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Bitcoin is a deflationary currency since it's supply is limited. Doesn't that mean that it's expected to rise in price? This also ends up being the currency's

by adambom 14y ago

Bitcoin is a deflationary currency since it's supply is limited. Doesn't that mean that it's expected to rise in price? This also ends up being the currency's downfall, since there's an incentive to hoard it rather than spend it.

thangalin 14y ago
http://bitcoin.stackexchange.com/questions/408/does-hoarding-really-hurt-bitcoin http://bitcoin.stackexchange.com/questions/408/does-hoarding... "The argument that increasing value means people would prefer to hold Bitcoins rather than spend them is specious. While it will make people want to have Bitcoins more, it will also make people want to convince others to give them Bitcoins more so they can have them."
- TylerE 14y ago
  That....doesn't answer the question at all.
  - justinmk 14y ago
    It is a coy answer to the question. Currency is a good, like anything else. An economic agent (human) trades currency for some other good precisely when that currency becomes less valuable to that individual than the good.
cbr 14y ago
Doesn't that mean that it's expected to rise in price? No. Because people can buy and sell bitcoins freely then its current price should include peoples expectations about future value.
jasonkolb 14y ago
No, because demand is also rising.
- davmre 14y ago
  Bounded supply + rising demand = rising price, no?
markkat 14y ago
Consider that it's not a just a currency; it's also a commodity, and a tool, and possibly a few other things. IMHO it is a mistake to apply traditional notions of currency to bitcoin as it has several other non-traditional characteristics.
gojomo 14y ago
If the designed-in deflation works (and is widely understood), then yes, there's an incentive to hoard. Whether that means a 'downfall' is far less clear. If Bitcoin just keeps becoming more valuable, serving a role but not circulating as much as other currencies (be they traditional or digital-of-a-post-Bitcoin-design), is that a 'downfall', or just a peculiar kind of success? Bitcoin is like a new form of monetary/economic matter... some lessons from traditional domains may apply, but others not at all. Casual, confident pronouncements either way are silly.
justinmk 14y ago
> deflationary ... there's an incentive to hoard it rather than spend it. By that logic, everyone would put their dollars into investments that beat inflation (this is a form of saving). Yet they do not. You can hold (hoard?) securities (VBLTX, HTS, JNJ) that beat inflation, yet people spend dollars on depreciating assets (cars, computers). There are other less-risky financial instruments [1] that beat nominal CPI, yet people spend dollars. > Doesn't that mean that it's expected to rise in price? Sure, relative to an inflationary currency. But bitcoin fluctuates quite a bit. By they way, currency is just a good, like anything else. One trades currency for some other good that one values more than the currency [2]. [1] http://www.mint.com/blog/investing/beat-inflation-with-i-bonds-102011/ http://www.mint.com/blog/investing/beat-inflation-with-i-bon... [2] http://en.wikipedia.org/wiki/Time_preference http://en.wikipedia.org/wiki/Time_preference
- yungchin 14y ago
  I'm not sure I get that "currency is just a good". If people hoard gold, then the price of gold spikes, and it will be hard to come by gold, but you can probably still buy other things. But if people hoard a currency, to the point where there's not enough freely flowing to pay for stuff, it will affect all kinds of transactions. Doesn't that make it different? (So I mean, the point of the securities you mention is exactly to hold/hoard them, whereas the point of a currency is not to hold it, but to pass it around, or?)
- lmm 14y ago
  >You can hold (hoard?) securities (VBLTX, HTS, JNJ) that beat inflation, yet people spend dollars on depreciating assets (cars, computers). No-one buys a dozen computers and puts them in their basement as savings for retirement. People buy cars and computers to use, not as investments. People with nontrivial quantities of "spare" dollars generally do put them into inflation-beating investments.
Retric 14y ago
It leads to value instability as bubbles form and pop. In theory the total value of bit coins in circulation is not all that important to an individual however price instability is a major downside so deflation does hurt adoption.
ealloc 14y ago
Currently bitcoin supply is inflationary because 25 bitcoins are created every 10 minutes, and a similar amount will be generated for decades. True, this amount is set to decrease to 0 eventually. However, with some planning conceivably this could be changed, as long as the majority of bitcoin users agree it should be changed.
pixie_ 14y ago
Are you saying that inflationary currency is the root cause of an economy geared towards consumption.
mrb 14y ago
Critics keep saying that there is no incentive to spend it. But all the numbers indicate that there is increased spending: http://news.ycombinator.com/item?id=5296889 http://news.ycombinator.com/item?id=5296889 Therefore, no, I do not think it will cause its downfall. I guess people are irrational and still spend bitcoins despite knowing about deflation.
- lmm 14y ago
  Spending makes sense because the future of bitcoin is uncertain. If you could guarantee that bitcoin wasn't going to crash, hoarding would be a guaranteed winner and people would stop spending (and ironically enough, it then would crash).
netcan 14y ago
Prices adjust to reflect expectations. Theoretically, if everyone knew with certainty that prices will increase in the future, it would rise now instead. It would rise to reflect the NPV of the future price at any point where its NPV is highest. The mechanism that would happen through is just as you predict. People would buy & hold bitcoin. Buying & holding is an increase of demand (buying) & a decrease in supply (holding). These both increase prices until the point where buying and holding isn't any more attractive than buying and holding some other asset with a known future value (like government bonds). In reality that certainty doesn't exist. Current prices of bitcoin a reflection of all sorts of wild guesses about possible future effects that are dependent on all sorts of things.
im3w1l 14y ago
>rise in prise >incentive to hoard it >downfall I don't see how these are compatible. Reminds me of "No one in New York drove. There was too much traffic."

by adambom 14y ago

thangalin 14y ago

http://bitcoin.stackexchange.com/questions/408/does-hoarding-really-hurt-bitcoin http://bitcoin.stackexchange.com/questions/408/does-hoarding... "The argument that increasing value means people would prefer to hold Bitcoins rather than spend them is specious. While it will make people want to have Bitcoins more, it will also make people want to convince others to give them Bitcoins more so they can have them."

TylerE 14y ago
That....doesn't answer the question at all.
- justinmk 14y ago
  It is a coy answer to the question. Currency is a good, like anything else. An economic agent (human) trades currency for some other good precisely when that currency becomes less valuable to that individual than the good.

cbr 14y ago

Doesn't that mean that it's expected to rise in price? No. Because people can buy and sell bitcoins freely then its current price should include peoples expectations about future value.

jasonkolb 14y ago

No, because demand is also rising.

davmre 14y ago
Bounded supply + rising demand = rising price, no?

markkat 14y ago

Consider that it's not a just a currency; it's also a commodity, and a tool, and possibly a few other things. IMHO it is a mistake to apply traditional notions of currency to bitcoin as it has several other non-traditional characteristics.

gojomo 14y ago

If the designed-in deflation works (and is widely understood), then yes, there's an incentive to hoard. Whether that means a 'downfall' is far less clear. If Bitcoin just keeps becoming more valuable, serving a role but not circulating as much as other currencies (be they traditional or digital-of-a-post-Bitcoin-design), is that a 'downfall', or just a peculiar kind of success? Bitcoin is like a new form of monetary/economic matter... some lessons from traditional domains may apply, but others not at all. Casual, confident pronouncements either way are silly.

justinmk 14y ago

> deflationary ... there's an incentive to hoard it rather than spend it. By that logic, everyone would put their dollars into investments that beat inflation (this is a form of saving). Yet they do not. You can hold (hoard?) securities (VBLTX, HTS, JNJ) that beat inflation, yet people spend dollars on depreciating assets (cars, computers). There are other less-risky financial instruments [1] that beat nominal CPI, yet people spend dollars. > Doesn't that mean that it's expected to rise in price? Sure, relative to an inflationary currency. But bitcoin fluctuates quite a bit. By they way, currency is just a good, like anything else. One trades currency for some other good that one values more than the currency [2]. [1] http://www.mint.com/blog/investing/beat-inflation-with-i-bonds-102011/ http://www.mint.com/blog/investing/beat-inflation-with-i-bon... [2] http://en.wikipedia.org/wiki/Time_preference http://en.wikipedia.org/wiki/Time_preference

yungchin 14y ago
I'm not sure I get that "currency is just a good". If people hoard gold, then the price of gold spikes, and it will be hard to come by gold, but you can probably still buy other things. But if people hoard a currency, to the point where there's not enough freely flowing to pay for stuff, it will affect all kinds of transactions. Doesn't that make it different? (So I mean, the point of the securities you mention is exactly to hold/hoard them, whereas the point of a currency is not to hold it, but to pass it around, or?)
lmm 14y ago
>You can hold (hoard?) securities (VBLTX, HTS, JNJ) that beat inflation, yet people spend dollars on depreciating assets (cars, computers). No-one buys a dozen computers and puts them in their basement as savings for retirement. People buy cars and computers to use, not as investments. People with nontrivial quantities of "spare" dollars generally do put them into inflation-beating investments.

Retric 14y ago

It leads to value instability as bubbles form and pop. In theory the total value of bit coins in circulation is not all that important to an individual however price instability is a major downside so deflation does hurt adoption.

ealloc 14y ago

Currently bitcoin supply is inflationary because 25 bitcoins are created every 10 minutes, and a similar amount will be generated for decades. True, this amount is set to decrease to 0 eventually. However, with some planning conceivably this could be changed, as long as the majority of bitcoin users agree it should be changed.

pixie_ 14y ago

Are you saying that inflationary currency is the root cause of an economy geared towards consumption.

mrb 14y ago

Critics keep saying that there is no incentive to spend it. But all the numbers indicate that there is increased spending: http://news.ycombinator.com/item?id=5296889 http://news.ycombinator.com/item?id=5296889 Therefore, no, I do not think it will cause its downfall. I guess people are irrational and still spend bitcoins despite knowing about deflation.

lmm 14y ago
Spending makes sense because the future of bitcoin is uncertain. If you could guarantee that bitcoin wasn't going to crash, hoarding would be a guaranteed winner and people would stop spending (and ironically enough, it then would crash).

netcan 14y ago

Prices adjust to reflect expectations. Theoretically, if everyone knew with certainty that prices will increase in the future, it would rise now instead. It would rise to reflect the NPV of the future price at any point where its NPV is highest. The mechanism that would happen through is just as you predict. People would buy & hold bitcoin. Buying & holding is an increase of demand (buying) & a decrease in supply (holding). These both increase prices until the point where buying and holding isn't any more attractive than buying and holding some other asset with a known future value (like government bonds). In reality that certainty doesn't exist. Current prices of bitcoin a reflection of all sorts of wild guesses about possible future effects that are dependent on all sorts of things.

im3w1l 14y ago

>rise in prise >incentive to hoard it >downfall I don't see how these are compatible. Reminds me of "No one in New York drove. There was too much traffic."