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> It's more of a hedge against low interest rates and the central banks printing money in that environment IMO. Could you explain how /exactly/ it functions as

by yunohn 4y ago

> It's more of a hedge against low interest rates and the central banks printing money in that environment IMO. Could you explain how /exactly/ it functions as a hedge? I don’t care about price, just the mechanics/logic.

ericmay 4y ago
From what I gather, and certainly someone may come in with a much better explanation or refutation is that Bitcoin is in a sense a finite resource (let's just look at the mechanics right now) and if appetite for Bitcoins increases you can't make more of them. If a central bank is inflating a currency, it means each year that more of that currency exists than it did previously, so people can effectively bid for resources with more currency which increases the relative price. A pack of gum used to cost $.05. Now it's like $2.99 (or whatever). This is primarily due to inflation as far as I can tell. Likewise the same is true for Bitcoin, except that it has an additional feature in that it's transmutable into a pack of gum, or a share of JPMorgan stock, or a house, or a car, or some service. It's also transferrable - you can move it (again let's ignore how well it works right now) from place to place without having to actually ship it anywhere. So because Bitcoin is transmutable like a Euro or Dollar it can do similar things, except the difference is that more Euros and Dollars are effectively "mined" and created, whereas there's a limit to how many Bitcoins can ever exist. So as more and more Euros and Dollars are created, you can spend more of those to buy the same Bitcoin. Granted, this is very much at face value and some of the mechanics aren't quite there - it's actually very expensive right now to move Bitcoin around and it appears to make for a pretty bad currency, but I think this should at least touch on the mechanics or logic. tl;dr it's like gold.
- namaria 4y ago
  Prices don't rise 'due to inflation'. Inflation is just another name for price rise. This 'transmutability' you speak of is called currency. Bitcoin has some but very little compared to cash. Also the so-called 'deflacionary' nature of bitcoin, supposedly caused by the supply cap assumes a constant or growing demand for it, which is far from assured. Bitcoin only needs to collapse once to become worthless forever, there will be no cold re-start. Whereas precious metals don't need one. That, IMHO, is the crucial difference that advocates seem to forget.
  - ericmay 4y ago
    Prices rise for more than one reason. For example marble is more expensive because it’s more difficult to find and mine than it was in the past (just a contrived example). But prices also rise due to increases in money supply. I agree that Bitcoin is a poor currency compared to fiat currency, but conversely a dollar is a very poor store of wealth while Bitcoin is looking like it may be a good store of wealth. The confusion comes when you (not you specifically) don’t recognize that you can assess the utility and value of these “things” across various traits. Gold is a decent store of wealth, but a very bad currency. Stocks are great at producing and storing value and are highly liquid but awful currencies. I’m not a Bitcoin advocate. I’m a neutral investor. You are correct in my view that if Bitcoin collapses it may become worthless forever. We have examples of this happening with fiat currency as well, though, so it’s not a unique trait of Bitcoin. Diversification and asset accumulation are what I focus on. Bitcoin could turn out to be totally worthless. So could Amazon stock. So could GBP.
    - namaria 4y ago
      I agree with most of what you said, except that Bitcoin looks like a good store of wealth. It has a very short track record, and has shown huge volatility. How does that indicate a good store of wealth?
      - ericmay 4y ago
        Well I would just mention it looks like it to me but that’s an opinion, not a fact. I don’t think it’s dissimilar to any other financial advice though. Like some people think Amazon stock is a good investment. I personally don’t. That’s all :)
  - deleted 4y ago
    [deleted]

by yunohn 4y ago

ericmay 4y ago

From what I gather, and certainly someone may come in with a much better explanation or refutation is that Bitcoin is in a sense a finite resource (let's just look at the mechanics right now) and if appetite for Bitcoins increases you can't make more of them. If a central bank is inflating a currency, it means each year that more of that currency exists than it did previously, so people can effectively bid for resources with more currency which increases the relative price. A pack of gum used to cost $.05. Now it's like $2.99 (or whatever). This is primarily due to inflation as far as I can tell. Likewise the same is true for Bitcoin, except that it has an additional feature in that it's transmutable into a pack of gum, or a share of JPMorgan stock, or a house, or a car, or some service. It's also transferrable - you can move it (again let's ignore how well it works right now) from place to place without having to actually ship it anywhere. So because Bitcoin is transmutable like a Euro or Dollar it can do similar things, except the difference is that more Euros and Dollars are effectively "mined" and created, whereas there's a limit to how many Bitcoins can ever exist. So as more and more Euros and Dollars are created, you can spend more of those to buy the same Bitcoin. Granted, this is very much at face value and some of the mechanics aren't quite there - it's actually very expensive right now to move Bitcoin around and it appears to make for a pretty bad currency, but I think this should at least touch on the mechanics or logic. tl;dr it's like gold.

namaria 4y ago
Prices don't rise 'due to inflation'. Inflation is just another name for price rise. This 'transmutability' you speak of is called currency. Bitcoin has some but very little compared to cash. Also the so-called 'deflacionary' nature of bitcoin, supposedly caused by the supply cap assumes a constant or growing demand for it, which is far from assured. Bitcoin only needs to collapse once to become worthless forever, there will be no cold re-start. Whereas precious metals don't need one. That, IMHO, is the crucial difference that advocates seem to forget.
- ericmay 4y ago
  Prices rise for more than one reason. For example marble is more expensive because it’s more difficult to find and mine than it was in the past (just a contrived example). But prices also rise due to increases in money supply. I agree that Bitcoin is a poor currency compared to fiat currency, but conversely a dollar is a very poor store of wealth while Bitcoin is looking like it may be a good store of wealth. The confusion comes when you (not you specifically) don’t recognize that you can assess the utility and value of these “things” across various traits. Gold is a decent store of wealth, but a very bad currency. Stocks are great at producing and storing value and are highly liquid but awful currencies. I’m not a Bitcoin advocate. I’m a neutral investor. You are correct in my view that if Bitcoin collapses it may become worthless forever. We have examples of this happening with fiat currency as well, though, so it’s not a unique trait of Bitcoin. Diversification and asset accumulation are what I focus on. Bitcoin could turn out to be totally worthless. So could Amazon stock. So could GBP.
  - namaria 4y ago
    I agree with most of what you said, except that Bitcoin looks like a good store of wealth. It has a very short track record, and has shown huge volatility. How does that indicate a good store of wealth?
    - ericmay 4y ago
      Well I would just mention it looks like it to me but that’s an opinion, not a fact. I don’t think it’s dissimilar to any other financial advice though. Like some people think Amazon stock is a good investment. I personally don’t. That’s all :)
- deleted 4y ago
  [deleted]