Bitcoin Deflation and Economic Activity • Hacker News Board

Re: Bitcoin Deflation and Economic Activity

#91

Post by bigiain » Thu, Nov 28, 2013, 9:44 AM UTC

InclinedPlane wrote: post #90

bigiain wrote: post #85

Earlier quoted context omitted.

I think I was making a _different_ point. I think BTC is a perfectly fine transactional tool. Much like credit cards. I can buy and sell things with my credit card, but I can't eat positive or negative numbers on my bank statement - in one sense it's not "real" until I turn those numbers into something of "value", perhaps butter - perhaps some other abstraction of "value" that I trust, like dollars. Dollars as an "as…

Given that bitcoin only has notional value: if it's not used as a currency, with prices denominated in it, then what supports its value? If nothing does then you have the recipe for a speculative bubble, and crash, and little else. At least gold can be made into pretty jewelry and electronics.

It's pretty much the same as post-fund-raising stock market "value". Snapchat is "worth" 4 billion dollars in exactly the same way as a bitcoin is worth $1000 - enough people _believe_ it's "worth" that much that you can buy and sell some form of notional ownership of them - at least in small amounts – based on that value. If everybody stops believing in bitcoin or Snapchat, that value will plummet and perhaps disappear. The government will try to prevent that happening to USD, but ask a Greek or Zimbabwe person how their fiat currency has gone as a "reliable store of wealth". So long as people keep believing in BTC it _might_ maintain a real value - it does provide some real-world convenience to some people, so it's not impossible that it'll maintain long-tern value I guess.

I can't help but think though, that there's way more people "talking it up" because they have enough BTC stashed that another order of magnitude increase in BTC conversion rates will have many of them jumping to exit with "fuck you" amounts of money - with the inevitable deflation as their BTC all hits the market in a big rush…

Re: Bitcoin Deflation and Economic Activity

#92

Post by aflinik » Thu, Nov 28, 2013, 11:18 AM UTC

dllthomas wrote: post #23

marcell wrote: post #14

Earlier quoted context omitted.

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.

Just to explain why growth => inflation, frequently: Grow the (effective) money supply with lending and deposit accounts, and apples / dollar falls. When things are growing, people know there is money to be made, and so expect they are more likely to be paid back, and so lend more freely.

Thanks. That was counter-intuitive for me, now I get it.

Re: Bitcoin Deflation and Economic Activity

#93

Post by InclinedPlane » Thu, Nov 28, 2013, 12:10 PM UTC

bigiain wrote: post #91

InclinedPlane wrote: post #90

Earlier quoted context omitted.

Given that bitcoin only has notional value: if it's not used as a currency, with prices denominated in it, then what supports its value? If nothing does then you have the recipe for a speculative bubble, and crash, and little else. At least gold can be made into pretty jewelry and electronics.

It's pretty much the same as post-fund-raising stock market "value". Snapchat is "worth" 4 billion dollars in exactly the same way as a bitcoin is worth $1000 - enough people _believe_ it's "worth" that much that you can buy and sell some form of notional ownership of them - at least in small amounts – based on that value. If everybody stops believing in bitcoin or Snapchat, that value will plummet and perhaps disapp…

Hardly. Those companies make things. The provide services to people. That's real, concrete value.

Companies can be over valued, but certainly there is some value even in snapchat. There is zero non-notional value in bitcoin. It's just a currency. But if it's only used as an investment and not a currency then it's unlikely to retain value indefinitely.

Fiat currencies certainly have some similar problems, but because they are used heavily as currencies much of those problems are mitigated. Everyone around me is getting paid in dollars, everything at the store is denominated in dollars. Taxes are in dollars. Etc. Because of economic activities there is a tremendous amount of inertia to the value of the dollar. The only inertia inherent in bitcoin is the market valuation, and that is dependent on, effectively, a pyramid scheme. Once the value of bitcoin starts falling everyone will want to divest from it as quickly as possible, merely accelerating the collapse.

This is economics 101, we've seen countless speculative bubbles before, if you don't believe that speculation is a risk in the BTC market then you're just unaccountably naive.

If the BTC market started falling at the same rate it is going up right now, and persisted in doing so for 6 months what would you do with your BTCs?

Re: Bitcoin Deflation and Economic Activity

#94

Post by n00b101 » Thu, Nov 28, 2013, 2:44 PM UTC

> it will cost you 1 BTC to produce, market, and sell a single widget, and that it is only worth your effort if you can sell each widget for 2 BTC, a handsome 100% margin.

That's a 50% profit margin, not 100%.

profit margin = 1 - cost/revenue = 1 - 1/2 = 0.5

Re: Bitcoin Deflation and Economic Activity

#95

Post by dragonwriter » Thu, Nov 28, 2013, 6:44 PM UTC

jwallaceparker wrote: post #87

dragonwriter wrote: post #18

Earlier quoted context omitted.

> 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 i…

> Fiat currencies only end if the issuing entity ceases to exist or abandons them I'm curious - can you point to one example of this happening? To my knowledge they've all gone to zero in a hyperinflation but I'd love to know of a counterexample.

> > Fiat currencies only end if the issuing entity ceases to exist or abandons them

> I'm curious - can you point to one example of this happening?

Obvious, clear, and fairly recent examples include all of the European currencies that were retired in favor of the Euro.

> To my knowledge they've all gone to zero in a hyperinflation but I'd love to know of a counterexample.

A number have been abandoned (and often replaced by a new currency with the same name) by the issuing state in the face of inflation (often not even at the level typically labelled "hyperinflation"), but the nature of the "fiat" in "fiat currency" essentially assures some minimal residual value as log as the issuing state remains functional as a state and does not abandon the currency.

E.g., the pre-1993 Mexican Peso was withdrawn and replaced by the New Peso after a long period of double-digit annual inflation, but it neither "went to zero" (prior to being withdrawn) nor suffered hyperinflation (monthly inflation >50%.)