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Personally I deride it because solves the wrong problem. I just don't see how it can be an efficient long term medium of exchange with the built in deflation. A

by yxhuvud 14y ago

Personally I deride it because solves the wrong problem. I just don't see how it can be an efficient long term medium of exchange with the built in deflation. As far as I see it, the hype around bitcoin is built around the broken idea that the main purpose of money is as a store of value. But it is not - the main purposes are to act as medium of exchanges and as the unit of account. I'm a lot more intrigued by Ripple I feel they try to solve the correct problem, though there are some issues left. The most glaring one being that it lacks a unit of account of it's own but instead pickyback on a different unit of account. It is also a harder to explain, especially to people that believe in hard money since it is basicly a stripped down fiat system.

jacoblyles 14y ago
There's nothing stopping you from devising a coin with a different mining schedule. I'm working on two proposals right now, one with constant growth over time and one with a slightly increasing growth. Both of them have an initial deflationary period to encourage adoption. Working title is "Friedman Coin". This solves the problem of decreasing mining incentives and the possibility of a too-big windfall for early adopters. It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem.
- ef4 14y ago
  > It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem. Not really. It might offend someone's sense of fairness, but it hardly has an impact on whether the currency will achieve adoption. It's really only behavior on the margin that matters.
- dsterry 14y ago
  You should really look into the history of altcoins because I'm positive one with a constant mining release schedule has been done. One issue with some of them has been premining but if it wasn't premined and was reasonably well-known at launch it probably stands as a good test of whether something like it will ever work. Funnily enough the altcoin that has done the best has changed very few parameters.
- aminok 14y ago
  "I'm working on two proposals right now, one with constant growth over time and one with a slightly increasing growth." Such a coin has been created. Freicoin is a bitcoin-variant that devalues at a constant rate. It hasn't caught on, probably because people prefer currency that doesn't lose its value. "It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem." He owns 2-3% of all the money at one point in time. He can only spend that money once. Money circulates, and can only give value to its user when they circulate it. Given a given unit of money will circulate indefinitely, the relative economic power of a holder of a particular percentage of the money supply at a particular point of time will decrease over time as a percentage of total economic power exercised throughout the currency's existence.
Eliezer 14y ago
What we need is a currency that automatically implements NGDP level targeting a la Scott Sumner, and does so even as it's adopted in a more widespread fashion. Right now Bitcoin is a beautifully elegant transaction settlement mechanism married to a horrible, horrible crackpot goldbug theory of how money works as a store of value. You cannot make loans denominated in Bitcoin (because the price is going up too fast to ever be paid back, and if it ever stops going up, people will be dumping it too fast for an interest rate) so there's no basic demand for the currency at a given price level (to pay back loans). People who want to use the beautiful transaction-settlement mechanism do not have any motive to thereby hold coins, and that means everyone holding the coins is doing so in an expectation that somebody else will buy them at a higher price. Bitcoin is pure instability, pure feedback (in either direction) of the velocity of money into the inverse price of money. I wish I had time to write an article about what an awful, terrible, no good, very bad idea it would be to try running a planet on Bitcoin. If anyone does have a good idea how to implement NGDP level targeting in an e-currency, please say so or write me at yudkowsky at gmail. In fact, just write me if you can figure out how to measure NGDP in an e-currency in a way that can't be hacked and can distinguish more widespread adoption from increasing RGDP.
- jl6 14y ago
  > because the price is going up too fast to ever be paid back, and if it ever stops going up, people will be dumping it too fast for an interest rate Is it implausible that these two forces would reach a relatively stable equilibrium, like stocks?
  - tedsanders 14y ago
    I think it is implausible. What ultimately sets the price of stocks (and prevents undue speculation) is the profit earned by a company. This mechanism doesn't exist in currencies, where the value comes only from what people think it's worth.
  - jacoblyles 14y ago
    Can you make loans denominated in gold? I think you can. The volatility of bitcoin will settle down eventually. It's essentially the 19th century international gold standard for the 21st century.
btcthinker 14y ago
You are correct, the HYPE around Bitcoin is built around a broken idea, but Bitcoin is built around a good idea. Indeed, the main purpose of Bitcoin is in fact to be a medium of exchange and as a unit of account. Bitcoin will be highly profitable for those who treat it as a store of value, until the market gets saturated, but the fact that they treat it as a store of value and hype it up will only expedite the market saturation process. When that happens, then Bitcoin will maintain a steady price and it will serve its purpose as an efficient medium of exchange on the Internet without the need of a central authority. Until, of course, something better comes and replaces it. Deflation is easily negated by the natural rate of inflation, which will always occur simply because of supply/demand economics. Natural inflation is actually healthy for the economy. Artificial inflation forces people, businesses and governments to depend on lending a lot more than on the money they earned. Note that lending will still continue with natural inflation, but the interest rates won't have to be kept artificially low (like they are now).
mhartl 14y ago
Bitcoin doesn't have built-in deflation; it has built-in hardness: a(n eventual) strictly fixed supply. Deflation comes from currency concentration; inflation comes from currency dilution. Bitcoin has neither.
FellowTraveler 14y ago
Re: "Built-in deflation" This being the theory that "no one is going to spend Bitcoin if it keeps increasing in value, since they will sit on it instead, for the future gains. Therefore the currency is deflationary." Amazing how this rationalization, given to slaves to justify their slavery, ends up being touted by the slaves themselves. Technically the same is true of the U.S. dollar: If you put your dollar in a savings account, instead of spending it, you will earn interest. Therefore you will have more money in the future, from the interest earned, if you don't spend that dollar now. Therefore the dollar is also "deflationary."
- elemeno 14y ago
  That's not correct with regards to the dollar. It's inflationary because the purchasing power of those dollars in the bank decreases more rapidly than you accrue interest on them. The current US inflation rate is around 2%, so unless you're making more than 2% interest on your money every year, your purchasing power is going down. For point of reference, yield on a 1yr treasury bill is around 0.14%. Bitcoin is deflationary because, once the coin limit is hit, the number of available coins will decrease over time simply due to coins being lost. As the currency contracts, the purchasing power of a coin goes up over time. In a world where BTC had an inflation rate of -2%, 1 BTC now would buy what 0.98BTC will buy in a year. Any investments you make now need to yield in excess of 2% per annum for you to be better off. In an inflationary world, an investment only needs to beat the T-Bill rate for you to gain (or least be less worse off), which allows for less risky investments.
aminok 14y ago
A gradual rate of deflation didn't stop world markets when they used an international gold standard. Very few people forgo buying something they need because they could get 2% one year later if they hold on to the currency. I think deflation IS economically inefficient, but the negative effect of slight deflation has been exaggerated in the popular economic literature. For a peer-to-peer currency network, a fixed money supply could even be beneficial by creating an incentive for bitcoin holders to invest in the technology. Bitcoin is working, has created the most powerful distributed supercomputer in the world, and is processing an increasing number of instant global transactions every month. It works in practice, as a medium of exchange, and that is a better argument for it working as a currency than theories about how deflation affects economies.
- yxhuvud 14y ago
  The problem is that the time period of the world that had a gold standard had several instances where the world markets did stop. Both the Great Depression and the Long Depression happened in the period in question, and that that is more depression than either before or after the gold standard.
  - aminok 14y ago
    The Great Depression was not during the international gold standard period. By the time it rolled around, central banks controlled the money supply of every advanced economy, and in the midst of the Depression, the U.S. government further left gold-redeemable currency by enacting Executive Order 6102, which ordered all private citizens to turn in their gold, criminalized private gold possession, and made dollars irredeemable in gold. But let's grant that the Great Depression, along with the Long Depression, was during the gold standard's reign. That's two serious economic contractions interspersing mostly long periods of expansion. Compared to the last several decades, which has been marked by several 'lost decades' for the Middle Class, the gold standard era doesn't look bad.

by yxhuvud 14y ago

jacoblyles 14y ago

There's nothing stopping you from devising a coin with a different mining schedule. I'm working on two proposals right now, one with constant growth over time and one with a slightly increasing growth. Both of them have an initial deflationary period to encourage adoption. Working title is "Friedman Coin". This solves the problem of decreasing mining incentives and the possibility of a too-big windfall for early adopters. It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem.

ef4 14y ago
> It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem. Not really. It might offend someone's sense of fairness, but it hardly has an impact on whether the currency will achieve adoption. It's really only behavior on the margin that matters.
dsterry 14y ago
You should really look into the history of altcoins because I'm positive one with a constant mining release schedule has been done. One issue with some of them has been premining but if it wasn't premined and was reasonably well-known at launch it probably stands as a good test of whether something like it will ever work. Funnily enough the altcoin that has done the best has changed very few parameters.
aminok 14y ago
"I'm working on two proposals right now, one with constant growth over time and one with a slightly increasing growth." Such a coin has been created. Freicoin is a bitcoin-variant that devalues at a constant rate. It hasn't caught on, probably because people prefer currency that doesn't lose its value. "It's not unrealistic that Satoshi could own 2% or 3% of all the money that will ever be made. That's a problem." He owns 2-3% of all the money at one point in time. He can only spend that money once. Money circulates, and can only give value to its user when they circulate it. Given a given unit of money will circulate indefinitely, the relative economic power of a holder of a particular percentage of the money supply at a particular point of time will decrease over time as a percentage of total economic power exercised throughout the currency's existence.

Eliezer 14y ago

What we need is a currency that automatically implements NGDP level targeting a la Scott Sumner, and does so even as it's adopted in a more widespread fashion. Right now Bitcoin is a beautifully elegant transaction settlement mechanism married to a horrible, horrible crackpot goldbug theory of how money works as a store of value. You cannot make loans denominated in Bitcoin (because the price is going up too fast to ever be paid back, and if it ever stops going up, people will be dumping it too fast for an interest rate) so there's no basic demand for the currency at a given price level (to pay back loans). People who want to use the beautiful transaction-settlement mechanism do not have any motive to thereby hold coins, and that means everyone holding the coins is doing so in an expectation that somebody else will buy them at a higher price. Bitcoin is pure instability, pure feedback (in either direction) of the velocity of money into the inverse price of money. I wish I had time to write an article about what an awful, terrible, no good, very bad idea it would be to try running a planet on Bitcoin. If anyone does have a good idea how to implement NGDP level targeting in an e-currency, please say so or write me at yudkowsky at gmail. In fact, just write me if you can figure out how to measure NGDP in an e-currency in a way that can't be hacked and can distinguish more widespread adoption from increasing RGDP.

jl6 14y ago
> because the price is going up too fast to ever be paid back, and if it ever stops going up, people will be dumping it too fast for an interest rate Is it implausible that these two forces would reach a relatively stable equilibrium, like stocks?
- tedsanders 14y ago
  I think it is implausible. What ultimately sets the price of stocks (and prevents undue speculation) is the profit earned by a company. This mechanism doesn't exist in currencies, where the value comes only from what people think it's worth.
- jacoblyles 14y ago
  Can you make loans denominated in gold? I think you can. The volatility of bitcoin will settle down eventually. It's essentially the 19th century international gold standard for the 21st century.

btcthinker 14y ago

You are correct, the HYPE around Bitcoin is built around a broken idea, but Bitcoin is built around a good idea. Indeed, the main purpose of Bitcoin is in fact to be a medium of exchange and as a unit of account. Bitcoin will be highly profitable for those who treat it as a store of value, until the market gets saturated, but the fact that they treat it as a store of value and hype it up will only expedite the market saturation process. When that happens, then Bitcoin will maintain a steady price and it will serve its purpose as an efficient medium of exchange on the Internet without the need of a central authority. Until, of course, something better comes and replaces it. Deflation is easily negated by the natural rate of inflation, which will always occur simply because of supply/demand economics. Natural inflation is actually healthy for the economy. Artificial inflation forces people, businesses and governments to depend on lending a lot more than on the money they earned. Note that lending will still continue with natural inflation, but the interest rates won't have to be kept artificially low (like they are now).

mhartl 14y ago

Bitcoin doesn't have built-in deflation; it has built-in hardness: a(n eventual) strictly fixed supply. Deflation comes from currency concentration; inflation comes from currency dilution. Bitcoin has neither.

FellowTraveler 14y ago

Re: "Built-in deflation" This being the theory that "no one is going to spend Bitcoin if it keeps increasing in value, since they will sit on it instead, for the future gains. Therefore the currency is deflationary." Amazing how this rationalization, given to slaves to justify their slavery, ends up being touted by the slaves themselves. Technically the same is true of the U.S. dollar: If you put your dollar in a savings account, instead of spending it, you will earn interest. Therefore you will have more money in the future, from the interest earned, if you don't spend that dollar now. Therefore the dollar is also "deflationary."

elemeno 14y ago
That's not correct with regards to the dollar. It's inflationary because the purchasing power of those dollars in the bank decreases more rapidly than you accrue interest on them. The current US inflation rate is around 2%, so unless you're making more than 2% interest on your money every year, your purchasing power is going down. For point of reference, yield on a 1yr treasury bill is around 0.14%. Bitcoin is deflationary because, once the coin limit is hit, the number of available coins will decrease over time simply due to coins being lost. As the currency contracts, the purchasing power of a coin goes up over time. In a world where BTC had an inflation rate of -2%, 1 BTC now would buy what 0.98BTC will buy in a year. Any investments you make now need to yield in excess of 2% per annum for you to be better off. In an inflationary world, an investment only needs to beat the T-Bill rate for you to gain (or least be less worse off), which allows for less risky investments.

aminok 14y ago

A gradual rate of deflation didn't stop world markets when they used an international gold standard. Very few people forgo buying something they need because they could get 2% one year later if they hold on to the currency. I think deflation IS economically inefficient, but the negative effect of slight deflation has been exaggerated in the popular economic literature. For a peer-to-peer currency network, a fixed money supply could even be beneficial by creating an incentive for bitcoin holders to invest in the technology. Bitcoin is working, has created the most powerful distributed supercomputer in the world, and is processing an increasing number of instant global transactions every month. It works in practice, as a medium of exchange, and that is a better argument for it working as a currency than theories about how deflation affects economies.

yxhuvud 14y ago
The problem is that the time period of the world that had a gold standard had several instances where the world markets did stop. Both the Great Depression and the Long Depression happened in the period in question, and that that is more depression than either before or after the gold standard.
- aminok 14y ago
  The Great Depression was not during the international gold standard period. By the time it rolled around, central banks controlled the money supply of every advanced economy, and in the midst of the Depression, the U.S. government further left gold-redeemable currency by enacting Executive Order 6102, which ordered all private citizens to turn in their gold, criminalized private gold possession, and made dollars irredeemable in gold. But let's grant that the Great Depression, along with the Long Depression, was during the gold standard's reign. That's two serious economic contractions interspersing mostly long periods of expansion. Compared to the last several decades, which has been marked by several 'lost decades' for the Middle Class, the gold standard era doesn't look bad.