The Evolving Economics of Bitcoin, Gold and Fiat Currencies(cmegroup.com)
cmegroup.com
The Evolving Economics of Bitcoin, Gold and Fiat Currencies
http://www.cmegroup.com/education/featured-reports/evolving-economics-of-bitcoin-gold-currencies.html
164 comments
Thank you so much! I'm tired of all the goddamn Philistine's that have dunning-kurger'd themselves into thinking that deflationary currency is a good idea and inflation is a central bank conspiracy.
That said
>It will probably need to have constant money supply growth and preferably money supply growth that matches economic needs and not some algorithm’s hard, mathematical constraint
Why not have a "hard math" algorithm which looks at the trade volume in the blocks and adjusts accordingly.
That said
>It will probably need to have constant money supply growth and preferably money supply growth that matches economic needs and not some algorithm’s hard, mathematical constraint
Why not have a "hard math" algorithm which looks at the trade volume in the blocks and adjusts accordingly.
Can you explain to us idiots why a growing money supply is necessary? I've heard various reasons but none convincing.
It depends on if we want our output of valuable stuff (not just consumer products, but homes, health care, education and research) to grow or not. If we want them to grow, we need a growing money supply.
If not, you won't spend your money on any of those things, and if you don't spend your money on it, the demand goes down and less of the stuff is produced. The reason you won't spend your money today is because you'll get more tomorrow, so why not buy it tomorrow? And why spend your money tomorrow when you'll get more stuff the day after tomorrow?
And if most people aren't spending their money, you don't get any money either, because you only get money by someone else wanting what you produce (or wanting what your investment produces). Then you'll spend even less of your money, because now that you're strapped for cash, you really need to wait until the prices drop to maximize your purchase power.
It's the main reason we have near zero interest rates across the West years after 2008; that crisis was deep and we need to drive up inflation to kick start the economy for real and make the growth more equal.
If not, you won't spend your money on any of those things, and if you don't spend your money on it, the demand goes down and less of the stuff is produced. The reason you won't spend your money today is because you'll get more tomorrow, so why not buy it tomorrow? And why spend your money tomorrow when you'll get more stuff the day after tomorrow?
And if most people aren't spending their money, you don't get any money either, because you only get money by someone else wanting what you produce (or wanting what your investment produces). Then you'll spend even less of your money, because now that you're strapped for cash, you really need to wait until the prices drop to maximize your purchase power.
It's the main reason we have near zero interest rates across the West years after 2008; that crisis was deep and we need to drive up inflation to kick start the economy for real and make the growth more equal.
This is a strong argument and I feel like it makes sense.
Doesn't it rely on the premise that "we" (as a society) are deciding what currency all of us will use? I think what you're saying is totally true, but as a single rational person, I'd rather store my savings in something that is not (by design) decreasing in value.
People could always theoretically do this with gold, but it's not quite the same since gold has its own risks (like it being lost or stolen), ongoing costs (to protect it), and is trickier to trade.
Bitcoin is still in its early phases and another cryptocurrency may surpass it at some point, but if we don't already, it's likely people will have increasingly easy access to currency that is algorithmically constrained (like Bitcoin). Won't people rationally flock to such currencies, and if that's the case, won't it be difficult to encourage spending / investment using a minorly inflationary currency?
Doesn't it rely on the premise that "we" (as a society) are deciding what currency all of us will use? I think what you're saying is totally true, but as a single rational person, I'd rather store my savings in something that is not (by design) decreasing in value.
People could always theoretically do this with gold, but it's not quite the same since gold has its own risks (like it being lost or stolen), ongoing costs (to protect it), and is trickier to trade.
Bitcoin is still in its early phases and another cryptocurrency may surpass it at some point, but if we don't already, it's likely people will have increasingly easy access to currency that is algorithmically constrained (like Bitcoin). Won't people rationally flock to such currencies, and if that's the case, won't it be difficult to encourage spending / investment using a minorly inflationary currency?
> but as a single rational person, I'd rather store my savings in something that is not (by design) decreasing in value.
That's one of the reasons currency decreases in value, it's a deliberate effort to get people to use just about anything else as a store of value.
> Won't people rationally flock to such currencies
Supply constraints combined with utility to drive demand (whether a supply constrained “currency” has the latter is another question) makes for a good store of value—investment—but that's orthogonal to utility as a currency.
That's one of the reasons currency decreases in value, it's a deliberate effort to get people to use just about anything else as a store of value.
> Won't people rationally flock to such currencies
Supply constraints combined with utility to drive demand (whether a supply constrained “currency” has the latter is another question) makes for a good store of value—investment—but that's orthogonal to utility as a currency.
That last point is really key I think - If people flock to a currency as a means of growing their holdings value then it's not really a currency, it's an investment vehicle.
That argument has been levelled and Bitcoin, and I personally agree with it. It explains the adoption boom up to this point, and off the back of it it's possible to fairly confidently predict a bust when returns fail to materialize. Right now returns are based on adoption coupled with increasingly constrained supply.
That argument has been levelled and Bitcoin, and I personally agree with it. It explains the adoption boom up to this point, and off the back of it it's possible to fairly confidently predict a bust when returns fail to materialize. Right now returns are based on adoption coupled with increasingly constrained supply.
It is both a currency and a means of investment, all currencies are, even inflationary fiat currencies, the people who get in first when interest rates are high can earn a lot of interest before the currency is eventually devalued by the controllers.
In theory, when bitcoin reaches a saturation point of adoption, the value of bitcoin won't increase anymore (it can't if there is no more demand). At this stage deflation would technically have stopped and the currency is matured.
This should lead to a much more stable economy than we have now, where people aren't encouraged through the use of cheap credit to make emotional purchases for things they don't need, sure the economy might not "grow" at the same rate but the growth would be a more precise representation of what people truly needed (instead of just being a big party). Maybe people would even lead more stable responsible lives.
In theory, when bitcoin reaches a saturation point of adoption, the value of bitcoin won't increase anymore (it can't if there is no more demand). At this stage deflation would technically have stopped and the currency is matured.
This should lead to a much more stable economy than we have now, where people aren't encouraged through the use of cheap credit to make emotional purchases for things they don't need, sure the economy might not "grow" at the same rate but the growth would be a more precise representation of what people truly needed (instead of just being a big party). Maybe people would even lead more stable responsible lives.
> I'd rather store my savings in something that is not (by design) decreasing in value.
That's why you don't want to store your wealth in "cash" for investing, you most likely want to lend capital to new ventures that needs it.
That's why you don't want to store your wealth in "cash" for investing, you most likely want to lend capital to new ventures that needs it.
Sure, and I almost certainly would. But isn't that side-stepping the issue?
I could invest with a deflationary currency. I might not have 100% of it invested at every moment. When I do, the company could hold onto that for a while until they're able to make use of it. It benefits both of us (individually) for that money to not be decreasing in value, even if it works against us (as a society) in that we have decreased incentive to spend.
The key question is that if normal rational people would choose a deflationary currency if given a choice, and that choice is becoming more and more realistic, at what point does the current strategy of "assume everyone uses the nation's main currency and do what's best for the whole economy" not work any more?
I could invest with a deflationary currency. I might not have 100% of it invested at every moment. When I do, the company could hold onto that for a while until they're able to make use of it. It benefits both of us (individually) for that money to not be decreasing in value, even if it works against us (as a society) in that we have decreased incentive to spend.
The key question is that if normal rational people would choose a deflationary currency if given a choice, and that choice is becoming more and more realistic, at what point does the current strategy of "assume everyone uses the nation's main currency and do what's best for the whole economy" not work any more?
> at what point does the current strategy of "assume everyone uses the nation's main currency and do what's best for the whole economy" not work any more?
When the government stops using it as the basis for taxation, damages in civil cases irrespective of the specific nature of the assets at issue, and criminal fines.
Because as long as those (especially the first two) are true, essentially everyone will use the natiobal currency substantially, both directly and indirectly, regardless of what other assets and currencies they use, and normal monetary policy measures will affect the broader economy in the normal manner unless the auxiliary currencies are actively managed to counteract national monetary policy.
When the government stops using it as the basis for taxation, damages in civil cases irrespective of the specific nature of the assets at issue, and criminal fines.
Because as long as those (especially the first two) are true, essentially everyone will use the natiobal currency substantially, both directly and indirectly, regardless of what other assets and currencies they use, and normal monetary policy measures will affect the broader economy in the normal manner unless the auxiliary currencies are actively managed to counteract national monetary policy.
There are already companies that allow you to pay federal taxes with Bitcoin (by converting them to USD for you). There are already debit / credit cards that allow you to have your account funds in Bitcoin, but convert to USD for a merchant when you use them.
I guess to me it doesn't seem fundamentally impossible that those things could be based in a national / fiat currency that is not the same currency a large number (or even majority) of people use.
I guess to me it doesn't seem fundamentally impossible that those things could be based in a national / fiat currency that is not the same currency a large number (or even majority) of people use.
> There are already companies that allow you to pay federal taxes with Bitcoin (by converting them to USD for you)
That's immaterial, in the same way that you can sell non-currency assets to get dollars to pay federal taxes is.
As long as the taxes are denominated and collected exclusively in dollars (and as long as that's the norm for civil damages, as well), the supply of dollars will affect the economy in the usual way, whether or not for most transactions people directly use things that are not US dollars.
That's immaterial, in the same way that you can sell non-currency assets to get dollars to pay federal taxes is.
As long as the taxes are denominated and collected exclusively in dollars (and as long as that's the norm for civil damages, as well), the supply of dollars will affect the economy in the usual way, whether or not for most transactions people directly use things that are not US dollars.
I appreciate the response but that doesn't follow logically to me.
This isn’t quite correct. Technically I’d say it’s highly incomplete, and that incompleteness makes it wrong.
For instance, a side effect is that only high productive investments will be made. That leads to high return on investment. Which leads to higher profitability. (Look up ROIC if you want a quick overview of the effect - it’s very well documented).
What’s this leads to is a society which has a highly improving productivity, and therefore a highly improving quality of life.
I’m not sure why some economists leave this effect out. It’s a very significant effect, and leads to a different set of outcomes when you include it in a model.
Side note - using ROIC is a great filter for ranking companies to invest in. Over the longer term, companies with higher ROIC tend to significantly beat their competitors.
For instance, a side effect is that only high productive investments will be made. That leads to high return on investment. Which leads to higher profitability. (Look up ROIC if you want a quick overview of the effect - it’s very well documented).
What’s this leads to is a society which has a highly improving productivity, and therefore a highly improving quality of life.
I’m not sure why some economists leave this effect out. It’s a very significant effect, and leads to a different set of outcomes when you include it in a model.
Side note - using ROIC is a great filter for ranking companies to invest in. Over the longer term, companies with higher ROIC tend to significantly beat their competitors.
> And why spend your money tomorrow when you'll get more stuff the day after tomorrow?
Right, we'll die of starvation because our money will be worth more in the future. Instead of paying rent we'll all sleep in cardboard boxes. Then the economy will grind to a halt and global warming will cease to be a threat. Thus resulting in the onset of another ice age. The reason you don't want another ice age is, it'll destabilize the snow-shoe equities market. It's all pretty self-explanatory. (This is how I imagine your typical economist reasons).
Right, we'll die of starvation because our money will be worth more in the future. Instead of paying rent we'll all sleep in cardboard boxes. Then the economy will grind to a halt and global warming will cease to be a threat. Thus resulting in the onset of another ice age. The reason you don't want another ice age is, it'll destabilize the snow-shoe equities market. It's all pretty self-explanatory. (This is how I imagine your typical economist reasons).
I want to respond to your post but I sincerely can't tell what argument you're making here, too many layers of what I'm reading as sarcasm.
A more specific question might lead to a better discussion:
If the economy-wide goal[0] is increasing wealth[1], then why are increasing prices better than flat or decreasing prices[2]?
[0] There is general consensus that stable economic growth is our macroeconomic goal, generally defined as increasing output per person, or GDP. [1] Generally in economics this is taken to mean real purchasing power. [2] An increasing money supply is a side effect of the real goal of central banks: small amounts of inflation. If a population were shrinking, or if output was contracting, it might well mean that the money supply could remain flat or decrease and there might still be inflation. But as the population grows, the money supply must increase not just to keep prices flat but to encourage slight inflation.
Keynes writes brilliantly on this topic in "Essays on Persuasion," and many of the points are addressed here in the comments. But it can generally be distilled into three main points:
A low level of inflation 1) compels business activity because businesspeople can sell things at a higher price than they paid for all of the inputs; 2) compels consumer spending because today is the most valuable your cash will ever be; and 3) compels lending because there is a cost to simply doing nothing with cash.
Without those incentives, there would be a severe pull-back in lending, spending, and business and job creation, which are the same deflationary forces fought in the 2008 financial crash.
If the economy-wide goal[0] is increasing wealth[1], then why are increasing prices better than flat or decreasing prices[2]?
[0] There is general consensus that stable economic growth is our macroeconomic goal, generally defined as increasing output per person, or GDP. [1] Generally in economics this is taken to mean real purchasing power. [2] An increasing money supply is a side effect of the real goal of central banks: small amounts of inflation. If a population were shrinking, or if output was contracting, it might well mean that the money supply could remain flat or decrease and there might still be inflation. But as the population grows, the money supply must increase not just to keep prices flat but to encourage slight inflation.
Keynes writes brilliantly on this topic in "Essays on Persuasion," and many of the points are addressed here in the comments. But it can generally be distilled into three main points:
A low level of inflation 1) compels business activity because businesspeople can sell things at a higher price than they paid for all of the inputs; 2) compels consumer spending because today is the most valuable your cash will ever be; and 3) compels lending because there is a cost to simply doing nothing with cash.
Without those incentives, there would be a severe pull-back in lending, spending, and business and job creation, which are the same deflationary forces fought in the 2008 financial crash.
Let's say you have a successful manufacturing business, and you need to buy a new machine to produce and sell more of your stuff. The machine costs 1M and will last 10 years. You go to a rich friend of yours and ask for 1M DeflationaryDollars to buy that machine; your friend accepts to lend you that money for 10 years, at a 10% annual interest. You agree to pay the interest every year, and to give back the principal at the end of the 10 years.
The first year, you buy the machine, put it to good use, and sell more of your stuff for an additional gross profit of 200K - a GREAT return for a 1M machine. After paying 100K interest to your friend, you're left with a good 100K in pre-tax profit, which isn't bad at all!
The second year, DeflationaryDollars deflated by 10%. You're lucky, because all your employees gladly accepted a 10% salary cut, you slashed your prices by 10%, and you still make 180K in gross profits from your machine. But you still need to give your friend 100K, so your pre-tax profit is only 80K.
Third year, another 10% deflation. Gross profits are 162K, you're left with 62K after paying interests.
Fourth year: gross 145.8K, 45K after interests.
...
Eighth year: gross 95.6K, but you need to pay 100K in interests. You better have saved your profits from the previous years, and not paid any taxes on them, otherwise you're already in trouble.
...
Tenth year: gross 77.5K, and you need to give 1.1M to your friend. But the total gross profit you made before taxes was 1.3M, so, even with a very low tax rate, you're broke, because your machine is worth nothing by now. Next time, instead of investing to expand your business in a deflationary environment, you should think better and just spend as little as possible, save and hoard your DeflationaryDollars under your mattress, like most other people are doing.
The first year, you buy the machine, put it to good use, and sell more of your stuff for an additional gross profit of 200K - a GREAT return for a 1M machine. After paying 100K interest to your friend, you're left with a good 100K in pre-tax profit, which isn't bad at all!
The second year, DeflationaryDollars deflated by 10%. You're lucky, because all your employees gladly accepted a 10% salary cut, you slashed your prices by 10%, and you still make 180K in gross profits from your machine. But you still need to give your friend 100K, so your pre-tax profit is only 80K.
Third year, another 10% deflation. Gross profits are 162K, you're left with 62K after paying interests.
Fourth year: gross 145.8K, 45K after interests.
...
Eighth year: gross 95.6K, but you need to pay 100K in interests. You better have saved your profits from the previous years, and not paid any taxes on them, otherwise you're already in trouble.
...
Tenth year: gross 77.5K, and you need to give 1.1M to your friend. But the total gross profit you made before taxes was 1.3M, so, even with a very low tax rate, you're broke, because your machine is worth nothing by now. Next time, instead of investing to expand your business in a deflationary environment, you should think better and just spend as little as possible, save and hoard your DeflationaryDollars under your mattress, like most other people are doing.
What if you wrote some software that created DeflationaryDollars that you could sell to people?
You mean like "forged" DeflationaryDollars?
As in, creating software to produce a database which you call hmm maybe a "Softcoin" and you would limit the supply by typing an arbitrary number in the source code, say 21,000,000?
After you run the software to generate the coins, you can sell them to other people and tell them the coins are rare. Maybe you can leave a few coins to be generated by other people too, that way they you can let them feel like they're part of it.
After you run the software to generate the coins, you can sell them to other people and tell them the coins are rare. Maybe you can leave a few coins to be generated by other people too, that way they you can let them feel like they're part of it.
Ahhhh, I see now. Well, yes, of course I was thinking about those Softcoin, but preferred using values in "dollars" that would make some sense to the reader ;)
The current belief is a monetarist one: that more money in the economy, up to a certain degree, can lead to greater economic growth.
Hence, why low amount of inflation is considered a good thing, and sometimes used to measure the health of our economy.
This comes from a quantity theory of money -- MV = PQ, where M is the total amount of money in circulation, V is the velocity of money (or the amount of times it exchanges hand in a given year), and PQ is equal to GDP [1].
To understand this belief, we should consider 3 scenarios: deflation, low inflation, and high inflation.
In a deflationary economy, where 1 dollar today is worth more than 1 dollar tomorrow, people are incentivized to save. What follows is a decrease in M and or V, which has a detrimental multiplier effect on PQ. Under these circumstances, owning a business would be very hard as interest rates would be incredibly high.
Let's consider the opposite event -- high inflation. In a highly-inflation economy, where 1 dollar today is worth less than 1 dollar tomorrow, people would be incentivized to spend. This may initially sound like a good idea, with M and V increasing, and interest rates extremely low; but in a global economy, greater foreign demand for goods would drive up local prices, resulting in people unable to buy the goods and services they want. There's that other thing where wages are sticky, or not as reflexive to economic changes as prices are.
The happy medium is a low-inflation economy, where people are incentivized to spend and banks willing to loan, and saving money a low-risk activity.
[1] https://en.wikipedia.org/wiki/Equation_of_exchange#Quantity_...
Hence, why low amount of inflation is considered a good thing, and sometimes used to measure the health of our economy.
This comes from a quantity theory of money -- MV = PQ, where M is the total amount of money in circulation, V is the velocity of money (or the amount of times it exchanges hand in a given year), and PQ is equal to GDP [1].
To understand this belief, we should consider 3 scenarios: deflation, low inflation, and high inflation.
In a deflationary economy, where 1 dollar today is worth more than 1 dollar tomorrow, people are incentivized to save. What follows is a decrease in M and or V, which has a detrimental multiplier effect on PQ. Under these circumstances, owning a business would be very hard as interest rates would be incredibly high.
Let's consider the opposite event -- high inflation. In a highly-inflation economy, where 1 dollar today is worth less than 1 dollar tomorrow, people would be incentivized to spend. This may initially sound like a good idea, with M and V increasing, and interest rates extremely low; but in a global economy, greater foreign demand for goods would drive up local prices, resulting in people unable to buy the goods and services they want. There's that other thing where wages are sticky, or not as reflexive to economic changes as prices are.
The happy medium is a low-inflation economy, where people are incentivized to spend and banks willing to loan, and saving money a low-risk activity.
[1] https://en.wikipedia.org/wiki/Equation_of_exchange#Quantity_...
It's because of this:
https://en.wikipedia.org/wiki/Nominal_rigidity
Some things (like labor) simply do not react well to a decrease in price. And if your money supply isn't increasing, those will see some years of price increases and others of price decreases.
https://en.wikipedia.org/wiki/Nominal_rigidity
Some things (like labor) simply do not react well to a decrease in price. And if your money supply isn't increasing, those will see some years of price increases and others of price decreases.
This is an argument against inflation. The fact that an invisible hand can manipulate the value of wages further weakens labors bargaining power — a power which has been nothing but eroded over the last 50years. Sorry, I feel employers should at least be honest and upfront with their employees when they’re cutting wages.
It's not really acting upon bargaining power. If you look at almost every instance of nominal rigidity around, you will see it is caused by some kind of government intervention. On labor, it is mostly illegal or really hard to reduce salaries, even on deflation. That would force companies into firing people instead of just correcting their salaries.
I am not convinced it is a good reason for inflation. It is the reason for inflation. It does exist. It does cause a lot of problems (as in bankrupting even rich countries) when inflation is gone.
Yet I do think it is self inflicted in that a society can organize in a way that where it doesn't exist. I also have no idea it this way would be better or worse than our current ways.
I am not convinced it is a good reason for inflation. It is the reason for inflation. It does exist. It does cause a lot of problems (as in bankrupting even rich countries) when inflation is gone.
Yet I do think it is self inflicted in that a society can organize in a way that where it doesn't exist. I also have no idea it this way would be better or worse than our current ways.
I think it has less to do with merely growing the money supply, and more to do with preventing and quickly recovering from crashes.
The Great Depression was exacerbated and prolonged by us being on the gold standard and thus not being able to use monetary stimulus. Also with a gold standard, there's a limit to how much fiscal stimulus a government can conduct as well because every dollar has to be convertible to gold.
Essentially, fixed money supply = less control. On the surface this might seem like a good thing, and if money is in the hands of a corrupt oligarchy I'd prefer the fixed money supply. But most people don't realize that only 3% of the money supply is printed by the government (the rest is created by private banks), and economic bubbles/crashes and inflation/deflation aren't restricted to fiat currencies.
The Great Depression was exacerbated and prolonged by us being on the gold standard and thus not being able to use monetary stimulus. Also with a gold standard, there's a limit to how much fiscal stimulus a government can conduct as well because every dollar has to be convertible to gold.
Essentially, fixed money supply = less control. On the surface this might seem like a good thing, and if money is in the hands of a corrupt oligarchy I'd prefer the fixed money supply. But most people don't realize that only 3% of the money supply is printed by the government (the rest is created by private banks), and economic bubbles/crashes and inflation/deflation aren't restricted to fiat currencies.
>most people don't realize that only 3% of the money supply is printed by the government (the rest is created by private banks)
do you have a source for this claim?
do you have a source for this claim?
Section "Money creation in reality" [1]. States that 97% of money in circulation are from bank deposits, the majority of which are themselves created by commercial banks (though it doesn't explicitly state that the rest comes from governments).
[1] http://www.bankofengland.co.uk/publications/Documents/quarte...
[1] http://www.bankofengland.co.uk/publications/Documents/quarte...
>Can you explain to us idiots
If you're willing to ask the question and listen to the answer then you're not in the set of idiots.
I'll go for the short answer rather than the wall-of-text exhaustive answer. Deflationary currency leads to stagnation. People buy less because holding money under the mattress is incentivized. Its nearly impossible to run a business in an economy where people only buy essentials and never loan money out as startup capital.
Look at the history of economic panics in the US back when the gold standard was a thing.
I'm into bitcoin for reasons other than the 21 million limit.
If you're willing to ask the question and listen to the answer then you're not in the set of idiots.
I'll go for the short answer rather than the wall-of-text exhaustive answer. Deflationary currency leads to stagnation. People buy less because holding money under the mattress is incentivized. Its nearly impossible to run a business in an economy where people only buy essentials and never loan money out as startup capital.
Look at the history of economic panics in the US back when the gold standard was a thing.
I'm into bitcoin for reasons other than the 21 million limit.
[deleted]
Deflationary money (a fixed money supply) encourages people to hold money and not spend because the same money will buy more goods and services tomorrow. This leads to a decrease in economic activity.
[update: I see this argument is raised over and over in other parts of this discussion, I didn't add much]
[update: I see this argument is raised over and over in other parts of this discussion, I didn't add much]
Deflation isn’t guaranteed. Eventually people need to spend. A currency with fixed supply certainly encourages saving. Why is that a bad thing?
Because if you're saving your money, you're not doing anything constructive at all. I sure as hell don't want people saving their money, I want people to invest their money.
Wether it's a savings account, a 401k or a revolutionary business idea everything is better for society than your mattress. And people won't invest in anything today when they can invest more tomorrow, but then they'll wait until after tomorrow, or the day after that, or not at all because they reached that time when they eventually have to spend (which would mean they're broke, which is bad).
Wether it's a savings account, a 401k or a revolutionary business idea everything is better for society than your mattress. And people won't invest in anything today when they can invest more tomorrow, but then they'll wait until after tomorrow, or the day after that, or not at all because they reached that time when they eventually have to spend (which would mean they're broke, which is bad).
This isn't true, if you are saving it you are reducing supply and driving the price up. This gives economic opportunity to other savers who at some point may try and build or sell something that has a greater rate of return than the deflation rate.
No, you're reducing the supply of the currency, you're not reducing the supply of stuff the currency can buy. If the amount of stuff drops but the currency stays the same, the price increases but if the amount of stuff the currency can buy increases but the currency stays the same (as in, the number of Bitcoins have capped) the price drops.
If other people build something or sell something they increase the supply of stuff which makes the prices drop if the currency stays the same. In other words, they're less incentivized to build or sell something (since selling and building has costs) than just keeping the money themselves in their mattress if the amount of currency is fixed.
If other people build something or sell something they increase the supply of stuff which makes the prices drop if the currency stays the same. In other words, they're less incentivized to build or sell something (since selling and building has costs) than just keeping the money themselves in their mattress if the amount of currency is fixed.
Saving is investment, as long as you mean it in terms of a bank account & fractional reserve banking, in which case banks just re-lend that money to someone else as for example a loan or mortgage.
The only reason saving it in a bank account is an investment is because more people are borrowing than saving, thus the bank makes money and gives you a share of the profits (that's your saving's interest). If everybody's saving, nobody gets any return on it and all that money does absolutely nothing for society at all.
It appears that Bitcoin has turned into a $100 billion mattress.
I don’t buy your argument. People will still invest because investment generates a return on their money. Additionally, if the savings rate becomes too high the government has the ability to tax and reinvest that revenue as appropriate.
Inflation is a hidden tax that impacts the poor and middle classes the most. Worse, wealthy people have the means to escape inflation. Today the worlds weathiest simply buy land and property. Is that the sort of “investment” you’re cheering for as a positive result of inflation?
Inflation is a hidden tax that impacts the poor and middle classes the most. Worse, wealthy people have the means to escape inflation. Today the worlds weathiest simply buy land and property. Is that the sort of “investment” you’re cheering for as a positive result of inflation?
The problem is that with a deflationary currency, the only risk you run into is if the amount of stuff drops because that's the only way this global currency would drop in value; the perceived amount of stuff it could buy drops. Every other investment has much greater risks, so why would people chose them? And what's saying the return would be higher for that stuff anyway when everyone's saving rather than spending, why would anyone spend their money on the output of your investment? Not saying you're wrong, I'm saying there's a very high likelihood it won't result in investments, far higher than I would like.
And it's good that you brought up land and property because that's exactly what I don't want people to invest in (unless they actually want to use it for production, like renting it out to people or companies) but housing is something a lot of people do invest in for retirement, especially in my country. I would much rather people invested it in their 401k, a mutual fund, their business idea, bonds or whatever would enable production. Inflation is a tax on people who have money in their mattresses, if you invest money rather than save it you will beat inflation over your life. That's what I want people to be incentivized to do, not to pile them up or freeze them in status symbols like homes.
And inflation can actually help the poor, it makes it much easier for them to pay off their debts as the principal decreases in value. It's the main reason poor farmers fought for bimetalism in Gilded Age America because rich bankers were making a killing on low inflation.
And it's good that you brought up land and property because that's exactly what I don't want people to invest in (unless they actually want to use it for production, like renting it out to people or companies) but housing is something a lot of people do invest in for retirement, especially in my country. I would much rather people invested it in their 401k, a mutual fund, their business idea, bonds or whatever would enable production. Inflation is a tax on people who have money in their mattresses, if you invest money rather than save it you will beat inflation over your life. That's what I want people to be incentivized to do, not to pile them up or freeze them in status symbols like homes.
And inflation can actually help the poor, it makes it much easier for them to pay off their debts as the principal decreases in value. It's the main reason poor farmers fought for bimetalism in Gilded Age America because rich bankers were making a killing on low inflation.
Because banks don't want us to save, they want us to _borrow_.
How is that an argument for inflation?
I don't think it leads to a decrease in economic activity, just discourages an increase.
Why doesn't it lead to a decrease? Well, as soon as the economic output decreases (but the money supply didn't change!), then each dollar is worth less, so the incentive (to not spend because it will be worth more tomorrow) disappears, so the spending starts back up...
Why doesn't it lead to a decrease? Well, as soon as the economic output decreases (but the money supply didn't change!), then each dollar is worth less, so the incentive (to not spend because it will be worth more tomorrow) disappears, so the spending starts back up...
The growth mindset precisely why we are headed for ecological destruction. What's wrong with holding?
We don't just spend money on consumer products and food. We need more health services, research, water, education, affordable housing and much more. None of this is free, all of it is dependent on people making money producing this stuff. No demand, no stuff.
If everyone kept all their cash under their mattresses, what makes you think your employer would be able to pay your salary? Where would your employer get the cash to pay you?
A healthy economy requires money to flow through it at a healthy, manageable rate.
A healthy economy requires money to flow through it at a healthy, manageable rate.
> What's wrong with holding?
To put it short: that people won't have jobs.
To put it short: that people won't have jobs.
If you think we can't have economic growth without resource extraction, you've missed centuries of history.
Because economic output is growing. If the money supply grows to match, then each dollar has a stable value. If the money supply doesn't grow, then each dollar becomes worth a fixed fraction of the economy, and therefore the value of the dollar grows as the economy grows. (It's essentially the same as saying, if the amount of liquid increases, we want the number of liters to also increase, so that a liter can represent a fixed amount of liquid.)
Why does that matter? Well, let's say you own money on your house. And let's say that each of those dollars is worth more money, year after year, for a thirty year mortgage. That's going to become a problem, a big enough problem to crush you.
Why does that matter? Well, let's say you own money on your house. And let's say that each of those dollars is worth more money, year after year, for a thirty year mortgage. That's going to become a problem, a big enough problem to crush you.
My very rudimentary understanding is that if the amount of money flowing around the system is static (or reducing), then the money itself will increase in value over time (scarcity + demand). In that situation, it's (individually) most rational to hold on to your money and never spend it - it'll be worth more the longer you hold! This then results in the flow of money in the system trending towards zero. Which means everything locks up.
So tl;dr static money supply directly leads to the economy grinding to a halt.
So tl;dr static money supply directly leads to the economy grinding to a halt.
I'm not OP and won't try to give a lengthy explanation, but one key element is that by controlling the amount of money available (by adding or removing some depending on the financial environment) is how the government avoids the 'boom and bust' economy of the gold standard.
There is a misconception that governments only 'print money' and push it out, creating inflation. But this isn't true. Governments also take money out of circulation to prevent the economy from overheating.
There is a misconception that governments only 'print money' and push it out, creating inflation. But this isn't true. Governments also take money out of circulation to prevent the economy from overheating.
There is an implication here that there is only one way to address the boom and bust cycle. Furthermore why is the root cause of boom and bust not addressed? Currency manipulation seems like a bandaid for a gunshot wound.
That is certainly not an implication. However one significant root was identified: a fixed amount of fiat. That is exactly what this addresses.
What do you suggest as an alternative?
Why not have a "hard math" algorithm which looks at the trade volume in the blocks and adjusts accordingly.
Indeed. https://blog.ethereum.org/2014/11/11/search-stable-cryptocur...
Indeed. https://blog.ethereum.org/2014/11/11/search-stable-cryptocur...
It's possible to have a different opinion on things without being a victim of "Dunning-Kruger".
deflationary currency is not that bad of idea, the S&P 500 is an index of 500 of the best American companies and last time I check the number of shares do not increase year by year and it seem to be working for $FB, $GOOG, and $AAPL and for now $BTC...
When was the last time you spent $FB on food or rent?
I sold my $SNAP into dollars at a loss when it went to $11, bought bitcoin and spent over $1000 on a bitcoin debit visa on beer, food and other things does that count?
The number of shares does increase sometimes, though. Google's doubled in 2014, for example.
Bitcoin doubled with Bitcoin Cash
Not sure if I agree with your use of 'Philistine' and 'Dunning-Kruger'..
Having a hard math algorithm would be either too rigid or technological for our government.
There is probably a monetarist argument that looking at trade volume alone cannot understand the nuances and needs of an economy; mind that trade volume would be one of the more easily-accessible data. And that centralized banking is needed to aggregate that information, analyze it, and then relay that to government to decide what to do.
But what you're talking about has already been implemented in Bitcoin Cash during their emergency difficulty adjustment.
Having a hard math algorithm would be either too rigid or technological for our government.
There is probably a monetarist argument that looking at trade volume alone cannot understand the nuances and needs of an economy; mind that trade volume would be one of the more easily-accessible data. And that centralized banking is needed to aggregate that information, analyze it, and then relay that to government to decide what to do.
But what you're talking about has already been implemented in Bitcoin Cash during their emergency difficulty adjustment.
> Why not have a "hard math" algorithm which looks at the trade volume in the blocks and adjusts accordingly
Because it will be gamed.
Because it will be gamed.
Yeah, money velocity is important, aggregate demand is real, and currency hoarding is unavoidable with a deflationary currency. Why buy something when you can buy more somethings tomorrow?
"Why buy something when you can buy more somethings tomorrow":
In anything technology related, this has already been true for a couple of decades now. I can buy a phone, TV, computer, tablet etc today, or I can wait a year and get much more for the same amount of money.
People still buy all of those things because, as others have posted, you reach a point where you just have to or want to upgrade because the alternative is you spend years on old technology endlessly waiting for "just the right time to buy".
In anything technology related, this has already been true for a couple of decades now. I can buy a phone, TV, computer, tablet etc today, or I can wait a year and get much more for the same amount of money.
People still buy all of those things because, as others have posted, you reach a point where you just have to or want to upgrade because the alternative is you spend years on old technology endlessly waiting for "just the right time to buy".
Because everyone wants things much more today. Seems like a partial solution for our failure to save.
https://www.theonion.com/chipmunk-s-plan-for-future-better-c...
https://www.theonion.com/chipmunk-s-plan-for-future-better-c...
Practical issues aside and from an individual’s perspective, why use an inflationary currency at all if you can use a deflationary one?
The first thing that comes to mind is that debt stops making sense. In addition to your interest rate, your principle becomes more expensive over time.
A mortgage, a car payment, becomes more expensive over time since the deal was struck when prices were higher. A bitcoin can buy you a heck of a lot more now, but the mortgage you signed in 2014 was for 200 bitcoins. Uh oh...
Now, of course you can argue the necessity of credit until the cows come home. The bottom line is whatever credit is to you, deflation really throws a wrench in it.
Naively, other things the same, the best time to take out credit for something you need is now. Under a deflationary currency that time is never.
A mortgage, a car payment, becomes more expensive over time since the deal was struck when prices were higher. A bitcoin can buy you a heck of a lot more now, but the mortgage you signed in 2014 was for 200 bitcoins. Uh oh...
Now, of course you can argue the necessity of credit until the cows come home. The bottom line is whatever credit is to you, deflation really throws a wrench in it.
Naively, other things the same, the best time to take out credit for something you need is now. Under a deflationary currency that time is never.
Can't the interest rate be negative ? (of course the some stability in price increase is needed for it to work).
Why loan money at a negative interest rate? Just keep it.
Because you can buy more with a deflationary currency tomorrow than you can today. So the tendency would be to not buy things with a deflationary currency and instead buy things with an inflationary currency.
Depends on what you mean by "use". Gresham's Law states that bad money drives out good. In this context, that means that everyone stores their value in (hoards) the deflationary currency, and spends the inflationary one.
Generally you can only pay taxes in a specific currency. Deflationary currency's lower debt risks which is a really nice feature when paying taxes, so considering taxes such a large expense deflationary currency's become far more appealing than you might think.
You also reduce risks by paying taxes in the same currency you conduct business in. So, while having large savings in deflationary currency is not a great idea, for the average person deflationary currency's are surprisingly appealing.
PS: Remember, many things like socks are valued in USD, but are not actually USD. Total USD supply is actually fairly low per person limiting average losses from inflation.
You also reduce risks by paying taxes in the same currency you conduct business in. So, while having large savings in deflationary currency is not a great idea, for the average person deflationary currency's are surprisingly appealing.
PS: Remember, many things like socks are valued in USD, but are not actually USD. Total USD supply is actually fairly low per person limiting average losses from inflation.
point is, deflationary currency has already been tried before (the gold standard), and it was observed that years of deflation was not good for the economy. There's a reason we don't use it anymore.
If all else is equal, you wouldn't.
But all else isn't equal. Since the deflationary one induces people to horde, you might have sudden, extreme inflation if people panic sell.
Bitcoin and other crypto are only deflationary if their economies grow faster than the supply. But that isn't at all guaranteed.
But all else isn't equal. Since the deflationary one induces people to horde, you might have sudden, extreme inflation if people panic sell.
Bitcoin and other crypto are only deflationary if their economies grow faster than the supply. But that isn't at all guaranteed.
What I really want to know at this point is how come my landlord won't accept all of these Linden Dollars I've been saving up to pay my rent? :)
Given this reality, why not create a multiplicity of currencies, all convertible with each other and with different inflation rates? Currently we have a hodgepodge of assets with various interest rates that are all convertible with the fiat currency, but as with the gold and silver standards, we are mapping objects with other kinds of utility, such as houses, onto the financial asset spectrum and distorting those other uses. Interest rates should just be used to efficiently allocate resources across time, and the vehicles we have of doing so are very rough and prone to supply and demand shocks for reasons that have nothing to do with one's value of current time and future time.
>Bitcoin can became a mainstream p2p fiat replacement for the masses all while having a 21 million coin limit.
Does anyone outside of the most zealous ideologues really believe this?
Does anyone outside of the most zealous ideologues really believe this?
Why does one have to be zealous to understand bitcoins are divisible up to eight decimal places? A single bitcoin is really 100,000,000 bitcoin "satoshis" (1.00000000). "Satoshis" being the smallest unit (0.00000001).
So, there really are 2,100,000,000,000,000 bitcoin units. When you purchase a single "bitcoin", you really are purchasing 100,000,000 "satoshis".
So, there really are 2,100,000,000,000,000 bitcoin units. When you purchase a single "bitcoin", you really are purchasing 100,000,000 "satoshis".
Gold is also divisible into arbitrarily-finite (down to the atom, one would suppose, though that doesn't exactly seem practical...), but that completely misses the point of the article: that the money supply isn't large enough, so Bitcoin, like gold, becomes a store of value and is useless as a currency.
How easily can one spend an atom of gold? I can spend a handful of satoshis while sitting on the couch with my laptop.
>but that completely misses the point of the article: that the money supply isn't large enough
It seems you misunderstood my point, which is that bitcoin is not "21 million coins". There really are many more units, with the option of increasing the divisibility past eight decimal places in the future.
>but that completely misses the point of the article: that the money supply isn't large enough
It seems you misunderstood my point, which is that bitcoin is not "21 million coins". There really are many more units, with the option of increasing the divisibility past eight decimal places in the future.
> There really are many more units, with the option of increasing the divisibility past eight decimal places in the future.
You are still missing the point. It is not divisibility that makes bitcoin unsuitable as a spending currency, it is the fact that its price keeps rising. Imagine if you are presented with two coins one that historically inflates and another that deflates and are asked to spend one and hold the other. Which do you pick? An inflating coin will always replace a deflating one as a medium of exchange. This is called Gresham's law.
A coin with a fixed supply will never be suitable for daily transaction because the demand for currency isn't fixed (due to economic and population growth).
You are still missing the point. It is not divisibility that makes bitcoin unsuitable as a spending currency, it is the fact that its price keeps rising. Imagine if you are presented with two coins one that historically inflates and another that deflates and are asked to spend one and hold the other. Which do you pick? An inflating coin will always replace a deflating one as a medium of exchange. This is called Gresham's law.
A coin with a fixed supply will never be suitable for daily transaction because the demand for currency isn't fixed (due to economic and population growth).
Bitcoin is currently inflationary. 1,800 newly generated bitcoins (about $11,700,00) are added to the supply roughly every 24 hours.
NO it is not. Inflation does not mean growing money supply. It means money supply growing faster than the real economy that transacts on that money. Bitcoin money supply may be growing but not fast enough to accomodate the demand. So it is deflating.
> money supply isn't large enough, so Bitcoin, like gold, becomes a store of value and is useless as a currency.
This isn't true though, the supply of the money has no relation to whether or not something becomes a store of value. The key attribute is that it's finite (deflationary).
However, I need to say that a finite currency isn't deflationary forever, it can only be deflationary until there is no more demand for the currency, which has to happen at some point, then the currency becomes stable and mature.
The money supply is important as well, bitcoin is infinitely divisible (easy network upgrades possibly required) so for all practical reasons money supply (liquidity) will never be a problem for bitcoin, but it has been a problem for every single currency which came before. Gold especially because it's expensive to deal with changing and re-issuing the money supply each time you want to add liquidity.
Today, it's much easier with digital banking but liquidity is still not 100% all the time so when liquidity needs to be added or removed, it's done in unnatural ways, which leads to instability in markets.
This isn't true though, the supply of the money has no relation to whether or not something becomes a store of value. The key attribute is that it's finite (deflationary).
However, I need to say that a finite currency isn't deflationary forever, it can only be deflationary until there is no more demand for the currency, which has to happen at some point, then the currency becomes stable and mature.
The money supply is important as well, bitcoin is infinitely divisible (easy network upgrades possibly required) so for all practical reasons money supply (liquidity) will never be a problem for bitcoin, but it has been a problem for every single currency which came before. Gold especially because it's expensive to deal with changing and re-issuing the money supply each time you want to add liquidity.
Today, it's much easier with digital banking but liquidity is still not 100% all the time so when liquidity needs to be added or removed, it's done in unnatural ways, which leads to instability in markets.
That's about where the metaphor ends. While dividing gold down to atoms requires a great amount of mechanical effort, dividing btc requires a few more pushes of the '0' key (or configuring your client to use satoshis as the base amount).
The thing you have to remember though is that the velocity of Bitcoin or any cryptocurrency is higher than that of normal fiat. We could still have a finite supply of coins that acts as a currency.
Why is the velocity higher? How technologically easy it is to transfer the currency has nothing to do with actual velocity.
Bitcoin can be destroyed, but in theory the limit never increases. Thus, Bitcoin will fail given a long enough time-frame eventually there will be less than 1 bitcoin left in circulation.
Granted, most currency's don't last all that long, but their are not enough accuracy to last say 20,000 years.
Granted, most currency's don't last all that long, but their are not enough accuracy to last say 20,000 years.
Bitcoins (the unit, not the currency) can indeed be destroyed by using OP_RETURN. This has been done in the past, and is still being done right now.
It is however highly unlikely that all 21 million bitcoins will end up in that drain.
Bitcoin can also be sent to an address of which there is no known private key. Future advances/exploits of Elliptic curve cryptography should make those coins recoverable.
In the end, users will probably not even know each other's public keys for everyday spending of bitcoin. They will only check the public keys for large purchases such as houses, cars, etc.
It is however highly unlikely that all 21 million bitcoins will end up in that drain.
Bitcoin can also be sent to an address of which there is no known private key. Future advances/exploits of Elliptic curve cryptography should make those coins recoverable.
In the end, users will probably not even know each other's public keys for everyday spending of bitcoin. They will only check the public keys for large purchases such as houses, cars, etc.
It's easy to lose private keys which is a far more common issue than you might think.
> Future advances/exploits of Elliptic curve cryptography should make those coins recoverable.
It's possible for that to be true without also completely destroying bitcoin. But, it's not particularly likely.
> Future advances/exploits of Elliptic curve cryptography should make those coins recoverable.
It's possible for that to be true without also completely destroying bitcoin. But, it's not particularly likely.
My anecdotal experience is most believers in the future of crypto believe that there will be a number of cryptocurrencies that will be used.
> never heard one good argument to backup the claims that Bitcoin can became a mainstream p2p fiat replacement
There are many reasons Bitcoin will not be the currency for daily transactions. Some of them are even technical. But, that is ok because it will be used as a store of value filling a need similar to gold. So I guess I'm agreeing with you. But it's taking people awhile to come to understand this subtle difference.
There are many reasons Bitcoin will not be the currency for daily transactions. Some of them are even technical. But, that is ok because it will be used as a store of value filling a need similar to gold. So I guess I'm agreeing with you. But it's taking people awhile to come to understand this subtle difference.
Bitcoin are (effectively) infinitely divisible. Money supply creation on it's surface is meant to replace notes that age out of supply. Inflationary growth is a byproduct (albeit a good one). Bitcoin supply will also age out (as people lose access to private keys). This creates a natural inflationary action that pushes the value up. No new coins need to be created, just take what's in the supply and break it up into smaller values. This also removes the politics out of the money supply.
Many users are already using mBTC as a base unit (0.001BTC) as it's much easier to transact with at a human level. 1mBTC currently is ~ $6.50. The current smallest unit (1 Satoshi) is worth 0.0001USD, plenty of room for further unit division. It's been confirmed on a technical level that moving that division deeper is possible, but unnecessary in the short term.
Many users are already using mBTC as a base unit (0.001BTC) as it's much easier to transact with at a human level. 1mBTC currently is ~ $6.50. The current smallest unit (1 Satoshi) is worth 0.0001USD, plenty of room for further unit division. It's been confirmed on a technical level that moving that division deeper is possible, but unnecessary in the short term.
You definitely have inflation and deflation backwards here.
Bitcoin is the digital version of returning to the gold standard (right now I'd say it's more like digital gold, but if they can get fast micro payments, it will be like an actual currency)
What might surprise you is that there are a lot of people who think that planned inflation is a way for governments to rob people who are prudent with their personal finance (and save up money)
If we are 10 people who each have 100 dollars, we have a money supply of 1.000, evenly distributed. If I'm the national bank and I print another 1.000, the money supply has doubled, while the value of the total money supply has remained constant. Only now, instead of holding on to 10% of the total supply, I now own 55%!
So as long as somebody have control of the money supply, it is not a free financial market. Limiting the money supply, either through the scarcity of gold, or cryptography of bitcoin ensures that the market will distribute money, and not the printers.
What might surprise you is that there are a lot of people who think that planned inflation is a way for governments to rob people who are prudent with their personal finance (and save up money)
If we are 10 people who each have 100 dollars, we have a money supply of 1.000, evenly distributed. If I'm the national bank and I print another 1.000, the money supply has doubled, while the value of the total money supply has remained constant. Only now, instead of holding on to 10% of the total supply, I now own 55%!
So as long as somebody have control of the money supply, it is not a free financial market. Limiting the money supply, either through the scarcity of gold, or cryptography of bitcoin ensures that the market will distribute money, and not the printers.
I get that people consider this a poor argument, but parent asked what the argument for bitcoins deflationary nature, and to the best of my knowledge this is the argument for it, and it is found within groups who identify with anarchistic economics and austrian schools of thought.
Bitcoin comparison with Gold has become gospel. And with it a typical upper bound on the price estimate of a single coin in the ~$100K range. The assumption is that the total Gold market is about $10T globally and Bitcoin will displace some percentage of that. With the current Bitcoin market valuation based on exchange rate approaching $1T and 25% or so mining complete.
But a much better estimation might arise from looking at global consumer demand for Digital Payments. By the year 2020 its conceivable that we are at 1T digital transactions. At an average value of $10 each, we are again speaking of roughly the size of the total market for Gold.
The million dollar question is: What percentage of all digital transactions globally will be made in BTC?
Approaching the problem from the FinServ lens, rather than FinTech, can radically alter your view ;)
But a much better estimation might arise from looking at global consumer demand for Digital Payments. By the year 2020 its conceivable that we are at 1T digital transactions. At an average value of $10 each, we are again speaking of roughly the size of the total market for Gold.
The million dollar question is: What percentage of all digital transactions globally will be made in BTC?
Approaching the problem from the FinServ lens, rather than FinTech, can radically alter your view ;)
Bitcoin is valued at $110b with 16.66m mined out of 21m. So ~80% mined [1]
1 - https://coinmarketcap.com/currencies/bitcoin/
1 - https://coinmarketcap.com/currencies/bitcoin/
To evaluate the price of a Bitcoin from the perspective of its value as a unit of exchange you need to take into account the volume of the transactions and the time currency is held between being paid and being spent.
If there were $1T of Bitcoin transactions each year and the coins were held for 1 year in between, then yes, the total value of all circulating Bitcoin need to be $1T. If the coins are held on average for a week, you only need $20B worth of circulating Bitcoin.
When you leave out that last number, you implicitly assume whatever interval you're talking about is the transaction duration, which is usually a bad assumption.
If there were $1T of Bitcoin transactions each year and the coins were held for 1 year in between, then yes, the total value of all circulating Bitcoin need to be $1T. If the coins are held on average for a week, you only need $20B worth of circulating Bitcoin.
When you leave out that last number, you implicitly assume whatever interval you're talking about is the transaction duration, which is usually a bad assumption.
How does Bitcoin make the transition from a gold-like store-of-value to a medium-of-exchange then?
If the general consensus is that Bitcoin's value will continue to appreciate, it makes more sense for one to hoard it rather than to use it as digital currency.
If the general consensus is that Bitcoin's value will continue to appreciate, it makes more sense for one to hoard it rather than to use it as digital currency.
>Approaching the problem from the FinServ lens, rather than FinTech, can radically alter your view ;)
What do you mean?
What do you mean?
"The phenomenal increase in the value of bitcoins, by 6,000,000%, over the past seven years, has taken the investing world by storm. CME Group will launch Bitcoin futures in the fourth quarter of 2017."
This is promote an upcoming product.
This is promote an upcoming product.
Their ads are everywhere - took me a while to notice that it's the same CME that run all of those expensive video ads that have that scammy "get rich working from home" feel to them.
Their user acquisition cost must be $1k+ because barely a day passes that I don't see them somewhere - and it's a pretty broad base they deliver to since I use multiple profiles / incognito windows
Their user acquisition cost must be $1k+ because barely a day passes that I don't see them somewhere - and it's a pretty broad base they deliver to since I use multiple profiles / incognito windows
Why the downvotes?
Aren't there 4 zeroes too many in that number?
In juli 2010, 1 bitcoin was worth 0.08 usd.
No clue at all what money is, or about.
Yet another 'money is a commodity' view that just doesn't fit reality.
Money is a representation of credit. That's actually what we use it for.
https://medium.com/modern-money-matters/crypto-shilling-8799...
Yet another 'money is a commodity' view that just doesn't fit reality.
Money is a representation of credit. That's actually what we use it for.
https://medium.com/modern-money-matters/crypto-shilling-8799...
The whole article in a single sentence:
"However volatile they may be, the reason why gold and bitcoin are perceived as stores of value is simple: their money supply doesn’t grow quickly and, in the case of bitcoin not at all, some day."
Ergo, bitcoin is like gold. Hence, should be valued as gold.
Ergo, bitcoin is like gold. Hence, should be valued as gold.
No, gold has one advantage over bitcoin: in the worst case scenario (where you survive, though a couple religions let you take it with you) it is a physical thing that is somewhat pretty to wear as a ring on your finger.
Bitcoin and the like are entirely based on the idea that somebody else will want them as currency forever. Gold is based on somebody will want ti for either currency or jewelry forever. That gives gold a slight edge.
I don't know if it is significant, but it is a factor.
Bitcoin and the like are entirely based on the idea that somebody else will want them as currency forever. Gold is based on somebody will want ti for either currency or jewelry forever. That gives gold a slight edge.
I don't know if it is significant, but it is a factor.
I've thought about the idea that the value of a cryptocurrency is in its network. Since bitcoin has a large network it has some value that can't easily be copied or replicated. I have wondered if the value is actually closer to something like Facebook stock than gold.
Gold is also truly fungible, and has maintained some value for thousands of years.
Gold is also a pretty good conductor of electricity
Gold is at best Okay. There is a common belief that gold is a good conductor, but it has too high resistance. Look at the table https://en.wikipedia.org/wiki/Electrical_resistivity_and_con... gold is 5 on the list, well behind copper (which is what we use), and only barely ahead of aluminum.
Yes, there will be only 21 million bitcoins.
Oops, fork! Now there will be 42 million.
Another fork! Now the maximum is 63 million. There's no such thing as scarcity for a virtual currency.
Oops, fork! Now there will be 42 million.
Another fork! Now the maximum is 63 million. There's no such thing as scarcity for a virtual currency.
Post-fork, two coins like BTC and BCH are not fungible either from the networks or from a user's point of view
Then shouldn't every deflationary alt-coin also be valued like gold? You can see where this is going...
By that logic, gold would have crashed long ago and been replaced by all the other alt-rare-metals out there. It has not.
The network effect should not be underestimated. The world is filled with examples of inferior systems that exist simply because they have more momentum than others. Investors demand a “store of value” investment vehicle. Up until now, gold has led that role. Now Bitcoin will take over. Not because it is the best, but because it is first to market and has enough momentum and utility to replace it.
The network effect should not be underestimated. The world is filled with examples of inferior systems that exist simply because they have more momentum than others. Investors demand a “store of value” investment vehicle. Up until now, gold has led that role. Now Bitcoin will take over. Not because it is the best, but because it is first to market and has enough momentum and utility to replace it.
I remember when people used to pay real money for ICQ numbers, so the network effect argument doesn't really get me.
Shouldn't every resource be valued like gold? There's a limited supply of copper... You can see where this is going.
Gold is a weirdly sticky anachronism of a wealth store that never made any sense in the first place.
Gold is a weirdly sticky anachronism of a wealth store that never made any sense in the first place.
Gold has one good property, it does not rust.
Thus making tokens out them meant said tokens would last generations, and withstand the rigors of international transport.
As best i recall, gold and silver were rarely popular for domestic trade. There more common materials were used. They were instead used for international trade.
In the end people have come to confuse the token, a way to do trade accounting without an accountant always present, with the metal it was made of.
Thus making tokens out them meant said tokens would last generations, and withstand the rigors of international transport.
As best i recall, gold and silver were rarely popular for domestic trade. There more common materials were used. They were instead used for international trade.
In the end people have come to confuse the token, a way to do trade accounting without an accountant always present, with the metal it was made of.
Gold make sense because girls like to wear gold on their fingers, in their ears... Copper is not useful for that purpose.
I know, that's why I highlighted the flawed logic therein. Sure, one can talk about bitcoin and blockchain as being revolutionary but every time someone with a finance degree writes something, they go by hype and not substance.
Finally a way to short bitcoin without having to worry about counterparty risk!
Did the CME group just call bitcoin dramatically undervalued??
"While there is no logical reason to suppose that bitcoin should have the same value as gold, if it did, each bitcoin should be worth approximately $285,000, 45 times the current market price. As such, one might wonder: is bitcoin still vastly undervalued even after a 6,000,000% rally?"
Only if btc's total worth equates gold's. Which is a possibility, for better or for worse
Only if btc's total worth equates gold's. Which is a possibility, for better or for worse
Yes but we don't have to industrialise the asteroid belt to dump equivalent quantities of crypto-currency into the market ...
Bitcoin is currently using 0.12% of the world's electricity production -- enough to power 2 million homes.
That figure sounds outrageous. I had to check for myself.
According to an IEEE article[0], bitcoin's power usage is at around 1 Gigawatt. In 2012, Wikipedia[1] tells me that the global electricity usage was around 20,000 Terawatt hours, which makes an average power of around 2,000 Gigawatts. We can assume this has increased somewhat since then - the growth rates suggest annual consumption would be a few thousand Terawatt hours greater by now.
So the 2012 figures give us around 0.05% of electricity consumption being used by bitcoin. While this runs a little shy of your figure, and current values may be somewhat lower still, I'm really surprised at just how power intensive the whole endeavour is.
[0] https://spectrum.ieee.org/energy/policy/the-ridiculous-amoun...
[1] https://en.wikipedia.org/wiki/Electric_energy_consumption
According to an IEEE article[0], bitcoin's power usage is at around 1 Gigawatt. In 2012, Wikipedia[1] tells me that the global electricity usage was around 20,000 Terawatt hours, which makes an average power of around 2,000 Gigawatts. We can assume this has increased somewhat since then - the growth rates suggest annual consumption would be a few thousand Terawatt hours greater by now.
So the 2012 figures give us around 0.05% of electricity consumption being used by bitcoin. While this runs a little shy of your figure, and current values may be somewhat lower still, I'm really surprised at just how power intensive the whole endeavour is.
[0] https://spectrum.ieee.org/energy/policy/the-ridiculous-amoun...
[1] https://en.wikipedia.org/wiki/Electric_energy_consumption
which helps mines roughly 7,740,000 USD worth of new bitcoins per day, I'm not sure how sustainable this is.
I ask myself: is there a limit for a drawdown without return in bitcoins? - as in, if the value goes under a certain threshold, it's not profitable any more to "mine it up" again and the blockchain falls dry... or could they just lower the difficulty of mining in order to prevent that?
The Bitcoin network cannot know or should it care about a fiat exchange rate. Which currency should it look at? Dollar? Euro? Why?
If the block frequency of ten minutes is not met, the difficulty is automatically adjusted after 2016 blocks (ca. 2 weeks) up or down.
I think miners have to know and care about a fiat exchange rate, at least until electricity can be paid for in BTC. So that's where I thought a threshold for miners running their equipment without losing money might come from - and thus a never-come-back dropdown limit. I really don't know, just curious. But probably automatic adjustment takes care of this, as you said.
I didn’t read it that way. The article seems to have a balanced tone, though the conclusion is that bitcoin is kind of digital gold and lacks the economically stabilizing effect of fiat currencies.
Again the flawed gold comparison. You can still trade gold after the miners stop mining.
Nothing prevents you from mining yourself and still confirming transactions if you're the last Bitcoin user in the world.
It depends on how fast the other miners disappeared so that the difficulty can adjust in a timely manner.
If the hash rate drops to fast and you are the last miner left, you will have trouble finding a block and so you actually can't mine new blocks.
Of course, as the last miner in the world you won't have trouble conducting a hard fork the resets the difficulty.
If the hash rate drops to fast and you are the last miner left, you will have trouble finding a block and so you actually can't mine new blocks.
Of course, as the last miner in the world you won't have trouble conducting a hard fork the resets the difficulty.
Common sense prevents me. How much value will it still have if there is a single miner? The integrity of the blockchain is ensured by the number of miners.
Also the gold analogy is still flawed.
Also the gold analogy is still flawed.
> The integrity of the blockchain is ensured by the number of miners.
No it is not. Even if you are a single miner you won't be able to pass incorrect transactions, such as moving other people's money or create coins out of nowhere.
No it is not. Even if you are a single miner you won't be able to pass incorrect transactions, such as moving other people's money or create coins out of nowhere.
51% attack?
You don't seem to understand how 51% attack works. It allows you to roll back correct transactions, but it does not allow you to perform incorrect transactions.
I never claimed otherwise. The ability to manipulate history affects the chain integrity. Perhaps integrity isn't the right word. Consistency?
I'm honestly curious what role Bitcoin has played in the relative stability of gold over the last ~five years.
I'm gonna gamble and guess none
I mean, suc^H^H^Hinvestors have dumped hundreds of millions if not billions into Bitcoin over that same time-frame, I assume it has to be cannibalizing something, and the "the world is ending you better buy gold it only goes up!!!" market is as good a guess as any.
No one says they had to take away money from somewhere. But most likely the stock market. With the markets being up a ton over the last ten years, most HNWIs could have easily borrowed against their shares portfolio at <2% a year and put it into crypto, if they were up for it. (Portfolio) margin debt is at an all time high.
If you had the balls to lever up your portfolio 3x you would have made a killing after the 2008 crash with just a few million in capital, and that's just by investing in the stock market.
If you had the balls to lever up your portfolio 3x you would have made a killing after the 2008 crash with just a few million in capital, and that's just by investing in the stock market.
Whenever someone buys bitcoin, somebody is selling–the same amount, at the same price. That seller can then use those US$ or EUR they got and buy gold.
There's no value "stored" in bitcoin that is missing anywhere else. It's all in your head.
There's no value "stored" in bitcoin that is missing anywhere else. It's all in your head.
What’s clear from all these comments is that economic theory is bankrupt and impotent at explaining or predicting anything. It’s quite odd constantly hearing why bitcoin can’t work or whether it can be labeled a currency according to academic theory X, yet reality doesn’t care.
Bitcoin is amazing simply for showing us that monetary economists have no clothes. They’re astrologists that use math.
Bitcoin is amazing simply for showing us that monetary economists have no clothes. They’re astrologists that use math.
Nobody is saying that bitcoin can't reach new heights every day. All it needs is enough idiots to buy.
What they are saying is that it has exactly zero chances at becoming a serious rival to the US$ or other currencies as a medium of exchange.
And that prediction still seems pretty accurate, considering there's just about exactly almost no transactional volume happening in bitcoin. It's also now more expensive than credit card fees for anything <$100, and it takes much longer than PayPal or Apple Pay or cache. It's also not really anonymous, but of course everyone always knew that. It's so risky to store your private keys on anything with ethernet the real pros print them and put them in bank safes. It's about as decentralised and bottom-up democratic as you can be when you're basically living at the mercy of the Chinese government, which, by the way, has shown that autocratic governments can shut it down with less effort than it took Obama to kill a fly.
What they are saying is that it has exactly zero chances at becoming a serious rival to the US$ or other currencies as a medium of exchange.
And that prediction still seems pretty accurate, considering there's just about exactly almost no transactional volume happening in bitcoin. It's also now more expensive than credit card fees for anything <$100, and it takes much longer than PayPal or Apple Pay or cache. It's also not really anonymous, but of course everyone always knew that. It's so risky to store your private keys on anything with ethernet the real pros print them and put them in bank safes. It's about as decentralised and bottom-up democratic as you can be when you're basically living at the mercy of the Chinese government, which, by the way, has shown that autocratic governments can shut it down with less effort than it took Obama to kill a fly.
"What they are saying is that it has exactly zero chances at becoming a serious rival to the US$ or other currencies as a medium of exchange."
There is definitely a non zero percent chance of this happening. How much % chance is debatable, but it's certainly >0.
There is definitely a non zero percent chance of this happening. How much % chance is debatable, but it's certainly >0.
> Some fiat currencies lose their value slowly, others do so quickly. That loss of value is precisely what makes them useful. Without the fear of inflation, holders of currency tend to hoard rather than spend it. Hoarding currency depresses economic growth and creates financial instability.
Economist here. That relationship is not clear. A currency skyrocketing in value induces suboptimal willingness to delay spending, yes, but one plummeting in value induces a similarly suboptimal willingness to spend too early.
Moreover, a depressed economy can cause deflation, rather than the reverse: Sluggish economic activity implies weak aggregate demand (people not buying a lot of stuff), which can lead prices to fall.
Economist here. That relationship is not clear. A currency skyrocketing in value induces suboptimal willingness to delay spending, yes, but one plummeting in value induces a similarly suboptimal willingness to spend too early.
Moreover, a depressed economy can cause deflation, rather than the reverse: Sluggish economic activity implies weak aggregate demand (people not buying a lot of stuff), which can lead prices to fall.
This was an interesting article, thanks for sharing it.
But as an average consumer and amateur investor (at best) I'm much more interested in using Bitcoin (and other digital currencies) as a medium of exchange rather than as a store of value. For short term transactions (ex: exchange fiat for bitcoin -> transfer bitcoin to recipient) digital currencies offer a very fast, secure, and simple method for transferring value across borders that would traditionally take much longer than a few ticks of the blockchain. And over that shorter term their value is relatively stable and suitable as a medium for such exchanges.
But as an average consumer and amateur investor (at best) I'm much more interested in using Bitcoin (and other digital currencies) as a medium of exchange rather than as a store of value. For short term transactions (ex: exchange fiat for bitcoin -> transfer bitcoin to recipient) digital currencies offer a very fast, secure, and simple method for transferring value across borders that would traditionally take much longer than a few ticks of the blockchain. And over that shorter term their value is relatively stable and suitable as a medium for such exchanges.
I believe a fixed supply of currency is beneficial when determining price. The ability of an institution to secretly change the amount of a currency used to measure price introduces yet another variable into the valuation equation.
Additionally, when the dollar was fixed on the gold standard, employers needed to be upfront and honest with their employees. When they needed to cut wages, employees knew it was happening. Much of the labor movement and union formation happened because employers needed to be honest about what they were doing.
I've yet to hear a convincing argument that inflation is good for me.
Additionally, when the dollar was fixed on the gold standard, employers needed to be upfront and honest with their employees. When they needed to cut wages, employees knew it was happening. Much of the labor movement and union formation happened because employers needed to be honest about what they were doing.
I've yet to hear a convincing argument that inflation is good for me.
But the fed doesn't change the dollar's value in secret. Indeed, wages are worth less now, but it's not because employers are having back-room chats with the central bank.
> Bitcoin isn't Fiat currency.
> Bitcoin Cash doubles the number of coins in an instant, and future updates could do more, and the market value of each coin increases rather than halving.
Choose one.
Choose one.
> "...the Federal Reserve, might even create their own cryptocurrencies..."
If that happens, wouldn't demand for Bitcoin take a hit ?I don't think so. It would be the government legitimizing the industry, yet the need for non-government controlled currencies would still be extant.
Finally someone acknowledges this reality. I've brought this up multiple times in Bitcoin discussions and never heard one good argument to backup the claims that Bitcoin can became a mainstream p2p fiat replacement for the masses all while having a 21 million coin limit.