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Bitcoin is a fantastic idea, with one crucial mistake: the finite nature of bitcoins. The fact that coins will one day "run out" will almost certainly lead to i

Bitcoin is a fantastic idea, with one crucial mistake: the finite nature of bitcoins. The fact that coins will one day "run out" will almost certainly lead to increased speculation, which will in turn lead to a deflationary spiral, followed by a "bubble burst" when speculators sell all their bitcoins and average coin holders are left holding the bag. Infinite coins would tie the value to the opportunity cost of computation, which is actually a really cool idea. Inflation based on the log of moore's law would ensure a steady inflationary rate based on computing power. This would deter speculators and incentivize innovation in computing power in order to more efficiently mine currency. My hunch is that an uncapped bitcoin competitor would have a more difficult time getting off the ground, since the finite nature of bitcoins favors the first mover.

powertower 16y ago
Speculation is exactly what is required for Bitcoin to take hold as a legitimate currency. Without speculation it's a product/service no one wants (because it has no value or potential), by definition. Before today Bitcoin was "just" interesting to me, after reading this I now see the potential it has. I think I'm going to run an experiment and also accept payment for my product in Bitcoins: http://www.devside.net/server/webdeveloper http://www.devside.net/server/webdeveloper
- joelthelion 16y ago
  If you start accepting bitcoins, be sure to drop a word at the bitcoin forums.
- ZitchDog 16y ago
  I fundamentally disagree. The purpose of currency is to facilitate efficient trade. It is dangerous when currency is seen as an appreciating asset (deflation) as this will encourage hoarding (speculation) and discourage spending and investing.
  - euccastro 16y ago
    This is aggravated, in the long run, by the fact that they intend to support/incentivate the people who run nodes by transaction fees. Another friction factor. It would be better to have small, fixed, predictable inflation, and pay the infrastructure with that (that is, with the newly generated money). It worked in ancient Egypt. There was a currency that was more or less a receipt on stored grain. That "money" lost value over time due to storage costs and loss to decay and rodents. That inflation stimulated trade. Currencies with so-called demurrage worked wonders in middle-century central Europe until they were banned. http://en.wikipedia.org/wiki/Demurrage_%28currency%29 http://en.wikipedia.org/wiki/Demurrage_%28currency%29 (I'm basically parroting Bernard Lietaer [which google for] here.)
  - danenania 16y ago
    These are well-worn fallacies. First, falling prices do not cause hoarding--demand for goods will increase if anything. Mild deflation is actually the sign of a healthy economy, competition, and technological innovation. Just look at the consumer electronics industry. Why do people buy iPads when they know a cheaper and better one will come along in the next couple years? According to your theory, wouldn't they just sit on their money? The second fallacy is that 'hoarding' (long term saving, in other words) is a problem for an economy. It simply demonstrates a longer term time preference, which is actually necessary for larger and more complex uses of capital which can often take 10-20 years of investment and planning to pay off. It is axiomatic that the only purpose for hoarding cash is to eventually spend it. Trying to eliminate this 'problem' by confiscating wealth through inflation is both short-sighted and immoral.
    - nerfhammer 16y ago
      Deflation is almost invariably a sign of economic distress. This can easily be observed historically. By the way the term I think you mean is "quantity demanded" with respect to price, "demand" is invariant to price. Under deflation average income decreases. It's not like everyone is suddenly richer. Your employer gets less money, and so has to pay you less, or lay off a portion of their workforce. The price of labor is a price like any other. Assuming a fixed money supply, hoarding currency will cause deflation. Hoarding currency takes money out of the money supply. Saving by making investments is different; the money is still participating in the economy. Deflation discourages investment in useful activity. If you can earn a 5% rate of return just for already having money, why bother with a investment could return 5% or less?
tcoppi 16y ago
There is a finite amount of bitcoins because it is designed to mimic a natural resource - easy to "mine" at first, much more difficult to mine as time goes on, and eventually there are none left. If there were an infinite amount of bitcoins that could be generated, there would always be inflation in place roughly proportional to the amount of computational power being used to mine, and soon your bitcoins would be worthless. As well, bitcoins are divisible to 8 decimal places, so I don't think there's any problem of "running out" in practice, bitcoins will just become more and more valuable. And why shouldn't they? Miners and investors now are expending time and money investing in them, which is a risk because bitcoin may never become popular. The greater the risk, the greater the reward, same in any type of business.
- seanalltogether 16y ago
  You know I've thought about this for awhile and I'm starting to come to the conclusion that inflation is a good thing. Having a currency that doesn't inflate is bad for 2 reasons. 1. The population keeps growing, 2. Humans are hoarders. Having currency inflate encourages society to use their money instead of squirreling it all away. Everything in life devalues over time and I don't think currency should be any different. However I don't believe currency should be unpredicatble and inflate at the whims of the government.
  - deleted 16y ago
    [deleted]
  - cturner 16y ago
    Everything in life devalues over time That's not true. Violins, clinker bricks, gold, wine, classic aston martins, original prints of the Book of Mormon tend to appreciate. Some wisdom for you: cheese. When sovereign debt collapses, those of us who have been quietly stashing wheels of cheese will laugh all the way to market.
  - joe_the_user 16y ago
    Congratulations, you've arrived at the conclusions of JM Keynes' General Theory. http://en.wikipedia.org/wiki/John_Maynard_Keynes http://en.wikipedia.org/wiki/John_Maynard_Keynes Of course, that viewpoint has been the subject of some debate in the last eighty years.
vrotaru 16y ago
> There has never had been such a thing a deflationary spiral, though.
- quanticle 16y ago
  Yes there has. The Great Depression was a deflationary spiral. Bank failures caused people to hoard currency. This hoarding led to decreased investment and economic activity. The decrease in economic activity led people to lose jobs, which caused them to hoard even more money. In addition, the decrease in the money supply greatly increased the value of debts. You were getting paid less, but the your mortgage payment remained the same. This ended up being a crushing burden even for those who managed to keep their jobs.
  - mike_esspe 16y ago
    Great Depression was in the epoch of fiat money and most likely was a result of inflating money supply during 1920s (http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression#Austrian http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression#...). Do you know about a deflationary spiral when gold was the money? (Almost all the history before 20th century).
    - nerfhammer 16y ago
      The US dollar was backed by gold until 1933. The deflationary contraction occurred between 1929 and 1933. So, there you go.
      - vrotaru 16y ago
        > The deflationary contraction occurred between 1929 and 1933. Sorry, but are you serious? For starters: "By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product," Ohanian said. "His policy was the single most important event in precipitating the Great Depression." http://newsroom.ucla.edu/portal/ucla/pandering-to-labor-caused-great-91447.aspx http://newsroom.ucla.edu/portal/ucla/pandering-to-labor-caus...
joeycfan 16y ago
Two mistakes - the unencrypted wallet file is another WEIRD error. Otherwise - it's the proof of concept for digital currency.

powertower 16y ago

Speculation is exactly what is required for Bitcoin to take hold as a legitimate currency. Without speculation it's a product/service no one wants (because it has no value or potential), by definition. Before today Bitcoin was "just" interesting to me, after reading this I now see the potential it has. I think I'm going to run an experiment and also accept payment for my product in Bitcoins: http://www.devside.net/server/webdeveloper http://www.devside.net/server/webdeveloper

joelthelion 16y ago
If you start accepting bitcoins, be sure to drop a word at the bitcoin forums.
ZitchDog 16y ago
I fundamentally disagree. The purpose of currency is to facilitate efficient trade. It is dangerous when currency is seen as an appreciating asset (deflation) as this will encourage hoarding (speculation) and discourage spending and investing.
- euccastro 16y ago
  This is aggravated, in the long run, by the fact that they intend to support/incentivate the people who run nodes by transaction fees. Another friction factor. It would be better to have small, fixed, predictable inflation, and pay the infrastructure with that (that is, with the newly generated money). It worked in ancient Egypt. There was a currency that was more or less a receipt on stored grain. That "money" lost value over time due to storage costs and loss to decay and rodents. That inflation stimulated trade. Currencies with so-called demurrage worked wonders in middle-century central Europe until they were banned. http://en.wikipedia.org/wiki/Demurrage_%28currency%29 http://en.wikipedia.org/wiki/Demurrage_%28currency%29 (I'm basically parroting Bernard Lietaer [which google for] here.)
- danenania 16y ago
  These are well-worn fallacies. First, falling prices do not cause hoarding--demand for goods will increase if anything. Mild deflation is actually the sign of a healthy economy, competition, and technological innovation. Just look at the consumer electronics industry. Why do people buy iPads when they know a cheaper and better one will come along in the next couple years? According to your theory, wouldn't they just sit on their money? The second fallacy is that 'hoarding' (long term saving, in other words) is a problem for an economy. It simply demonstrates a longer term time preference, which is actually necessary for larger and more complex uses of capital which can often take 10-20 years of investment and planning to pay off. It is axiomatic that the only purpose for hoarding cash is to eventually spend it. Trying to eliminate this 'problem' by confiscating wealth through inflation is both short-sighted and immoral.
  - nerfhammer 16y ago
    Deflation is almost invariably a sign of economic distress. This can easily be observed historically. By the way the term I think you mean is "quantity demanded" with respect to price, "demand" is invariant to price. Under deflation average income decreases. It's not like everyone is suddenly richer. Your employer gets less money, and so has to pay you less, or lay off a portion of their workforce. The price of labor is a price like any other. Assuming a fixed money supply, hoarding currency will cause deflation. Hoarding currency takes money out of the money supply. Saving by making investments is different; the money is still participating in the economy. Deflation discourages investment in useful activity. If you can earn a 5% rate of return just for already having money, why bother with a investment could return 5% or less?

tcoppi 16y ago

There is a finite amount of bitcoins because it is designed to mimic a natural resource - easy to "mine" at first, much more difficult to mine as time goes on, and eventually there are none left. If there were an infinite amount of bitcoins that could be generated, there would always be inflation in place roughly proportional to the amount of computational power being used to mine, and soon your bitcoins would be worthless. As well, bitcoins are divisible to 8 decimal places, so I don't think there's any problem of "running out" in practice, bitcoins will just become more and more valuable. And why shouldn't they? Miners and investors now are expending time and money investing in them, which is a risk because bitcoin may never become popular. The greater the risk, the greater the reward, same in any type of business.

seanalltogether 16y ago
You know I've thought about this for awhile and I'm starting to come to the conclusion that inflation is a good thing. Having a currency that doesn't inflate is bad for 2 reasons. 1. The population keeps growing, 2. Humans are hoarders. Having currency inflate encourages society to use their money instead of squirreling it all away. Everything in life devalues over time and I don't think currency should be any different. However I don't believe currency should be unpredicatble and inflate at the whims of the government.
- deleted 16y ago
  [deleted]
- cturner 16y ago
  Everything in life devalues over time That's not true. Violins, clinker bricks, gold, wine, classic aston martins, original prints of the Book of Mormon tend to appreciate. Some wisdom for you: cheese. When sovereign debt collapses, those of us who have been quietly stashing wheels of cheese will laugh all the way to market.
- joe_the_user 16y ago
  Congratulations, you've arrived at the conclusions of JM Keynes' General Theory. http://en.wikipedia.org/wiki/John_Maynard_Keynes http://en.wikipedia.org/wiki/John_Maynard_Keynes Of course, that viewpoint has been the subject of some debate in the last eighty years.

vrotaru 16y ago

> There has never had been such a thing a deflationary spiral, though.

quanticle 16y ago
Yes there has. The Great Depression was a deflationary spiral. Bank failures caused people to hoard currency. This hoarding led to decreased investment and economic activity. The decrease in economic activity led people to lose jobs, which caused them to hoard even more money. In addition, the decrease in the money supply greatly increased the value of debts. You were getting paid less, but the your mortgage payment remained the same. This ended up being a crushing burden even for those who managed to keep their jobs.
- mike_esspe 16y ago
  Great Depression was in the epoch of fiat money and most likely was a result of inflating money supply during 1920s (http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression#Austrian http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression#...). Do you know about a deflationary spiral when gold was the money? (Almost all the history before 20th century).
  - nerfhammer 16y ago
    The US dollar was backed by gold until 1933. The deflationary contraction occurred between 1929 and 1933. So, there you go.
    - vrotaru 16y ago
      > The deflationary contraction occurred between 1929 and 1933. Sorry, but are you serious? For starters: "By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product," Ohanian said. "His policy was the single most important event in precipitating the Great Depression." http://newsroom.ucla.edu/portal/ucla/pandering-to-labor-caused-great-91447.aspx http://newsroom.ucla.edu/portal/ucla/pandering-to-labor-caus...

joeycfan 16y ago

Two mistakes - the unencrypted wallet file is another WEIRD error. Otherwise - it's the proof of concept for digital currency.