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Because a dollar is not always worth a dollar. A bitcoin is always worth a bitcoin. The dollar doesn't have a "reference rate," as it is subject to arbitrary i

Because a dollar is not always worth a dollar. A bitcoin is always worth a bitcoin. The dollar doesn't have a "reference rate," as it is subject to arbitrary inflation. The dollar has had several reference rates in the past, based on weight in silver, and later, gold. The purchasing power of a dollar has declined rapidly since these reference rates were abandoned. A bitcoin has a reference rate which is eventually 1 in 21M. There is an initial inflationary period until it reaches that, but we're already 1 in ~18M, so most of the inflation has already occurred. We will be very close to the 21M in another 13 years, and after that we will only be adding small fractions. If you had a dollar in 1918, it would be worth only a small fraction of a dollar today. 1/16 or 1/40, depending on what estimations you use. If past performance is anything to go off, then a dollar in 2118 will be worth 1/16th of a dollar today. If you hold onto 16 dollars today, they will have the purchasing power of 1 dollar in 2118. On the other hand, if you hold 16 bitcoin today, you have 16 of 18M of the bitcoin supply. In 2118, you will have 16 of the ~21M total supply. In the same 100 years, bitcoin will inflate by most 16%. The dollar will inflate by 160% in the same period, if the past century is anything to go off (it isn't, this century will be much much worse). Or put it in to shorter timeframe. If inflation is approximately linear over the 100 years, then every 6 1/4 years, your bitcoin will lose 1% of its purchasing power. In the same timescale, your dollar will lose 10%. Which of these are you going to save money with? The above is based on the assumption that demand for bitcoin will not increase in relation to demand for the dollar. Given Gresham's Law, this is highly unlikely.

falcolas 8y ago
That only pins the value of a bitcoin in relation to other bitcoins - it does nothing to pin the value of a bitcoin to real-world goods. And the only practical value of a bitcoin, in the long run, is its value in relation to real-world goods. It's also worth remembering that once the inflation of bitcoin stops at the 21m mark, it can only ever deflate from there as wallets (and their associated coins) are lost. As bad as inflation is, a deflating currency is not any better. Of course, the proposed solution to bitcoin deflation was (at least at one point) just to inflate the bitcoin currency by effectively moving the decimal point to the right (one bitcoin becomes 10, etc).
- sparkie 8y ago
  > That only pins the value of a bitcoin in relation to other bitcoins - it does nothing to pin the value of a bitcoin to real-world goods. This is true, but it's also true for dollars. No goods are inherently pinned to a dollar value. Goods are priced in dollars with the expectation that the seller will earn a profit if sold at a given rate. But if that dollar loses its purchasing power, mostly due to it being inflated by central banks, then the price of goods in dollars will have to increase for the seller to earn the same profit. It is not sufficient for the seller to just increase their goods at the rate of inflation either, because the cost of all their expenditures increases too. To earn the same profit after inflation, they need to increase their revenue more than the rate of inflation. This has a ripple effect over all industries. On the other hand, if the non-inflationary currency is not losing its purchasing power over the same periods, then merchants will prefer to obtain the non-inflationary currency over the inflationary one. If they obtain both, they will use the inflationary currency first to purchase new materials, and only dig in to the non-inflationary currency as and when they run out of the inflationary currency. If eventually, businesses decide to price their goods in bitcoin, rather than the dollar amount of bitcoin at the current market exchange rate, then they might be able to expect that they will not need to keep raising prices annually for inflation, but might instead be able to lower them, or keep them at the same rate and increase their profits for as long as a cheaper competitor does not appear. However, if these goods are priced both in bitcoin and USD, then while the bitcoin value remains the same, the dollar value must continue to increase for inflation. Since bitcoin also enables a certain level of transactional privacy too, it will also be used for grey and black market transactions, which make up 10-20% of economies. Most people interact either directly or indirectly with these markets for saving money or generating additional profit. Cash has traditionally been used in these cases, but as the effort of states to make money digital, under mass warrantless surveillance increases, the practicality of using cash decreases. Bitcoin is well suited to fill the gap being created. > As bad as inflation is, a deflating currency is not any better. I often hear strawmen arguments against deflation, but never any real sources or evidence of how terrible it supposedly is. I'm led to believe that people won't spend money in a deflationary economy, but peoples need to eat and drink suggests otherwise. An example of deflation in action is in Moore's Law. If I buy a computer now, it will be half as powerful in 1.5 years. Why would I not just wait 2 years and buy a computer then? People continue to buy new machines all the time, and they don't wait 2 years for the next iteration, because they know that in another 2 years, that one is out of date. People will spend for as long as they perceive the transaction is worthwhile now for the labour effort they put in to acquire that amount in currency. In a deflationary economy, people simply make better decisions, because they're not simply comparing the amount to what they earned recently, but in any significant transaction they need to weigh the importance of the transaction against their future self. I think the real complaints about deflation are from socialist types who worry that the rich will get richer. Too bad for them, they can't prevent this any longer. The state no longer has the capacity to steal people's bitcoin if they take the right measures to secure their keys. The rich might get richer, but anyone can get better off if they shift to a low time-preference mindset, instead of being stuck in the debt spirals that are encouraged by high time-preference economies. > Of course, the proposed solution to bitcoin deflation was (at least at one point) just to inflate the bitcoin currency by effectively moving the decimal point to the right (one bitcoin becomes 10, etc). The "bitcoin" denomination is really just cosmetic anyway. All of the values in the bitcoin protocol are measured in satoshis, as a 64-bit integer. It is not trivial to change this denomination as it would affect the entire UTXO set of transactions. On the other hand, moving the decimal place for the cosmetic appearance of satoshis could be trivial, but it doesn't change much.
umanwizard 8y ago
You’ve explained why dollars are inflationary, which I already knew. You haven’t, however, explained why an inflationary currency is bad. > Which of these are you going to save money with? Neither. Most of my savings is in productive assets (i.e. stocks). Some is in gold.
- sparkie 8y ago
  The inflationary money is bad in comparison to the non-inflationary money, because the inflationary money sees people's purchasing power lose value from the labour they underwent to acquire the currency, over short terms (a few years). The non-inflationary money however, sees people's purchasing power remain the same as their productive effort to acquire it, if not, increased from when they obtained it due to deflation. When two forms of money exist and one is better than the other, people will save the better money and spend the worse money. People do save with currency, usually in limited amounts or limited times, in large part due to its inflationary nature. Inflation forces a high time-preference on labour because the non-spender loses value over time. Putting money into stocks is not the same as saving, but it is investment, with varying degrees of risk. None are guaranteed to even preserve value, let alone profit. At present, Bitcoin behaves like a stock because its value wrt USD is so volatile. Gold is only valuable because of it's perceived scarcity and historical use as a store of value. It is not priced so highly due to its intrinsic properties as a metal (it is neither that useful nor that scarce), unlike some other commodity metals. Bitcoin is the digital equivalent of gold. Its value is based on scarcity and perception of value due to the ability to find someone who will trade it at an expected market rate for other currencies or for goods.
  - umanwizard 8y ago
    So far your argument seems to be: (1) Saving is not the same thing as investment. (2) Inflationary currencies encourage investment whereas non-inflationary ones encourage saving. (3) It is better to encourage saving than to encourage spending. (4) Bitcoin is a better non-inflationary currency than gold. 1 and 2 -- sure, agreed. 3 -- This is the most important part of your argument yet you have not explicitly stated it, nor argued in favor of it, anywhere. It is unclear to me why it's good policy not to encourage investment. 4 -- You are right that neither bitcoin nor gold has intrinsic value (not counting the value that gold would naturally have as an industrial material). Both are only valuable because other people perceive them as value. However, people have perceived gold as valuable for thousand s of years. The fact that gold has value is deeply rooted in human culture and therefore not likely to change in our lifetime. None of that is true for bitcoin. So, what are we left with? The only advantage of bitcoin that I can discern in all of this is that it can be transferred via the internet in a censorship-resistant way. I do not think that advantage is important enough for most people to outweigh the disadvantages.
amanaplanacanal 8y ago
Precious metals already solved this problem, and already have widespread acceptance.
- sparkie 8y ago
  Good luck sending gold through copper wires. Good luck transporting it without getting mugged. Good luck hiding it when the socialist state comes knocking for it.
  - ric2b 8y ago
    Or even conveniently dividing it to pay for goods and services.

falcolas 8y ago

That only pins the value of a bitcoin in relation to other bitcoins - it does nothing to pin the value of a bitcoin to real-world goods. And the only practical value of a bitcoin, in the long run, is its value in relation to real-world goods. It's also worth remembering that once the inflation of bitcoin stops at the 21m mark, it can only ever deflate from there as wallets (and their associated coins) are lost. As bad as inflation is, a deflating currency is not any better. Of course, the proposed solution to bitcoin deflation was (at least at one point) just to inflate the bitcoin currency by effectively moving the decimal point to the right (one bitcoin becomes 10, etc).

sparkie 8y ago
> That only pins the value of a bitcoin in relation to other bitcoins - it does nothing to pin the value of a bitcoin to real-world goods. This is true, but it's also true for dollars. No goods are inherently pinned to a dollar value. Goods are priced in dollars with the expectation that the seller will earn a profit if sold at a given rate. But if that dollar loses its purchasing power, mostly due to it being inflated by central banks, then the price of goods in dollars will have to increase for the seller to earn the same profit. It is not sufficient for the seller to just increase their goods at the rate of inflation either, because the cost of all their expenditures increases too. To earn the same profit after inflation, they need to increase their revenue more than the rate of inflation. This has a ripple effect over all industries. On the other hand, if the non-inflationary currency is not losing its purchasing power over the same periods, then merchants will prefer to obtain the non-inflationary currency over the inflationary one. If they obtain both, they will use the inflationary currency first to purchase new materials, and only dig in to the non-inflationary currency as and when they run out of the inflationary currency. If eventually, businesses decide to price their goods in bitcoin, rather than the dollar amount of bitcoin at the current market exchange rate, then they might be able to expect that they will not need to keep raising prices annually for inflation, but might instead be able to lower them, or keep them at the same rate and increase their profits for as long as a cheaper competitor does not appear. However, if these goods are priced both in bitcoin and USD, then while the bitcoin value remains the same, the dollar value must continue to increase for inflation. Since bitcoin also enables a certain level of transactional privacy too, it will also be used for grey and black market transactions, which make up 10-20% of economies. Most people interact either directly or indirectly with these markets for saving money or generating additional profit. Cash has traditionally been used in these cases, but as the effort of states to make money digital, under mass warrantless surveillance increases, the practicality of using cash decreases. Bitcoin is well suited to fill the gap being created. > As bad as inflation is, a deflating currency is not any better. I often hear strawmen arguments against deflation, but never any real sources or evidence of how terrible it supposedly is. I'm led to believe that people won't spend money in a deflationary economy, but peoples need to eat and drink suggests otherwise. An example of deflation in action is in Moore's Law. If I buy a computer now, it will be half as powerful in 1.5 years. Why would I not just wait 2 years and buy a computer then? People continue to buy new machines all the time, and they don't wait 2 years for the next iteration, because they know that in another 2 years, that one is out of date. People will spend for as long as they perceive the transaction is worthwhile now for the labour effort they put in to acquire that amount in currency. In a deflationary economy, people simply make better decisions, because they're not simply comparing the amount to what they earned recently, but in any significant transaction they need to weigh the importance of the transaction against their future self. I think the real complaints about deflation are from socialist types who worry that the rich will get richer. Too bad for them, they can't prevent this any longer. The state no longer has the capacity to steal people's bitcoin if they take the right measures to secure their keys. The rich might get richer, but anyone can get better off if they shift to a low time-preference mindset, instead of being stuck in the debt spirals that are encouraged by high time-preference economies. > Of course, the proposed solution to bitcoin deflation was (at least at one point) just to inflate the bitcoin currency by effectively moving the decimal point to the right (one bitcoin becomes 10, etc). The "bitcoin" denomination is really just cosmetic anyway. All of the values in the bitcoin protocol are measured in satoshis, as a 64-bit integer. It is not trivial to change this denomination as it would affect the entire UTXO set of transactions. On the other hand, moving the decimal place for the cosmetic appearance of satoshis could be trivial, but it doesn't change much.

umanwizard 8y ago

You’ve explained why dollars are inflationary, which I already knew. You haven’t, however, explained why an inflationary currency is bad. > Which of these are you going to save money with? Neither. Most of my savings is in productive assets (i.e. stocks). Some is in gold.

sparkie 8y ago
The inflationary money is bad in comparison to the non-inflationary money, because the inflationary money sees people's purchasing power lose value from the labour they underwent to acquire the currency, over short terms (a few years). The non-inflationary money however, sees people's purchasing power remain the same as their productive effort to acquire it, if not, increased from when they obtained it due to deflation. When two forms of money exist and one is better than the other, people will save the better money and spend the worse money. People do save with currency, usually in limited amounts or limited times, in large part due to its inflationary nature. Inflation forces a high time-preference on labour because the non-spender loses value over time. Putting money into stocks is not the same as saving, but it is investment, with varying degrees of risk. None are guaranteed to even preserve value, let alone profit. At present, Bitcoin behaves like a stock because its value wrt USD is so volatile. Gold is only valuable because of it's perceived scarcity and historical use as a store of value. It is not priced so highly due to its intrinsic properties as a metal (it is neither that useful nor that scarce), unlike some other commodity metals. Bitcoin is the digital equivalent of gold. Its value is based on scarcity and perception of value due to the ability to find someone who will trade it at an expected market rate for other currencies or for goods.
- umanwizard 8y ago
  So far your argument seems to be: (1) Saving is not the same thing as investment. (2) Inflationary currencies encourage investment whereas non-inflationary ones encourage saving. (3) It is better to encourage saving than to encourage spending. (4) Bitcoin is a better non-inflationary currency than gold. 1 and 2 -- sure, agreed. 3 -- This is the most important part of your argument yet you have not explicitly stated it, nor argued in favor of it, anywhere. It is unclear to me why it's good policy not to encourage investment. 4 -- You are right that neither bitcoin nor gold has intrinsic value (not counting the value that gold would naturally have as an industrial material). Both are only valuable because other people perceive them as value. However, people have perceived gold as valuable for thousand s of years. The fact that gold has value is deeply rooted in human culture and therefore not likely to change in our lifetime. None of that is true for bitcoin. So, what are we left with? The only advantage of bitcoin that I can discern in all of this is that it can be transferred via the internet in a censorship-resistant way. I do not think that advantage is important enough for most people to outweigh the disadvantages.

amanaplanacanal 8y ago

Precious metals already solved this problem, and already have widespread acceptance.

sparkie 8y ago
Good luck sending gold through copper wires. Good luck transporting it without getting mugged. Good luck hiding it when the socialist state comes knocking for it.
- ric2b 8y ago
  Or even conveniently dividing it to pay for goods and services.