make a bigger profit than holding on to it.
But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything?
To use a case from the bitcoin economy, we all know the story of the pizza that someone bought when the x-rate was something like 3 cents per coin. Today, the 10k btc spent on that pizza would have been worth $100k! This story is often told to try to incent people to get into btc, with the implication that "if you forgo the cost of one pizza, in a little while that will be worth thousands of dollars", without realizing that this exactly is the problem with a btc-based economy; if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.
But is that $10 profit going to be worth the risk of default when an investor could get a satisfactory return by just sitting on the money in the first place? What incentive does an investor have to take bets and possibly lose thousands or millions of dollars when his money appreciates considerably without doing anything?
People loans each other bitcoin in the bitcoin economy all the time, abiet with high interest rate.
if everyone is forgoing their metaphorical pizza in the hope of exponential growth in currency value, the market will be unusable.
The demand for pizza will be low, but not zero, because the desire for pizza competes with desire for monetary profit. At some point in the future, people decides that the waiting is enough, and they will buy pizza as reward for all their patience.
> The reason it's bad is that deflation makes it more profitable to do nothing than to invest.
This makes no sense to me. If keeping 100 units makes one richer because they are worth more in a year, then any investment which has a positive return (that is, you end up with more than 100 units in a year) must be that much better... What am I missing?
Let's pretend the deflation is at 3% (i.e. there's a inflation rate of -3%). Then your 100 units will be worth 103 units (in today's money) in 1 years time. This is a guaranteed rate of deflation (bitcoin has a guaranteed rate of deflation, I don't know if it's 3%)
So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it.
So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone. So that's only a 2.5% interest rate. Again, why loan it out if you can get a guaranteed 3% by doing nothing?
>So someone comes along and can pay you 5% interest rate. Sounds better, right? However it's for a business. So you don't know if their business will survive, it might go backrupt. Let's pretend it's an early start up, so there's a 50/50 chance they go bust and your 100 units are a write off and gone.
I know it's just an example, but no-one should ever lend at 5% if there's a 50% chance of losing the total sum, regardless of the currency involved and whether it's deflationary or inflationary. The EV of such a loan is -$47.50 for a one-year term.
>So someone comes along and wants a loan, but they can't pay back 3% interest rate, only 2%. Why would you give that person your 100 units if you'll only get 102 units (in today's money) back in a year? Much better to hold on to it.
Because if you don't lend, you keep your $100. If you lend, you get back $103. $103 will always be worth more than $100, regardless of whether your currency is inflationary or deflationary.
Assuming they pay you back in the same currency, they're actually paying you 2% on top of the 3%, giving you a 5% return.
Today, with dollars, you can get a risk-free return by investing in T-bills. Riskier investments pay a higher return in exchange for higher risk. The risk-free return from holding a deflationary currency plays essentially the same role as the risk-free return in T-bills.
Because the money supply of BTC is fixed, BTC are effectively proxies for the value of the entire economy that they're a part of. When the economy grows by 5%, so does the value of your BTC. It's at the absolute optimimum point of the risk/reward curve: you could hypothetically invest in a way that performs better than the average, but when factoring in the risk, your expected value is slightly worse than if you'd simply held on to your money.
With USD, you know the value of your currency will drop due to inflation. In order to keep up with inflation, you have to put your money in an investment vehicle that stands in as a proxy for the overall economy. Hypothetically, you could buy a perfectly proportional amount of every single listed stock, every bond, piece of real estate, and so on (this is what index funds attempt to approximate).
In the latter example, you also have managed to convert your currency into an ideal proxy for the entire economy. Any attempt to pick winners or losers will, statistically, give you slightly worse results on average than had you simply tracked the market as a whole.
Both examples are similar, except in the latter example, you've actually put your money back into the economy: a company issued the stock in order to raise the capital to expand and grow. In the former, your money is essentially removed from the overall money supply. It is available to no-one, and causes further deflation. The more money you hoard, the less money available for financial transactions. The less money available for transactions, the more valuable each unit of currency becomes.
So Keynesian economics forces everyone to invest in order to avoid the inflation tax while Austrian economics encourages saving allowing savers to reap the benefits of deflation. Both serve as proxies for the economy, so tell me again the downside of saving and prices going down over time?
Money you are saving that isn't being used for monetary exchange is effectively dead weight in an economy. Due to modern inflation rates, nobody really "saves" in any modern economy by just hoarding fiat currency - and because of this, the vast majority of the monetary supply is being used for exchange and commerce, and you get peak utility of the currency that way.
If you sit on money you get from the economy, you are taking it out of the exchange system as long as you don't spend it, which slows exchange.
Savings would be invested significantly less with a fixed money supply, because every possible alternative investment is statistically guaranteed to have a lower expected value than simply holding onto your money. Obviously, there are still going to be people who attempt to beat the market. But it will happen significantly less often since the "default" of holding onto your money is both the safest possible investment and the most optimal.
This is clearly the case when nominal prices are falling. But when prices are rising, the reason they are rising is a contraction of the economy… and again, your money is still best left alone. Because while your investments might pay off when the economy rebounds, you'd still be statistically better off with your money sitting under the digital equivalent of your mattress; when the economy rebounds, prices will fall again, and your untouched money will be worth more in direct proportion to how much the economy has rebounded.
Deflation increases the value of holding cash. By definition deflation occurs when the price of a basket of goods decreases. Why invest your money in a basket of goods today when it is going to be cheaper to buy that same basket tomorrow?
Because today (and every day between now and next year) you can use that smartphone to do things that you can't do without a smartphone. So yes, the smartphone has lost money value, but you as a person and in your life, have gained.
Unless, you know, you actually want bitcoin. Maybe you want to buy something now with bitcoin (especially something that's more difficult to buy with government currency, like online gambling or illegal drugs), or maybe you just think bitcoin is cool.
It separates (theoretically, as it can't be measured) the price change due to faith-in-currency from price change due to market forces on the products.
That is, the price of good may fluctuate as function of how much current labor you need to buy it, or as a function of how much of your past savings it will cost.
The diference between those measurements is due to money supply (in part, for there are other complicating factors)
It increases the return on investment needed for a project to succeed. Simple example: I grab the 100btc and buy machinery to support my new factory. Right after buying, I'm losing money, because machinery won't appreciate like BTC does. So, I'm only interested I machinery investments that return over the BTC deflation rate.
This is a simple example. Some of this already occurs in the real world, since machinery depreciates over time. it's just that currency deflation is another force opposing investment and braking money flow.
Those investments may not exist. Investments can yield a positive return only if somebody else spends money. But what if every potential customer also sits on their money to exploit the deflation instead of spending any?
In the example of buying a laptop, the laptop is not the deflationary thing. The deflationary thing is the one that increases in value, not decreases. Dollars (or whatever) are the deflationary thing in that example. They increase in value compared to the laptop (you get more laptop for the same number of dollars).
Therefore when you compare Bitcoins to the laptop, you're comparing the wrong things. The argument is:
"People will not spend deflationary currency [Bitcoin] on stuff [anything] because it's better to simply keep the deflationary currency [Bitcoin]"
the reply is:
"People do spend deflationary currency [Dollars] on stuff [laptops] even though it would be better to simply keep the deflationary currency [Dollars]"
> It's only purpose is to allow you to buy other stuff.
There is certainly utility in being able to buy stuff that cannot easily be bought with traditional (government) currencies. Namely, things that are illegal in various countries, like drugs or gambling.
That's the "use it to buy things" which isn't utility. The laptop I'm typing on will not be worth more later. Ever. This very second is as much as it'll be worth, which is perhaps half of what I bought it for a year and a half ago. But I bought it, because I need a laptop. I fully expect it to be continually worth less, just like the couch I'm sitting on, the watch I'm wearing, the table I keep the laptop on, etc. But I put up with that because I'm using them. Bitcoins are useful for these things, but that's not utility - you don't buy a bitcoin and (supposing they dropped heavily in value year after year) shrugged and said "Oh well, I need this bitcoin for this so I'm keeping it even if I get very little in return for it in five years when I craigslist it as '1 used bitcoin, still in pretty good shape'".
You're saying that drugs cannot easily be bought with government-issued cash? It's totally the other way around: drugs are easily and frequently bought using cash, and vanishingly rarely bought with bitcoins.
I would consider the Silk Road to be fairly large. Obviously, it's tiny relative to the entire USD drug market, but bitcoin is also tiny relative to USD. But the point is, you simply cannot deny that there is actual demand for bitcoins caused by the fact that the Silk Road only uses bitcoin.
> deflation makes it more profitable to do nothing than to invest
Saving is investing. You're investing in your ability to manage your risk at a future date. If you have no savings, then you are at risk of any minor problem (e.g. an injury, decreased revenue, or a natural disaster) causing you a major setback.
The "common wisdom" you've heard about inflation being necessary for an economy is a lie. It's a lie that justifies the wealthiest class of individuals in this society to be "bailed out" again and again.
No, it's not a lie. Why in heaven's name would the investor class want higher inflation? They don't. The really don't. Our understanding of the benefits of a small amount of inflation comes in spite of the interests of those who already possess of a lot of wealth.
The investor class doesn't want bail-outs, though I'm sure they appreciate bail-outs when they happen. The wealthiest lost the most (in money, though not in utility/standard of living) in the 2008 crash. They'd have much rather avoided the 2008 crash's happening in the first place.
The lie, in actuality, is the idea deliberately promulgated by certain members of the investor class that inflation is evil. They do this for obvious reasons. It is precisely this lie to which you evidently subscribe.
The investor class doesn't benefit from inflation, it's the banker class that benefits.
Here's how it works: The banks have a balance sheet of debts owed to them. Some of the debts come from companies like General Motors and United Airlines. If one of those companies threatens to go bankrupt, then the bankers simply lobby the congress to "bail out" the troubled company. This allows the banks to keep the troubled asset on their balance sheet, and continue making an ongoing revenue stream. Of course, the "bail out" results in an increase in the money supply, which means every single holder of USD pays through a decrease in spending power of their dollars.
That's awfully convoluted. You're asserting that this Glenn-Beck's-whiteboard-esque arrangement holds more sway on banker's behavior than the effects of inflation on bankers' own personal wealth holdings.
Do banks want to be bailed out? Sure. Who doesn't. Do rich bankers benefit more than the working class from higher inflation? Certainly not.
>Do rich bankers benefit more than the working class from higher inflation? Certainly not.
Yes, they do, because they are the first to get to spend the inflated money.
If you go back to a point in time when the royal mint could produce an inflated currency by diluting the metal content in coins, then they were the beneficiary of the inflated money by getting to spend it at the current price levels. By the time that money filters through the system to the poor, the prices have risen and the currency is worth less.
The same happens now when the central bank provides newly-minted funds to banks. The banks get first use of the money and get to use it at current price levels, before the flow-on effect of the increased supply takes hold.
In a hyperinflationary environment, here's how a million bucks in new money plays out:
In week one, it buys you a new house
In week two, it buys you a new car
In week three, it buys you a new friday
In week four, it buys you a restaurant meal
In week five, it buys you a newspaper
That is a necessarily exaggerated example, but the beneficiaries of newly inflated money are those that first get to use it. And that is the banks. This is all entirely by design; the true purpose of having a central bank and a fiat currency.
This is part of the issue. The other part is that no one has any incentive to spend money, which can cause a recession. You can either 100 units of something today, or buy 110 units of it tomorrow. This gives you a very strong incentive to wait and not spend money. This means that no one buys anything, so no one needs to make or manufacture anything. People lose their jobs, so they don't have money, so they can't buy things... and so on.
What do you mean "higher quality"? Almost everything everyone buys is something they don't need. I would guess that almost everyone using Hacker News produces things people don't need. No one needs Google or Amazon or whatever your favorite tech company is.... The economy is built on things people don't need.
The problem is that if I won't buy it for $100 today because I can buy it for $50 tomorrow, I won't buy it for $50 tomorrow because I can buy it for $25 the next day, so you NEVER buy an iPhone
Because it is completely unrealistic and total rubbish. That's why you have a hard time believing it.
Of course, all those who insist that inflation is a superior state can't explain the economic effects of everyone deciding to purchase today before the prices go up, leading to much weaker demand and production in the future.
Bringing forward spending excessively is just as problematic as send it backward into the future.
>You can either 100 units of something today, or buy 110 units of it tomorrow.
People make this kind of tradeoff all the time. I can either purchase a product for $100 from Best Buy, or, I can wait for two days and get the same product for $80 from amazon (or $83.99 and get it the next day).
There are times when I choose to be prudent and save the extra cash and wait 48 hours until the amazon package shows up. Other times, I would prefer the product sooner, rather than later and spend more money for the item.
They weren't throwing nearly enough cash out the window to make up for everyone suddenly wanting to hold more money. NGDP still crashed. Inflation dropped. The spread on inflation-indexed Treasury bonds warned that monetary policy was far too tight and the market knew it and was signalling this well in advance. Low interest rates do not mean loose money... oh, never mind, everyone just needs to go read The Money Illusion.
Think about technology. Every day, the cost of a new computer drops by $0.27 on average, let us say, or about $100 per year. Last year's models have a $100 discount, three-year-old machines have a $300 discount, five-year-old or older machines are bargain basement or even negative value (you have to pay someone to haul them away for recycling).
Every day, your money increases relative to the value of computers. Every day, when you wake up, you face an economic choice: You could buy that new machine today, and have it today, or you could buy it tomorrow, and have the new machine and $0.27 left in your pocket.
By your logic, everyone would always choose to postpone buying a computer.
Yet people buy new computers all the time, and have for several decades. How can you explain that? It's a real deflationary market that doesn't have this problem.
Isn't the value(not necessarily the price) of a currency the size of the market in which it trades divided by the number of units of currency in circulation.
If the market reduces because of a lack of investment, wouldn't the currency reduce because you hold the same proportion of a smaller thing, creating an incentive to stop negative growth.
There is also the factor of the OP's so-called CryptoBarons. Money is just an idea until you actually spend it. If there are a number of people living it up because they got a bunch of bitcoin really early the result would be essentially another form of bitcoin creation. Those CryptoBarons would be adding currency into circulation as they spend, currency that was effectively frozen before that point.
I'm not sure what will happen in the end, but it will certainly be an interesting ride.
Yeah, there is nothing stopping "bytecoins" if early bitcoin holders hoard too much. Same as with dollars and bankers. As long as the system produces more value than the barons seize, people will get value from the system.
Person A: one who gives Bitcoins in exchange for Widgets.
Person B: one who gives Widgets in exchange for Bitcoins.
Notice the symmetry. The name buyer and seller are arbitrary designations depending on what you consider the currency and what you consider the good being sold.
The inflation/deflation symmetry exists but it is not in the same terms. Deflation for bitcoins is the same as inflation for widgets. The widget holders are desperate to trade their widgets for bitcoins since their widgets's purchasing power is decreasing, but bitcoin holders are reluctant to buy widgets since their value is decreasing.
Hoarding is a derogatory term, intended to evoke an emotional response from the reader. I prefer the term "saving".
> Why lend, why build new companies, when simply storing it is more than enough? Take shocks such as bubbles and demand-side crises.
Most bitcoin proponents to indeed reject Keyensian, demand-side economics.
I, for one, think entrepreneurs would typically benefit from not relying on debt.
>capitalism[...] needs inflation, feeds from it
Increasing the money supply helps one class of people: the bankers. It doesn't help the middle class, it doesn't help entrepreneurs, and it definitely doesn't help the common person. It's an insidious hidden tax.
Increasing the money supply helps one class of people: the bankers. It doesn't help the middle class, it doesn't help entrepreneurs, and it definitely doesn't help the common person. It's an insidious hidden tax.
I don't understand how something completely unsupported by the data is repeated as truth.
Historically, deflation is disastrous for everyone, and high inflation also disastrous for everyone. Moderate inflation has the effect of redistributing wealth from capital to work, and tight money the effect of redistributing wealth from work to capital. Compare Australia (loose money) to the Eurozone or America or Japan (tight money) for example.
"Saving" fails to distinguish between different uses of assets.
"Investing" one's resources means putting them to work to create value. "Hoarding" them means the assets are as good as if they were buried in the ground. Investing is riskier and takes more work and more smarts, but any idiot can hoard.
What creates (or is more likely to create) more value? 1 million dollars distributed among promising startups, or 1 million dollars spent on mining gold? 1 billion dollars spent creating an airline, or 1 billion dollars spent on vast swaths of real estate?
inflation is an absolutely necessary force in an economy; without inflation there is little incentive to spend money and as a result there is no real liquidity.
tl;dr; money is useless if no one spends it, that's the whole point.
another way to think about it is a stock. if a stock is priced, and no one is buying or selling at that price, is that price really valid? whats to keep another actor in the economy from pricing a stock totally different if there is a 'dumb' actor wiling to buy at that price.
> inflation is an absolutely necessary force in an economy
I don't think there is good evidence of this "fact". Economics is not a hard science.
A few points, one, you can't argue that bitcoin deflates and therefore is worthless. The is an obvious inconsistency there. Second, imagine if bitcoin had built-in inflation. What would happen if someone would release bitcoin+ with inflation equal to zero (i.e. current bitcoin)? Obviously the "good money" would drive out the bad and everyone would save bitcoin+.
It's not related to your comment, but I'd also like to comment on the Ponzi scheme arguments. My question is, how would you design a cypto-currency to avoid to problem of early adopters getting wealthy (the new ripple has a different scheme, a terrible one, IMHO)? You have to introduce the currency somehow. If you are an early adopter of bitcoin, should you sell now at $100? Maybe you should have sold out when it got to $1.
there are no real facts in economics, but there are some pretty easy concepts to grasp. here is another explanation:
"Inflation is bad, but deflation is worse. The reason is that in a deflationary environment, no one spends money — because whatever you want to buy is sure to become cheaper in a few days or weeks. People hoard their cash, and spend it only begrudgingly, on absolute necessities" from https://medium.com/money-banking/2b5ef79482cb
> cryptobarons it will have created from its inner circle, through shameless hoarding.
This isn't 1941 England and bitcoins aren't sugar. Early adopters in the right thing often make money. Usually on HN they are called investors and congratulated. Sour grapes on missing out? (I did too)
I bought 30,000 bitcoins when they were worth less than a penny and sold them all when the value went up to $0.80. Lol, oops.
If you don't want to miss out again, buy Litecoins and Namecoins. Litecoin will never be worth as much as BTC (because there will be 80million of them as opposed to 20something million BTC) but it will slowly gain in value as it has some impressive features especially suited for online gaming payments with fast confirmation, secure online voting apps, or of course online gambling.
Litecoin is presently $1.30/each I see that going up to $4 at least by end of year now that more people are using it.
You are assuming that the demand for any cryptocurrency responds linearly to the completely arbitrary total "quantity" assigned: Litecoin can't be worth more than Bitcoin because there are more units of them. That's simply not true.
I am a fan of cryptocurrency in principle, but not of this particular oversimplification that was borrowed from some very sloppy thinking on the part of gold enthusiasts.
Limited supply does not reliably ensure certain price behavior independent of demand.
Read about namecoin here: http://dot-bit.org/Main_Page
It works perfectly as an open DNS p2p system, a decentralized p2p magnet tracker (think pirate bay but impossible to shut down), secure online voting, plenty of other possible uses.
There's also PPcoin a low energy coin compatible with BTC miners that's getting more popular.
Another advantage to Litecoin is you don't see it in the news everyday with the words 'Drugs' and 'Blackmarket' beside it, meaning correspondent banks will still deal with you if you want to set up an exchange whereas a lot of banks now are dumping bitcoin startups out of paranoia
>>Another advantage to Litecoin is you don't see it in the news everyday with the words 'Drugs' and 'Blackmarket' beside it...
You should qualify that with the word "yet". Is there anything in Litecoin's design that doesn't allow it to be used for drugs and by black markets? No. Honestly, Litecoin doesn't even have that going for it. Acceptance as an actual currency is the difference between a cryptocurrency becoming a legitimate investment versus a speculative pump-and-dump scheme.
I assume that mining will tend to be modestly profitable. As Bitcoin scales up and as the reward goes down, either it will have to increase transaction fees and use an enormous amount of energy, or the mining reward will be too low compared to Bitcoin's value, there won't be enough miners, and 51% attacks will start to be profitable.
This isn't a problem for PPcoin, which gradually transitions to proof-of-stake instead of proof-of-work. It seems to me like it'd be more viable as a major currency.
I'm sure there are a lot of other "oops" and "fuck" moments in many bitcoin watchers' moments. If you can laugh about it, then more power to you. From what I've read, when they first came out, they were very hard to obtain and people were actually excluded from it (is this true?), so someone must have seen the value. I first came across it on github in late 2009 when searching for project ideas but skipped over it as some type of scam. Others only saw value in building bitcoin apps, rather than simply holding the coins.
You are espousing one form of economics which many consider unsustainable.
Regardless, many assets are deflationary. Rich people buy real estate and commodities because they are deflationary, or at least not inflationary. There is nothing wrong with assets that grow or maintain value.
Bitcoin is a liquid and easily transferrable deflationary value store, just like gold. Telling people they should submit to inflation for the greater good is ridiculous. Inflation works because it keeps those too poor to have real assets on the gerbil wheel. The wealthy (or smart) just store their money in non-inflationary assets and sit pretty.
Besides, if you can't get better than a 4% return, you probably shouldn't be investing in whatever it is you're considering anyhow.
Sustainability is really the achilles heel of inflationary economics. The Earth is finite. Exponential growth cannot continue forever. When a steady state is reached, that's apocalyptic to inflationary money systems since debts all the sudden can never be repaid.
Edit: I don't think space colonization matters here. Sure, it may be possible. But Mars is sufficiently far from Earth and the energy cost of transport sufficiently high that a populated Mars would effectively be an entirely separate economy for everything but intangibles. I don't think a Mars colony would permit Earthly exponential growth to continue, even though Martian exponential growth could occur for quite some time. (Until Mars' own unique limits were reached.)
People will find plenty of ways to kill each other before the Earth's resources are exhausted. We have a billion year energy supply and raw materials are never lost, only converted from one form to more annoying forms.
- Inflation does not help debtors, unless they don't pay interest. Inflation is added to interest rates, so it has no effect. Inflation only helps debtors if they have a fixed interest rate and inflation goes up, which clearly not desirable or sustainable over a long period. In fact, inflation encourages debt, which creates a further enslaves debtor class and enriches capital holders.
- Inflation does not hurt capital holders. Anyone with sufficient capital holds assets that are not inflationary, such as gold or real estate.
- Price inflation hurts wage earners because real wages drop rapidly and requires nominal "raises" which creates a false reward, thus the hamster wheel. Got that 10% raise after 3 years? Congratulation, you make the same amount of real wage. Further, low wage earners can not afford or don't have the savvy to purchase inflation resistant assets, so what little they do have either depreciates or is inflated, thus the hamster wheel.
I may sound like a Marxist, but I am not. I believe in the free market and real currency, not the modern mess we have.
You are saying that there won't be any growth because people will hoard all money because they want to participate in the (non-existing) growth? Isn't that self-contradictory?
I think you are wrong. Imagine living in such an economy and facing the choice between hoarding (4% deflationary gain) and a good investment (10% gain). What would you do? All I see happening is that less money is being spent on bad investments due to artificially low interest rates as it happens to today.
You totally wrong, and the reason you are wrong, is because you do not understand growth. Like... totally.
Yes, I'm arrogant and I'll deal with an idealized model where the same set of resources is transformed into final goods, but bear with me.
In order to get a real growth of 4% be it per year or per century in such a scenario, you need to find a better use of resources so that with the same resources you may produce an output which is 4% greater than before.
Which is the same as saying the the only way to grow is to find ways to produce final goods cheaper.
And because production is cheaper, more goods could be sold but.. entrepreneurs will still make a profit. Pretty much the same.
And the fact that final goods get cheaper means just that.. That goods get cheaper.
And you will not get rich by just holding bitcoins, or any other fixed supply money. Yes, you will be able to get more stuff for but only because the stuff get cheaper..
You'll still hold the same fraction of total purchasing power that as the day you decided to "hoard" your money for a while.
That's not what I call getting rich, and that's why loans and interest make sense and are safe with bitcoin.
> In order to get a real growth of 4% be it per year or per century in such a scenario, you need to find a better use of resources so that with the same resources you may produce an output which is 4% greater than before
Let's work through an example. I buy 100 seeds for $1 each. I plant them, let them grow, and harvest the result. I now have 104 seeds. My real growth is 4%!
Now I want to sell the seeds back to recoup my investment. But I discover that prices have dropped by 4%: seeds now go for 96 cents apiece. My 104 seeds now are worth $99.84! I would have been better off not buying seeds at all, and instead just holding on to my money. Real output is reduced.
Do you suppose that there is some sort of seed-factory producing the seeds at no cost and selling them into the market, or do the other seeds in the market come from plants which produce only 4% y/o/y growth in the number of seeds? In the latter case, has the entire seed-planting industry taken a loss over the last year? And if so, would less people plant the seeds this year, so that planting the seeds would again be profitable (assuming demand is static relative to decreased production)?
Do the seeds or plants have any purpose other than the production of more seeds to eventually be sold?
I like using seeds as an example, because they make a nice toy model. They last a long time, and more of them can be produced through capital goods (that is, other seeds) and labor alone.
In this model, seeds have no inherent depreciation, and our hero would have bought them from a seller, e.g. a storefront. In a deflationary environment, the nominal value of capital goods decreases, so anyone holding seeds, whether as inventory (the seed store) or investment (planted in the ground), would take a loss.
You are correct that, given deflationary expectations, fewer people would plant seeds. That is exactly what this scenario is meant to illustrate. Fewer people doing work is called unemployment!
And to your last question, let us say that seeds can be used as food. As seed suppliers drop out of the market, this inescapable demand for food will indeed drive their price up. Deflationary spirals do not terminate in starvation: equilibrium is reached, because of basic necessities. But the equilibrium is at a lower output level, and with higher unemployment.
In a case where monetary supply is fixed (ie gold), if you hold on to it for a period of time, you will get more goods for it than now. That 'more' will correspond to economic growth over the period. You will have the same fraction of the purchasing power pie as before, but now the pie is larger. Does not look like a win to me, but this is the judgement call for the reader.
PS. Yes, I am simplifying and ignoring some thing like velocity of money and fluctuations in economic output, and growth of capital, human resources, and technology.
Clearly, since new land isn't being created anymore, everyone is going to shamelessly hoard real estate. Why would anyone ever buy or sell a house anymore? REAL ESTATE IS ALL A BIG DEFLATIONARY SCAM- You heard it here first.
UK land rights are much different then the US owing to their history of kings and lords. You don't pay property tax on the land you hold. As a result there isn't much incentive to ever sell your land. Since other people still want to live on your land though you set up a deal so that they can build houses and live on that land, but they have to pay you rent. You are effectively a landlord in the truest sense of the word.
 If you rent out your land you start paying property tax, the government wants there own piece of that pie.
This is not false but the majority of people and properties are freehold, not leasehold. Around 3 million properties are leasehold, the majority are flats, with 1 million being houses. There are about 25 million residential properties overall, so leasehold is only about 12% of the market.
Plus, in the UK there are certainly liabilities for holding land that has a residential property on it. As the landowner, you'll be paying the council tax on it if you have no tenants, and with many councils now, that'll be a more expensive rate too (currently 150% of the standard rate for unoccupied property in my area). Of course, council tax isn't really a property tax, though it can act like one in some situations and basically covers similar things that US property taxes do.
that is where it all originates from: our property/land laws are all built on medieval law, as we haven't had a revolution to shake things up!
houses are nearly always freeholds, whereas flats (apartments) are normally leaseholds, as it would be unfair if one flat owning tenant has land rights over the others.
recently the government has given leaseholders the right to purchase the freehold from their landlord (if they all agree), but this involves setting up a company that all leaseholders are shareholders/directors of, with all the rights and responsibilities that that entails.
Interesting- But in that case the problem (probably) is that you have to pay super high taxes when you sell land (or they wouldn't have such weird arrangements.) This is a separate issue from the deflationary aspects of land I think.
The realtors were lying to you when they said real estate always goes up in value. ;-)
Jokes aside, any sort of investing in illiquid assets is fraught with risks. We are talking about a currency here which by definition requires liquidity to be useful, these are two very different things.
Prices change to reflect new knowledge, not "very old knowledge". Everyone buying bitcoins knows the supply growth path, and this expectation is priced in when non-stupid traders buy or sell them.
It's not like ~2035 (or whatever) rolls around and everyone's like "Holy crap! There aren't going to be any more of these! Better quadruple my bids!" No -- there's no profit to be made simply from the fact of supply increase stopping at some point, not when the entire market knows it as well.
So you can't really compare it to a situation in which a government (or affiliated central agency) controls the money supply, changing its mind at future dates, to arbitrarily hold the supply steady when it had been growing before -- which is what is required to get the results you've described.
If you want to take the red pill: Please read F.A Hayek's critique of "The Paradox of Savings" (http://mises.org/daily/2804) for a refutation of inflationist monetary policy. This was an essay he wrote during the debate with Keynes and others, explaining the flaws in the Keynesian theories. It was written in the 1930s , but explains better than any other theory the dynamics of a fixed money supply currency like bitcoin vs a constantly inflating money supply.
Deflation generally benefits almost everyone. Things get cheaper and cheaper over time, while the amount of money you make stays the same. Technology is a beautiful example of this. Almost every year technology gets cheaper and cheaper, and better and better for the same amount of money spent. And of course this is great for everyone and I don't think many would dispute that.
Imagine a world where that wasn't true. Imagine you had to spend more and more every year just to get the same quality of phone or computer or TV. Now ideally, and depending on what's causing the inflation, your income would increase at exactly the same amount and so it wouldn't make a difference. The same quality TV would cost the same percent of your wage in 1960 as it would in 2013.
But with deflation it's the opposite. Your income will (on average) remain the same, since the amount of money in the economy hasn't changed and it's being divided over the same number of people. But prices will go down due to the economy growing, increasing efficiency, technological improvements, and all that good stuff.
You may see a slight flaw in my argument. Presumably the same amount of stuff is being produced in both economies, regardless how the currency is changing in value over time, and presumably there are the same amount of people to receive all the stuff being produced. So how can people in the deflationary economy be richer, on average, than people in the inflationary one?
Well on average, they aren't. Inflation as you are talking about it is caused by the money supply increasing. Usually due to the government printing more. Whoever gets the money first is suddenly richer, because prices haven't increased in response to inflation yet. The amount of money they have relative to everyone else has increased. Therefore everyone else has become poorer relative to them.
Only on average does everything stay the same, but it's a zero sum game where for one person to benefit, someone else has to lose. The amount of goods in the economy hasn't changed. But the person with more money (obtained through printing money) gets a bigger piece of the pie and therefore everyone else gets less.
Inflation is just a really confusing, inefficient, and indirect form of wealth redistribution. Whoever gets the printed money obviously gets to benefit from it, and everyone else is therefore poorer, including your entrepreneurs and investors and consumers and everyone else.
The only way this isn't true is if the money is distributed perfectly equally so the percentage everyone has is exactly the same as before. However this is not the case in the real world at all.
> Things get cheaper and cheaper over time, while the amount of money you make stays the same.
This can't be universally true. If food gets continually cheaper, unless the cost of owning land and farming it goes down by the same amount, farmers must eventually make less money than before (or be driven out of business entirely).
And I don't quite buy the comparison between technological progress (where things get cheaper due to massive amounts of competition and research) and switching to a fiat currency which is arbitrarily limited (bitcoin). Using bitcoin doesn't guarantee technological progress.
> Inflation as you are talking about it is caused by the money supply increasing. Usually due to the government printing more. Whoever gets the money first is suddenly richer, because prices haven't increased in response to inflation yet. The amount of money they have relative to everyone else has increased. Therefore everyone else has become poorer relative to them.
Yes, printing money is in effect a government tax for usage of that currency.
>This can't be universally true. If food gets continually cheaper, unless the cost of owning land and farming it goes down by the same amount, farmers must eventually make less money than before (or be driven out of business entirely).
Or the same farmer could be producing more food than before, but at a reduced cost. He would make the same amount but the price of food would be lower.
>And I don't quite buy the comparison between technological progress (where things get cheaper due to massive amounts of competition and research) and switching to a fiat currency which is arbitrarily limited (bitcoin). Using bitcoin doesn't guarantee technological progress.
No but technological and economic progress is almost guaranteed anyways. A currency like bitcoin means you actually get the reward from it in the form of cheaper prices over time.
>Yes, printing money is in effect a government tax for usage of that currency.
Exactly. In that sense bitcoin and currencies like it are free of that form of taxation which is a good thing for everyone using them.
I have never understood the inflation is good argument.
Looking at PCs, DVD players, etc. it seems price deflation has been great for the consumer and overall "market". Perhaps it has been bad for the manufacturers, but the overall society has benefited from the deflation of those goods.
Electronics become cheaper due to technological improvements, that is, positive supply shocks. That means our real wealth is increasing. That's a good thing!
Electronics might also became cheaper due to, say, someone setting money on fire, so there's less to go around. Clearly in this case our real wealth would not be increasing, so it's not good. But it's not obvious why it should be bad, either.
The reason it's bad is due to our psychology. If the money supply shrinks (and nothing else changes), prices and wages must both go down. But people hate the idea of negotiating a lower wage, so instead wage drops are accomplished through layoffs and unemployment. That's bad because it means that people aren't working: the economy's real output is reduced.
So inflation provides a buffer that allows the economy to adjust wages downwards in a way that we find more palatable than negotiated nominal wage decreases.
The price of Bitcoin won't stabilise. The best you could hope for would be a similar volatility to a commodity like gold or silver. So products and services will never be priced in Bitcoin while there is a better alternative like the dollar which is relatively stable.
A mistake 'economists' make with bitcoin is to draw macroecomic conclusions based on theories suited to single currency economies. Actually we need theories that allow for multiple currencies circulating that have different strengths to understand the effects.
Tl;dr Bitcoin won't change the way we price things, it just provides another option to transfer wealth.
What we're seeing there is competitive devaluations through printing and recently confiscations. Fixed supply commodities like gold fare well, but their existence doesn't drag the world into a deflationary spiral. Bitcoin's existence won't have macroeconomic implications either.
I believe we'll see some form of inflation through the introduction of new currencies. when the price (ie. deflation) of one cryptocurrency becomes too high other currencies will jump in. the outcome however is unclear, because we are now at an unprecedented point in history. because of the openness of the bitcoin protocol everybody has now the possibility to create his own currency - and the price of adopting a new currency will become marginal for businesses, thanks to new APIs. I have no idea what the long term equilibrium will be.
Since Bitcoin can be subdivided and is used (rather than held) primarily as a medium of exchange, there's no reason for increased price in dollars to decrease its use as a medium of exchange... let alone a store of value. Unfortunately.
So you claim hoarding will kill Bitcoin. You are wrong for a very simple reason: the ultimate goal of hoarders is to eventually profit from their fortunes by spending it. They may spend slowly, but they will spend it, and this spending is what will ("should", to sound less pretentious) keep the Bitcoin economy alive.
Basically Bitcoin hoarders are not going to sit on their fortunes and passively watch Bitcoin dies.
"My question is, what then will happen when Bitcoin stabilizes, that is, when the time to new coin mined approaches practically infinity? Let's assume the global economy grows at 4% per year. Do Bitcoin's proponents believe a constant 4% deflation rate will be somehow compatible with capitalism? Why lend, why build new companies, when simply storing it is more than enough? Take shocks such as bubbles and demand-side crises. Could a economy based on Bitcoin survive them, and not crash inevitably into a deflationary spiral? I claim it won't."
This makes the assumption that people won't make their own forks of bitcoin. If there's a shortage of bitcoins, and not enough is being mined to meet demand, I think that will give more incentive to people to make their own forks of the currency. Maybe will see various communities forming their own currencies for their own trading purposes.
Re: 3. The deflationary spiral doesn't end in a whole bunch of people dying of hunger, exactly, it ends with them all starting their own subsistence farms rather than spending on food, and making their own clothing rather than buying pre-made. Basically it retards progress, sends people back into the dark ages where they have to fend for themselves. I can't imagine a country ever allowing that to happen, so you had better believe that they wouldn't allow something as deflationary as bitcoin to become the de-facto currency. When you need a loan, the banks will be giving you something other than bitcoins. So I don't worry too much about this particular dystopia, it will never come about.
Surely the problem solves itself - if nobody invests, then there is no growth. If there is somehow growth without investment (because everyone is hoarding currency)... then that's a problem I'd like to have.
Bitcoin will never be a government backed cryptocurrency they will make their own like Canada is doing. Governments want to track all money, and be able to print trillions to fight illegal wars bitcoin/gold standard prevent that behaviour.
To me bitcoin is excellent for e-commerce because of it's secure signatures you can use for escrow, proof of payment, decentralization so nobody can interfere with your commerce and safety for me as a merchant to prevent fraud.
You seem to misunderstand certain aspects. If economy will grow at 4% it means that people get on avarage 4% on their investment be that work, assets, capital. Its still beneficial for them. Even with deflation at this assumed 4% they will simply invest in things that have better ratio of roi/risk.
Deflation is not obviously bad. We had deflation during the whole industrial revolution and things were running smooth. If people hold on to savings rather than invest suppliers will quote higher prices in order to put the money back into system or hoard the money for themselves.
One thing for sure. You wont be robbed out of thin air and that whats inflation is for. Central bank has no money for retirment... fiiiine, let print more -> market will stabilize itself.
Plus if the value of bitcoin goes sky high. It will be lucrative to mine again. It has the mechanisms of selfhealing.
The deflationary nature of bitcoin is by design, yes, but the thing with cryptocurrencies is - if it's somehow unsucessful, people can either ditch the currency and make a new one, or if most of the miners agree by consensu, even change the bitcoin protocol with its deflationary nature itself.
For example, if the economy will be in such a terrible state thanks to the deflation, somebody can do a fork of bitcoin that will not have halved mining reward (and thus not having finite number of bitcoins in existence), and if the miners will jump to this new version (and probably clients, too, not sure about that), this new currency will be used as easily as the old bitcoin.
If I am wrong technically, please correct me.
The nice thing about bitcoin is - nobody enforces anything.
the need for inflation is a widespread belief, not a fact. Of course people would still spend their coins. How would they buy services otherwise? what monetarists do not understand is that if you could save money, that would free many resources now used to hedge against inflation, and they would be available to better use and cheaply. Furthermore we all would be inflation-protected, and not just the rich who can afford to do investment. Furthermore deflation revalue your salary, and you should not be fighting with your boss for a payment increase, but he would have to give that fight you to decrease it. We wouldn't have an economy based on the ever growing, ever spending
while Bitcoin is deflationary due to monopoly, crypto-currency is inflationary.
Bitcoin's value is not held by how hard it is to mine them. It's held by how bad people want to use crypto-currency for trading behaviours.
When bitcoin's value become too high to be used for normal trading, it's value will decrease, simply because people will invent new types of crypto-currency(i.e litecoin, namecoin) to replace its function. When less people using bitcoins, no matter how 'hard' its mining algorithm gets, its price will drop.
Therefore crypto-currency is inflationary, and that's why Bitcoin will become inflationary eventually.
It's thoughtful yet mistaken posts like this one that make it clear how early we still are in the Bitcoin game.
Capitalism doesn't need inflation. Capitalism works best with a hard currency. Money gaining 4% per year in purchasing power isn't "deflation". The notion of "4% growth" is ill-posed.
I could back these statements up with logic and evidence, but experience shows that virtually no amount of rational argument ever convinces anyone of these points. Luckily, rather than arguing till we are hoarse, those of us who have swallowed the hard-money red pill can now put our money where our mouth is and buy some bitcoins.
That is a good point and that is a big weakness of bitcoin. Fact of the matter is this crazy appreciation is not very good for the currency. It encourages hoarding and discourages commerce. For all the stories about appreciation I do not hear many stories about bitcoin actually being used as a currency. And why would it be. Most people holding it believe it will go up in the future. Why would they spend their bitcoins on commerce if they think those bitcoins will be worth ten times their value in the future.
Currently bitcoin is not a currency but a very speculative investment.
inflation vs. deflation: I have three points for your consideration
1) High tech sector has been experiencing massive deflation for decades and is thriving. Why? Is deflation really that bad when it comes from productivity? We know deflation due to massive decrease in money supply or velocity is bad, but what is wrong with slow, steady deflation from productivity?
2) With 2-3% steady deflation, won't interest rates adjust? People will lend their money out to earn a better risk adjusted rate than deflation. There isn't some magical number or percentage where people will start or stop lending. It's more like behavioral economics where people have several choices at different risk profiles.
3) The biggest proponent for an inflationary system is the banking system and economists who are funded/trained/selected by the banking system. This casts a lot of doubt on 'inflation is bad for lenders' statement. In a deflationary system, productivity gains go to the consumers (via lower prices). In an inflationary system, productivity gains go to capital owners (via debt and higher prices).
The US experienced very strong but volatile economic growth under a capitalistic fixed currency system (gold standard) that had periods of deflation and inflation in the 19th century. There is no historical basis that shows that capitalism needs inflation.
One thing to consider: In 30-50 years the world population starts shrinking, however, amount of bitcoins will stay the same. Which in turn is likely to inflate it's value and possibly offset the deflation.
I added a Bitcoin purchase option to Scribophile to test the waters. But I'm interested in a Bitcoin economy, not a USD cash alternative--the situation where a Bitcoin has its own value, not a value dependent on a different currency. For that reason, I decided to fix the price of an upgrade to 2 BTC, not peg it to the dollar like most other sites do.
Unfortunately it seems like that's just not going to work at this point. I set the price at 2 BTC when the exchange rate was $35--like two weeks ago or so. That meant the BTC membership price was about in line with the USD price. But in a few weeks, the value of a Bitcoin has tripled. Since most people using BTC ultimately want to convert it to dollars, this insane instability makes BTC impossible to use for anyone interested in a pure BTC economy. Too bad.
One reason debt-backed currencies are relatively stable (vs stocks, commodities, and bitcoin) is that they are pegged to an interest rate, in the case of the dollar the (at least what used to be) the risk-free rate of return. You can even think of them as derivatives of the interest rate, for a loose definition of derivative.
This bounds their volatility in a way that bitcoin can't, and makes me wonder if the lack of a similar stabilizing mechanism isn't a long-term flaw in bitcoin's design.
The only way I can see bitcoin ever reaching a similar level of stability is for its market cap to reach a level such that it stabilizes under sheer weight and momentum rather than any built-in mechanic, which could require exceeding that of all other currencies combined (making speculation and market manipulation difficult or impossible), no small feat.
The lack of a stabilizing mechanism is a feature, not a bug. The risk-free rate of return on dollars only exists because the central authority possesses compulsive force of taxation and/or inflationary power, to pay out the return that it guarantees. Bitcoin is of course designed without any central authorities, inflationary power, or compulsive force.
Flipping around the question, how could a risk-free rate of return exist in Bitcoin at all? Nobody has the power to create more currency or forcibly acquire some in order to satisfy a promised payout.
I believe the proper course of action is to make a calculation, involving:
1. a given velocity of money and thus a derived desirable monetary volume for a given economic condition
2. a projected percentage of that economic activity that makes sense in bitcoin
3. a projected economic condition
Even if there is no value in BTC as a medium of account, the quantity of economic transfer it could plausibly come to represent alone has a certain value.
I believe if/when it does crash there will be an immediate resurgence in the price per BTC, driven by the people who wanted to invest but thought the price was too high. This is why i'm not all that scared investing rather large sums of money into the Bitcoin economy.
It's not just about fees, Paypal has banned half the world from using their services (India, China) and dictates what you're allowed to sell, arbitrarily seizes money for months on end, and can be easily frauded with no protection for merchants.
You also don't have to trust any exchange, you can walk to your local coffee shop and trade for cash off the books with anybody from localbitcoins.com
In a common scenario where Paypal freezes your account for dubious reasons and then refuses to answer your telephone calls or emails, Bitcoin comes out ahead.
In another common scenario where a Senator named Lieberman makes a press release accusing Wikileaks of criminal activity, and other payment processors simply refuse to conduct transactions for you, Bitcoin also comes out ahead.
Don't worry, from what I've heard Coinbase are quite capable of freezing accounts for dubious reasons, along with causing purchases to fail by delaying outgoing payments for days and other similar fun activities.
Precisely. No risk at all. You don't even have to send your stuff to your client, because you've already been paid.
Bitcoins right now puts the consumer / supplier relationship upside down. The supplier is already right... not the customer. I wonder if any customers will prefer to paying BTC over Paypal, especially after they've been defrauded a few times.
"A new domain name has been 10 USD from Namecheap for the last decade. A new domain name in BTC however, has varied between 1 BTC and 0.1 BTC in just the past two months."
I agree that the value of bitcoins changes faster than other currencies. However, the fact remains that the prices for all currencies change. Domain names are the exception, but inflation adjusts prices upwards of almost all commodities.
"BTC as a proxy for USD is still useful IMO, it gives us a way to avoid Paypal and other online processors. But for it to be a USD replacement, it needs to first settle down and stabilize."
I disagree with your definition of "proxy". Bitcoin fits the definition of currency, not "proxy-currency" in my opinion. It's true that the currency will benefit when it's value will stabilize, as the currency is currently being adopted.
USD changes at a rate of 3% per year, according to the CPI.
Bitcoin is currently changing at a rate of 50% per month.
Volatility is a bad thing for currency. Bitcoin has too much of it right now.
And sorry, as long as BTC keeps changing by 50%+ per month, it will only be a proxy currency. If BTC is to become a true currency, it will need to settle down to ~3% / year volatility, like the other major currencies of the world.
Yeah, this. Right now, BTC is more of a speculative investment than it is a currency. You just can't have insane volatility or even too much uni-directional movement in your medium of exchange.
For a merchant to offer something at a particular BTC price, that merchant would have to update its prices at least daily, if not more so. This to avoid losing money or overcharging himself out of the market, depending on the direction of the currency. It's just not practical at this point.
And, it's a catch-22: As long as it's a speculative investment, it's likely to remain volatile. And, as long as it remains volatile, it's likely to remain a speculative investment vs. a "true" currency.
Thats a bit of a logical fallacy. Just because modern currencies tend to not exhibit volatility, doesn't mean its a bad trait for a currency. In the past, ideas like "menu costs" might make it less favorable because of sticky prices not aligning with a free floating currency, but that isn't as much of an issue anymore. The real issue would be if the underlying fundamentals, IE the supply and demand of the currency, didn't align, making the volatility due to human expectations and not genuine factors.
While I think that a good deal of the BTC volatility is due to human expectations, it just bothers me when people try and use older macro ideas when explaining Bitcoin.
Uh, do you realize big companies already put big hedges for the value of existing currencies to minimize the swings in value? That will not be possible with bitcoins with the current volatility since it will be way too expensive. That is bad for business and therefore also bad for the economy and the currency.
That alone doesn't prevent something from being a currency, it simply changes who prefers to use the currency, altering its supply and demand. Currencies have many characteristics and a "store of value" is just one. A volatile currency, may make a poor store of value and thus less favorable to companies that hold large cash accounts (the ones who have to do the hedging you mention), but this volatility may also make it desirable to other economic actors. By accurately reflecting the supply and demand (IE not having an artificially manipulated price as many global currencies do) bitcoin makes a much stronger medium of exchange than many other currencies in the world. The growing interest out of Cyprus is a great indication of this.
My main point was just that for a traditional controlled currency, volatility would be bad, but for bitcoins, which rely on supply and demand to set the price (this includes speculative demand), volatility is not necessarily a bad thing.
Have you read my post? I even mentioned "menu costs" in my response.
The issue is not that the currency has volatility, but that they refuse to peg the value. Scribophile is facing menu costs, but the menu costs are of their own creation. Simply allowing their prices to fluctuate with value would solve the problem. My point was that technology can make volatility a much smaller issue than it was in the past, hence why using old currency paradigms hinders thoughtful examination of the costs and benefits of a currency like bitcoin.
Give it time. I happen to think that bitcoin is still stabilizing. Whether it will stabilize at an even higher price than it is now, or "crash" and stabilize at a much lower price, I think it will eventually stabilize.
Isn't the point of bitcoin that its monetary supply is disconnected from economic activity? I thought the "mining" is supposed to be analogous to actual gold mining, so that increases in supply happen very slowly, get more difficult over time, and eventually cease completely. Obviously, many (perhaps most) people think that centralized government currencies (where the government can essentially increase the money supply at a whim) is the best system, but the point of bitcoin is to challenge that system.
Some people think the point of Bitcoin is decentralized detection of double spending and consider the deflationary goldbug mentality a flaw. One could imagine a decentralized inflationary cryptocurrency that uses a closed-loop algorithm to adjust the monetary supply (perhaps in response to difficulty, since the system already measures that). Of course, a stable exchange rate doesn't make speculators rich.
Right now a landgrab is going on. People want to hold some btc. At some point in the future, when everyone knows about btc and purchased as much as they want/can, the price will be more stable and grows only as much as new wealth is created by the global economy and new people are born.
Out of curiosity, did you see any uptake on that option? A lot of places seem to be adding the BTC option lately, but I haven't managed to find any good sources on how much use there is once the option is provided.
It's interesting that the accounting costs more than they bring in (though this is something that could obviously change with increased stability in the BTC/USD rate / increased volume / better processes). Somewhat concerning, considering that they host what seems to be one of the most active/vocal bitcoin communities out there.
1. The site audience tends to be a little older and not very tech-savvy, so Bitcoin isn't something that many are interested in comprehending.
2. Since the price was fixed at 2BTC a few weeks ago when 1BTC~=35USD, and now 1BTC~=100USD, people will see this is a raw deal. (The USD price for a membership is $65.)
It's #2 that's the hard part. I'm not interested in accepting BTC just so I can convert it to USD, but since everyone's so focused on the BTC->USD exchange rate as the measure of value for BTC, and since the rate is so insanely volatile, it's impossible for a merchant to fix a "fair" price without auto-adjusting the BTC price to the USD exchange rate.
Yeah but that's what I don't want to do--because that makes Bitcoin just a USD proxy, not a currency and economy of its own. I'm interested in BTC as its own economy, but unfortunately the price instability and tendency of most users to exchange for USD in the end makes it impossible to explore that.
Logically speaking it doesn't make bitcoin a USD proxy, a non-currency or "not-a-economy" as you claimed. Fixing the bitcoin price to another currency is a good solution when the value of 1 bitcoin is changing rapidly, as it would take a lot of work to adjust it daily. Besides, you can fix the price to the average of multiple major currencies (like average of euro, American dollar and the British pound).
A currency can have an economy fully its own and still have prices pegged to another currency. There is a lot of historic precedent for that. You act like its an abhorant practice. Prices will stabalize as the BTC price approaches something more workable on a global scale, like $21,000,000/BTC
This feels kinda like a pump and dump to me. I don't mind articles/projects/sites that make use of bitcoins. But the frequency of posts on how much each bitcoin is worth feels like pennystocks/etc on an investing forum. People trying to get more people to buy in. To drive it up. So they can get out while it's high.
The whole "Cyprus people are getting into Bitcoin" narrative is a total lie as well. But I guess Bitcoin is a great learning opportunity for spotting Scams etc., as long as people don't lose too much money, it might even be beneficial.
Actually for me bitcoin proves just how few people can ACTUALLY spot a pyramid scheme or a pump and dump - instead resorting to calling everything that seems too good to be true a scam. It may work 99.9% of the time, but BTC is the false positive IMO.
I totally agree that the Cyprus thing is totally bogus though, journalists are uninformed and lazy as usual. The real reason is that it seems more and more likely that bitcoin will be the currency of the Internet in the future. And nothing else.
The fact that Bitcoin is touted as an alternative to untrustworthy -- because inflationary -- traditional currencies, while its exchange rate staggers around like an ice-skating drunk compared to those same traditional currencies, does not fill me with confidence.
"The real reason" for the current price hike is most likely http://www.google.com/trends/explore#q=bitcoin
meaning we are back in a super high interest in bitcoin phase. Maybe because that is because the world just realized the "currency of the Internet" thing, or it is just a hype, fueled by a lot of misleading promotion and lies. No use to discuss it though, we all will learn in 6+ months...
It doesn't really invalidate his statement though. The USD is not backed by anything (whether it was in the past or not is irrelevant), and aside from the fact that it's commonly accepted, has no more intrinsic value than Bitcoin.
While I'd like to believe you, a link to the "Cyprus lie" would be nice. :-)
I don't think "core bitcoin" users are scamming anyone. But at this point, the speed at which BTC has grown has triggered my "manipulation trigger". A decentralized currency is prone to manipulation... its not like there is an FCC out there to stop people from manipulating BTC.
That's incredibly stupid. They present no evidence, and here's the quote they lead with:
> “If I was looking for a store of value, I'd buy gold, wouldn't I?” Edward Castronova, a professor of telecommunications, and an expert on virtual worlds and currencies, told Ars. “It's a hell of a lot safer than Bitcoin.”
Castronova, have you ever heard of things like 'margins' or 'fungibility' or 'walking and chewing bubblegum'? You know, people can buy both bitcoins and gold - shocking as this may seem. The question is not 'are people physically on the island of Cyprus who would be buying gold instead buying bitcoins?', the question is 'on the margin, are people worldwide buying bitcoins because of Cyprus?'
Nor is pointing out the recent rise an objection. The rise over the past months to $30 was relatively slow and gradual. The rise to $50 and then $105 has been meteoric and directly correlates with the sudden Cyprus crisis. Bitcoin literally started with criticism of bank failures and bailouts (check out the first block, by Nakamoto, in the blockchain) and immunity to this sort of shit is one of its main selling points. The burden of proof is on anyone who thinks that Bitcoin has suddenly just sorta accidentally tripled for no reason at all relating to Cyprus.
All currencies are prone to manipulation. Spend a couple of months trading forex (even on paper) if you don't believe me. The columes involved in forex trading (last I looked something like 3 or 4 trillion USD/day equivalent) are way beyond the capacities of /any/ central bank to "manage" or manipulate in their own favour, and it's an over-the-counter trading system, so mostly-impossible to regulate.
So who and when is going to get out? And out where? To fiat currency that is controlled, inspected, can be frozen, taxed and stolen? Bitcoin grows like crazy because it is a money proved to work. It survived exchange hacks, stolen wallets, viruses, user mistakes, network-affecting software bugs and government seizures of bank deposits. It allows you to hold something in your pocket that nobody knows about and you can split it in 100 pieces and send to 100 people in different countries in a matter of seconds.
Bitcoin is not a promise of future delivery. Like William Gibson said, "The future is already here — it's just not very evenly distributed."
I worry that as Bitcoin's value rises, people are buying in not to use it as payment for services or goods, but simply as an investment vehicle. In principle, there's nothing wrong with this; currency trading is common and well-explored. The problem is that the value of a currency is supposed to also be somehow related to its utility in acquiring goods and services. When it is rarely used to that effect, people may reconsider their investment in the currency.
It'd also be interesting to look at the effects of deflation in the fledgling bitcoin economy, although the actual exchange of currency for goods and services is a bit small to judge this effectively.
I'm not a bitcoin fanboy - but I see this sentiment around a lot and I'm not sure I agree with it. The claim is that the value of a currency is supposed to also be somehow related to its utility in acquiring goods and services. And if this isn't the case - then people will go off it.
When was the last time someone acquired a good or service with an ounce of gold? Perhaps we shouldn't consider gold a currency? Well I'm fine with that. Bitcoin probably isn't a proper currency yet either (in the sense that people aren't exchanging much with it yet). But not being directly relatable to utility in exchange certainly hasn't hurt gold in recent history. So I don't see why necessarily it will be a problem for bitcoins.
Gold is a commodity; same with bitcoins. Not that there's anything wrong with that, but it isn't the same thing as a currency. Gold was only ever a currency when it was stamped by the issuing authority.
As a commodity, gold always had an intrinsic value separate from its value as a currency. So if the authority stamping the coin disappeared, I could always melt down the gold and sell it as a simple commodity.
In the case of bitcoins, they do not have a utility outside of their use as a medium of value exchange. You can't really melt them down and use them to make jewelry, build cables or any of the myriad other uses that gold has.
Of course gold's value is inflated because of its dual role as a value store and as a commodity with practical applications.
Even if gold loses favor as a value store, there will be some minimum boundary on its price based on its usefulness in practical applications. That is not true of bitcoin.
The GP was implying that bitcoin has a commodity value, which it does not. It merely has value as a means of exchange. What that means is that bitcoin does not benefit from same lower price boundary that gold does. Therefore, it is much riskier.
What good would bitcoins do for you after a Hurricane Katrina-like event when there is no communications network or electrical service to speak of? What about gold?
Commodities that are consumed are priced on the marginal cost of production. Saudi Arabia can pump oil for less than $5/barrel, but what drives the prices are the costs of fracked shale and frontier plays like UDW. Gold is the same. Generally, gold is found in sulfide mineralization deposits or in placer deposits (weathered ore bodies, ie nuggets in alluvial deposits). Most new mines are the former, which requires massive mining and ore treatment (on the order of grams of gold per ton of ore, which is then crushed and leached in acids). So it's expensive to produce. Usually it's found with silver and copper, and some miners will account for it after credits for selling those metals, but you can assume $800-1000 USD/oz for production costs after fully capitalizing the development of the mines, at least the last time I looked into it several years ago.
There's a lot of assumptions built in there... but it's besides the point: n% is infinitely better than 0% for any value of n > 0.
Also, the claim that "gold only became a currency when it was stamped" is wrong. The value of gold on the commodity markets today does include a value store component and none of it is stamped.
When the czar's family fled russia they didn't grab rubles, the grabbed jewels. Why? Because their currency was worth nothing but their jewels could be traded for value in a very transparent manner wherever they might end up.
I'd say that that utility is sufficiently valuable enough to allow BitCoin to survive. Just look at the precursors, like Hawala, and the more modern stuff like Western Union. If nothing else, BitCoin will find a niche like them (and possibly replace them).
Gold has been used as currency (medium of exchange) at multiple points in history. It's not now. People are trying to use bitcoin as a currency atm - but it's very difficult with its fluctuations in value. It may perhaps be more successful as a medium of exchange in the future - but that won't be for a while.
If I see a currency rising in value faster than Gold itself, I'm going to want to get in on the value.
Fact is, if I had "invested" in 100 BTC only 5 months ago when it was hovering around USD$10, that would have cost me about $1000. And now it would be worth $10000. There are not that many investments that have that kind of return in such a short time. You'd have to be dumb to believe that people aren't doing exactly this. You don't see 1000% returns and just ignore it and wonder about its utility. Right now, it's a volatile and risky currency exchange being intentionally used to ride the rising popularity into a cash la-la land.
At some point people are going to convert this toy back to a real-world currency and take their winnings home with them. I don't know what's going to happen then, but I don't believe it will be good. Perhaps 'stabilizing' would be a good optimistic name for it.
This is not rational thinking. Simply because something has gone up in the past does not mean it will continue to. The returns for the past 5 months have been insane, but that doesnt mean it was a good investment 5 months ago because thats based entirely on results oriented thinking. In a casino, if a roulette wheel hit black 10 times in a row, somebody letting it ride on black the whole way would have made a fortune, but that doesnt mean it would have been a good bet, it means the people making those bets got lucky. It also doesnt affect the chance of the wheel hitting red or black on the next spin, so it doesnt tell us anything about the future.
> In a casino, if a roulette wheel hit black 10 times in a row, somebody letting it ride on black the whole way would have made a fortune, but that doesnt mean it would have been a good bet, it means the people making those bets got lucky.
Equating a currency to a game of chance based on independent events—now that's irrational thinking.
My conclusions might not be valid, this isn't something I'm an expert at, but I really don't think that's a good example.
the problem is that you did not base any of your arguments on actual facts. you just said "if you would have invested 5 months ago, your investment would have grown by a factor of 10." when that is the logic presented, the analogy holds. if you were to give specific reasons why you believe bitcoins grew at that rate AND why the will continue to grow, then it would be a different argument [not that it would necessarily be correct]. however, my point is that when you do not have any sound logic underlying your "investment" it is truly the same as gambling.
The difference and what a lot of people seem to miss is the scarcity of bitcoin and the fact that its makers and followers are bootstrapping a new global economy. Having only $1B in liquidity is not enough to participate in all global markets. If bitcoin successfully acquires fractions of all global markets, there is but only one direction the exchange rate can go, and that is up until there are hundreds of billions of dollar value in bitcoin. Divide that by the 11 million bitcoins in current circulation, and each one will be worth thousands and thousands of dollars.
Call me a skeptic as I see this like speculation, but where I've seen that kind of return, turned out to be really clever ponzi schemes and enough supply of dumb enough "investors". Oh yea, I remember that fun time when the housing market in my area went up 5X in 4 years. It was all fine till people ran out of actual money. The rest is history.
My point was simply that no currency is backed by "stuff" any more. I was responding to your criticism of Bitcoin ("A currency can't make value out of nothing for long").
Of course Bitcoin is deflating - it was designed that way. And of course fiat currencies are inflating - there is no limit to how much can be printed except reason, which is apparently in short supply.
Well - I was making the point that not being used as a currency of exchange does not hurt it's chances at serving as a store of value. In fact, volatility isn't necessarily bad either if you are using it to store wealth only and you take the long view. What would hurt its ability as a store of value would be a sustained and systemic trend downward in value (i.e. inflation). Short of complete collapse of the currency - this is unlikely given bitcoin's inherent deflationary nature.
Complete collapse is entirely possible. If governments crack down on exchange sites that allow for convertibility - that'll pretty much be it. I'd be very surprised this hasn't happened. I think they are waiting for all the major players to be massively invested in bitcoin so that when they pull the plug it'll take a very long time for an alternative to rise from the ashes.
I hope this doesn't happen. But what world do we think we're living in really?
There are derivative markets where you could purchase an option to sell bitcoin at a set price in the future. If the price falls below your target by then, buy up cheaper Bitcoins and sell them at profit.
If gold rose as fast as Bitcoins are rising, people would be shorting it hand over foot. They don't have that opportunity with Bitcoin, so the ship of fools sails on unimpeded until the supply of fools is exhausted, as in any bubble. Which could nonetheless take awhile and make some people very rich, provided they are smart enough to get out in time. Not everyone lost in the real estate bubble.
I wasn't disagreeing with anything you said. I was trying to tighten up the language around "what is a currency". From a conceptual level, BitCoin is much more currency friendly than gold due to both divisibility and ability to process electronic transactions.
>I worry that as Bitcoin's value rises, people are buying in not to use it as payment for services or goods, but simply as an investment vehicle.
I'd say it has been that way for a long time. When I dabbled in the community 2 years ago it was already brimming with speculators. Early adopting evangelists looking to legitimize their hoards and speculators who'd have been gambling on leveraged ETFs or FX if not BTC.
Demurrage (cost to hold currency) could help hoarding. However, at some point, people will start spending them too.
There's a fork of Bitcoin which actually has this built in.
I imagine we could see an interesting future with cryptocurrencies, where people are essentially betting/investing on the stability of the framework/algorithm and demand on it. Multiple ones could exist, and you're hoping for the best return, or greatest stability.
What would be REALLY interesting is if essentially one of these ends up seeming a better 'idea' than US currency (the de-facto currency now)
Freicoin is a scam. If you mine Freicoins 80% of the mined coins are automatically transferred to the "Freicoin Foundation" (see e.g. https://bitcointalk.org/index.php?topic=134629.0). A real demurrage might be an interesting concept, but I wouldn't suggest to buy into Freicoin.
I can't help but think these prices represent people confusing a currency being useful with a unit of the currency being worth more. Obviously this is true at the extreme case that a useless currency is worthless in any quantity. But it doesn't really follow that more trading of goods and services in Bitcoin would cause the price to increase. This wouldn't need to happen until some substantial fraction of them are in the hands of people spending them instead of holding them speculatively. Currently the amount of Bitcoins that need to exist to satisfy all the commerce is tiny.
I think part of the reason for the optimism of those speculating bullishly on BTC is that the inherent properties of a decentralized finite online currency will result in their utility will only increase with time.
There was ticker on their site that must of reset this morning. They say need to get $850k per quarter in order to keep re-seller account and the low prices. They are selling 0% margin in order to promote bitcoin and get the competition, newegg and amazon to accept it as well.
They didn't make the goal but were not open the whole quarter so they may still be able to continue. I'll see if they post news or press release about it
It'd also be interesting to look at the effects of deflation in the fledgling bitcoin economy, although the actual exchange of currency for goods and services is a bit small to judge this effectively.
The GDP stats for bitcoin is not systematically collected. The blockchain data only gives us a approximate picture.
So most people just rely on their guts and vague feeling about the size of the bitcoin economy. Bitcoin detractors tend to underestimate the size of bitcoin economy because they can't recall selling or buying goods or services. Bitcoin users tend to be more optimistic because they keep up with news of merchants opening up.
I think it would be very useful if somebody built a stats site dedicated to systematically report on economic activities occuring in bitcoinland.
"The problem is that the value of a currency is supposed to also be somehow related to its utility in acquiring goods and services. When it is rarely used to that effect, people may reconsider their investment in the currency."
Gold and silver stand in opposition to this statement.
You can't buy groceries with gold or silver coins, but they're a fantastic store of value and time-tested investment.
Furthermore, according to Gresham's Law, people keep "good money" (i.e. money that holds its value) out of the marketplace and spend their "bad money" (i.e. fiat) acquiring goods and services.
That is very much not my idea of a "fantastic store of value." Not unlike bitcoin, its value appears to vacillate wildly. The S&P 500 looks tame by comparison, and also has the added benefit of a much higher long-run rate of return.
"Real" prices are almost always measured in CPI terms, although sometimes the GDP deflator is used (it was CPI in that chart).
The real value of gold was (relatively) flat until gold convertibility ended in 1971 because the price was being fixed by the western powers under Bretton-Woods. Ever after it's been on a non-stop roller-coaster ride. If you bought gold in 1980, far from its value being "stored" it would have lost half its value in 10 years even if you bought after the spike.
It sounds like you don't value low CPI volatility very much (perhaps CPI goods and services are of little interest to you), which is fine, but many would use CPI volatility as the definition of a "store of value" as opposed to a speculative investment.
> When measured in dollars
No, when measured in real terms.
> which have lost 98% of their value since 1913.
Nobody would suggest that dollars are a useful store of value. They are a useful medium of exchange and in the short term, a useful unit of account.
But still, gold has never dipped below its 1918 low on that chart. Twice it shot up as a hedge against paper inflation, but it never went below where it started.
Isn't that a terrific store of value? I'm talking about a time frame of centuries here. Not just a few years during a bubble.
And before you counter that we're currently in a low inflation period - we're not. If the CPI was measured using the same metrics that the government used itself in the early 80's, inflation would be running at 9% annually.
Gold and silver are not money either, except in a tiny minority of countries. Wages are not being paid in gold or silver, debts cannot be settled with gold or silver, and neither gold nor silver is commonly traded for other goods. Nobody uses gold or silver as units of account. The only resemblance either metal has to money in this day and age is as a store of value, but if that is your only requirement to consider something to be money then you would need to include land, buildings, and various collectible items too.
Gold and silver are commodities, traded like any other metal, and the historically-motivated obsession people have with using gold as a store of value makes it more difficult to acquire gold for industrial uses (which would be a real, productive use of the metal).
That is my sentiment exactly. There is much talk of growing bitcoin adoption, but I've yet to see anything beyond a few web-based services(which, beyond their time, are almost free for the operators to begin with).
Yes, I've seen it. Have you given it a serious look? It looks great in quantity, but would you ever consider purchasing anything for a decent sum from any of them? The only remotely reputable merchant I'm aware of on there is BitcoinStore.
Furthermore, there is noone offering general groceries, household supplies or clothing, just niche approximations of those categories. Also critically lacking are complex B2B services(their professional services section is...well, not much to look at - I certainly would not be investing my business's money in any of them at this time).
If I showed you a list of non-Bitcoin-accepting merchants picked at random, you would almost certainly have the same reaction: you would not trust most of them, because they are all too tiny and you have never heard of them.
You have to realize that the web is a long-tail ecosystem. There are tons of small merchants you have never heard of, while the biggest ones (Amazon, Newegg, etc) are just a few and represent <1%. What you call a "reputable" merchant exclude 99% of all merchants. Plus, the most reputable/biggest merchants will probably be the last ones to adopt Bitcoin (the bigger you are, the less likely you are to adopt a disruptive technology).
The anonymity feature (and subsequent fees involved in the the transaction) is useful primarily for illicit activities. Maybe 1% of people are legitimately worried about privacy (the true libertarians). But most just want transactions that can't be traced back to them.
I worry about that, too, but I think it's unlikely to happen, because Bitcoin will stabilize eventually. But it first needs to become so big (think $100 billion - $1 trillion here) that every single transaction affects the value in a very small way, and any top HN or Reddit article about it has an almost insignificant effect on its value.
I do believe that will happen eventually, but it's too early right now. Bitcoin works by the law of numbers - after all it's all numbers and math. When its tiny in value, its growth can be very high. When it's already huge, the growth will slow down a lot.
I would expect steady growth of Bitcoin's price to look like the logistic function. Exponential at first, then flattening out. At some point, it would just grow opposite the inflation of other currencies once it's stable.
"The problem is that the value of a currency is supposed to also be somehow related to its utility in acquiring goods and services."
Well, it is. As more people hold some BTC "for the future", they are more than willing to accept them as payment for their services. Imagine you are surrounded by people who have "hoarded" some BTC. Suddenly they can just trade in BTC without going to a bank (unless they have some spare cash which they haven't allocated to other purchases yet).
But that is only one side of the coin. If people are hoarding BTC, then they aren't spending them on goods / services.
IE: Deflationary Spiral. It becomes hard to be a merchant who accepts bitcoins, because everyone expects BTC to keep rising in prices.
People who bought a domain name for 1 BTC a few weeks ago from Namecheap lost a lot of money. They should have instead "saved" that BTC. Therefore, people are discouraged from using BTC as a transaction vehicle.
Currently, hoarders are the ones benefiting from BTC, but no one else is. No merchant knows how to value their services in BTC, not when there is this much volatility around.
Is $2 million really significant? BTC famously passed $1 billion in the money supply recently. That means that about 0.2% of the money supply is turning over each month, and 99.8% being hoarded from month to month.
The US GDP is about $15 trillion, so about $1.25 trillion in transactions happen in a month. If you take M2 of about $10 trillion as the US money supply, about 12.5% of the US money supply turns over each month and 87.5% is being hoarded. If you take M1 of about $2 trillion as the money supply, about 62.5% of the US money supply is used in a transaction each month, with only 37.5% being hoarded.
Compared to 62.5% or even 12.5%, 0.2% seems pretty unhealthy.
$2M and growing is significant, although it's only one of many companies. Every other day another business sets up with Bitcoin as a medium of exchange that is a low-fee, no-chargeback transactional currency. The fundamental value of such a currency, with a quasi-fixed money supply, scales as some multiple of real circulation. The momentary value is proportional to that fundamental value multiplied by short-term expectations of the BTC as an asset, which is driven by growth in usage and hype.
It's entirely possible that 99% of the value of a bitcoin is a self-reinforcing set of asset-bubble expectations, but this is something that really didn't exist before, that we don't have great paradigms to explain, that is undergoing massive daily shifts in its usage. It is explicitly not a stable national floating fiat currency with people who circulate the money their banking system provides & pay their taxes in those notes & denominate their salaries and grocery bills in sticky quantities of those notes, and so it's not directly comparable.
I don't have to. The fact is, no one prices their goods in BTC. Its absolutely ludicrous to price goods in BTC in the current market.
I think BTC has utility as a currency for exchange however. But on that side, you don't want to be in the position of hoarding BTC. You hoard dollars, and then use BTC to transfer dollars between people. Services like Bitpay allow you to keep most of your money in hard cash.
"Currently, hoarders are the ones benefiting from BTC, but no one else is."
That's not true, BTC has many benefits to bitcoin users. There's plenty of bitcoin-only services, but more importantly, it provides freedom for many people who are facing government regulation. In the long run, bitcoin enables all kinds of innovation (good example is reddit's bitcointip service, which wouldn't really exist without bitcoins).
If it were to stop moving in the near future, BTC would be stuck at minor-currency status with a $1 billion valuation. I'll be happier if it stops moving with a $1 trillion valuation, so lots of people can use it instead of just a few geeks and druggies.
Huh? Just... don't tip 1 BTC? For example, the bitcointip bot on reddit will take USD values, use the current mtgox price and then tip the equivalent amount in BTC. Of course the person receiving the tip is affected by volatility compared to USD. For now, it's certainly in their favor, and again, it's no different than other currency except BTC's high current volatility.
The volatility of a currency is one of the most important metrics.
It really doesn't matter if a currency is inflating or deflating. It just shouldn't change that much over time. The less it changes, the better. (or, if it is changing, then it should at least change consistently. IE: People expect USD to inflate at 3% so it should).
Since no one can predict the value of BTC next week, or hell... even tomorrow's price of BTC... it becomes a very hard to use currency.
That may be true, but I'd wager most of the people who are buying into bitcoin for its property as a store of value will be shocked to find out bitcoins other very interesting property. The ease and low cost of transferring those bitcoins to anyone, anywhere in the world.
"I can BUY things with these? Wait... I can sell things? I just need to paste a hash?!"
Then one day, some highly motivated attacker will come along and discover the other very interesting property: that the work needed to attack Bitcoin scales linearly with the work needed to use Bitcoin. As soon as a successful attack is announced publicly, faith in Bitcoin will be shaken to badly that nobody will ever want to use anything called "digital cash" for a long time.
So the real question you should be asking is, "Who would benefit from a Bitcoin failure, and could they amass that much computing power?"
It seems like the biggest risk would be with the wallet websites, which is an issue that is present in other payment methods.
The biggest problem IMO is that there is no way to refund or right the wrongs done by an attack. If someone in russia or china steals half of the bitcoins, there is nothing anyone can do to get them back. I suppose they would all be logged and everyone could band together to block those BitCoins as payments, but that's probably not going to happen. That would be interest to watch play out.
I think betterunix is not talking about a crypto flaw but a 51% attack; for ~$20M you can buy enough ASICs to basically take control of Bitcoin. (I'm not convinced that mathematical concepts like "polynomial time" should be applied without consideration for economics, but that's a whole different topic.)
"Supposedly they can easily change algorithms if SHA-256 is broken in the future."
You are not understanding the problem. Bitcoin is not a hash function, nor is Bitcoin a digital signature system. Bitcoin is a digital cash system, and so any discussion of Bitcoin's security must be based on the notion of security in a digital cash system.
There are two minimum security properties a digital cash system should have (informally): first, that the units of value cannot be counterfeited; second, that each unit of value can be spend by exactly one party at any given time. In both cases, it is commonly assumed that the attacker's work is bounded by some polynomial in the parameters of the system itself, so the system is secure if no polynomial time algorithm can break either property (but an exponential time algorithm might e.g. a brute-force approach). It is possible (and usually desirable) to prove that a system is secure using mathematical arguments, for example these systems:
(Sorry that these are paywalled, you can probably find them elsewhere)
Unfortunately for Bitcoin, while it seems to satisfy the first property (but no security proof is out there as far as I know), it fails the second property. Double spending in Bitcoin requires work that scales linearly with the parameters of the system (the "51% attack"), which is basically worthless as far as cryptography is concerned. The fact that Bitcoin uses a secure hash function and a secure signature system is irrelevant because the problem is with the protocol itself.
An easy way to illustrate the difference between using a secure cryptosystem and being a secure cryptosystem is the "surreptitious forwarding" problem. Suppose you receive a message from your boss that was signed with his secret key then encrypted with your public key which said, "You're fired!" Now what you might do is to re-encrypt the signed message with another person's key and send that to them; they would now believe that they were being fired. It is not the encryption system or the signature system that you attacked, it was the fact that composing signing with encryption in that manner does not prevent such forwarding (but there are ways to do that). Bitcoin has a similar problem.
> As soon as a successful attack is announced publicly, faith in Bitcoin will be shaken to badly that nobody will ever want to use anything called "digital cash" for a long time.
It's worth noting that a 51% attack would only allow double-spending, and it's not something that could be realistically hidden; it would be very obvious what was happening. In addition, the amount of computing power available to the bitcoin network is becoming significant enough that it would be hard to exceed, even with a botnet.
It's also worth pointing out that people still use Paypal, despite all the stories of frozen accounts and people never getting their money back. People also still use credit cards, despite not every instance of fraud resulting in the victims getting their money back.
I agree that people may very well use Bitcoin despite a successful attack (plenty of people still use Hushmail), although I think a lot of confidence would be lost. Bitcoin has a lot of hurdles to overcome as it is, and the detection or announcement of a successful attack would add yet another.
That is exactly the sort of argument the Germans made: that Enigma had known cryptographic flaws, but that they did not think anyone would actually expend the effort needed to attack it. You are saying that Bitcoin has a known flaw, but that nobody is going to amass the computing power needed to exploit that flaw. That is a bad way to approach security.
It is not just about botnets (CPU "mining" is pretty slow); what do you think stops someone from spending their money on enough ASICs to pull off the attack? It is not all that expensive, maybe tens of millions of dollars in chips. Even if it were hundreds of millions of dollars, if Bitcoin were as threatening to the financial system as some people seem to think it is, that would not be a lot to spend on attacking it.
It is also important to recognize that the existence of an obvious polynomial time attack does not in any way rule out the existence of faster attacks, it only establishes an upper bound on the attack effort. The reason proofs of security in modern cryptography involve a reduction to an (assumed) infeasible problem is that it rules out all practical attacks (in fact, all theoretically feasible attacks).
It would be nice if there were a way of solving the double-spending problem that would make all attacks infeasible. But since there isn't, we need to make do with the options we have: to place trust in either a pre-chosen authority, or a defined majority we assume to be trustworthy.
Not all the tools we have for maintaining security are as good as public key encryption or symmetric encryption. In the world of bricks and mortar, $10 million buys you a lot of criminal clout. Is a safe deposit box safe against a determined attacker with that budget? Are all employees immune to million dollar bribes?
The law attempts to redress imbalances by making it difficult to get away with circumventing security to perpetrate financial crimes. The problem is not so much stealing from a bank, but getting away with it after the fact. The same problem applies to bitcoin if you want to execute a 51% attack; double-spending is financial fraud, after all.
Buying up $10 million worth of ASICs is relatively straightforward, but doing so in a way that can't be traced back to you is substantially more difficult. As well as the problem of trying to run that amount of hardware in secret, without a paper-trail, you'll also have problems in trying to convert any profits you make from the scheme back into fiat currency.
If one merely wanted to demonstrate the attack without profitting from it, then one could double-spend a small amount between accounts you own, in the same way that one could demonstrate an attack on a safe by buying one and then drilling into it. But that doesn't change the fact that there's a big difference between circumventing security, and illegally profitting from it without consequences.
Monetary economists have a measure called velocity, which is "the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply."  It can be thought of as the "rate of turnover in the money supply" . It is a good indicator of the "health" of a currency.
The annualised velocity of the M2 Money Stock for Q4 2012 2 was 6.152 . That is, the average dollar in the form of notes and coins in circulation (M0), traveller's cheques, checking account/demand deposits, savings deposits, time deposits/CDs under $100 000, and individuals' money market deposits was spent 1.538 times on economically useful activities in the fourth quarter of last year.
The annualised velocity of the Bitcoin Money Stock for Q4 2012 was 1.27. That is, the average Bitcoin in existence was transacted 0.32 times in the last 90 days of 2012. This includes economically useless transfer payments, i.e. transactions not involving the exchange of real goods or services, as well as economically useless hoarded or lost coins, i.e. Bitcoins not in circulation and so less a unit of "money" than a speculative asset (in the case of hoarding). Since this is a ratio, the two balance out, though it is still biased to the downside. For the 30 days ending on 29 March 2013, it was 1.86. Here is what it has been doing since February 2009 .
More encouragingly, Bitcoin Velocity has quadrupled YoY. M2 Velocity declined 4% over the same time. I would thus offer, very tentatively, that there is a substantial portion of the Bitcoin economy involved in real transactions (versus financial ones, e.g. trading on an exchange).
Curiously, yet to emerge (to my knowledge [EDIT: which was wrong]) is a majour vendor of Bitcoin mining equipment that accepts Bitcoin as a mode of payment. If that were to happen, the Bitcoin economy would have an endogenous "risk-free rate" in the form of mining yields, with power companies serving as the most salient factor. If it were not for the ceiling on the number of Bitcoins which can come into existence, it could very well have been the first currency pseudo-denominated in energy.
Thanks for bringing the concept of velocity to attention. I'd been looking for a metric just like this to compare Bitcoin to other currencies. It would be interesting now to compare the market cap of Bitcoin to currencies with similar velocity values.
However, I think it would be really important to get a velocity value for Bitcoin only including transactions for goods and services, not including trading transactions with other currencies. Bitcoin's high velocity value could (and I suspect it does) just mean there is a lot of speculative trading going on and still very few real transactions in Bitcoin.
Currencies have existed in a huge variety of forms over time. Basically anything can work as a medium of exchange as long as everyone has a high degree of confidence that if they are paid in the currency, that they too can pay someone else in that currency. But that's not to say all currency regimes are created equally -- we've learned a number of lessons, painfully, about how to manage currencies.
For a small-scale, but very instructive example that shows there are cases where simply increasing the money supply can sometimes create more value in the economy (or how deflation can destroy value), see the story of the Capitol Hill Babysitter Co-Op .
At a more serious scale, many prominent economists believe that an artificial restriction of the monetary supply led to, or exacerbated the Great Depression .
So, like Krugman , I think that BTC proponents really have to explain how the artificial restriction of the size of the BTC money supply is not a serious design flaw in the currency. Are BTC just crypotographic gold? If so, then is a successful BTC economy just a different gold standard (and all its associated problems)?
The actual problem that arose in the CH Babysitter Co-Op, supposedly solved by inflation, was that they didn't let scrip trade at actual relative value; you had to pay/accept one scrip unit per time unit whether the babysitting was for Wednesday or Saturday night.
This was compounded by a case of retardism on the part of its managers, who refused to accept that different nights have different value, and that prices have to change to achieve equilibrium. So the supposed solution of inflation was actually replacing one artificial problem (a price floor) with another (temporary misvaluation of the new currency due to "money illusion").
Go find out how Krugman answers the question of "Why didn't they just let the exchange rate of scrip per hour float freely in response to differential weeknight demand and risk aversion?" (Hint: he doesn't, anywhere.)
> If so, then is a successful BTC economy just a different gold standard (and all its associated problems)?
The main problem with gold standards, is that governments don't like them, because it makes it really hard to fund wars and other expenditures. Eventually, this leads to gold confiscations , and the effective end of a gold standard. Bitcoin solves this by being resilient to confiscation, and also by having a value transfer mechanism built-in, so that you don't need to replace gold with paper receipts for the sake of convenience.
In essence, bitcoin has all the upsides of a gold standard, with none of the downsides.
The one thing BTC cannot yet replicate is the trust that gold standard has.
Anyone in the world would immediately accept gold standard, but this BTC, despite being a digital gold, will be difficult to overcome the initial fear/mist-trust. It doesn't matter what mathematical proof you provide - the laymen doesn't really understand it. May be one day, it becomes accepted, and BTC will then really be a new gold standard. But i don't see that day coming, because there are people who don't like the gold standard (as it prevents them from leeching money from society - i.e., various parties/entities who hold controlling interests in major central banks etc).
As Moldbug wrote: "In any economy, there exists no less than one commodity or security of inelastic volume which is overvalued due to reservation demand. Ie: one scarce good which is money." Bitcoin's increasing price is a sign that it's further along in its passage to monetization. Gold, too, experiences the same phenomena of being "overvalued". I.e., being far above the price warranted by its use value. In the same way gold is also partially monetized (in particular it has large reservation demand from central banks)
Buying bitcoin is essentially a bet on the probability it will be monetized. This probability will wax and wane in the minds of the population participating in the bitcoin market, who in turn will be influenced by media perceptions, the actions of the state etc. So the price will no doubt be quite volatile. But the increase in price, based on an increase in reservation demand, is self-reinforcing. It increases the desire of merchants to accept bitcoin in payment (since there are now a greater pool of holders who have greater savings looking for an outlet to spend those savings). And as new merchants begin accepting bitcoin in payment, the reservation demand increases. These two causalities are linked together and reinforce each other. At some point they become entrenched enough that the whole thing "lifts off", so to speak, and the commodity becomes money. Interestingly, the same thing happens with gold, except that one of the two causalities is short-circuited by the state: the reservation demand for gold does not spur merchants to accept gold in payment, because that is made illegal by the state. Thankfully bitcoin is so well engineered that the problem of the state banning use in transactions is essentially moot (no offense "Chuck" Schumer).
It looks like a classic bubble now - while slow gains programmed in could be justifiable, this seems to be driven purely by expectations of future price rises - which is a classic bubble sign. So far, all bubbles popped sooner or later. Maybe this would be the only one in history that doesn't - I wouldn't bet on that, but maybe someone would and become a millionaire. Or lose all his money.
Apple is a company that created a lot of real value during that period. Bitcoin is a currency that claims to offer some marginal advantages over other currency, but certainly not enough to justify the rocket ride. The biggest advantage that Bitcoin is offering these days is that it will be worth 50% more next month than it is today. That's a hard advantage for speculators to ignore, but it is ultimately an unsustainable pyramid scheme.
Yeah, apple is obviously so much more valuable than bitcoin because having computers in prettier cases or phones with prettier user interfaces is incalculably more valuable than access to a provably fair and reliable financial system not captive to the global banking cartels or their crony governments.
Ok, Even if this is granted, more thoughtfully designed products that exist within an already existing category and enable no entirely new abilities. A globally distributed peer to peer cryptocurrency with the characteristics bitcoin has, whether this actually is bitcoin or some other item that has the same characteristics, is an enormous game changer.
I was just reading a comment from someone who I think really nailed just how big this could potentially be, so instead of restating it I'll just link to it;
There's nothing that happened with BTC between when it cost $14 and now. Comparing it to the shares of Apple that created a whole new consumer industry and substantially changed the information interactions of the whole humankind betrays deep misunderstanding of the question at hand. Bitcoins did not suddenly turned into new way of living, did not produce hundreds of amazingly useful things and did not change how many people do things. They just cost more, because people expect them to cost even more in the future.
Bitcoin technology allows something that has never before been possible in human history: Two individuals, that never meet in person, can trade with each other without placing any trust in a third party. The implications of this are far-reaching, and will fundamentally shape how governments and businesses operate.
That's a fascinating point. It has me wondering if this is a solution in search of a problem though. When I do business with someone online, typically I trust the third party more than I trust the counterparty. That's definitely the case when I use my American Express card to buy something from a merchant I've never used before. It's why Ebay and Amazon Marketplace succeeded. They broker the transactions and ensure you don't get screwed in exchange for a cut of the value.
So far I see absolutely zero effects of these fundamental changes. In fact, even finding a way to get bitcoins - without trusting one of those "exchanges" that constantly are getting hacked - looks non-trivial at best, and looks next to impossible to do it anonymously. As for using it for some common activity except selling/buying controlled substances and such - forget about it. When I am able to pay with Bitcoins on Amazon - then we'd be talking.
Not really. They still must rely on the Bitcoin peer to peer network, the code behind the Bitcoin clients, and the stability of the Internet. There is still a third party, it's just distributed more widely.
I hope that people who got in last year or earlier this year are starting to sell some of their bitcoins, at least enough to cover the cost basis. I wouldn't be surprised to see a very sharp fall soon.
That may not be a good idea. The SR pegs are based on a moving average, so even if the vendor you're buying from priced his goods to the dollar, you may well still be overpaying. (And given how fast the exchange rate has increased, if the vendor did not peg to the dollar, you'll probably be overpaying a ton.)
Unless these people have invested extra money they can afford to lose for the reasons to save them from inflation and confiscation. Then they still have enough cash to pay the bills, so why should they get back to fiat?
E.g. I myself and many of people I know are not going to sell a single Bitcoin unless any sort of personal or global disaster. And many of them are going to spend their BTC over time to avoid interaction with banking system as much as possible.
99% of the people who ultimately argue about avoiding the banking system engage in behavior that is either morally questionable or explicitly illegal. I'd say about 1% are true "what i do with my money is my business and my business only" libertarians
I guess I indeed missed this recent confiscate event. Can you point me to where I can read about it?
Last major financial disaster I've heard about is Cyprus. Where people deposited money in the banks, the banks gambled with the money and lost it. Which is "slightly" different than confiscation. The involvement of "governments" and "entities" only helped the depositors to lose less of their money.
Bitcoin is vulnerable too. A dedicated effort by collaborating governments could destroy or severely damage Bitcoin, by e.g. blocking the protocol, seizing powerful hashing equipment, downing exchange websites, performing a 51% attack, and so on.
This notion that Bitcoin is some robust, untamperable currency system is simply incorrect.
Precious metals are not easy: either you store it somewhere where people ask questions and can block your access to it, or you store it in your pocket and cannot easily spend portion of it when you need.
Everyone keeps saying that a crash is around the corner and the current price is unsustainable, been hearing it since $40/BTC, maybe earlier. I don't completely disagree, the question I keep pondering though is, if there is a big sustained crash coming, is it from $100 to $30, or $900 to $300?
Hard to say, but my guess is that the price won't go under 15 USD no matter from which level it will fall. Also it's interesting that according to google trends, the current popularity of bitcoin still doesn't reach peak level from 2011, I would expect that current popularity is much higher compared to 2011. BTW using forecast feature, "google predicts" the crash any time now :)
The creator doesn't need a backdoor; the early adopters have gigantic stacks of BTC that has never been used. The appropriate concern is not that they have a backdoor but that they flood the market and make it crash.
The exchange or Bitcoin itself? The code is open source and actively developed. Many people come over to bitcointalk asking about certain sections of the code. Many many eyes are looking at the main client source. Its highly unlikely there is a backdoor that has been missed.
I almost bought $500 worth of BTC back when they were trading for pennies. Now, who knows if they would have survived two hacks, or if I would have had the patience to hold on to them, but I sometimes wish I'd pulled the trigger.
Yeah, it's apparently possible to short bitcoins. If the recent rise in price is a bubble, and it crashes back to about $30, it will still come back to about $100 in a year, if bitcoin adoption continues.
An impressive list in quantity, but upon closer inspection I don't see any essential goods & services. Under "consumables" there are literally no general groceries, just specialty foods. Under clothing, a bunch of niche items. It's also worth noting that nearly all of these look like to be pretty low-quality vendors.
There's lack of payment options with "essential goods & services", like groceries, but what's your point? Any new currency, especially digital, doesn't start with supermarkets, because supermarkets tend to be owned by large corporations that are not first adopters.
If bitcoin will become a major currency, it will have to have a phase where it cannot be used in general and only with a small number of companies. That's not evidence that bitcoin will not become a major currency, it's evidence that it hasn't yet, and nobody claims it has.
What you say is true, but I don't see mass adoption anytime soon because it seems there are no essential goods and services(and perhaps more importantly complex B2B services) being bought and sold with bitcoins alone. I think it's safe to say that the majority of these vendors accepting bitcoins are turning around and converting them to USD to pay for operational costs and only a small(if any) portion of their bitcoin revenue is traded as bitcoins. It will always be that way until the large corporations that we are all beholden to, especially as businesses, accept bitcoins.
So at this point it's really an investment vehicle and a convenient method of exchange, not a replacement for fiat currencies.
It is incredibly easy to buy and sell Bitcoin options: icbit.se is just one of several reputable derivatives markets that focus on Bitcoin. So yes, if you are completely sure this is a bubble, it's easy money...right?
Yeah it is incredibly easy to short Bitcoin by trusting an unregulated, anonymous website without exposing yourself to any counterparty risk... There just isn't any real way to short Bitcoin, because if your investment thesis is true and collapses, it will be very difficult to collect your winnings.
I am going out on a limb and calling this price peanuts. The rise is due to Cyprus, and if bankers keep stealing people's money (and printing it) ... which they sure will because they compete amongst themselves about who has the most multi-millions (regardless of how they got it)... a portion will move their wealth into bitcoin. Also, as fiat currencies lose value, bitcoin will rise. Bitcoin is a hedge against fiat.
add: in fact the ideology of bitcoin is steeped in disempowering central banks. So you are buying into an ideology, and so long as the tech can keep up with the ideology, and there's nothing with better tech, and central banks keep ripping people off, then bitcoin will rise. It's far from perfect, but I think the web itself was about unlocking information to empower people (as created by hippies), something like the advent of literacy to empower people to read the bible when it was limited to priestly classes. Bitcoin is like grade 1 spelling and grammar, or the first web browsers: sure is better than not having either.
I set up camp over the Golden Gate Bridge. I ask people if they'd be willing to throw their lunch into the water (use their computer's time/energy/money to mine Bitcoin), with no possibility of retrieving it, and in return I offer to give them a certificate stating that they've thrown their lunch away (a Bitcoin).
Now, I see no reason why anyone would expect why these certificates would have any value. But let's suppose they do have value, and people can trade their certificates, say, for a lunch (or perhaps half a lunch). NOW, suppose I have been secretly stashing away those lunches (really it doesn't need to be in secret - you don't care what happens to your lunch after you throw it away). Then there is now objectively more value in the world than there was before I set up shop - there are the same amount of lunches in the world, but there are also now certificates that have some positive value. We've made a free lunch!
This is a contradiction. If we could create value by this silly game, we could easily make as much value as we want, and we would have solved all the world's problem.
But this should be obvious in the first place! Why on earth would you expect to be rewarded with something of value (a Bitcoin) for doing something fundamentally useless to society (mining Bitcoin). Even though mining Bitcoin comes at a cost to you, this doesn't matter - it just means you're throwing your lunch away.
Now why does the US Dollar have value? Instead of throwing away our lunches for a certificate, we basically asked the government to store our lunches in Fort Knox. Today, lots of gold and other items of value are held there. Why are they held there? There is an implicit assumption that these items of value support the US Dollar. The government knows it could not start "eating those lunches" that it's got in its reserve! It would not yield society a free lunch - it would crash the US Dollar.
Lots of online retailers have implemented accepting Bitcoin. For everywhere else, Amazon and eBay included, there's BitSpend- which allows anyone to buy anything with Bitcoin from anywhere for as little as 0.5%
Oh, there are a number of users that have been nay-saying for months, or longer. I hope they did manage to get a short in. That sounds vindictive, but even in this thread are people that clearly don't understand BTC firing off calling it a "scam". Poor people, should've bought two weeks ago.
When I mined my first block of bitcoins a couple years ago (back when I could use the GPU on my aging laptop and still have a chance to mine a block) they were worth about 5¢; I sold a bunch when they were around $5 because I thought that was ridiculously high, and the price was sure to collapse. Silly me; had I not sold them, I could have a few thousand dollars from a couple of days worth of GPU time.
People like Max Keiser are calling 100k to 1mill per bitcoin. Hard to imagine. I left my gpu running for a few weeks a year or so ago and mined myself 1 bitcoin. I figure that should Keiser's prediction comes true - it will be a nice easy pay day - if not, I didn't waste much time, energy on it.
I've been looking at it lately though and thinking that it surely must drop back soon. I'm thinking a drop back down to 15 us is reasonable.
Bitcoin is like a startup. If it works, it's worth a tremendous amount. If it doesn't, it's worth nearly nothing.
Right now its proponents are valuing it like a tech startup stock- what's its potential future value?
Its opponents have already decided it will fail.
Either side may be right at this point, though bitcoin has more going for it than it did six months ago.
To me, the trend is currently towards "it's going to work", so I think it's worth a gamble. But it's definitely a gamble.
I think cryptocurrency is without question a force for the future. It makes exchanging money too easy and too fast for it not to eventually dominate economic systems. Economies/companies that don't use it will be at a disadvantage.
What's in doubt for me is whether bitcoin will be the winner of the cryptocurrency market.
The only way it "works" is if people start using it to pay for goods and services.
Right now it is an investment vehicle for speculation. And the crazy volatility suggests to me that most people won't feel comfortable using this as a currency for transactions, until the volatility decreases immensely.
My money is on Bitcoin remaining the winner in the cryptocurrency market. It's got enough network effect now for people to keep it a success. The economy is growing, and people have too much vested interest already. Flaws will be fixed, improvements will be made, etc.
Bitcoins are in a speculative bubble. This bubble is attracting fringe merchants, which provides a veneer of legitimacy to the dramatic speculative rise. Note that there is no way to effectively short bitcoins at this point, so there's no counterbalance to the speculation. When the bitcoin market turns south, it will fall hard as the shallow liquidity evaporates quickly.
I think a lot of people here would benefit from reading some William Gibson novels.
I don't think the BTC will ever be a 'currency' as the USD or the GBP. It is also not necessary for the BTC to be at a 'fixed value' at any time. As a virtual currency it's ok for the BTC to fluctuate heavily as the only thing needed for it to still succeed is that payment systems are 'always on' and can determine a spot price for goods and services.
I would rather see the BTC tied to 'Pizza index' than USD. This would make it easy for people to use an in-app value determinator when making purchases.
Say you just tap your phone with a BTC wallet against a cash register. The register answers, well your burger will be 0.00065 BTC at spot price as of 18.104.22.168 PM. Accept/decline.
That's it. I see the BTC/LTC (Litecoin) as alternative currencies but still worthy of a HUGE market share for micro/everyday transactions.
This is why I wonder whether a company will come along and offer point-of-sale BTC to USD (or other). They could perhaps issue plastic cards to their users for making payments, and charge businesses 2.5% of the transaction for their services.
They would have to define it to ban it. Bitcoin would just evolve to no longer fit the ban. There are already dozens of other cryptocurrencies brooding- just waiting for a scenario where Bitcoin is pushed out to make more room for them.
A ban on bitcoin will work about as well as a ban on piracy.
If speculators decide they've had enough and start selling, then the bitcoin will return to a value based on its usefulness for transactions, instead of its attractiveness as an investment. How far it can go down depends on the size of consumer bitcoin demand vs investor bitcoin demand.
Some people lack the knowledge and skills needed to be able to buy something from Amazon. Compare buying something from Amazon with buying anything using Bitcoins - Amazon is ridiculously easy.
Bitcoin will never reach that level of ease of use. But when it has something like a 5 step LiveCD it might start to get wider use.
 Something like insert CD, prepare anonymising stuff; load encrypted file from USB stick; load key from hardware token and enter short password; and have the distro wallpaper give idiot proof flowchart diagram instructions.
Banks is still necessary to migrate analog currencies to digital currencies in todays financial economy. People trust banks and they would also be offering support on how to use the new currency, and with their investments on the highest security to guard their assets, it's much secure for them to generate the wallets and safeguard the information and incorporate them into the main currency. Banks are absolute necessity for propagating the new system, and merging the old currencies into bitcoin.
If any big companies today would be the first to utilize Bitcoin and use them, they would really glad that they did, with the prices of bitcoin soaring, the more people invest in it the more the price gets higher and people trusts the currency, it would be really wise to invest in them. Imagine if any of Facebook, Google, Amazon, Paypal would use them first, it would be faster to propagate bitcoins into the main financial system, and I think they will make a really good and wise decision.
Bitcoins were designed to do that. If the price for 1 BTC rises to the level it becomes profitable to offer them computing power for the network people will generate new money. Until then its value gonna rise. This will loop until infinity.
Its hard to compare against dollar. As bitcoin is newborn with freedom written all over it. If it gets adapted more chances are its gonna be rising in value and will become first a currency for savings later on a day to day activity currency.
Each Bitcoin can be split into 100 million parts, in addition there is a possibility of the division being pushed further if ever needed (the smallest unit could be split down more if the people accepted this change)
Also there is talk of making the default traded unit a mBTC, (I think) Its a unit that represents a thousandth of a unit. once this becomes the standard unit the psychology is there to allow BTC to rise even further.
Imagine, if banks are using a bitcoin wallet, issues a bitcoin card (in a form of debit, savings card or credit card) with private keys on back and public keys on front, the bank then deposits money into the wallet then the end user withdraw money with the same bank or supporting banks.
This is one of the scenarios I think that would incorporate bitoin into the current financial system.
It's difficult to say how much can this rise indefinitely. The higher the rise, if the bitcoin bubble does collapse, expect a even bigger fall when speculators start dumping their bitcoins on the market.
Unfortunately not, I have been watching GPU mining returns vs the BTC price for a while, all the time the hash rate of the network is always increasing a little quicker than the income from mining.
The ASIC's will continue to dominate. Per watt of electricity they are far more efficient and we will see thousands of ASIC coming into existence this year. GPU mining Litecoin and converting over the USD or Bitcoin is actually more profitable.
I fired up a miner again recently just for fun. Took 5 days to dig out $15. That's comparable to the $3/day the same GPU could mine back when the exchange rate was $5/coin. But yes, the ASICs are coming. There are only a few in the wild right now. Pretty soon there won't be much point to GPU mining.
This seems a natural consequence of bitcoin's adoption and growth. I see virtually no barriers to entry here, no limit to the number of competing currencies that could be introduced, and as a result no real value to bitcoins. How long can one cryptocurrency expect to be allowed to grow before another comes along and dilutes the market? What factors prevent the average consumer from considering them substitutes? Bitcoins and competing currency are fundamentally similar. They vary only in retail and consumer adoption. I can't make sense of this bitcoin hype.
What is the incentive for merchants to start accepting litecoin? Why not just bitcoin? Litecoin won't give them lower transaction fees (over bitcoin), it won't give them more customers (anyone who can pay in bitcoin can pay in litecoin).