China is leading this rally - so look there for answers. Baidu accepting bitcoins is a good example of what is going on there - this would not happen if the party did not want it - so many people think that maybe the Chinese government would like to give it a try, experiment, maybe not as the final move - but to test the grounds of alternative international currency.
Well, maybe because it only took such a small hit when SR went down and quickly recovered, whereas everyone expected it to greatly lose in value. It basically has proven it can exist without SR.
Also, there are two big new markets and countless smaller ones already.
I wonder if someone could build a new digital currency that starts let's say at 1 trillion units, and is expanded by 2 percent per year (that 2 percent being split so a slight increase happens every day, so it doesn't happen all at once, but after a year, the increase rounds up to 2 percent).
The problem would be seeding it and distributing it early on. But it could still be mined much like Bitcoin, with the difference being that the total amount will never be limited. Also, it should be easier to mine them, since the (non-finite) total (1 trillion) would be a lot larger than the 21 limit for Bitcoins. Someone should also do the math for this new currency's adoption rate, so all of the 1 trillion units (adjusted with the 2 percent inflation rate) get distributed in 3-5 decades.
Basically we don't want a few thousand people to get that whole trillion within 10 years. I'd also prefer if anonymity would be built it (look to Zerocoin for that). Perhaps it shouldn't be anonymous by default, but you should be able to "switch it on"). It should also be as easy to use and as secure as possible (the clients), so normal people can use it safely on all of their devices.
PPcoin is also slightly inflationary, although it offers you an interest rate higher than the inflation rate if you participate in the validation process (basically like mining except you "mine" with your ppcoins rather than with your cpu cycles):
Personally, I don't mind the inflation/deflation argument too much; one thing I would like to see, however, is a coin with a semi-centralized distribution model - an organization bound by contract to give X units to every person in the world. Ripple could have been it, but they went with keeping the coins to themselves instead.
The problem is that for a real currency you ideally want inflation to match the growth of the economy. Fixed inflation rates (including 0) are decidedly non-optimal.
There are arguments in favor of the fixed supply model. The usual economic one is this:
When you earn and stockpile currency units, what you are doing is producing more than you consume, so in real terms you are allowing others to temporarily consume more than they produce. This essentially means that you are investing the difference into society as a whole. Thus, it makes sense that if the economy grows by 2x, your currency units should grow 2x in value, as that's the way any other investment works.
I know too little about currencies but to me it looks like that our "real currencies" are inherently deflationary as well... At least this is how it is supposed to work - right? I mean what if governments weren't printing new money all the time? Then there would also be a limited amount of money available in a big pool... Wouldn't it depend on the growth rate of country to determine weather or not a currency is deflationary?
- Number of people is growing, same amount of money for the people, no new money is printed => deflationary?
vs.
- Number of people is shrinking, same amount of money for the people, no new money is printed => inflationary?
Printing money is basically intrinsic to our "real currencies" so if you remove that you have something quantitively different,effectively a new type of currency.
Technically currency is a medium of exchange and can be linked to anything,industrial production,gold,number of cows,someones else's currency etc ,so whether it is inflationary or deflationary depends on its social framework and design.
Now what is a deflationary currency inherently bad?Say I am Mr Big with my 2 million bitcoins, I can invest in your new business with a variable prospect of success or I can sit on my arse and watch the value of my money go up due to deflation,which am I more likely to do?
How do you deal with exiting debits in a deflationary spiral?
In deflationary systems money does not circulate and that is the death knell of commerce.
But bitcoin is circulating! Well yes,but its value is due to it being traded for speculation and extralegal activities (a lot of which Im actually sympathetic to) ,not as an actual replacement currency.
But why does a fixed supply make it deflationary? What happens when all BTC have been mined, will the price still go up all the time?
I guess it could go up if the Dollar goes down at the same time. The actual price is staying the same, but the Dollar is worth less, so it takes more to buy X. Not sure why that would be bad.
Also I suspect banks will create virtual bitcoin, as they do with money (lending BTC that they borrowed). Perhaps that will affect the price as well.
You mean, assuming there was only one Bitcoin: if a VW Beetle costs 1 BTC this year, and next year a Porsche is published (growing the economy by replacing cars with better cars), the Porsche would also have to cost 1 BTC because there isn't more than 1 BTC?
That seems incorrect. While impractical, there might be other solutions, for example the Porsche could cost 1 BTC+ 1 Carrot, or maybe it could cost 2 BTC anyway. The buyer just wouldn't be able to pay in one go.
Marginal effects don't really reduce well to narrow examples like that.
What I mean is that if you assume a healthy trade in something of limited abundance, you should be prepared for demand to drive up the value of that thing. It might not, but given the simple dynamics of supply and demand (microeconomics isn't really controversial), it is prudent to be aware of the possibility.
(I do sort of assume that people are mostly using bitcoins to complete transactions and speculate, I don't assume there is a healthy trade in them)
True, but there are things that governments can do to influence how infationary/deflationary their currency is. Bitcoin by design cannot be influenced in this way. Once the production of new bitcoins end (which is guaranteed by its algorithm), then it is highly likely there will be deflation, possibly a deflationary spiral.
It's extremely implausible for everyone to know that the value of ${commodity} will rise steadily, with no risk, for the foreseeable future.
Why? Think of the second-order effects of what you're saying--I expect the value of ${commodity} to rise indefinitely, so what do I do? Buy ${commodity}. Or, I own a bunch of ${commodity} and expect the price to rise indefinitely--what do I do if someone offers to buy my ${commodity}? Either sell for a higher price, or don't sell at all.
Both of these have the effect of bringing the future price increase into the present. If everyone expects a 10% increase in the next year, the price today will increase by roughly (10% - the risk-free interest rate).
Now, is the picture different for currencies? Yes. Economists call short-term prices "sticky," and sticky prices are why demand-side recessions are possible. If I'm earning $40,000 a year today, and my boss decreases my pay to $39,000 a year, I don't say "well, there was deflation this year, so I actually got a raise!" On the other hand, if I'm earning $40,000 a year, and my boss doesn't increase my pay at all, I don't say "there was inflation this year, so I just got a pay cut!" In the short term, sticky prices make things (like labor) cost more or less than they would in a frictionless market. That stickiness is why countries with deflationary currencies have problems.
Now then--bitcoin may be a currency of sorts, but are bitcoin prices sticky? No. Companies selling products for bitcoins overwhelmingly price their goods in dollars. At whatever time the transaction is conducted, the buyer converts that price into bitcoin and transfers bitcoin to the seller, who sells the bitcoin for dollars. A buyer will never say "yesterday your price was 1BTC, and today it's 1.2BTC--why have you increased your prices?" A seller will never say "yesterday you offered to pay me 1BTC, and today you're only offering 0.8BTC--no sale!" Both sides of the transaction are dealing in dollars, only using bitcoin as a medium to exchange those dollars. In other words, bitcoin is a medium of exchange but not a unit of account.
Is bitcoin likely to become sticky in the future? Well, if a large proportion of people were paid solely in bitcoin, and could live comfortable lives spending bitcoin instead of dollars, it's possible that we could have a cultural shift to thinking "I'm paid 333BTC a year" instead of "I'm paid $60,000 a year." And at that point, bitcoin's deflationary nature would be an issue. How likely are we to reach that point? Not very, not least because it's a self-limiting cycle--if the sticky-price/deflation combo is an issue in the bitcoin economy and not in the dollar economy, people have very little incentive to switch their accounting to bitcoin. But that's an entirely separate issue from whether bitcoin is or will remain a useful medium of exchange.
"bitcoin is a medium of exchange but not a unit of account."
Very true,however from an economic point of view it is a terrible medium of exchange,you have large spread costs,a difficulty sourcing and transferring product,issues of divisibility and and a massive level of price instability relative to the currency being exchanged.
Your example of buyer and seller also makes that point indirectly unless the bit coins are instantly convertible to dollars someone is going to loose out in any price move.
The cheapest way to pay someone in dollars is to actually pay them in dollars.
I never thought of that, you are right. In the current culture, inflation seems to make most people happy due to the inflated paycheck, even when they actually are at loss. But if we ever reach the point where people get paid in Bitcoin, maybe we will already have gone through a cultural shift, and people will finally understand money. Can you imagine a type I civilization still falling for the same lies? I can't.
Only if that currency is the basis for your economic system, and you wish to continuously stimulate artificial demand in your economic system through continuous currency debasement.
It has been theorized that though such continuous stimulus may lead to greater growth on paper, that growth is more likely to be malignant than it would be were the economy allowed to grow at a more natural rate. Furthermore, continuous inflation is also at least partially responsible for the business cycle. The price of money is the interest rate at which it can be borrowed, and constant inflation is what keeps interest rates low. When money's cheap, people tend to borrow more of it and are less careful about what they do with that money. Hence, due diligence declines, and economic bubbles become more likely.
I guess it comes down to whether you believe people are overly conservative with their money. Inflationary currency incentivizes investment, which is useful in a world with scarcity. But if you believe enough people spend too much on luxuries, deflationary currency wins out.
What it comes down to is whether you think the increased growth from perpetually easy credit is worth the malinvestment and economic bubbles that come with it.
