7 ms·

Econ 101: the value of ordinary goods are determined both by supply and demand. Bitcoin-fanatic-USD-bears claim that Bitcoin is a good store of value because i

Econ 101: the value of ordinary goods are determined both by supply and demand. Bitcoin-fanatic-USD-bears claim that Bitcoin is a good store of value because it has constrained supply. But they miss the demand side of the equation. Similarly, they claim that the USD is a bad source of value because it has "unlimited" supply. That also misses the demand side. The demand for USD is robust because people need USD to pay taxes and to purchase most goods and services offered by US-based organizations. The demand for Bitcoin is based on... how many people Bitcoin-fanatics can get to buy and hodl Bitcoin. (I don't count organizations that accept Bitcoin as payment because almost all of them exchange received Bitcoin into the local currency, negating the demand effects of the original Bitcoin purchase. In the US, that's usually USD.)

PragmaticPulp 6y ago
Exactly. Bitcoin proponents tend to tell only half of the story, and pick and choose economic theory that fits the "buy more bitcoin" narrative. In economic terms, Bitcoin is inflating as an asset. Specifically, it's demand-pull inflation. Bitcoin isn't even uniquely positioned to protect against inflation, other than the mistaken public belief on that topic. Inflation is an increase in the price of assets, so investors can (and do) escape inflation by investing their money. Ironically, Bitcoin's limited supply disincentivizes holders from investing their money.
- tylerhou 6y ago
  > Bitcoin is inflating as an asset. I don't think this is precise. Inflation of an asset means that the asset itself drops in value, relative to the value of other goods. For example: when prices rise, the USD itself would be inflating because would then take more USD to buy goods. Bitcoin is rising in price compared to the USD. So it's not "inflating." If we treat Bitcoin as a currency, it's deflating because right now it takes fewer Bitcoin to buy goods than one year ago. This is also why "asset inflation" is not precise. The asset itself is not inflating, it is actually deflating wrt. to other goods.
  - DenisM 6y ago
    > This is also why "asset inflation" is not precise I'm afraid this ship has sailed.
  - mbesto 6y ago
    > Inflation of an asset means that the asset itself drops in value, relative to the value of other goods. That assumes an asset can be used as a medium of exchange. In its current form, BTC is not a medium of exchange, it's a store of value. In other words - the word inflation has to do with purchasing power. If the asset isn't used as a way to purchase then comparing the characteristic of inflation is basically pointless. It' be like saying "trees are inflating as an asset". No one makes purchases using trees so the concept is irrelevant.
    - tylerhou 6y ago
      Hence, "if we treat Bitcoin as a currency." But you're right that Bitcoin is mostly used as a speculative investment, and not to actually exchange goods. (That's not very convincing to crypto-people, though.)
  - dleslie 6y ago
    I'm not certain that Bitcoin should be treated as a currency.
  - imtringued 6y ago
    I have used asset inflation in the past to mean the opposite of CPI inflation. The appreciation of assets without a corresponding increase in CPI inflation. I also refer to Bitcoin as a deflationary currency. The problem is that I needed a simple easy to understand term that cryptocurrency, real estate and stocks so I just referred to the entire class of goods gaining value relative to USD as "asset inflation" because CPI inflation also refers to a class of goods and thus its easier to transfer the concept. I will admit that this is not precise enough.
    - tylerhou 6y ago
      I think a better term would just be “rise in asset prices/values,” or “asset appreciation.” You can add “in real terms” to clarify after inflation. It more accurately conveys the fact that 1) the assets are increasing in value, compared to a basket of goods or the USD; and 2) doesn’t imply that the asset is a currency.
- disruptalot 6y ago
  When Bitcoiners talk about "inflation" they don't mean inflation of prices. They mean loss of purchasing power. Demand-pull inflation in fact is exactly what is happening with Bitcoin and bitcoiners would agree. There's huge demand for bitcoin and an ever reduction of circulating supply. What that means is that it can maintain/increase purchasing power incredibly relative to other assets that have unconstrained and erratic supply (fiat).
  - tylerhou 6y ago
    Demand-pull inflation is not happening with Bitcoin. Again, inflation refers to the devaluation of currency. If the purchasing power of Bitcoin goes up, Bitcoin is deflating, not inflating. Maybe you are trying to say that the USD is inflating (w/ demand-pull inflation) because USD is becoming less valuable, relative to Bitcoin. But that theory is still problematic, since you can't measure inflation against just one asset. An asset might appreciate because of a shift in consumer demand -- the currency itself might not have "devalued." Instead, a better way to measure inflation is wrt. a basket of goods, like CPI. CPI has not changed much in the last year, which implies that the USD is not inflating much.
    - ad31mar 6y ago
      > But that theory is still problematic, since you can't measure inflation against just one asset. How about another two? Like equities and real estate. Still not inflation? CPI is a scam - it now includes 80,000+ items muting the shit out of the dramatic price changes in the stuff you actually want and need.
    - lupire 6y ago
      That's half true, because Jeff Bezos can't buy himself a billion takeout dinners. Consumer prices are flat, but the money printer is making investing assets expensive. That's fun for last year's investors but not next year's.
oraphalous 6y ago
"The demand for USD is robust because people need USD to pay taxes..." You cite this a priori - but it's so much more complicated than this. Demand is intimately connected with supply in many cases. Soemtimes this can be because demand is latent. If production of food goes through the roof - and people were previously starving because the price of food was too high, then that latent demand will be released when supply improves and costs drop. But currency is different - opposite even. If supply goes through the roof - then demand will respond inversely. People will rush to unload that currency for other assets as they watch their wealth evaporate. It may hit some sort of baseline determined by the daily needs of payroll and tax payments - but other than those moments everyone will try to store there wealth anywhere but that currency. What is actually happening empirically is that people are coming to see Bitcoin as a reliable store of value over medium to long timeframes. You can continue to believe in your theory a priori, believing that in the even longer term, the lack of goverment mandate in Bitcoin will see its value evaporate... You can even continue to do this when everyone is vested in Bitcoin except you. At which point, you can claim, with 100% theoretical consistency that everyone is a stupid lemming. But ultimately, it will be the case that the Bitcoin folks had a better explanation of supply and demand than you - and their prediction of reality will be the measure of this.
- tylerhou 6y ago
  Citing "latent demand" or "induced demand" as counter-evidence to my original statement shows your (mis)understanding of basic economics. In fact, basic economics predicts "latent demand" for ordinary goods! > But currency is different - opposite even. If supply goes through the roof - then demand will respond inversely. This is terrible reasoning. It depends on why that supply is going through the roof. Maybe the supply is increasing because of higher demand? (Hint: increased demand for the USD is why the Fed is increasing the supply -- to keep the price stable.) The phenomenon you're referring to is that, with all else equal, people will shift away from the USD if supply increases make the USD's value drop. But all else is not equal; demand for USD last year effected all-time high issuings of stocks and bonds. Or, another way I could interpret this sentence is that you are claiming that the USD is not an ordinary good. Do you have some evidence to back that up? > What is actually happening empirically is that people are coming to see Bitcoin as a reliable store of value over medium to long timeframes. "Happening empirically." Have some numbers to back that up?
hanniabu 6y ago
You didn't answer the question. In a situation where both have equal demand, how does unconstrained supply make it a better store of value?
- tylerhou 6y ago
  Your question is not very meaningful/vacuously true for two reasons. 1. The premise is false. Bitcoin does not have the same demand as the USD. 2. The whole point of my original comment is that value is a result of demand. So your question is circular. "If Bitcoin had equal demand to the USD, then it would be a better store of value" is as logical a statement as "if my grandmother had wheels, she would be a wagon, if you define a wagon as anything that has wheels."
  - hanniabu 6y ago
    So value is only a result of demand for USD but when it comes to BTC that doesn't apply?
    - tylerhou 6y ago
      Value is a product of demand for both USD and BTC. So as I said above, your question was tautologically true: if the demand of Bitcoin will always be high, then yes it will be a store of value, because things that are in high demand have value. But that is true for any good. I could ask the same question about cow dung, or any scarce good. If the demand for cow dung was as high as the USD, will it be a stable store of value? Yes.
efwfwef 6y ago
I don't buy this argument, it sounds like you're just convinced that Bitcoin can't be a store of value because X and Y and completely ignore the fact that it is being used as a store of value.

PragmaticPulp 6y ago

Exactly. Bitcoin proponents tend to tell only half of the story, and pick and choose economic theory that fits the "buy more bitcoin" narrative. In economic terms, Bitcoin is inflating as an asset. Specifically, it's demand-pull inflation. Bitcoin isn't even uniquely positioned to protect against inflation, other than the mistaken public belief on that topic. Inflation is an increase in the price of assets, so investors can (and do) escape inflation by investing their money. Ironically, Bitcoin's limited supply disincentivizes holders from investing their money.

tylerhou 6y ago
> Bitcoin is inflating as an asset. I don't think this is precise. Inflation of an asset means that the asset itself drops in value, relative to the value of other goods. For example: when prices rise, the USD itself would be inflating because would then take more USD to buy goods. Bitcoin is rising in price compared to the USD. So it's not "inflating." If we treat Bitcoin as a currency, it's deflating because right now it takes fewer Bitcoin to buy goods than one year ago. This is also why "asset inflation" is not precise. The asset itself is not inflating, it is actually deflating wrt. to other goods.
- DenisM 6y ago
  > This is also why "asset inflation" is not precise I'm afraid this ship has sailed.
- mbesto 6y ago
  > Inflation of an asset means that the asset itself drops in value, relative to the value of other goods. That assumes an asset can be used as a medium of exchange. In its current form, BTC is not a medium of exchange, it's a store of value. In other words - the word inflation has to do with purchasing power. If the asset isn't used as a way to purchase then comparing the characteristic of inflation is basically pointless. It' be like saying "trees are inflating as an asset". No one makes purchases using trees so the concept is irrelevant.
  - tylerhou 6y ago
    Hence, "if we treat Bitcoin as a currency." But you're right that Bitcoin is mostly used as a speculative investment, and not to actually exchange goods. (That's not very convincing to crypto-people, though.)
- dleslie 6y ago
  I'm not certain that Bitcoin should be treated as a currency.
- imtringued 6y ago
  I have used asset inflation in the past to mean the opposite of CPI inflation. The appreciation of assets without a corresponding increase in CPI inflation. I also refer to Bitcoin as a deflationary currency. The problem is that I needed a simple easy to understand term that cryptocurrency, real estate and stocks so I just referred to the entire class of goods gaining value relative to USD as "asset inflation" because CPI inflation also refers to a class of goods and thus its easier to transfer the concept. I will admit that this is not precise enough.
  - tylerhou 6y ago
    I think a better term would just be “rise in asset prices/values,” or “asset appreciation.” You can add “in real terms” to clarify after inflation. It more accurately conveys the fact that 1) the assets are increasing in value, compared to a basket of goods or the USD; and 2) doesn’t imply that the asset is a currency.
disruptalot 6y ago
When Bitcoiners talk about "inflation" they don't mean inflation of prices. They mean loss of purchasing power. Demand-pull inflation in fact is exactly what is happening with Bitcoin and bitcoiners would agree. There's huge demand for bitcoin and an ever reduction of circulating supply. What that means is that it can maintain/increase purchasing power incredibly relative to other assets that have unconstrained and erratic supply (fiat).
- tylerhou 6y ago
  Demand-pull inflation is not happening with Bitcoin. Again, inflation refers to the devaluation of currency. If the purchasing power of Bitcoin goes up, Bitcoin is deflating, not inflating. Maybe you are trying to say that the USD is inflating (w/ demand-pull inflation) because USD is becoming less valuable, relative to Bitcoin. But that theory is still problematic, since you can't measure inflation against just one asset. An asset might appreciate because of a shift in consumer demand -- the currency itself might not have "devalued." Instead, a better way to measure inflation is wrt. a basket of goods, like CPI. CPI has not changed much in the last year, which implies that the USD is not inflating much.
  - ad31mar 6y ago
    > But that theory is still problematic, since you can't measure inflation against just one asset. How about another two? Like equities and real estate. Still not inflation? CPI is a scam - it now includes 80,000+ items muting the shit out of the dramatic price changes in the stuff you actually want and need.
  - lupire 6y ago
    That's half true, because Jeff Bezos can't buy himself a billion takeout dinners. Consumer prices are flat, but the money printer is making investing assets expensive. That's fun for last year's investors but not next year's.

oraphalous 6y ago

"The demand for USD is robust because people need USD to pay taxes..." You cite this a priori - but it's so much more complicated than this. Demand is intimately connected with supply in many cases. Soemtimes this can be because demand is latent. If production of food goes through the roof - and people were previously starving because the price of food was too high, then that latent demand will be released when supply improves and costs drop. But currency is different - opposite even. If supply goes through the roof - then demand will respond inversely. People will rush to unload that currency for other assets as they watch their wealth evaporate. It may hit some sort of baseline determined by the daily needs of payroll and tax payments - but other than those moments everyone will try to store there wealth anywhere but that currency. What is actually happening empirically is that people are coming to see Bitcoin as a reliable store of value over medium to long timeframes. You can continue to believe in your theory a priori, believing that in the even longer term, the lack of goverment mandate in Bitcoin will see its value evaporate... You can even continue to do this when everyone is vested in Bitcoin except you. At which point, you can claim, with 100% theoretical consistency that everyone is a stupid lemming. But ultimately, it will be the case that the Bitcoin folks had a better explanation of supply and demand than you - and their prediction of reality will be the measure of this.

tylerhou 6y ago
Citing "latent demand" or "induced demand" as counter-evidence to my original statement shows your (mis)understanding of basic economics. In fact, basic economics predicts "latent demand" for ordinary goods! > But currency is different - opposite even. If supply goes through the roof - then demand will respond inversely. This is terrible reasoning. It depends on why that supply is going through the roof. Maybe the supply is increasing because of higher demand? (Hint: increased demand for the USD is why the Fed is increasing the supply -- to keep the price stable.) The phenomenon you're referring to is that, with all else equal, people will shift away from the USD if supply increases make the USD's value drop. But all else is not equal; demand for USD last year effected all-time high issuings of stocks and bonds. Or, another way I could interpret this sentence is that you are claiming that the USD is not an ordinary good. Do you have some evidence to back that up? > What is actually happening empirically is that people are coming to see Bitcoin as a reliable store of value over medium to long timeframes. "Happening empirically." Have some numbers to back that up?

hanniabu 6y ago

You didn't answer the question. In a situation where both have equal demand, how does unconstrained supply make it a better store of value?

tylerhou 6y ago
Your question is not very meaningful/vacuously true for two reasons. 1. The premise is false. Bitcoin does not have the same demand as the USD. 2. The whole point of my original comment is that value is a result of demand. So your question is circular. "If Bitcoin had equal demand to the USD, then it would be a better store of value" is as logical a statement as "if my grandmother had wheels, she would be a wagon, if you define a wagon as anything that has wheels."
- hanniabu 6y ago
  So value is only a result of demand for USD but when it comes to BTC that doesn't apply?
  - tylerhou 6y ago
    Value is a product of demand for both USD and BTC. So as I said above, your question was tautologically true: if the demand of Bitcoin will always be high, then yes it will be a store of value, because things that are in high demand have value. But that is true for any good. I could ask the same question about cow dung, or any scarce good. If the demand for cow dung was as high as the USD, will it be a stable store of value? Yes.

efwfwef 6y ago

I don't buy this argument, it sounds like you're just convinced that Bitcoin can't be a store of value because X and Y and completely ignore the fact that it is being used as a store of value.