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A currency with no mechanism for monetary policy is not going to be adopted. Bitcoin is purely deflationary for more reasons than just people losing their keys.

A currency with no mechanism for monetary policy is not going to be adopted. Bitcoin is purely deflationary for more reasons than just people losing their keys. For example, a fixed reward split between a growing group of miners will also cause a rising price floor. The miners will not sell for less than their electricity costs, which makes the smaller piece of the block reward they receive have a higher price. So you have this asset you call a currency but it is always deflationary. No one will set prices in that. Think of it in terms of setting a salary. One month you are paying the equivalent of 1000 dollars, the next you are paying 2000. Since this has no way of stabilizing it will never become a true base currency. Instead, at best, it serves as a pass through to a fiat currency. So it is acting as a payment processor but very inefficiently. Slow transaction speeds, expensive, difficult to acquire. The price is driven by speculative demand. It honestly is more like a digital collectible than a currency (sign up to receive one of 21 million e coins, be part of history).

comboy 8y ago
Currency that is guaranteed to be deflationary sure has its problems. But taking ideology and using it for every day stuff aside, why wouldn't you want to own some?
- kristjansson 8y ago
  Exactly: own some. Not spend some, hence the problem with using it as a currency.
  - amatic 8y ago
    I'm not sure that is a real problem. You own some, then when you want to spend, you spend. The fact that it is deflationary means you might postpone your purchase, but ultimately, you will need to eat/travel/etc more than you need to "own" currency. Or are there other problems?
    - deleted 8y ago
      [deleted]
    - crististm 8y ago
      Pardon my french but what the fuck do you do with a number that you "own"? The whole point of a currency is to be spent as opposed to be "owned".
    - kristjansson 8y ago
      The issue is that, in a smoothly deflating currency, all but the most essential consumption will be postponed indefinitely, as will investment of that currency in anything that expects to return less than the rate of deflation. This is bad for an economy denominated entirely in that currency, as the deduction in economic activity can increase the rate of deflation, which reduces economic activity further, and so on. Obviously bitcoin is not the primary currency for any economy, so the feedback effect isn't a concern, but the deflationary pressure is (per TFA) reducing actual economic activity denominated in bitcoin.
- pjc50 8y ago
  ... why would you?
  - ehrtt 8y ago
    ..because in this thought experiment it's guaranteed to be deflationary...
    - WJW 8y ago
      It's only deflationary in terms of bitcoins, the dollar value can still drop to zero if demand completely drops away.
konschubert 8y ago
> For example, a fixed reward split between a growing group of miners will also cause a rising price floor. The miners will not sell for less than their electricity costs, which makes the smaller piece of the block reward they receive have a higher price. No that's not how markets work. Miners will sell at the best prive they can get. If they cannot cover their costs, they'll stop mining and the difficulty will drop until mining is profitable again. The resulting mining rate may be too low though to secure the network, bug that's a different topic.
jstanley 8y ago
> The miners will not sell for less than their electricity costs, which makes the smaller piece of the block reward they receive have a higher price. That's not how it works. If you spent $100 in electricity and you have an asset that's worth $50, you can either sell it for $50 and only be down $50 on your electricity, or you can not sell it at all and be down $100 on your electricity. Electricity cost of mining does not set a price floor. The price floor is 0.
- Scaevolus 8y ago
  More than just power, you have depreciating assets (mining chips, servers, buildings) that are effectively losing money constantly. Operating them at a small loss is better than leaving them idle for a huge loss. You see similar economics when farmers sell crops at a net loss.
  - salawat 8y ago
    Note: Farming in that manner regularly is not sustainable. Also, at a certain loss point, you might as well compost the crop back into the soil to contribute to next year's crop as fertilizer. That stuff is expensive. Hell, the entire economy makes no guarantees at being sustainable in the long run. The unsustainability period just shows all indications of being longer than a human lifespan, thereby making it easy for people to write off as not their problem.
  - luckydata 8y ago
    So slightly negative margins but making it up in volume?
    - jandrese 8y ago
      Think of it more as cutting your losses. You've already lost the money, so even if you can't make it all back you can make back part of it by selling the product at a loss.
    - joejerryronnie 8y ago
      That's how you lock up your Series A. For the next round of funding you'll need to upgrade to "large negative margins but hockey stick volume". The Saudi Sovereign Wealth Fund will accept nothing less.
dev_dull 8y ago
> For example, a fixed reward split between a growing group of miners will also cause a rising price floor. The miners will not sell for less than their electricity costs Sure they will. They’ll have to if there are more sellers than buyers. Sellers are poor things at creating “floors” unless they’re in collusion. Bitcoin is famously decentralized so good luck with that.
DennisP 8y ago
Bitcoin automatically adjusts the difficulty of mining, targeting ten minutes per block. If the price drops, then some miners will find themselves unprofitable and shut down, blocks will take longer to produce, and the difficulty will drop. Mining effort follows price, not the other way around.
- TACIXAT 8y ago
  Price follows buyers and sellers. It is not some magical property that miners are chasing. They produce a product for costs and aim to sell it above those costs.
  - DennisP 8y ago
    They're a small minority of the total selling. In the past 24 hours the volume listed on coinmarketcap was 500K bitcoins. The number of bitcoins produced by miners was 12.5 every 10 minutes, or 1800 coins. Due to difficulty adjustment, they also have no ability to change the overall level of production. They can choose not to sell immediately, but for most large miners their costs prevent them from waiting too long. But since they're only 0.4% of overall daily sales, it won't matter to the price either way.
osrec 8y ago
It is by definition deflationary due to its restricted supply. This would not be so much of a problem at the moment, if it wasn't for the fact that people started treating it as an asset in its own right, rather than an experimental medium of exchange. Most people have lost sight of the fact that it is the first iteration of a series of experiments to create a decentralised mechanism of value transfer. It wasn't going to be right the first time round. Sometimes I feel that criticising Bitcoin for it's failures is like criticising Edison based on his first attempt at inventing the light bulb!
- forgotmypw 8y ago
  I think of Bit<oin as the MS-DOS of e1e<troni< <urren<ies.
  - sudomake 8y ago
    MS-DOS was successful. Perhaps CPM is a better choice?
    - topranks 8y ago
      Well CPM wasn’t a failure because MS-DOS was better technically. It was more down to other factors like IBM selling it for a much lower price than CPM for the IBM-PC. So to the original comment I think the poster means it’s like MS-DOS, but Windows or some such will come next and bring it to the mainstream.
    - forgotmypw 8y ago
      Bit<oin is a1so su<<essfu1. And a few years 1ater, we're 1eft wondering how we managed with 8.3 fi1enames.
tomrod 8y ago
Fantastic assessment. I hadn't thought about it in these terms before, but agree strongly.
sneak 8y ago
> A currency with no mechanism for monetary policy is not going to be adopted. ...except that bitcoin has been adopted, just not widely. Your basic premise is false.
- betterunix2 8y ago
  Bitcoin has only been around for a decade, and for most of that time its adoption was driven more by ideological support by libertarians and anarchists than by technical or economic advantages. After ideological reasons the next biggest driver was misunderstanding of its technical features by people who thought they were getting anonymity. Even ignoring the criminals and ideologically-driven adopters, you do not really have large-scale acceptance, because most businesses that claim to accept Bitcoin are only doing so via services that immediately convert the payments to fiat currencies (i.e. these supposed "adopters" are really accepting fiat currency and have no particular desire to receive, use, or hold Bitcoin). The basic premise of Bitcoin as a currency has always been questionable. With each passing year the premise has become more questionable -- there is the extreme volatility, the enormous energy tax, the inability of anyone to respond to liquidity or credit crunches (and the deflationary nature that encourages such problems) and the ever unclear driver of BTC demand (why would I want a BTC payment, especially when I need to make certain legally-mandated payments that are only payable in my nation's fiat currency?).
tzs 8y ago
> For example, a fixed reward split between a growing group of miners will also cause a rising price floor. The miners will not sell for less than their electricity costs, which makes the smaller piece of the block reward they receive have a higher price. There is one group of miners for whom electricity costs and Bitcoin price don't really matter much: home miners in cold regions whose homes used electrical resistance heating. Almost all of the energy consumed by a computer ends up as heat released directly into the room. A computer is, for most practical purposes, an electrical space heater that is as efficient as a "real" space heater [1]. It's just more complicated and the power consumption (and hence heat output) tends to vary a lot depending on what computation it is doing. I wonder if this will result in mining eventually becoming mostly a home activity again, as it was when Bitcoin was starting out? [1] https://www.pugetsystems.com/labs/articles/Gaming-PC-vs-Space-Heater-Efficiency-511/ https://www.pugetsystems.com/labs/articles/Gaming-PC-vs-Spac...
- lalaland1125 8y ago
  This logic is flawed because it doesn't consider the fact that we have more efficient heaters than electric space heaters. In particular, the two main alternatives are gas (more efficient because you skip inefficient fuel -> electricity steps) and heat pumps (more efficient because you draw in heat from outside). Compared to these alternatives, Bitcoin miners make very, very inefficient heaters.
  - tzs 8y ago
    > Compared to these alternatives, Bitcoin miners make very, very inefficient heaters ...which is why I specifically talked about people "whose homes used electrical resistance heating". Many areas do not have gas available by pipe, and having it delivered by truck in liquid form is often expensive. People living in rental units may not be allowed to install a heat pump, and heat pumps have a high up front cost that keeps out many people who aren't blocked by any other restrictions. Also, even people with other, more efficient, heat sources might have situations where electrical resistance heat makes sense. For example, it may save money at night to turn down a whole house heat pump to a level that would be uncomfortably cold, and use an electrical space heater to just keep your bedroom warmer.
conanbatt 8y ago
I disagree with several of your statements. First, bitcoin has a monetary policy, and the key is that it cant be changed, which is very appealing: more appealing that storing gold vs fiat, since gold has a less predictable monetary policy. Gold had been chosen as currency for most of history, across cultures and languages. In countries where the currency breaks down, things like chocolate, potatoes or corn get into circulation. Also bonds and other papers of different calibers. It is not the deflationary policy that makes bitcoin less adoptable: being deflationary predictably is better than unpredictably inflationary. Specially in this day and age, where bitcoin prices can be tracked to the second and prices changed accordingly across the board. Its interesting to see there's research talking about how the ability to price things faster has changed the effect of monetary policy on prices at all. The rest, I agree. It has a very speculative value, and its best usecase is pass-through. But pass through is still a good use-case. Argentina, 3 years ago, would pay up to 5% of funds to transfer money in-out of the country: bitcoin would have been easier and cheaper. And its still used as a way to evade controls. The use of bitcoin can severely reduce the government's capacity to levy taxes, as it is way harder to track down than bank/card transfers. Whether that's moral or good will be secondary to the fact that it can do that. If its use case is to sell drug money and reduce taxes, it will have value.
- bestnameever 8y ago
  > Specially in this day and age, where bitcoin prices can be tracked to the second and prices changed accordingly across the board. Its interesting to see there's research talking about how the ability to price things faster has changed the effect of monetary policy on prices at all. isn't this true for all currencies, virtual or not?
- WJW 8y ago
  > and the key is that it cant be changed, which is very appealing This is only very appealing if: - It is never necessary to change monetary policy. - The same monetary policy is appropriate for all nations. - The monetary policy that was chosen by the bitcoin dev team is exactly the right one.
  - 8y ago
tmornini_ey 8y ago
> it is always deflationary Except for the fact that it is currently, and always has been, inflationary. You need to learn more about economics. Inflation/Deflation is a separate phenomenon than rising/falling value — though they are sometimes related.

comboy 8y ago

Currency that is guaranteed to be deflationary sure has its problems. But taking ideology and using it for every day stuff aside, why wouldn't you want to own some?

kristjansson 8y ago
Exactly: own some. Not spend some, hence the problem with using it as a currency.
- amatic 8y ago
  I'm not sure that is a real problem. You own some, then when you want to spend, you spend. The fact that it is deflationary means you might postpone your purchase, but ultimately, you will need to eat/travel/etc more than you need to "own" currency. Or are there other problems?
  - deleted 8y ago
    [deleted]
  - crististm 8y ago
    Pardon my french but what the fuck do you do with a number that you "own"? The whole point of a currency is to be spent as opposed to be "owned".
  - kristjansson 8y ago
    The issue is that, in a smoothly deflating currency, all but the most essential consumption will be postponed indefinitely, as will investment of that currency in anything that expects to return less than the rate of deflation. This is bad for an economy denominated entirely in that currency, as the deduction in economic activity can increase the rate of deflation, which reduces economic activity further, and so on. Obviously bitcoin is not the primary currency for any economy, so the feedback effect isn't a concern, but the deflationary pressure is (per TFA) reducing actual economic activity denominated in bitcoin.
pjc50 8y ago
... why would you?
- ehrtt 8y ago
  ..because in this thought experiment it's guaranteed to be deflationary...
  - WJW 8y ago
    It's only deflationary in terms of bitcoins, the dollar value can still drop to zero if demand completely drops away.

konschubert 8y ago

> For example, a fixed reward split between a growing group of miners will also cause a rising price floor. The miners will not sell for less than their electricity costs, which makes the smaller piece of the block reward they receive have a higher price. No that's not how markets work. Miners will sell at the best prive they can get. If they cannot cover their costs, they'll stop mining and the difficulty will drop until mining is profitable again. The resulting mining rate may be too low though to secure the network, bug that's a different topic.

jstanley 8y ago

> The miners will not sell for less than their electricity costs, which makes the smaller piece of the block reward they receive have a higher price. That's not how it works. If you spent $100 in electricity and you have an asset that's worth $50, you can either sell it for $50 and only be down $50 on your electricity, or you can not sell it at all and be down $100 on your electricity. Electricity cost of mining does not set a price floor. The price floor is 0.

Scaevolus 8y ago
More than just power, you have depreciating assets (mining chips, servers, buildings) that are effectively losing money constantly. Operating them at a small loss is better than leaving them idle for a huge loss. You see similar economics when farmers sell crops at a net loss.
- salawat 8y ago
  Note: Farming in that manner regularly is not sustainable. Also, at a certain loss point, you might as well compost the crop back into the soil to contribute to next year's crop as fertilizer. That stuff is expensive. Hell, the entire economy makes no guarantees at being sustainable in the long run. The unsustainability period just shows all indications of being longer than a human lifespan, thereby making it easy for people to write off as not their problem.
- luckydata 8y ago
  So slightly negative margins but making it up in volume?
  - jandrese 8y ago
    Think of it more as cutting your losses. You've already lost the money, so even if you can't make it all back you can make back part of it by selling the product at a loss.
  - joejerryronnie 8y ago
    That's how you lock up your Series A. For the next round of funding you'll need to upgrade to "large negative margins but hockey stick volume". The Saudi Sovereign Wealth Fund will accept nothing less.

dev_dull 8y ago

> For example, a fixed reward split between a growing group of miners will also cause a rising price floor. The miners will not sell for less than their electricity costs Sure they will. They’ll have to if there are more sellers than buyers. Sellers are poor things at creating “floors” unless they’re in collusion. Bitcoin is famously decentralized so good luck with that.

DennisP 8y ago

Bitcoin automatically adjusts the difficulty of mining, targeting ten minutes per block. If the price drops, then some miners will find themselves unprofitable and shut down, blocks will take longer to produce, and the difficulty will drop. Mining effort follows price, not the other way around.

TACIXAT 8y ago
Price follows buyers and sellers. It is not some magical property that miners are chasing. They produce a product for costs and aim to sell it above those costs.
- DennisP 8y ago
  They're a small minority of the total selling. In the past 24 hours the volume listed on coinmarketcap was 500K bitcoins. The number of bitcoins produced by miners was 12.5 every 10 minutes, or 1800 coins. Due to difficulty adjustment, they also have no ability to change the overall level of production. They can choose not to sell immediately, but for most large miners their costs prevent them from waiting too long. But since they're only 0.4% of overall daily sales, it won't matter to the price either way.

osrec 8y ago

It is by definition deflationary due to its restricted supply. This would not be so much of a problem at the moment, if it wasn't for the fact that people started treating it as an asset in its own right, rather than an experimental medium of exchange. Most people have lost sight of the fact that it is the first iteration of a series of experiments to create a decentralised mechanism of value transfer. It wasn't going to be right the first time round. Sometimes I feel that criticising Bitcoin for it's failures is like criticising Edison based on his first attempt at inventing the light bulb!

forgotmypw 8y ago
I think of Bit<oin as the MS-DOS of e1e<troni< <urren<ies.
- sudomake 8y ago
  MS-DOS was successful. Perhaps CPM is a better choice?
  - topranks 8y ago
    Well CPM wasn’t a failure because MS-DOS was better technically. It was more down to other factors like IBM selling it for a much lower price than CPM for the IBM-PC. So to the original comment I think the poster means it’s like MS-DOS, but Windows or some such will come next and bring it to the mainstream.
  - forgotmypw 8y ago
    Bit<oin is a1so su<<essfu1. And a few years 1ater, we're 1eft wondering how we managed with 8.3 fi1enames.

tomrod 8y ago

Fantastic assessment. I hadn't thought about it in these terms before, but agree strongly.

sneak 8y ago

> A currency with no mechanism for monetary policy is not going to be adopted. ...except that bitcoin has been adopted, just not widely. Your basic premise is false.

betterunix2 8y ago
Bitcoin has only been around for a decade, and for most of that time its adoption was driven more by ideological support by libertarians and anarchists than by technical or economic advantages. After ideological reasons the next biggest driver was misunderstanding of its technical features by people who thought they were getting anonymity. Even ignoring the criminals and ideologically-driven adopters, you do not really have large-scale acceptance, because most businesses that claim to accept Bitcoin are only doing so via services that immediately convert the payments to fiat currencies (i.e. these supposed "adopters" are really accepting fiat currency and have no particular desire to receive, use, or hold Bitcoin). The basic premise of Bitcoin as a currency has always been questionable. With each passing year the premise has become more questionable -- there is the extreme volatility, the enormous energy tax, the inability of anyone to respond to liquidity or credit crunches (and the deflationary nature that encourages such problems) and the ever unclear driver of BTC demand (why would I want a BTC payment, especially when I need to make certain legally-mandated payments that are only payable in my nation's fiat currency?).

tzs 8y ago

> For example, a fixed reward split between a growing group of miners will also cause a rising price floor. The miners will not sell for less than their electricity costs, which makes the smaller piece of the block reward they receive have a higher price. There is one group of miners for whom electricity costs and Bitcoin price don't really matter much: home miners in cold regions whose homes used electrical resistance heating. Almost all of the energy consumed by a computer ends up as heat released directly into the room. A computer is, for most practical purposes, an electrical space heater that is as efficient as a "real" space heater [1]. It's just more complicated and the power consumption (and hence heat output) tends to vary a lot depending on what computation it is doing. I wonder if this will result in mining eventually becoming mostly a home activity again, as it was when Bitcoin was starting out? [1] https://www.pugetsystems.com/labs/articles/Gaming-PC-vs-Space-Heater-Efficiency-511/ https://www.pugetsystems.com/labs/articles/Gaming-PC-vs-Spac...

lalaland1125 8y ago
This logic is flawed because it doesn't consider the fact that we have more efficient heaters than electric space heaters. In particular, the two main alternatives are gas (more efficient because you skip inefficient fuel -> electricity steps) and heat pumps (more efficient because you draw in heat from outside). Compared to these alternatives, Bitcoin miners make very, very inefficient heaters.
- tzs 8y ago
  > Compared to these alternatives, Bitcoin miners make very, very inefficient heaters ...which is why I specifically talked about people "whose homes used electrical resistance heating". Many areas do not have gas available by pipe, and having it delivered by truck in liquid form is often expensive. People living in rental units may not be allowed to install a heat pump, and heat pumps have a high up front cost that keeps out many people who aren't blocked by any other restrictions. Also, even people with other, more efficient, heat sources might have situations where electrical resistance heat makes sense. For example, it may save money at night to turn down a whole house heat pump to a level that would be uncomfortably cold, and use an electrical space heater to just keep your bedroom warmer.

conanbatt 8y ago

I disagree with several of your statements. First, bitcoin has a monetary policy, and the key is that it cant be changed, which is very appealing: more appealing that storing gold vs fiat, since gold has a less predictable monetary policy. Gold had been chosen as currency for most of history, across cultures and languages. In countries where the currency breaks down, things like chocolate, potatoes or corn get into circulation. Also bonds and other papers of different calibers. It is not the deflationary policy that makes bitcoin less adoptable: being deflationary predictably is better than unpredictably inflationary. Specially in this day and age, where bitcoin prices can be tracked to the second and prices changed accordingly across the board. Its interesting to see there's research talking about how the ability to price things faster has changed the effect of monetary policy on prices at all. The rest, I agree. It has a very speculative value, and its best usecase is pass-through. But pass through is still a good use-case. Argentina, 3 years ago, would pay up to 5% of funds to transfer money in-out of the country: bitcoin would have been easier and cheaper. And its still used as a way to evade controls. The use of bitcoin can severely reduce the government's capacity to levy taxes, as it is way harder to track down than bank/card transfers. Whether that's moral or good will be secondary to the fact that it can do that. If its use case is to sell drug money and reduce taxes, it will have value.

bestnameever 8y ago
> Specially in this day and age, where bitcoin prices can be tracked to the second and prices changed accordingly across the board. Its interesting to see there's research talking about how the ability to price things faster has changed the effect of monetary policy on prices at all. isn't this true for all currencies, virtual or not?
WJW 8y ago
> and the key is that it cant be changed, which is very appealing This is only very appealing if: - It is never necessary to change monetary policy. - The same monetary policy is appropriate for all nations. - The monetary policy that was chosen by the bitcoin dev team is exactly the right one.
- 8y ago

tmornini_ey 8y ago

> it is always deflationary Except for the fact that it is currently, and always has been, inflationary. You need to learn more about economics. Inflation/Deflation is a separate phenomenon than rising/falling value — though they are sometimes related.