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I refuse. I think Bitcoins might appreciate more than that, and I don't want to take on the risk. On a planet with a growing economy and a growing population,
by Eliezer 14y ago
I refuse. I think Bitcoins might appreciate more than that, and I don't want to take on the risk.
On a planet with a growing economy and a growing population, Bitcoins will always be appreciating faster than material investments can grow. If you can plant 100 seeds to get back 103 seeds (3% material interest) and also the planetary population is growing at 2%, that's 5% interest on Bitcoins. Except then people try to hold more Bitcoins since they grow faster than seeds, which makes Bitcoins appreciate even faster... but even before taking that into account, you still wouldn't be able to grow enough seeds fast enough to pay back a loan in BTC, if the planetary economy used Bitcoin.
The deflationary process makes things much worse; the more people try to hold Bitcoins, the fewer circulate and the lower the velocity, increasing the apparent price of Bitcoins. This process continues until instability in the price of Bitcoins as people occasionally dump their hoards is so great that Bitcoins stop appreciating. Then fewer people want to hold Bitcoins and they dump their Bitcoins and the velocity goes up and the price goes down and the bubble pops.
(The reason this doesn't happen with existing central bank currencies is that central banks regulate interest rates to stabilize the supply of money and hence its price in response to velocity changes, or at least they're supposed to. The reason this doesn't happen with equities is that they have an intrinsic rate of return due to dividends or stock buybacks; real estate has intrinsic rent; bonds have returns denominated in stabilized money.)
So like I said, Bitcoin is a horrible crackpot theory of money as a store of value, married to a beautiful transaction settlement mechanism.
- erikpukinskis 14y agoWhy do you refuse? Here, I'll lower my rate to 1.05x. If CPI remains stable and mtgoxUSD goes up by 1.06x between now and next year then you'll owe me less BTC than what I gave you. If mtgoxUSD goes down then you'll owe me more than 1.05 BTC but it'll be that much easier for you to buy them. I am happy to offer you the loan, because Bitcoin prices are volatile and there is no guarantee if I keep my Bitcoin in storage that it will still be worth much one year from now. There have been many crashes. But if you agree to repay me an amount equivalent to 1.05x my current spending power then I know whatever you pay me I'll be in a better position than I am today in terms of my ability to pay my rent. Such a loan offers me a drastically different risk profile than holding Bitcoins. If BTC were as guaranteed to increase as you say then they would cost more.
- Eliezer 14y agoOh, sorry, I didn't understand your original proposal. This is a loan denominated in dollars, it's just being transaction-settled via Bitcoin. The medium of account is dollars and the medium of exchange is Bitcoin. This is pretty much exactly the original point I was talking about. :)
- erikpukinskis 14y agoWell, it's not really denominated in dollars, it's denominated in the CPI. You could also have a Bitcoin Price Index that tracked how much spending power Bitcoins had and denominate your loan in that.
- blogospheroid 14y agoI sincerely doubt this will happen, but lets run with the scenario. In a totally deflationary world, more people try to hold bitcoins, I agree. The complementary effect is that the value of real goods, land and labour is reducing. People earn to consume. The bitcoin rich, if they apply the Kelly criterion to their own portfolios, will diversify into whatever assets will provide them a regular real dividend. That is, farms yielding grain, orchard yielding fruit, NG wells yielding NG, wind farms yielding electricity. They will not be buying any investment for the purpose of money, but for the purpose of CONSUMPTION. There lies the negative feedback that will stabilize any new currency as it conquers the world.