Why Bitcoin Will Never Be a Currency(theatlantic.com)
theatlantic.com
Why Bitcoin Will Never Be a Currency
http://www.theatlantic.com/business/archive/2013/12/why-bitcoin-will-never-be-a-currency-in-2-charts/282364/
139 comments
> What Bitcoin really needs is a central bank to stabilize its value.
The whole point of Bitcoin is that there is no central governing authority. I'm not sure if this statement is meant to be funny, but if it isn't the author clearly has no understanding of how Bitcoin works or what it aims to achieve. I think given this statement its fair to ignore this piece all together.
The whole point of Bitcoin is that there is no central governing authority. I'm not sure if this statement is meant to be funny, but if it isn't the author clearly has no understanding of how Bitcoin works or what it aims to achieve. I think given this statement its fair to ignore this piece all together.
The author obviously understands that Bitcoin has no central bank - his point is that if it ever were to be used as a currency it would need one. Would you like your salary paid in bitcoins? You wouldn't know from one month to the next what you could afford to buy since prices would be so volatile. Bitcoin might have other uses like easy electronic payments - but the author points out that if you want to buy something legally it is quite convenient already today with the currencies we have.
> it is quite convenient already today with the currencies we have.
That's ridiculous. The friction or transferring money is a huge problem across the world. Developing nations are left out, governments shut down payments on a whim, etc.
That's ridiculous. The friction or transferring money is a huge problem across the world. Developing nations are left out, governments shut down payments on a whim, etc.
I get my salary paid in bitcoin and I think it's pretty awesome.
From your other comments you seem to be paid in USD but your employer buys bitcoin for you each month and gives you that. You could buy the bitcoin yourself each salary day and nothing would change.
Yep, basically. But what's your point? I don't want to do the extra work. I consider not having to a perk.
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How flexible is that arrangement? If Bitcoin undergoes a sudden downturn, can you ask for dollars next month?
I get paid a USD equivalent. So if bitcoin went down next month, I'd just get a greater amount of bitcoin. I could change to being paid in USD instead, but I choose to be paid in bitcoin.
If your salary is priced in USD, you're really just being paid in USD, not Bitcoin. When you're ready to accept a fixed amount of Bitcoin every pay period, then you're paid in Bitcoin.
At the end of the day I end up with bitcoin in my account, not dollars. So what you're saying does not seem correct to me. The conversion is just a way of determining how much bitcoin I should be paid.
Your dollars are being delivered to you via Bitcoin, but your salary is designated in dollars, thus you are paid in dollars.
But dollars are not being delivered to me, that's the point. Bitcoin isn't acting as a middleman here-it's the end.
If I were your employer and decided to price your bi-weekly paycheck in terms of segways (each paycheck would be the dollar equivalent of one segway), does that mean you'd be "paid in segways"? No, you're paid in dollars.
You can't really claim someone is paid in dollars unless (1) they receive actual dollars, or (2) the thing they receive instead is guaranteed to be exchangeable for that dollar amount at any point into the future. Neither of these is true of a salary that is delivered in bitcoin, regardless of how it's priced.
If I were your employer and decided to price your bi-weekly paycheck in terms of segways (each paycheck would be the dollar equivalent of one segway), does that mean you'd be "paid in segways"? No, you're paid in dollars.
You can't really claim someone is paid in dollars unless (1) they receive actual dollars, or (2) the thing they receive instead is guaranteed to be exchangeable for that dollar amount at any point into the future. Neither of these is true of a salary that is delivered in bitcoin, regardless of how it's priced.
> Bitcoin isn't acting as a middleman here-it's the end.
No, Employer > USD > Bitcoin > You. If you're using dollar equivalent for any reason whatsoever, then that's what you're really being paid in. Your salary is being priced in dollars, not Bitcoin.
> You can't really claim someone is paid in dollars unless (1) they receive actual dollars, or (2) the thing they receive instead is guaranteed to be exchangeable for that dollar amount at any point into the future.
Yes I can. Your employer is paying out dollars, that it's converted to something along the way is not relevant, they're paying you in dollars; you just receive something else through a middleman, in this case the Bitcoin network.
No, Employer > USD > Bitcoin > You. If you're using dollar equivalent for any reason whatsoever, then that's what you're really being paid in. Your salary is being priced in dollars, not Bitcoin.
> You can't really claim someone is paid in dollars unless (1) they receive actual dollars, or (2) the thing they receive instead is guaranteed to be exchangeable for that dollar amount at any point into the future.
Yes I can. Your employer is paying out dollars, that it's converted to something along the way is not relevant, they're paying you in dollars; you just receive something else through a middleman, in this case the Bitcoin network.
I think maybe being specific makes things easier. His pay is clearly denominated in dollars and delivered in bitcoin.
I also think "paid in dollars" mostly means the pay is denominated in dollars, but I can see that being a language usage thing.
I also think "paid in dollars" mostly means the pay is denominated in dollars, but I can see that being a language usage thing.
I guess I just disagree. To me, what you are "paid in" is the thing that changes ownership from your employer to you on pay day. It seems like you are simply insisting that "paid in" is synonymous with "priced in," in which case this debate is just a matter of semantics and not actually very interesting.
Also, to begin with, this conversation was about what I am paid in, not what my employer pays out. In your last sentence it sounds like you are confusing them, or using them interchangeably. I see no reason that they should be considered the same thing.
Also, to begin with, this conversation was about what I am paid in, not what my employer pays out. In your last sentence it sounds like you are confusing them, or using them interchangeably. I see no reason that they should be considered the same thing.
What does bitcoin aim to achieve?
I've heard so many different things, and as soon as one gets challenged someone will pop up and say "well it was never meant for that, it does these other five things".
Frankly if it was to be a currency, yes, a central bank would be a feature. But it's not a currency, its economic presets would make it a really bad one and its lack of central control makes it very prone to instability.
It's not really a very good payment method either, because it takes time to confirm and there's no chargeback facility, something that has given consumers the confidence to shop online and really helped along the boom in internet retail.
I've heard so many different things, and as soon as one gets challenged someone will pop up and say "well it was never meant for that, it does these other five things".
Frankly if it was to be a currency, yes, a central bank would be a feature. But it's not a currency, its economic presets would make it a really bad one and its lack of central control makes it very prone to instability.
It's not really a very good payment method either, because it takes time to confirm and there's no chargeback facility, something that has given consumers the confidence to shop online and really helped along the boom in internet retail.
"Why Bitcoin will Never Be a Currency".
And yet it only takes an arbitary 5 minutes to realise that it is being used as a currency. People are buying goods and services in exchange for bitcoins. Sure some people horde in the hope that the value will double but the same is done with US Dollars. I mean isnt that what FOREX trading is?
And yet it only takes an arbitary 5 minutes to realise that it is being used as a currency. People are buying goods and services in exchange for bitcoins. Sure some people horde in the hope that the value will double but the same is done with US Dollars. I mean isnt that what FOREX trading is?
If you RTFM, it states that 64% of Bitcoins have never been used. For a currency that is a problem. A deflationary currency drives people to not spend. When people do not spend and aggregate demand goes down you end up in a recession. Read the article linked at the bottom of the Atlantic article on why deflation is bad:
http://www.federalreserve.gov/boarddocs/speeches/2002/200211...
If Bitcoin stabilizes in the future it could maybe be used as a currency. But right now when every purchase decision is prefaced with a 'how much is BTC worth right now' decision it adds too much friction to a transaction.
http://www.federalreserve.gov/boarddocs/speeches/2002/200211...
If Bitcoin stabilizes in the future it could maybe be used as a currency. But right now when every purchase decision is prefaced with a 'how much is BTC worth right now' decision it adds too much friction to a transaction.
A compute cycle has fallen in price faster than anything else in the world except perhaps shares of the East India Company or Dutch tulips. People still buy computers. And TVs and cell phones and flash drives and etc, etc, etc.
Surely if the falling price of a good with respect to the currency it's purchased in would prompt people not to buy then nobody would purchase computers. And yet it's a thriving industry.
Please help me reconcile this fact with the author's statement that would indicate that precisely the opposite should be happening.
Surely if the falling price of a good with respect to the currency it's purchased in would prompt people not to buy then nobody would purchase computers. And yet it's a thriving industry.
Please help me reconcile this fact with the author's statement that would indicate that precisely the opposite should be happening.
Uhh, people totally do defer buying computers because the price per compute is constantly falling. If you are running a large-scale operation, you do not over-provision. You do not buy computers you won't need till next year till next year, because they'll be cheaper and better next year. This is a direct consequence of the deflationary environment created by constantly improving computation. Heck, even normal consumers put off buying a new iPhone X because the iPhone X+1 is launching in 3 months, so why buy the crappier one for more money today?
What sort of everyday value can I get from the bitcoins in my wallet?
The material goods you mention are good for all sorts of things.
(My point being that they are not great comparisons, I'm staying out of the argument about deflation)
The material goods you mention are good for all sorts of things.
(My point being that they are not great comparisons, I'm staying out of the argument about deflation)
You've missed the point.
From the article: "When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. "
I will make a more specific claim: the author is arguing that when the price of things in a given currency fall, people delay purchasing. This can be re-stated that as the ratio of money to goods declines, so too will the purchase of goods.
The ratio of money to a specific good declining can happen in one of two ways. Either
1) the currency as a whole appreciates in value relative to everything in the economy (usually called "deflation") or
2) the good becomes cheaper to extract, manufacture, grow or otherwise produce which then allows business to price it less expensively
In either case 1 or 2 the ratio of money to a good has decreased. We normally would say it has "gotten cheaper"
Computers are a good which has gotten cheaper in real terms and nominal terms and especially in absolute terms. A desktop computer used to cost $2000 or more for anything decent (adjusted for inflation perhaps $5000 or more), today a quite respectable laptop can be purchased for $800 which has hundreds if not thousands of times the capability of the $2000 machine from 20 years ago.
The world as it exists today does have a computer industry, in fact it's huge. Compared to 1993 it's at least 10x larger, and surely quite a bit more: http://en.wikipedia.org/wiki/File:Personal_computers_(millio...
So according to the author's "when things get cheaper people stop buying" argument the computer industry should have been shrinking over the last 20 years, not growing. But we can clearly see from the world that exists today that the computer industry has grown over the last 20 years.
How should I reconcile the author's argument with the reality I see around me? I feel I have no choice but to conclude that the notion that "falling prices causes people to reduce their purchases" might not be a universal truth, or perhaps it contains only a little truth inside it.
From the article: "When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. "
I will make a more specific claim: the author is arguing that when the price of things in a given currency fall, people delay purchasing. This can be re-stated that as the ratio of money to goods declines, so too will the purchase of goods.
The ratio of money to a specific good declining can happen in one of two ways. Either
1) the currency as a whole appreciates in value relative to everything in the economy (usually called "deflation") or
2) the good becomes cheaper to extract, manufacture, grow or otherwise produce which then allows business to price it less expensively
In either case 1 or 2 the ratio of money to a good has decreased. We normally would say it has "gotten cheaper"
Computers are a good which has gotten cheaper in real terms and nominal terms and especially in absolute terms. A desktop computer used to cost $2000 or more for anything decent (adjusted for inflation perhaps $5000 or more), today a quite respectable laptop can be purchased for $800 which has hundreds if not thousands of times the capability of the $2000 machine from 20 years ago.
The world as it exists today does have a computer industry, in fact it's huge. Compared to 1993 it's at least 10x larger, and surely quite a bit more: http://en.wikipedia.org/wiki/File:Personal_computers_(millio...
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So according to the author's "when things get cheaper people stop buying" argument the computer industry should have been shrinking over the last 20 years, not growing. But we can clearly see from the world that exists today that the computer industry has grown over the last 20 years.
How should I reconcile the author's argument with the reality I see around me? I feel I have no choice but to conclude that the notion that "falling prices causes people to reduce their purchases" might not be a universal truth, or perhaps it contains only a little truth inside it.
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
From the Bernanke article I originally linked.
From the Bernanke article I originally linked.
I'm just saying I don't think you can expect the same behavioral responses to 1 and 2.
In the case of 1, I minimize all of my purchases during periods where I perceive higher levels of appreciation.
In the case of 2, I only buy what I need of that good (which is approximately what I do anyway).
So it isn't a particularly interesting comparison to make.
In the case of 1, I minimize all of my purchases during periods where I perceive higher levels of appreciation.
In the case of 2, I only buy what I need of that good (which is approximately what I do anyway).
So it isn't a particularly interesting comparison to make.
Sure, but for most people even in case 1 you still have to have food, clothing, shelter, etc. Those needs don't disappear just because you want to speculate.
Now you might be able to speculate quite effectively buying when prices are low and living off of your stores when prices are high. But everyone can't do that by definition, so we're saved from case 1 totally throwing a monkey-wrench into the works.
Now you might be able to speculate quite effectively buying when prices are low and living off of your stores when prices are high. But everyone can't do that by definition, so we're saved from case 1 totally throwing a monkey-wrench into the works.
Deflation in a sector != entire economy deflating; this is a red herring.
Deflation in that sector has led to investment and growth. I would argue that the impetus is on you to prove that economics isn't scale-free.
In other words, what works for an individual with thousands of dollars also works for a company with millions. I.e. that math doesn't change as the numbers get bigger. $1 + $1 is $2 the same as $100b + $100b = $200b. If an individual accrues wealth by saving and investing (how most people do it) that's basic arithmetic. Expenditures less than income over a period of time. Works for companies large and small.
If we believe that this works at scales from the individual which is an organization of one person all the way up to organizations of hundreds of thousands or millions, why would it suddenly stop working that way once it's a "whole economy" that's nothing more than the organization of all individuals?
In other words, what works for an individual with thousands of dollars also works for a company with millions. I.e. that math doesn't change as the numbers get bigger. $1 + $1 is $2 the same as $100b + $100b = $200b. If an individual accrues wealth by saving and investing (how most people do it) that's basic arithmetic. Expenditures less than income over a period of time. Works for companies large and small.
If we believe that this works at scales from the individual which is an organization of one person all the way up to organizations of hundreds of thousands or millions, why would it suddenly stop working that way once it's a "whole economy" that's nothing more than the organization of all individuals?
You're running into a textbook case of the Fallacy of Composition.
The essence is that the economy is full of feedback cycles. Your savings and spending decisions affect the size of the economy.
Now, from an individual household perspective, your spending is only a drop in the bucket. It is small compared to the size of the economy, and it is small compared to the revenue of any individual firm. Any feedback effect your behavior may have is a rounding error compared to the sum of the effects of everybody else's behaviours. Therefore, it is reasonable to disregard the feedback effects when you make individual decisions.
However, when you evaluate the economy as a whole, there is nobody else and the feedback effects are suddenly the dominant term. Disregarding those effects when making economy-wide policy decision is therefore a recipe for disaster.
The essence is that the economy is full of feedback cycles. Your savings and spending decisions affect the size of the economy.
Now, from an individual household perspective, your spending is only a drop in the bucket. It is small compared to the size of the economy, and it is small compared to the revenue of any individual firm. Any feedback effect your behavior may have is a rounding error compared to the sum of the effects of everybody else's behaviours. Therefore, it is reasonable to disregard the feedback effects when you make individual decisions.
However, when you evaluate the economy as a whole, there is nobody else and the feedback effects are suddenly the dominant term. Disregarding those effects when making economy-wide policy decision is therefore a recipe for disaster.
I'm not sure that the assumptions I've made are fallacious. I read the examples on the fallacy of composition and they are things like "if one runner runs faster they can win. so if all runners run faster, all can win" but I didn't say that.
The original author made a very blanket, not at all specific statement about how "this leads to that" without any qualifications whatsoever. I have provided a specific counter-claim to that statement and asked for help reconciling. You can't just wave your hand and say "a whole economy is different than every other unit of organization in the world" just because.
It's not as though my not spending money causes the economy to halt. The more I save the more bank deposits are available for banks to lend and spur further growth. This is one of the feedback cycles you've mentioned. This works at all scales so as anyone or everyone is not spending two things are happening in parallel:
1. bank deposits pile up which all things being equal will push the interest rate down
2. real resources (oil, steel, timber, etc) pile up or are not being actively consumed, thus making them available for use
Then as the money loaned in 1 makes its way into the economy via loans, the real resources in 2 are readily available for those who secured the loans to make use of. I've just shown a situation where "deflation" leads to increased investment and growth rather than decreased.
EDIT:
If one person saves money, they can save money. Therefore if all people save money, all people can save money. That's the fallacy of composition I've supposedly made.
There's a difference between "saving money" and "not spending any money at all, whatsoever" This is because even the most ardent saver would still have rent/mortgage, utilities, food, gas, insurance, clothing, etc. The necessities make up a large portion of what makes the world go 'round; nobody would stop eating for 6 months because they could buy twice as much bread in the summer for the same price.
Furthermore bitcoin deflation isn't something that's guaranteed to happen forever, always no matter what. Many people are speculating in bitcoin right now the same way that investors speculate on a growing company, but that company's stock won't go up forever just because. At some point the exchange rate between bitcoin and the real economy will reach some kind of equilibrium and the price will level out.
The original author made a very blanket, not at all specific statement about how "this leads to that" without any qualifications whatsoever. I have provided a specific counter-claim to that statement and asked for help reconciling. You can't just wave your hand and say "a whole economy is different than every other unit of organization in the world" just because.
It's not as though my not spending money causes the economy to halt. The more I save the more bank deposits are available for banks to lend and spur further growth. This is one of the feedback cycles you've mentioned. This works at all scales so as anyone or everyone is not spending two things are happening in parallel:
1. bank deposits pile up which all things being equal will push the interest rate down
2. real resources (oil, steel, timber, etc) pile up or are not being actively consumed, thus making them available for use
Then as the money loaned in 1 makes its way into the economy via loans, the real resources in 2 are readily available for those who secured the loans to make use of. I've just shown a situation where "deflation" leads to increased investment and growth rather than decreased.
EDIT:
If one person saves money, they can save money. Therefore if all people save money, all people can save money. That's the fallacy of composition I've supposedly made.
There's a difference between "saving money" and "not spending any money at all, whatsoever" This is because even the most ardent saver would still have rent/mortgage, utilities, food, gas, insurance, clothing, etc. The necessities make up a large portion of what makes the world go 'round; nobody would stop eating for 6 months because they could buy twice as much bread in the summer for the same price.
Furthermore bitcoin deflation isn't something that's guaranteed to happen forever, always no matter what. Many people are speculating in bitcoin right now the same way that investors speculate on a growing company, but that company's stock won't go up forever just because. At some point the exchange rate between bitcoin and the real economy will reach some kind of equilibrium and the price will level out.
The more I save the more bank deposits are available for banks to lend and spur further growth.
This is false, but it's an easy mistake to make because it's such a common misconception about how banking works.
Banks do not lend out deposits in any possible interpretation of those words, and they do not require deposits prior to making loans. This is apparent because banks create deposits in the act of giving a loan.
This doesn't mean that banks can just make loans willy-nilly. They do have to satisfy regulatory capital constraints. However, deposits are not capital.
Still, by far the greatest determinant of loan-making is the credit-worthiness of potential borrowers. On this side, saving is a negative: It reduces the potential revenue of businesses, which makes those businesses less credit-worthy.
There's a difference between "saving money" and "not spending any money at all, whatsoever"
This is only a quantitative difference. If you think of the circular flow of money inside the economy, then any kind of saving represents a leak. If this leak is not balanced out by an in-flow of new money from loans, the circular flow will diminish. So you might be able to make a "one-time withdrawal" from that circular flow into your savings account, but in the long run, such withdrawals are not sustainable unless offset by somebody else. That much is clear.
To summarize: If you successfully save at a greater rate for a longer period of time, then somebody else necessarily must save at a slower rate (or borrow at a greater rate).
This is false, but it's an easy mistake to make because it's such a common misconception about how banking works.
Banks do not lend out deposits in any possible interpretation of those words, and they do not require deposits prior to making loans. This is apparent because banks create deposits in the act of giving a loan.
This doesn't mean that banks can just make loans willy-nilly. They do have to satisfy regulatory capital constraints. However, deposits are not capital.
Still, by far the greatest determinant of loan-making is the credit-worthiness of potential borrowers. On this side, saving is a negative: It reduces the potential revenue of businesses, which makes those businesses less credit-worthy.
There's a difference between "saving money" and "not spending any money at all, whatsoever"
This is only a quantitative difference. If you think of the circular flow of money inside the economy, then any kind of saving represents a leak. If this leak is not balanced out by an in-flow of new money from loans, the circular flow will diminish. So you might be able to make a "one-time withdrawal" from that circular flow into your savings account, but in the long run, such withdrawals are not sustainable unless offset by somebody else. That much is clear.
To summarize: If you successfully save at a greater rate for a longer period of time, then somebody else necessarily must save at a slower rate (or borrow at a greater rate).
> Banks do not lend out deposits in any possible interpretation of those words, and they do not require deposits prior to making loans. This is apparent because banks create deposits in the act of giving a loan.
I know that the Fed is allowed to create money out of thin air, and I do understand that fractional reserve banking allows banks to pyramid loans.
But ostensibly I can't start a bank today, deposit no money into it and tomorrow make a loan for $10mm. The money has to come from somewhere does it not?
Or are you saying that's exactly how a bank works?
I know that the Fed is allowed to create money out of thin air, and I do understand that fractional reserve banking allows banks to pyramid loans.
But ostensibly I can't start a bank today, deposit no money into it and tomorrow make a loan for $10mm. The money has to come from somewhere does it not?
Or are you saying that's exactly how a bank works?
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Because economies aren't individuals, your spending is my income and my spending is your income. Household economics does not scale up to an economy, the rules for an economy are entirely different. And I don't have to prove anything, deflation has a well established meaning: reduction of the general level of prices in an economy. One or a few sectors dropping prices simply is not what economists mean when they talk about deflation.
Now you're welcome to make up your own definitions of words, but then you're not really communicating with everyone else nor understanding what they're actually referring to since you're ignoring what they mean by those words.
Now you're welcome to make up your own definitions of words, but then you're not really communicating with everyone else nor understanding what they're actually referring to since you're ignoring what they mean by those words.
Why don't you do some accurate reading, it's "64% of bitcoins are in accounts that have never been used". NOT "64% of bitcoins have never been used".
And if you knew the basics of bitcoin that 64% would make sense. Actually, if all bitcoin software was programmed correctly that number would be 100%. Every transaction can create a new "account" for every output, it's actually a flaw in systems using bitcoin that that number is so low.
And if you knew the basics of bitcoin that 64% would make sense. Actually, if all bitcoin software was programmed correctly that number would be 100%. Every transaction can create a new "account" for every output, it's actually a flaw in systems using bitcoin that that number is so low.
Have not been used yet...
Bitcoin interest will increase speculators and vendor adoption and then, presumably with time, it should steady and people will likely spend some of their hordes.
Bitcoin interest will increase speculators and vendor adoption and then, presumably with time, it should steady and people will likely spend some of their hordes.
Congratulations, you found a semantic exception but missed the entire point. The point is that it's not just some people hordeing money. The fact that ratio of spending has not grown proportionately with BTC value suggests that recent demand for BTC is almost entirely speculative.
Sorry if this is kind of a nasty reply, but I'm really tired of people with no comprehension of how money functions being in denial about their pet technology.
Sorry if this is kind of a nasty reply, but I'm really tired of people with no comprehension of how money functions being in denial about their pet technology.
Ironically, anyone who doesn't understand how economies can function with multiple currencies which have different characteristics has little to no comprehension of how money works.
Or much of economic history, for that matter.
Or much of economic history, for that matter.
You're awfully presumptuous.
The global economy functions with many, many different currencies, nearly all of which are managed by a central bank. It's widely accepted that currencies are best that which are regionally segmented, because the qualities and monetary needs of different economies tend to vary locally. See wikipedia on Optimal Currency Area.
Thus, we consider individual currencies on a case by case basis. By almost every conventional and widely-accepted measure, bitcoin is a terrible currency with little chance of remaining stable. a.) it's region agnostic b.) hugely speculative c.) inelastic, practically constant supply d.) difficult to centrally manage.
Please, tell me more about economic history.
The global economy functions with many, many different currencies, nearly all of which are managed by a central bank. It's widely accepted that currencies are best that which are regionally segmented, because the qualities and monetary needs of different economies tend to vary locally. See wikipedia on Optimal Currency Area.
Thus, we consider individual currencies on a case by case basis. By almost every conventional and widely-accepted measure, bitcoin is a terrible currency with little chance of remaining stable. a.) it's region agnostic b.) hugely speculative c.) inelastic, practically constant supply d.) difficult to centrally manage.
Please, tell me more about economic history.
Ok. So it's a very poor currency.
According to the poorly thought out theory that deflationary currencies are by necessity bad currencies?
The idea that a small amount of inflation is better than deflation is pretty much the least controversial idea in economics. Seriously, no professional economists argue about that. (There are plenty of special cases where deflation is good, sure, but I'm talking about the general case).
I'm sure you're a very smart person, and you probably know a lot more than me in many areas. However, anyone trying to say that deflation is great for a general-purpose currency just sounds like someone trying to claim that evolution didn't (doesn't) happen.
I'm sure you're a very smart person, and you probably know a lot more than me in many areas. However, anyone trying to say that deflation is great for a general-purpose currency just sounds like someone trying to claim that evolution didn't (doesn't) happen.
I agree that inflation is better than deflation. I also agree that this is not controversial - that virtually all economists agree that inflation is better than deflation.
However.
This does not mean that all deflationary currencies are bad.
For example: It is entirely plausible that a currency which is almost 100% predictably deflationary would be preferable to our current currencies, the values of which vary depending upon many factors (central banking strategies, economic outlook, etc).
Whilst inflation may help spur consumer spending, and almost certainly does help the economy by permitting 'invisible' wage cuts to poorly performing workers/sectors (perhaps the biggest advantage of inflationary currencies, not even mentioned in the article), the upside of a nearly 100% predictable currency may be even greater.
Of course, it is also possible (likely, even) that our current central bank managed system is superior: The downside of unpredictability may be (likely is, in my opinion) outweighed by the flexibility granted to central banks.
But we'll never know unless we run the experiment.
However.
This does not mean that all deflationary currencies are bad.
For example: It is entirely plausible that a currency which is almost 100% predictably deflationary would be preferable to our current currencies, the values of which vary depending upon many factors (central banking strategies, economic outlook, etc).
Whilst inflation may help spur consumer spending, and almost certainly does help the economy by permitting 'invisible' wage cuts to poorly performing workers/sectors (perhaps the biggest advantage of inflationary currencies, not even mentioned in the article), the upside of a nearly 100% predictable currency may be even greater.
Of course, it is also possible (likely, even) that our current central bank managed system is superior: The downside of unpredictability may be (likely is, in my opinion) outweighed by the flexibility granted to central banks.
But we'll never know unless we run the experiment.
You seem to believe that the value of bitcoin could possibly be more predictable than the value of traditional currencies. Since bitcoin will be / is almost exclusively an investment vehicle it will (almost by definition) have an unpredictable value. [1] Traditional currencies will be somewhat predictable because they have a central bank actively managing the supply.
[1] http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
[1] http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
Given equal liquidity, a purer market should deliver less volatility than an actively managed one.
That reads like a credo.
Both systems contain massive speculator involvement. Only one system contains single overarching actor with ability to manipulate values at will.
Pretty obvious which will be more stable.
Pretty obvious which will be more stable.
@gahahaha
All historic gold currencies I know of were actively managed: Debasement, re-pegging, temporary abandonment to pay off debts via inflation - all were common practice under gold standard.
None are (should be) possible with Bitcoin.
All historic gold currencies I know of were actively managed: Debasement, re-pegging, temporary abandonment to pay off debts via inflation - all were common practice under gold standard.
None are (should be) possible with Bitcoin.
History shows pretty clearly that actively managed currencies with a central bank are far more stable than for example gold or bitcoin. I don't see how you can argue otherwise.
Until the advent of the Federal Reserve, the dollar itself was a deflationary currency:
http://nothirdsolution.com/wp/wp-content/uploads/2008/07/cpi...
http://nothirdsolution.com/wp/wp-content/uploads/2008/07/cpi...
Finally, somebody with a basic understanding of economics decides to chime in. It is not possible for bitcoin to be a currency due to its deflationary nature.
Bitcoin might be an interesting investment vehicle, a storage of value, but something that will at some point replace the dollar? No.
Bitcoin might be an interesting investment vehicle, a storage of value, but something that will at some point replace the dollar? No.
Actually, I studied economics in the past and technically you can have a currency which is deflationary in nature, it just does not make it ideal. The Dollar has a similar disadvantage in many respects due to inflation.
It would actually be better to have some sort of currency which expands based on the number of transactions... There's a pretty large theory behind it and I out line some of it on my blog, where I also explain how a crypto currency can "potentially" work[1] or you could read one of Friedman[2] or Knights[3] books.
[1] http://austingwalters.com/the-currencies-of-tomorrow/ [2] http://en.wikipedia.org/wiki/Milton_Friedman [3] http://en.wikipedia.org/wiki/Frank_Knight
Further, economic system and in turn the manipulation of the Dollar in the U.S. is based largely off Kaynes work, which for the most part (we now know) is an inaccurate portrial of economics.
It would actually be better to have some sort of currency which expands based on the number of transactions... There's a pretty large theory behind it and I out line some of it on my blog, where I also explain how a crypto currency can "potentially" work[1] or you could read one of Friedman[2] or Knights[3] books.
[1] http://austingwalters.com/the-currencies-of-tomorrow/ [2] http://en.wikipedia.org/wiki/Milton_Friedman [3] http://en.wikipedia.org/wiki/Frank_Knight
Further, economic system and in turn the manipulation of the Dollar in the U.S. is based largely off Kaynes work, which for the most part (we now know) is an inaccurate portrial of economics.
This. Bitcoin is digital gold. Once it proves itself, we will probably transition into something like peercoin, or more appropriately an unimplemented proof-of-work payment scheme that calculates the payments not only on difficulty but also on the transaction rate across the last several blocks. You would want a median 1% inflation, but if exchange slows significantly (indicating money hoarding) you want the inflation rate to increase. If too many transactions are happening, you would turn down the inflation rate to compensate.
The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.
The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.
I strongly suspect that the Bitcoin developers and mining community will eventually choose to inflate the currency. Not for any economic reasons, but rather to provide the funding for a large and secure mining network, because future transaction fees might prove to be insufficient.
That 21 million number is not set in stone, and will change if there is a need for it.
That 21 million number is not set in stone, and will change if there is a need for it.
That still doesn't account for the fact that having a mathematical model for inflation is hugely advantageous for a currency. Current btc should be inflating at upwards of 10% considering how little money movement there is in the network due to the investment hoarding.
> That still doesn't account for the fact that having a mathematical model for inflation is hugely advantageous for a currency.
This is hugely important and obvious to anybody who has taken Econ 101.
Everybody knows this.
So why would you invent a currency that was deflationary in nature due to an artificial cap? Well, once you realize that the guy(s) who invented it are holding 10% of it, you'll have your answer.
Bitcoin is in a huge bubble at the moment. My only hope is that this bubble bursts before the inventors can cash out. Oh, sweet justice.
After the collapse, there is every reason to believe that Bitcoin will become something genuinely useful or at the very least, inspire something that will be useful.
This is hugely important and obvious to anybody who has taken Econ 101.
Everybody knows this.
So why would you invent a currency that was deflationary in nature due to an artificial cap? Well, once you realize that the guy(s) who invented it are holding 10% of it, you'll have your answer.
Bitcoin is in a huge bubble at the moment. My only hope is that this bubble bursts before the inventors can cash out. Oh, sweet justice.
After the collapse, there is every reason to believe that Bitcoin will become something genuinely useful or at the very least, inspire something that will be useful.
Deflation is only a threat because of fractional-reserve lending. The world ends up owing itself more than it actually has in currency, and it collapses in on itself in a massive disaster if and when the currency deflates.
Fractional reserve lending of bitcoins seems highly unlikely to happen any time soon, if ever. And if it does start happening, it is likely to be made quickly illegal, because the system simply won't work.
Fractional reserve lending of bitcoins seems highly unlikely to happen any time soon, if ever. And if it does start happening, it is likely to be made quickly illegal, because the system simply won't work.
Are we even able to analyse Bitcoin as we would fiat currencies or precious metals? Why is this assumption left unstated and unanalysed?
Cryptocurrencies have several interesting properties that these traditional mediums of exchange do not, for example:
- the supply is fixed and precisely known at any point in time, with very little chance of that ever changing by unilateral decision (e.g. politics, war); surely this will factor into future decisions to price goods and services, in the same way businesses already factor inflation into their business models
- low transaction costs for high value cross-border payments could see a niche use that no fiat currency can compete with (unless you somehow believe there will be a unified global real-time gross settlement system or the like any time soon)
- settlement times could also see a niche use that no fiat currency can compete with (if it works, and your transaction is confirmed in seconds/minutes/hours rather than days as with ETFs, then I foresee people using it for certain value transactions)
- accessibility (just look at M-PESA in Kenya -- everybody has cellphones, but moving physical cash around is expensive and dangerous)
- up until all the coins are mined, and probably for some time thereafter, the value will be quite volatile; after that, however, value will pretty much reflect real economic activity and volatility will be less predictable -- why is there this obsession over the present volatility? All the coins will be mined within a fixed time frame provided 1 person continues mining, which is almost a certainty, and eventually the price will have to stabilise.
I fear the article is comparing apples and oranges. Maybe the author just wants to sow FUD while he buys some cheap BTC :)
Don't get me wrong - I have my doubts that Bitcoin has what it takes (among other things, I think the initial unequal distribution of wealth is a serious problem), but cryptocurrencies in general are likely to be a successful and inevitable medium of exchange at some point in the future.
Cryptocurrencies have several interesting properties that these traditional mediums of exchange do not, for example:
- the supply is fixed and precisely known at any point in time, with very little chance of that ever changing by unilateral decision (e.g. politics, war); surely this will factor into future decisions to price goods and services, in the same way businesses already factor inflation into their business models
- low transaction costs for high value cross-border payments could see a niche use that no fiat currency can compete with (unless you somehow believe there will be a unified global real-time gross settlement system or the like any time soon)
- settlement times could also see a niche use that no fiat currency can compete with (if it works, and your transaction is confirmed in seconds/minutes/hours rather than days as with ETFs, then I foresee people using it for certain value transactions)
- accessibility (just look at M-PESA in Kenya -- everybody has cellphones, but moving physical cash around is expensive and dangerous)
- up until all the coins are mined, and probably for some time thereafter, the value will be quite volatile; after that, however, value will pretty much reflect real economic activity and volatility will be less predictable -- why is there this obsession over the present volatility? All the coins will be mined within a fixed time frame provided 1 person continues mining, which is almost a certainty, and eventually the price will have to stabilise.
I fear the article is comparing apples and oranges. Maybe the author just wants to sow FUD while he buys some cheap BTC :)
Don't get me wrong - I have my doubts that Bitcoin has what it takes (among other things, I think the initial unequal distribution of wealth is a serious problem), but cryptocurrencies in general are likely to be a successful and inevitable medium of exchange at some point in the future.
It's merely very unlikely that the supply changes. Current accepted wisdom is that rewriting the client to produce more coins would fracture the currency. Future accepted wisdom may change.
It's also hard to beat cash for settlement times.
It's also hard to beat cash for settlement times.
Rewriting the client is not sufficient. You need to convince everybody to run the new client. I don't see that happening as easily as you presume. It is highly likely that cryptobanks will come into place in the future (cryptocurrencies are not very layperson friendly right now), with traditional contractual law ensuring the cryptobanks do not suddenly change the rules under client's noses.
I disagree regarding cash. You're making a blanket statement and I'm saying there are niches where cash sucks.
Aside from the M-PESA example I've given, another is overseas travel. Cash can be a big waste of time - depending on your local laws, obtaining forex prior to departure can be a pain (e.g. in South Africa), the withdrawal fees are exorbitant and often unclear, the risk of theft significant, you have to be aware of local exchange rates and if you want to save money you have to be aware of the exchange rate of the cash you have on hand vs. your debit and/or credit card processor etc., then when you get back (again in South Africa at least) you have to resell your forex within 30 days, and you also have limitations on how much you can purchase in a year.
Another is cash payments over a certain value -- again in South Africa, walking around with more than a certain amount of cash in your pocket is asking for trouble.
I disagree regarding cash. You're making a blanket statement and I'm saying there are niches where cash sucks.
Aside from the M-PESA example I've given, another is overseas travel. Cash can be a big waste of time - depending on your local laws, obtaining forex prior to departure can be a pain (e.g. in South Africa), the withdrawal fees are exorbitant and often unclear, the risk of theft significant, you have to be aware of local exchange rates and if you want to save money you have to be aware of the exchange rate of the cash you have on hand vs. your debit and/or credit card processor etc., then when you get back (again in South Africa at least) you have to resell your forex within 30 days, and you also have limitations on how much you can purchase in a year.
Another is cash payments over a certain value -- again in South Africa, walking around with more than a certain amount of cash in your pocket is asking for trouble.
Yes, I understand you would have to get widespread acceptance of the new client. I don't think it is likely (hence 'fracture the currency').
I didn't say cash was always better than bitcoin, I just pointed out that it is very hard to beat on settlement times (and you revised your comment to say fiat currency rather than cash). Maybe I replied to an early draft.
I didn't say cash was always better than bitcoin, I just pointed out that it is very hard to beat on settlement times (and you revised your comment to say fiat currency rather than cash). Maybe I replied to an early draft.
Why are people replying to this post like OP is some kind of authority? It doesn't sound like he "studied economics" so much as he took a course.
Of course you can have a deflationary currency. The problem is that people won't spend it. The dollar is not naturally inflationary. Instead, the fed allows for a controlled amount of inflation every year to encourage spending. Automatically managed currencies like you discuss still suffer from inflexibility—as our understanding of monetary economics adjusts, or qualities of the economy change (as with the change in velocity of money during the 80's-90's), it would be difficult to adjust the algorithm to better stabilize the money supply.
More importantly, cryptocurrencies are region agnostic. I take it you learned about optimal currency area in your studies? Any arbitrary threshold would risk having inconsistent effects in different places. Expansion may be just the thing to encourage additional transactions in a recessionary region, but may encourage rapid inflation elsewhere. The result is always high volatility, making it unfit as a store of value.
Of course you can have a deflationary currency. The problem is that people won't spend it. The dollar is not naturally inflationary. Instead, the fed allows for a controlled amount of inflation every year to encourage spending. Automatically managed currencies like you discuss still suffer from inflexibility—as our understanding of monetary economics adjusts, or qualities of the economy change (as with the change in velocity of money during the 80's-90's), it would be difficult to adjust the algorithm to better stabilize the money supply.
More importantly, cryptocurrencies are region agnostic. I take it you learned about optimal currency area in your studies? Any arbitrary threshold would risk having inconsistent effects in different places. Expansion may be just the thing to encourage additional transactions in a recessionary region, but may encourage rapid inflation elsewhere. The result is always high volatility, making it unfit as a store of value.
I think some variety of Friedman coin would be ideal. You even have the information necessary to implement it because Bitcoin mining is already based on blockchain data, right?
Why does it need to replace the dollar, though? Why can't it be just some form of hedge? Why can't I negotiatiate my salary to be 70% paid in USD, and the rest paid in some X BTC, with X being the remaining 30% at the day's rate of BTC/USD?
People keep saying that just because it's deflationary, they are never going to spend the coins. But as someone who grew up with hyperinflation (1980's Brazil) I can tell you that people still saved, they just used other currencies. I clearly remember my father buying dollars after getting his paycheck. Investment-wise it was a bad idea, but all people wanted was some sense of safety. When hyperinflation finally came to an end and I knew that my lunch at school would cost the same thing every week (instead of costing 20% more every Monday!), people started spending/selling their dollars.
The problem of BTC now is a problem of trust. And this lack of trust is due to the crazy volatility, not its deflationary nature. So, it is a chicken-and-egg problem. The more merchants you have accepting BTC, the more people will be able to spend their coins. Sure, the merchants buy be turning the 100% of their BTC into fiat right as they get them, but BTC could still be defined as the transaction currency.
People keep saying that just because it's deflationary, they are never going to spend the coins. But as someone who grew up with hyperinflation (1980's Brazil) I can tell you that people still saved, they just used other currencies. I clearly remember my father buying dollars after getting his paycheck. Investment-wise it was a bad idea, but all people wanted was some sense of safety. When hyperinflation finally came to an end and I knew that my lunch at school would cost the same thing every week (instead of costing 20% more every Monday!), people started spending/selling their dollars.
The problem of BTC now is a problem of trust. And this lack of trust is due to the crazy volatility, not its deflationary nature. So, it is a chicken-and-egg problem. The more merchants you have accepting BTC, the more people will be able to spend their coins. Sure, the merchants buy be turning the 100% of their BTC into fiat right as they get them, but BTC could still be defined as the transaction currency.
That proves itself: A deflationary currency can't replace the dollar, because the dollar isn't deflationary.
However, the present system is perhaps not the only possible system. Some alternative schools of thought in economics see possibilities beyond systematic inflation.
However, the present system is perhaps not the only possible system. Some alternative schools of thought in economics see possibilities beyond systematic inflation.
That's like saying "some alternative schools of thought in biology see possibilities beyond evolution" or "some alternative schools of thought in climatology see possibilities beyond anthropogenic climate change".
And in astronomy, to possibilities beyond the geocentric universe.
Alternative theories can be wrong or right. Don't oppose them because they're alternative: oppose them where the evidence compels you to.
Alternative theories can be wrong or right. Don't oppose them because they're alternative: oppose them where the evidence compels you to.
Right on! The established theories are all 100% right.
There's a fixed quantity of it like gold and gold worked as a currency for a very long time. If Bitcoin fails its certainly not because of its "deflationary nature." What you think it a basic understanding of economics is obvious nonsense. How could people have it so twisted?
It also failed as a currency in a very bad way. Part of the reason why the Great Depression was so bad is because most countries still used (or used the mindset associated with) the gold standard. Monetary policy is a very good way of stabilising the economy, and any currency which removes monetary policy as a tool is not likely to be stable in the long term.
You're dead wrong but even if you werent the fact that it worked for thousands of years completely invalidates the author's point.
> There's a fixed quantity of it like gold and gold worked as a currency for a very long time.
And that time has passed, the world moved on.
And that time has passed, the world moved on.
Understanding economics does not necessarily provide insight into understanding cryptocurrencies. That's been evident by the wildly varying posts about the topic over the last few months.
Regardless of the nice graphs, Bitcoin is currently NOT deflationary. Every 10 minutes 25 new coins are minted and placed into circulation. The rate of new Bitcoin creation will be halved every four years until there are 21 million BTC in circulation. Additionally, there are a slew of other cryptocurrencies with varying degrees of mining rates - some have a constant rate of inflation built into them. Time will tell which ones are adopted.
The miners who are minting these new coins are helping secure the currency (adding value) are putting work into the system by way of capital expenditure on equipment and costs associated with power. They expect a return on their investments and are probably the determining factor to the current price.
Regardless of the nice graphs, Bitcoin is currently NOT deflationary. Every 10 minutes 25 new coins are minted and placed into circulation. The rate of new Bitcoin creation will be halved every four years until there are 21 million BTC in circulation. Additionally, there are a slew of other cryptocurrencies with varying degrees of mining rates - some have a constant rate of inflation built into them. Time will tell which ones are adopted.
The miners who are minting these new coins are helping secure the currency (adding value) are putting work into the system by way of capital expenditure on equipment and costs associated with power. They expect a return on their investments and are probably the determining factor to the current price.
That's not what inflation means. Inflation is when prices rise because the growth in currency outstrips the growth in economic activity. If the growth in currency is less than the growth in economic activity, even if it's still >0, prices will drop, which is the definition of deflation.
Even that is a problematic take on it, because you ignore savings and what MVPQ people call the "velocity of money".
When firms like Apple sit on hoards of cash, the amount of currency can grow quite a bit faster than the economy without inflation.
When firms like Apple sit on hoards of cash, the amount of currency can grow quite a bit faster than the economy without inflation.
Yeah, the actual definition relies solely upon whether prices rise or fall in aggregate, for reasons that can be solely attributed to monetary factors. Which is a bitch to figure out, because you have all these libertarians screaming about how gasoline and groceries are more expensive, therefore inflation, when really it's because petroleum is expensive.
> Bitcoin is currently NOT deflationary.
Incorrect, demand alone has made it hugely deflationary; if everything were priced in Bitcoin right now, prices would have to be adjusted downward constantly, that's deflation. Money supply inflation is not inflation which generally refers to the overall prices of goods and services rising and money supply deflation is not deflation which is the fall of overall prices of goods and services. Bitcoin is currently hugely deflationary.
Incorrect, demand alone has made it hugely deflationary; if everything were priced in Bitcoin right now, prices would have to be adjusted downward constantly, that's deflation. Money supply inflation is not inflation which generally refers to the overall prices of goods and services rising and money supply deflation is not deflation which is the fall of overall prices of goods and services. Bitcoin is currently hugely deflationary.
The author is wrong on several points. The great depression was caused by an overestimation of how much the currency would inflate as a result of the Federal Reserve's lending practices, along with an expectation that the gold standard would be returned. It was an overprinting and contraction of fiat, deflation of which was totally unexpected, that caused it.
This almost reads like a parody. It's as if the author completely disregards the fact that the Austrian school exists at all.
I particularly like the reference to the 'deflationary' nature of the Great Depression while glossing over the fact that the prescribed solution (the establishment of a central bank) occurred less than two decades before it.
I particularly like the reference to the 'deflationary' nature of the Great Depression while glossing over the fact that the prescribed solution (the establishment of a central bank) occurred less than two decades before it.
All serious economists disregard the Austrian school. And with good reason - they're kooks.
There was a central bank during the great depression but the US was still on the gold standard until 1933. When it went off the gold standard the great depression stopped getting worse and started getting better: http://delong.typepad.com/sdj/2011/09/yes-recovery-in-the-gr...
There was a central bank during the great depression but the US was still on the gold standard until 1933. When it went off the gold standard the great depression stopped getting worse and started getting better: http://delong.typepad.com/sdj/2011/09/yes-recovery-in-the-gr...
> It's as if the author completely disregards the fact that the Austrian school exists at all.
Because they don't really, they're cranks, not a serious field of study. The Austrian school is equivalent to the flat earth society. Their answer to every possible economic issue is the same, the magic market will heal itself. When you have one answer for everything, you don't get to call yourself a serious field of study.
Because they don't really, they're cranks, not a serious field of study. The Austrian school is equivalent to the flat earth society. Their answer to every possible economic issue is the same, the magic market will heal itself. When you have one answer for everything, you don't get to call yourself a serious field of study.
I think it's important to distinguish between historic Austrians, like Hayek, and the nutjob libertarian variety that tried to turn economics into an apologia for anarchocapitalism, like Rothbard.
I'll make the distinction if you'll explain to me what Hayek proposes other than let the market handle it. From what I've seen, they're all cranks, Hayek included.
The Austrian school of thought is little more than don't touch the market, you'll break it, it's magic and it'll always work. That's not a serious field of study; that's a golden hammer theory.
The Austrian school of thought is little more than don't touch the market, you'll break it, it's magic and it'll always work. That's not a serious field of study; that's a golden hammer theory.
Hayek is tendentious, but he made substantive contributions to the science. Rothbard didn't even do that: he was a libertarian political activist masquerading as an economist.
You've already said that, but that's not what I asked, I asked what those contributions were beyond "the magic market will fix it".
For one, he seems to have developed the theory of price signals.
Falls under let the magic market handle it, I asked for something outside that.
Cap and trade basically hacks price signals by enforcing the notion that there's a finite supply of the environment's ability to absorb pollutants. Without the notion of price signals, cap and trade is not the type of thing you'd think to use, and the distinction I was making was that later Austrians, like Rothbard, never contributed anything of the like.
You can make whatever distinctions you want--this digression has gotten tiresome and I regret ever responding to you in the first place.
You can make whatever distinctions you want--this digression has gotten tiresome and I regret ever responding to you in the first place.
And by most historic interpretations, that centralization actually caused it.
Citation.
"When prices fall, people put off buying things"
So I'll never go on vacation, cause next year it will be cheaper. So I won't do the surgery now, cause next year it will be cheaper. etc, etc. This "common knowledge" means no one will ever buy anything if prices fall. That's patently wrong. It may be true for fads, but not for things people really want.
"This self-perpetuating cycle of doom [..] is what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely."
I live in a crisis stricken country in europe. Prices are NOT falling. That's a generalization and a lie. Prices fall for your property, what you have, and what you don't need, and prices are the same or spiking for things you need. Taxes also are spiking 2x 3x+. So, for example, you pay more and more taxes for your home, which is falling in price. (Owning it, not on debt.) But oil, food, electricity, etc, are rapidly increasing. Deflation and prices are falling, is a lie. They just destroy people, in order to pick up cheap on properties.
"What Bitcoin really needs is a central bank to stabilize its value."
lol. I remember seeing a graph of how much the dollar has lost it's value since the fed was created. Something like 90+%. I remember how much a coffee costed before entering the euro, and how much it costs now. Something like 15x more. It's bubbles, money printing, lies, and pure stealing. Central banks steal from all of us through inflation, and also give a competitive advantage to whoever they give the newly minted money first. (Their pals, big banks, etc.)
" See, the technology of Bitcoin really is revolutionary, but the currency of Bitcoin is holding it back. [..] So who's the perfect person to run Bitcoin? [..] Someone like ... Ben Bernanke."
This seems like a propaganda preparation piece. It seems that big players will introduce electronic money soon.
So I'll never go on vacation, cause next year it will be cheaper. So I won't do the surgery now, cause next year it will be cheaper. etc, etc. This "common knowledge" means no one will ever buy anything if prices fall. That's patently wrong. It may be true for fads, but not for things people really want.
"This self-perpetuating cycle of doom [..] is what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely."
I live in a crisis stricken country in europe. Prices are NOT falling. That's a generalization and a lie. Prices fall for your property, what you have, and what you don't need, and prices are the same or spiking for things you need. Taxes also are spiking 2x 3x+. So, for example, you pay more and more taxes for your home, which is falling in price. (Owning it, not on debt.) But oil, food, electricity, etc, are rapidly increasing. Deflation and prices are falling, is a lie. They just destroy people, in order to pick up cheap on properties.
"What Bitcoin really needs is a central bank to stabilize its value."
lol. I remember seeing a graph of how much the dollar has lost it's value since the fed was created. Something like 90+%. I remember how much a coffee costed before entering the euro, and how much it costs now. Something like 15x more. It's bubbles, money printing, lies, and pure stealing. Central banks steal from all of us through inflation, and also give a competitive advantage to whoever they give the newly minted money first. (Their pals, big banks, etc.)
" See, the technology of Bitcoin really is revolutionary, but the currency of Bitcoin is holding it back. [..] So who's the perfect person to run Bitcoin? [..] Someone like ... Ben Bernanke."
This seems like a propaganda preparation piece. It seems that big players will introduce electronic money soon.
If prices have been barely protected from falling like the author is claiming, I'd like to know why the price of owning a piece of just about any sector of the stock market has just about tripled in 4-5 years.
you would not buy surgery using this currency if you can avoid it since it would gain value in a possibly near future. So while people would still buy when prices fall, but with a preference given to other currencies.
Note: I am no expert.
Note: I am no expert.
I'm always a bit shocked that people can be so dismissive, is there really a precedent of a value construct like bitcoin that we can extrapolate confidently from?
> What Bitcoin really needs is a central bank to stabilize its value.
Neither did the U.S. before WWI... Once they added the Federal Reserve they really didn't know what they were doing and when the stock market collapsed they raised overnight lending rates and essentially caused the great depression (or made it significantly worse).
Point being, although the Federal Reserve may have a better handle on what is going on now, it does not mean that it is necessary for a currency to have a central bank.
The author pretty much has no idea what he is talking about.
Neither did the U.S. before WWI... Once they added the Federal Reserve they really didn't know what they were doing and when the stock market collapsed they raised overnight lending rates and essentially caused the great depression (or made it significantly worse).
Point being, although the Federal Reserve may have a better handle on what is going on now, it does not mean that it is necessary for a currency to have a central bank.
The author pretty much has no idea what he is talking about.
And the actual evidence behind the author's claim that deflationary currencies aren't successful?
crickets
Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while.
crickets
Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while.
>> Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while.
Gold has been a terrible choice of currency in the past. Read about it. There are a variety of very good reasons (and probably one or two bad ones, sure) why most modern countries have decoupled currency from precious metals.
Gold has been a terrible choice of currency in the past. Read about it. There are a variety of very good reasons (and probably one or two bad ones, sure) why most modern countries have decoupled currency from precious metals.
Gold didn't work very well as a currency. There is plenty of proof, but just look at the first graph in this article. http://fabiusmaximus.com/2010/09/13/21514/ Industrial production and when a country left the gold standard. Obviously clinging to the gold standard for so long was a huge mistake.
(my point is purely related to that one graph, not the rest of the article (that I have not read))
(my point is purely related to that one graph, not the rest of the article (that I have not read))
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Let T be the total amount of money in circulation in a given currency C. When you see a value X in units of C, convert it to C' by X in C' = X / T. There you have it, every currency is already trivially equivalent to Bitcoin in that the supply of C' is fixed at 1.
How they're _not_ equivalent is that the creation of money in existing currencies is centrally controlled. You can get a clearer view of what happens when money is printed by looking at C' rather than C.
For simplicity, pretend there's only the Mint (can create money) and the Public (can't). Initially, Mint has X C and Public has Y C. In C', this is X/(X+Y) C' and Y/(X+Y) C'. Then Mint decides to create Z C. Mint now has (X+Z) / (X+Y+Z) C' and Public has X / (X+Y+Z). The Mint has effectively transferred money away from Public. All arguments against deflation are, basically, Mint will now redistribute the money in such a way as to stimulate the economy.
How they're _not_ equivalent is that the creation of money in existing currencies is centrally controlled. You can get a clearer view of what happens when money is printed by looking at C' rather than C.
For simplicity, pretend there's only the Mint (can create money) and the Public (can't). Initially, Mint has X C and Public has Y C. In C', this is X/(X+Y) C' and Y/(X+Y) C'. Then Mint decides to create Z C. Mint now has (X+Z) / (X+Y+Z) C' and Public has X / (X+Y+Z). The Mint has effectively transferred money away from Public. All arguments against deflation are, basically, Mint will now redistribute the money in such a way as to stimulate the economy.
the creation of money in existing currencies is centrally controlled
This is a common misunderstanding. For typical fiat currencies, money creation is highly decentralized in the banking system. Most money creation happens when banks give out loans. Conversely, most money destruction happens when loans are paid back.
This is actually why our system works so well: the supply of money is not controlled by a central (and therefore fallible) institution, and neither is it fixed (which would be even worse). Instead, it adapts automatically to the demand of money (perhaps one should better say "liquidity" here) via market mechanisms.
This is a common misunderstanding. For typical fiat currencies, money creation is highly decentralized in the banking system. Most money creation happens when banks give out loans. Conversely, most money destruction happens when loans are paid back.
This is actually why our system works so well: the supply of money is not controlled by a central (and therefore fallible) institution, and neither is it fixed (which would be even worse). Instead, it adapts automatically to the demand of money (perhaps one should better say "liquidity" here) via market mechanisms.
Interesting point, and you're right: I was only considering printed money!
Exactly. And even with printed money, one could reasonably argue that the fact that money is printed centrally is irrelevant for the behavior of the economy.
After all, central banks typically just react to the demand for physical money that they observe via the requests that come from banks.
After all, central banks typically just react to the demand for physical money that they observe via the requests that come from banks.
> When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. Even worse, people are stuck trying to pay back debts that don't fall with wages that do. So bankruptcies pile up, and so do bank losses. That makes people too scared to borrow, and banks too scared to lend, which only makes prices fall even more.
> This self-perpetuating cycle of doom is what sunk the global economy in the 1930s, and what, to a lesser extent, has sunk Japan since the 1990s. And it's what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely.
Oh good, I'm glad that the causes of the business cycle, the great depression, and the recent global recession have all been discovered with absolutely no question or debate.
> This self-perpetuating cycle of doom is what sunk the global economy in the 1930s, and what, to a lesser extent, has sunk Japan since the 1990s. And it's what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely.
Oh good, I'm glad that the causes of the business cycle, the great depression, and the recent global recession have all been discovered with absolutely no question or debate.
Bitcoin aside just reading the first few sentences really shows what a sad state our economics education is in. People literally, dogmatically believe something that is so blatantly false you'd think you would have to be mentally handicapped to believe it. Yet they do.
Is it sad that they would believe those sentences, or sad that those sentences are even necessary? I can't tell whether you agree with it or not.
I had a dream last night that I went into Walmart. Everything was a penny so I went home to wait this terrible situation out. And because the economy is dependent on SPENDING not producing the economy collapsed as a result! What a nightmare.
This argument would only be valid if bitcoin were the only currency, or weren't easily convertible to and from dollars.
People invested in bitcoins still have to buy things. What many of them do is leave their investment in place, convert a few dollars to bitcoins and spend those.
Of course they have an incentive to save rather than spend bitcoins, but this incentive applies equally well to their dollars. If they expect bitcoin deflation to continue, they should convert their dollars to bitcoins rather than spending their dollars. If bitcoin's deflation isn't preventing people from spending dollars, it's not preventing them from spending bitcoins either.
Bitcoin isn't having a strong effect on dollars, because its total value is only about $10 billion. Maybe someday it will have a strong deflationary effect on the dollar economy, but it'll have to get much bigger before that happens.
But once it is that big, its rate of deflation will slow. It's high now because its usage is growing[1] so quickly. In the past seven days, the number of bitcoin-accepting merchants on coinmap grew 13%. That radical growth will eventually slow, and then we won't see such drastic price changes.
Arguably it will still be somewhat deflationary, but even that isn't a sure thing since bitcoin won't necessarily be the only successful cryptocurrency. Hayek argued that private competing currencies would result in price stability without central control, and we might find out whether he was right.
[1] http://www.bitcoinpulse.com
People invested in bitcoins still have to buy things. What many of them do is leave their investment in place, convert a few dollars to bitcoins and spend those.
Of course they have an incentive to save rather than spend bitcoins, but this incentive applies equally well to their dollars. If they expect bitcoin deflation to continue, they should convert their dollars to bitcoins rather than spending their dollars. If bitcoin's deflation isn't preventing people from spending dollars, it's not preventing them from spending bitcoins either.
Bitcoin isn't having a strong effect on dollars, because its total value is only about $10 billion. Maybe someday it will have a strong deflationary effect on the dollar economy, but it'll have to get much bigger before that happens.
But once it is that big, its rate of deflation will slow. It's high now because its usage is growing[1] so quickly. In the past seven days, the number of bitcoin-accepting merchants on coinmap grew 13%. That radical growth will eventually slow, and then we won't see such drastic price changes.
Arguably it will still be somewhat deflationary, but even that isn't a sure thing since bitcoin won't necessarily be the only successful cryptocurrency. Hayek argued that private competing currencies would result in price stability without central control, and we might find out whether he was right.
[1] http://www.bitcoinpulse.com
It's telling that none of those indicators relate to the value of the goods that are being purchased with Bitcoin. That's probably the most interesting metric.
It would definitely be interesting. I'm having trouble thinking of a way that metric could be gathered with any reliability, given that merchants typically generate new bitcoin addresses for each purchase.
> What Bitcoin really needs is a central bank to stabilize its value.
No, a distributed system who's goal is getting rid of central control doesn't need a central point of control.
> When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing.
And again no; rather, minting more currency can be built into the network algorithmically so that hoarding causes enough inflation to offset it.
Bitcoin's deflationary nature will make it a bad currency, but it's not the only crypt-currency out there, and inflation and deflation can be tied into actual transactions on the block chain to build a self regulating currency that can actually be trusted and more importantly adjusted by the economy itself, unlike central planning.
Peercoin has these attributes, though I'm not convinced in the correct proportions as it's still long term deflationary. Saving causes inflation by minting new coins and spending causes deflation by destroying transaction fees. This is a better strategy for a currency, but it's not quite balanced right yet.
No, a distributed system who's goal is getting rid of central control doesn't need a central point of control.
> When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing.
And again no; rather, minting more currency can be built into the network algorithmically so that hoarding causes enough inflation to offset it.
Bitcoin's deflationary nature will make it a bad currency, but it's not the only crypt-currency out there, and inflation and deflation can be tied into actual transactions on the block chain to build a self regulating currency that can actually be trusted and more importantly adjusted by the economy itself, unlike central planning.
Peercoin has these attributes, though I'm not convinced in the correct proportions as it's still long term deflationary. Saving causes inflation by minting new coins and spending causes deflation by destroying transaction fees. This is a better strategy for a currency, but it's not quite balanced right yet.
"Why the Internet Will Never be Newspaper"
It doesn't have to fit the role of traditional currency because it isn't.
It doesn't have to fit the role of traditional currency because it isn't.
You're criticizing The Atlantic (which happens to be a print publication as well, not just online) for an article stating that Bitcoin won't become an everyday currency, but saying "it doesn't have to fit [that] role." The article never said it did have to fit that role. The journalism is perfectly fine here, quit being defensive and make an actual argument.
Bitcoin is already used a currency right now but I believe what the author is trying to say is it has not lasting power. Which i believe it to be true.
In its current form, its too complex for non-tech savvy people and what makes bitcoin bitcoin will not last more then 10 years as processing power increases over time.
In its current form, its too complex for non-tech savvy people and what makes bitcoin bitcoin will not last more then 10 years as processing power increases over time.
Heh. It's not that complicated. How many concepts have common people learned since computers and the Internet took everything over? Computer network. Router. Website address. Domain name. IP address. Email address. File. Torrent.
What if knowledge of hashing and public and private keys become as commonplace? Because of bitcoin?
What if knowledge of hashing and public and private keys become as commonplace? Because of bitcoin?
The author makes really good points about Bitcoin's viability right now as a day-to-day currency. The conclusion at the end, that "What Bitcoin really needs is a central bank to stabilize its value" comes out of left field. No matter the difficulty, the goal most consistent with those of Bitcoin would seem to be to create a cryptocurrency that has a reliable built-in inflation/deflation mechanism. I suppose such a creation would amount to the perfection of money, for whatever that's worth.
People saying Bitcoin won't work because of the instable price are just dumb.
Can anyone bring up some charts from when the first 'normal' (non-crypto) currencies were invented? Let's see if those were so stable from the first year onward.
Earlier today I just happened to look up inflation rates from european countries before the Euro: one was nearly 30% in 1980. "Omg 30% price change in just a year," yeah and even that seems to have worked out fine. They were even allowed to join the Eurozone.
Can anyone bring up some charts from when the first 'normal' (non-crypto) currencies were invented? Let's see if those were so stable from the first year onward.
Earlier today I just happened to look up inflation rates from european countries before the Euro: one was nearly 30% in 1980. "Omg 30% price change in just a year," yeah and even that seems to have worked out fine. They were even allowed to join the Eurozone.
Look up the Euro. That was relatively recent.
And no, it didn't have fluctuations anything like BTC.
And no, it didn't have fluctuations anything like BTC.
That 30% price change in a year was an anomaly, and it was in 1980, during a severe global recession. Bitcoin, meanwhile, just gained value approximately eightfold over several weeks ago, and it's relatively unusual that it isn't highly volatile, especially lately.
It would be great to have some guys here run a large simulation. I might be wrong, but I bet that there is a trade-off between "centrally organized" currencies versus "decentralized" ones. There might market potential for both. A centralized monetary system could have some disadvantages, isn't it?
Isn't it contradictory to argue that everyone should go short on Bitcoin because it's deflationary?
It's either deflationary, so everyone should go long on it / use it as a store for all excess value, or it's not, so it doesn't actually have this problem.
It's either deflationary, so everyone should go long on it / use it as a store for all excess value, or it's not, so it doesn't actually have this problem.
> When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing.
To some degree, this already works. If the price of bitcoin gets high enough relative to the price of electricity and ASICs, then more bitcoins are mined, right?
To some degree, this already works. If the price of bitcoin gets high enough relative to the price of electricity and ASICs, then more bitcoins are mined, right?
Then the difficulty goes up. The network is designed to create an average of 6 blocks per hour, with a constant reward per block that halves every 4 years. https://en.bitcoin.it/wiki/Controlled_Currency_Supply
It is slowly racing ahead of the forecast though. The current block was projected for 2014:
http://blockexplorer.com/q/getblockcount
I guess that will slow down as ASIC hardware matures (or if there is a sustained price drop).
http://blockexplorer.com/q/getblockcount
I guess that will slow down as ASIC hardware matures (or if there is a sustained price drop).
Does a lack of inflation equal deflation? I've not heard that one before.
Deflation is when prices drop due to currency scarcity, and inflation is when prices rise due to currency abundance. The only perfect zero is when the amount of currency in circulation perfectly matches the amount of economic activity. A cryptocurrency might be able to make that happen, but central banks usually err on the side of 1-2% inflation since deflation is so much worse than inflation.
> Now, it doesn't make much sense, but there's actually a currency designed to create these kind of economic calamities.
I wanted to stop reading right there.
I wanted to stop reading right there.
While bitcoin supporters tend to hate the idea of inflation, there are others coins that have inflation built in to encourage spending -- a kind of progressive version of bitcoin.
Here's a random example of a coin designed around a specific economic philosophy:
>Unlike Bitcoin, Freicoin has a demurrage fee that ensures its circulation and bearers of the currency pay this fee automatically. This demurrage fee was proposed by Silvio Gesell to eliminate the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle and the entrenchment of the financial elite, and has been tested several times with positive results.
http://freico.in/
(no idea if that has merit but it was the one that stuck in my head because it was so clearly articulated on their homepage)
Whether bitcoin itself last who knows, but probably some descendant will be around at the very least at the protocol level.