IOTA: A tangled mess

> When currency is deflationary, no one wants to spend money,

“When stocks are deflationary, no one wants to sell stocks.”

That’s not how human market preferences work.

> hell, Japan has been stuck in a deflationary spiral for 20 years.

This is almost certainly due to Japan’s imbalanced age distribution.

> eventually you have to eat,

Or eventually your time preference on whatever product you want to buy will exceed whatever bitcoin’s risk-adjusted expected growth rate is, just like happens for literally any other asset class. The idea that people will just never buy things is clearly nonsense if you have a grasp of how pricing and arbitrage work; there’s no such thing as an asset that has such a high risk-free growth rate that no one buys anything else. Any such opportunity gets arbitraged away instantly.

You are also aware of the fact that any bitcoin sale has two sides, yes? For every bitcoin someone is buying, some other person decided the price of bitcoin now pushes it above their risk-adjusted expected growth requirements.

Read about portfolio pricing theory. There are some good lessons there that I think will help you make sense of why it’s silly to worry about a turbo-asset that trumps all other possible purchases.

The hypothetical endgame here is that as bitcoin’s associated risk decreases, its price would rise until its growth rate fell in line with the rest of the market, closer to run-of-the-mill securities or commodities investments. If you believe that a small depreciation is fine, you should probably agree that a small appreciation is fine as well.

Sure. The problems the author mentioned with IOTA are definitely there. But as a developer, I just couldn't let that one slide.

What I don't get about Cardano is that it has almost NO use at all. The number of transactions per MINUTE can be counted using only your hands (every so often you may need to include your toes):

https://cardanoexplorer.com/

I'm having a really hard time reconciling that with the fact that it's got a market cap in the billions at this point...

> This is almost certainly due to Japan’s imbalanced age distribution.

The main issue is very similar to the US 2008 financial crisis, because of a huge asset bubble which encouraged Japanese banks to create a huge debt overhang. This turned most of Japan's banks into zombie banks, liquidity dried up. A textbook debt crisis.

Debt overhang and risk averse banks, leads to a pull back in propensity to spend or invest, which lowers demand and triggers deflation.

Yes, demographics can alter the long term tendency, but there was a step-function change in 1989 and in 2008, it wasn't like people suddenly became old. The common theme was a huge debt crisis, banking system collapse, followed by anemic response by the Japanese until Abe.

Greece had a huge deflationary spiral at the same time their debt crises hit, you think that's a coincidence? You think demographics explains the deflationary spiral in the Great Depression, which was mirrored in the US and UK? There was a 30% deflation in 1930-1932.

Let me quote Friedrich Hayek, the patron saint of the anti-inflation Austrian brigade: "I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression."

A deflationary currency is simply a bad idea for a currency, it has a built in penalty against borrowers -- and regressive in that regard -- and would put downward pressure on demand. Couple that deflationary currency with one that is highly volatile, whose issuance can't be controlled, and you have a recipe for an future economic disaster.

I'd go one further, if it some point in the future, SHA-256 is cracked or some flaw was found in your crypto-currency, you've managed to centralize a flaw whose scale of attack is world wide, and nearly instantaneous. If such a currency replaced all other currencies, you'd in effect, have detonated a virtual electro magnetic pulse over the world economy, making trillions worthless overnight.

Do we really want to put the store of value of the entire world under something whose value could be erased in a nanosecond if there's an undiscovered flaw?

I am also curious about that...