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Bitcoin Is Fundamentally Flawed

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Re: Bitcoin Is Fundamentally Flawed

#151

Post by pjdorrell »

This is the "hyperdeflation" argument that we've already heard elsewhere. The thing about deflation is that eventually it has to stop, because there is a limit to how much value all the people of the world can hold in any currency. People are buying bitcoins now and holding on to them, because they expect Bitcoin to be a useable currency in the future. It will become a useable currency when the deflation stops. (It is somewhat useable now for buying and selling, but taking taking out a loan in bitcoins is extremely ill-advised.)

There may be some bouncing up and down before the value of bitcoins settles down to a somewhat stable final value. But it will eventually reach some type of equilibrium between the desire to hold it as a combination of desired savings (no longer held in expectation of constant hyperdeflation) and desired liquid "cash" holdings, and the desire to spend it, because sometimes there are things you want to buy.

All this holds whether or not Bitcoin replaces all other currencies (which it probably won't).

Whether of not Bitcoin hyperdeflation is bad for the world economy for some Keynesian reason is separate from the question of whether Bitcoin will continue to have value for its users.

Re: Bitcoin Is Fundamentally Flawed

#152

Post by scotty79 »

SteveArmstrong wrote: post #148
scotty79 wrote: post #112

Earlier quoted context omitted.

The amount of bitcoins you have just describes what fraction of its wealth humanity owes you. If you lost some BTC it doesn't destroy any value. It just means that you allowed humanity to forget that it owes you some of it's wealth. If you lost some BTC the fraction that humanity owes all other people who own bitcoins just increased.

I think that's only true if it was known how many wallets were actually lost. As is, the fraction of worth captured in that wallet can never be re-distributed to other people who own bitcoins, because the wallet is never decommissioned, just dormant.

Not quite. Losing your wallet doesn't destroy anything beside the proof that the rest of society owes you anything.

No actual worth is lost. You just lost the proof that you have a right to something useful or pleasant. It will be claimed by other people. Market will discover how much bitcoins were lost and bitcoin price will raise accordingly so other people holding bitcoin will be entitled to tiny bit more of the valuable things that society provides.

If you break your glass bowl it's a loss for the humanity. If you loose bitcoin wallet it's just a loss for you.

Re: Bitcoin Is Fundamentally Flawed

#153

Post by dragonwriter »

seandougall wrote: post #121
base698 wrote: post #3

This is the classic argument you hear a lot, particuarly from Keynsian economists is: bitcoin is bad because it's deflationary like gold. In the past when we were using gold, like during the Civil War, we couldn't pay soldiers so we went to greenbacks (paper money like today). That allowed the soldiers to get paid so we could continue to fight the war. Gold obviously has a physical practical limit that can be traded…

> Loans clearly have issues in a deflationary system. I would think, even more than that, loans would have issues in an anonymous system.

> I would think, even more than that, loans would have issues in an anonymous system.

Not really; the fact that the currency is anonymous doesn't make the loans anonymous. The lender cares that someone is on the hook for the payment being made, they don't care if that person is the person to whom the cash loaned is actually transferred or the person from whom the payments will, in fact, be transferred.

Of course, to establish credit worthiness and get attractive loan terms when the currency itself is anonymous -- whether its paper dollars or Bitcoins -- people are probably going to have to engage in transactions that are recorded and verifiable by the people who they want to trust them (either directly or through trusted third parties), mitigating the benefit of any anonymity inherent in the underlying currency system.

And, loan terms aside, if you want to take out loans whose enforcement relies on the compulsory powers of the states rather than the compulsory powers of lenders who act outside of the rules imposed by the state, you probably need to adopt some kind of protocol that allows you to prove in court that a loan agreement was made with particular terms by a particular lender and borrower and that repayments of specific amounts were made on that loan, which, again, will require sacrificing some of the anonymity inherent in the underlying monetary system.

Re: Bitcoin Is Fundamentally Flawed

#154

Post by dragonwriter »

Sambdala wrote: post #101
kruhft wrote: post #96

Earlier quoted context omitted.

Bitcoin is a commodity backed by Mathematics with the convenience of transfer of ownership through electronic rather than physical means. When the last coin is mined in 2140 the point of deflation might hold if it was a currency, but it's not. It is a faith based value store based on supply and demand, just like gold, which has next to no useful properties other than being shiny, non-tarnishing, conductive AND PEOPLE…

Bitcoin isn't backed by anything. "Backing" is also grossly misunderstood in general. Any "Backing" a currency has can generally be thought of as an put option on something fungible. For example, gold will never drop below $10-$20 per Oz because of the industrial/jewelry/etc uses people find for it. However, that "backing" only makes up a small percent of the price of gold.

> Bitcoin isn't backed by anything.

True; in a sense, its a formalized potlatch system in which the publicly-demonstrated destruction of wealth (energy and wear-and-tear on hardware, demonstrated via computation proofs) is rewarded instead of with informal social regard, with concrete exchangeable tokens.

Re: Bitcoin Is Fundamentally Flawed

#155

Post by scotty79 »

itsprofitbaron wrote: post #117
scotty79 wrote: post #102

Money is inflationary not because it is printed, but mostly because government allows banks to lend for long years the money that the bank could need tomorrow if the people whose money it is showed up at the said bank and demanded it back. There's nothing that could stop it for bitcoin. I can easily imagine that inflationary pressure from growing body of bitcoin credit could overcome bitcoin appreciation due to incre…

Inflation is considered a bad thing however, it doesn't necessarily mean that it’s a bad thing - if it's anticipated or unanticipated and it’s the sign that an economy is growing (although too little/much inflation can cause issues). What I'm arguing about Bitcoin is a potential liquidity trap because these new injections into the market may fail to stimulate economic growth (especially as Bitcoins can only add 25 ne…

Inflation is just sign that the supply of money printed by government and blown up by banks is higher than actual demand for the means of exchange (which is probably correlated with growth of economy).

Inflation isn't very bad if it's predictable. I can be made sort of predictable by hand-managing the supply to match the actual growth of economy but the process is very fuzzy.

I'm not sure if inflation is good though. I think that the fact that you have to give your money away to the bank just to keep your saving from deteriorating is horrible.

Deflation is sort of bad because people start to save money and reduce inessential purchases. They also have higher standard for considering investment to be good.

I think that economy build on currency so solid as bitcoins will be somewhat different than what we have now. I think it will be much less volatile than current situation and that it will much better reflect the development of humanity.

Re: Bitcoin Is Fundamentally Flawed

#156

Post by teeja »

dragonwriter wrote: post #16
base698 wrote: post #3

This is the classic argument you hear a lot, particuarly from Keynsian economists is: bitcoin is bad because it's deflationary like gold. In the past when we were using gold, like during the Civil War, we couldn't pay soldiers so we went to greenbacks (paper money like today). That allowed the soldiers to get paid so we could continue to fight the war. Gold obviously has a physical practical limit that can be traded…

> Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borr…

While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for.

If John's $45,000 house and Jane's $4.5M mansion are built in the same year and equally subjected to wear/tear, 20 years the value of John's house is probably less than 1 percent of Jane's mansion.

Re: Bitcoin Is Fundamentally Flawed

#157

Post by dragonwriter »

itsprofitbaron wrote: post #117
scotty79 wrote: post #102

Money is inflationary not because it is printed, but mostly because government allows banks to lend for long years the money that the bank could need tomorrow if the people whose money it is showed up at the said bank and demanded it back. There's nothing that could stop it for bitcoin. I can easily imagine that inflationary pressure from growing body of bitcoin credit could overcome bitcoin appreciation due to incre…

Inflation is considered a bad thing however, it doesn't necessarily mean that it’s a bad thing - if it's anticipated or unanticipated and it’s the sign that an economy is growing (although too little/much inflation can cause issues). What I'm arguing about Bitcoin is a potential liquidity trap because these new injections into the market may fail to stimulate economic growth (especially as Bitcoins can only add 25 ne…

> This is the opposite of what happens with fiat currencies as I highlighted with the American Recovery and Reinvestment Act of 2009[1] government spending and lending can have a positive impact on the economy in particular through kick-starting the multiplier effect.

Fiscal stimulus like ARRA isn't impossible in a Bitcoin economy. Monetary stimulus such as that practiced by the Fed (QE, QE2) might be impossible in a pure Bitcoin economy, but fiscal and monetary stimulus aren't the same thing.

(Actually, I think that monetary stimulus is possible in a Bitcoin economy via a sufficient subset of the network reaching consensus on evolving the protocol. Sure, the entity making the decision would be a different coalition of bankers than those running an existing government central bank, but it wouldn't be all that different fundamentally, still filtered by wealth and involvement in the financial system, but even less accountable than government central bankers are now. But much of the premise on which Bitcoin is sold is that such a consensus to alter the money supply would never actually occur.)

Re: Bitcoin Is Fundamentally Flawed

#158

Post by dragonwriter »

teeja wrote: post #156
dragonwriter wrote: post #16

Earlier quoted context omitted.

> Loans clearly have issues in a deflationary system. If you loan someone $10 today and that's worth $100 tomorrow how do they ever have a chance to pay it back? Payback would have to be on some growth rate where you owe "less" the longer the life of the loan with some interest built in. From the borrower side, the "you owe less over the life of the loan" option mitigates the effect of deflation on the viable of borr…

While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for. If John's $45,000 house and Jane's $4.5M mansion are built in the same year and equally subjected to wear/tear, 20 years the value of John's house is probably less than 1 p…

> While a bitcoin may be worth $nnn, is that the case for 0.0005 bitcoin? It could develop that the little pieces are seen to be a liability, and people might decide they're worth less than 0.0005 * $nnn. Which creates the 'risk' you're looking for.

I'm not looking for risk. I'm pointing out that a currency that appreciates in value when you stuff it in your mattress makes you far less likely to lend it out to someone and assume the risk of default, especially at interest rates that will be attractive to someone who is going to be uncomfortable paying it off even without interest, since just paying of the original loan value (denominated in the appreciating currency) without interest will mean paying over time many times the value (in purchasing power) of the original loan over its life.

Re: Bitcoin Is Fundamentally Flawed

#159

Post by jondtaylor »

mpyne wrote: post #43
jondtaylor wrote: post #7

"However, they are wrong because converting $100 into 10 x $10 bills or even 100 x $1 bills does not make you feel richer." This was also quoted in a Forbes article but I don't get it. Can someone explain what this means? What does lack liquidity or limited supply have to do with feeling richer by funging your bills? I'm not joking I seriously have no idea what this has to do with anything...

I think the idea is that it's a classic supply/demand equation: With a fixed supply of Bitcoin available to transact with, each individual Bitcoin will become more expensive as demand goes up. If you sub-divide Bitcoins further to purchase the same items then it's still a deflation: What you used to be able to sell for 1 BTC now you can only get 0.1 BTC for. If all prices drop proportionally at the same time that's n…

Ahh, Thanks.

Re: Bitcoin Is Fundamentally Flawed

#160

Post by dragonwriter »

Kapura wrote: post #119

The fundamental flaw is not with bitcoin, but with people. At the beginning of march, I told all of my friends that Bitcoin was worth more than it was selling for, for many of the reasons listed in the post. It's essentially inflation proof; supply of bitcoin is not going to outstrip demand. I reasoned, then, that long term, the value is likely to go up. This is great if you're planning on spending any bitcoins as cu…

> The important thing to remember is that this currency is not inherently worthless.

Yes, it is. Like all fiat currencies, Bitcoins (as distinct from the physical artifacts in which some of them might be housed) have no inherent value, only the value that results from the fact that some people are currently willing to accept them for other things.

> As long as people will still accept and trade in bitcoin, Bitcoin will never be as susceptible to collapse as other historical bubbles.

"As long as people accept and trade in X, X will never be as susceptible to collapse as other historic bubbles" is equally true for all possible values of X. The difficulty is predicting when and to what degree people will stop accepting X.

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