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Bitcoin Deflation and Economic Activity

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Re: Bitcoin Deflation and Economic Activity

#11

Post by dragontamer »

brownbat wrote: post #6
marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

> In the long run, bitcoin will stabilize, Why would this be true? Gold and silver have been around a long time, but both are still relatively volatile. I mean, I hope you're right, I'm just curious where you think volatility ends up and why you think so.

The volatility of Gold and Silver is approximately 20% / year. There was a MASSIVE Gold sell off earlier this year, which caused a temporary spike of Gold Volatility to 60%.

In comparison, the volatility of BTC is approximately 6000% / year.

The magnitude of volatility is straight up ridiculous. The behavior of BTC is more like a penny-stock than any commodity on the market

Re: Bitcoin Deflation and Economic Activity

#12

Post by gahahaha »

marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

Currencies are stable (and losing 2% value per year) because governments actively manage the supply of money to keep it stable in the face of very volatile demand (caused by what Keynes called "animal spirits". Since demand will fluctuate Bitcoin will fluctuate wildly for the foreseeable future like the value of gold has done and is doing. Bitcoin will never be a stable, safe place to store wealth for that reason. It might be useful as a payment system where you quicly buy Bitcoin and give it to somebody for a product (who then quickly sells it again), but it will be to volatile for much else except speculation..

Re: Bitcoin Deflation and Economic Activity

#13

Post by aflinik »

marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

Why would deflation converge to the rate of global economic growth? I'd think that the opposite tends to be true, eg. the inflation is often correlated with growth.

Re: Bitcoin Deflation and Economic Activity

#14

Post by marcell »

aflinik wrote: post #13
marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

Why would deflation converge to the rate of global economic growth? I'd think that the opposite tends to be true, eg. the inflation is often correlated with growth.

Suppose the only good in the world is apples, and the only currency is bitcoins. There are 21 million bitcoins in existence.

In 2013, we produce 21 million apples, so we could say that each bitcoin is worth 1 apple. In 2014, we produce 42 million apples, which is 100% annual GDP growth. Each bitcoin is worth 2 apples, which is a 100% appreciation in the value of the currency, aka. deflation.

Re: Bitcoin Deflation and Economic Activity

#15

Post by brownbat »

I heard Krebs in a radio interview say that many criminals who are practical experts in the actual use of experimental currencies require something like Liberty Dollars for price stability.

Could a cryptocurrency build price stability in as a feature?

I know this is anathema to one of Bitcoin's founding principles, but what if the payout for each round of mining was adjusted based on the average transaction size in the last few blocks? If transaction sizes are going up, you're getting deflation, so the algorithm would increase the rate at which money is being printed.

Not sure how to control for the opposite, for inflation. Maybe some small percentage of the transaction fees each round would get destroyed by the system, instead of paid out to the miners (it'd have to be a small percentage so you could keep people mining). Maybe better just leaving anti-inflation out of the design, since it isn't yet a demonstrable problem, might not ever be.

You could fiddle with how aggressively the system fights for price stability, trading off against the reliability of profitable mining.

Re: Bitcoin Deflation and Economic Activity

#16

Post by jquery »

brownbat wrote: post #6
marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

> In the long run, bitcoin will stabilize, Why would this be true? Gold and silver have been around a long time, but both are still relatively volatile. I mean, I hope you're right, I'm just curious where you think volatility ends up and why you think so.

> Gold and silver have been around a long time, but both are still relatively volatile.

Are gold and silver not less volatile than government-issued currencies, the long-term value of which has traditionally ended at $0?

Re: Bitcoin Deflation and Economic Activity

#17

Post by lumberjack »

Don't we the customers and the capitalists already have the same situation with dollars? I could either buy a PS4 or I could buy some penny stocks. I could either try my luck with a startup or I could put that seed money into a CD or a fairly low risk index fund.

So it all depends on the actual realistic rate of deflation if Bitcoin ever reaches widespread use.

Re: Bitcoin Deflation and Economic Activity

#18

Post by dragonwriter »

jquery wrote: post #16
brownbat wrote: post #6

Earlier quoted context omitted.

> In the long run, bitcoin will stabilize, Why would this be true? Gold and silver have been around a long time, but both are still relatively volatile. I mean, I hope you're right, I'm just curious where you think volatility ends up and why you think so.

> Gold and silver have been around a long time, but both are still relatively volatile. Are gold and silver not less volatile than government-issued currencies, the long-term value of which has traditionally ended at $0?

> Are gold and silver not less volatile than government-issued currencies

Which government issued currencies? Government issued currencies are not all alike.

> the long-term value of which has traditionally ended at $0?

Fiat currencies only end if the issuing entity ceases to exist or abandons them, and even so the market value of currency issued may not become zero, so the claim about ending value is suspect.

More importantly, though, volatility isn't even related to ending value, so this claim would be a complete non-sequitur even if it was true.

Re: Bitcoin Deflation and Economic Activity

#19

Post by marcell »

brownbat wrote: post #6
marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

> In the long run, bitcoin will stabilize, Why would this be true? Gold and silver have been around a long time, but both are still relatively volatile. I mean, I hope you're right, I'm just curious where you think volatility ends up and why you think so.

Bitcoin volatility is the result of thin order books. Look at http://bitcoinity.org/markets/bitstamp/USD: you can move the market by 10%+ with "just" a few million dollars. You can't move the market for Euros or Yen with that much money.

In a bitcoin success scenario, this will change once bitcoin is no longer the sole domain of currency speculators, but starts seeing actual commerce. Some places where this could start:

1) International remittance. Wire transfers are slow and expensive. Bitcoin could make moving money internationall much easier. See, for example, YC-backed "Buttercoin": http://techcrunch.com/2013/08/20/buttercoin/

2) Merchant adoption. Credit card fees for online commerce are in the 2-3% + $.35 range. Bitpay currently offers 0% fees, instead charging a flat $30/month: https://bitpay.com/pricing

3) Micropayments: The "+ $.35" part of credit card fees precludes micropayments. Bitcoin could be used for things like pay-per-minute streaming.

Once these types of things start adding volume and depth to the exchanges, it will be harder to move the market, and that will add stability. Obviously, this will take a few years.

Re: Bitcoin Deflation and Economic Activity

#20

Post by InclinedPlane »

marcell wrote: post #3

A few thoughts: 1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year? 2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, curr…

There's no such thing as free money. It's gotta come from somewhere, and it has to impose a cost somewhere.

Inflation in other currencies has a moderate, and mostly beneficial, cost. It encourages people to invest their money instead of just saving it, which leads to enhanced economic activity. Deflation in bitcoin only has value to the people "saving" their bitcoins, which sets up perverse incentives in regards to use of the currency as a medium of exchange.

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