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Bitcoin's deflationary nature makes me very nervous about it long term. I'd be a lot more okay with it if there were some sort of built-in inflation or arbitrag

Bitcoin's deflationary nature makes me very nervous about it long term. I'd be a lot more okay with it if there were some sort of built-in inflation or arbitrage mechanism. However, outside of that argument, I think there's a more fundamental problem. As it stands, the total cap of 21 million bitcoins comes to 2.1e15 'satoshis.' Meanwhile, total global economic output is around $7.9e14 USD. Essentially, if bitcoins were to be 'the' global currency at today's level of global GDP, the smallest unit of bitcoin allowed would be worth around $0.37 or $0.38, a value much too large for minimum granularity of currency. (Likewise, 1 bitcoin would be worth ~ $37.5 million USD.) Now most assume bitcoin will never be the global currency of choice. But even so, it seems to me that the 21 million cap is far too small. In any case, the so-called 'bubble' has every chance of inflating even larger because even if bitcoin traffic were 1% of GDP, you're still talking maybe 700 times the current bitcoin monetary base. That means a reasonable 'target' for a bitcoin valuation in USD might even be well above the current price. I'm not sure where things will go from here, but I'm sure it'll be interesting.

altertoad 14y ago
Deflation is a good thing
- Glyptodon 14y ago
  Why? I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)
- pbreit 14y ago
  The article makes a decent case that it is not. Care to elaborate?
  - vrotaru 14y ago
    Price deflation or money deflation? Price deflation is a good thing. I'm typing on something which is a "living" proof of these.
    - danielweber 14y ago
      If a specific good becomes cheaper because the means of production become more efficient, that's awesome. If everything is becoming cheaper because everything is getting more efficient, that's super awesome. If things are getting "cheaper" because the currency is becoming more valuable, that is a disaster. You have society-wide rent-seeking instead of wealth creation.
      - vrotaru 14y ago
        Well, that's exactly my point. In a system with a fixed money supply (all things equal) the only way to have price deflation is to have greater output, greater productivity. Now tell me again, how this is awful? EDIT: As for the rent seeking.. If you hold your money for a while, while the productivity soars, then after a while you can buy more stuff, but only because the stuff has become cheaper. As a fraction of total buying power you are still were you were before. Do you really call it rent-seeking?
        Nursie 14y ago
        In a system with a fixed money supply (all things equal) the only way to have price deflation is to have greater output, greater productivity. Uh, what the hell gave you that idea? Another way would be people hoarding cash, making the rest of it more valuable -> deflationary spiral.
        vrotaru 14y ago
        First you have missed the all things equal caveat, second people hoarding cash will not lead to a deflationary spiral, who give that idea? It will lead to a new equilibrium. The greater the cash balances and lower the prices the greater the temptation to spend, and to break the spiral.
        Nursie 14y ago
        Why spend when you can buy tomorrow even cheaper? A deflationary currency is not a good idea.
fnordfnordfnord 14y ago
Berkshire Hathaway BRK-A doesn't seem to have been harmed by not being watered-down.
- SkyMarshal 14y ago
  It's not a currency either.
tlrobinson 14y ago
The protocol is malleable (the majority of miners need to agree on changes) and can be migrated to use sub-Satoshi units if necessary.
- Glyptodon 14y ago
  So bitcoin miners as a whole become a de-facto central bank based on majority adoption? That's actually a very interesting possibility.
  - drcode 14y ago
    Yes the "central bank" in bitcoin is essentially a diffuse network of trust established via a large network of people.
    - olefoo 14y ago
      And we know for a fact that it's not possible to manipulate large networks of people in an organized manner...
      - polarix 14y ago
        Certainly it's easier to do that than to manipulate a small group of mostly hidden individuals with severe conflicts of interest.
        knowaveragejoe 14y ago
        How is consensus reached? Who has the 'final say' to merge in the patches necessary to make such a fundamental change?
        BrokenPipe 14y ago
        You know, open source. I can decide not to take the new version or I can even fork it. The majority decides, democracy like.
saalweachter 14y ago
You're implicitly assuming that everyone holds all of their BTC for one year before spending them. To illustrate, let's assume that BTC are used for all transactions, but no one holds them. Everyone holds dollars, or euros, or gold, or whatever. When they need to make a transaction they hop on an exchange, buy some BTC, and buy their cup of coffee with the BTC. Then the coffee-seller unloads his new BTC immediately and holds gold or silver or tulip bulbs as his store of value. Given a reasonably automated system, each transaction might take 1 minute. This means that you need 79 trillion _dollar-minutes_ per year, or about $150 million at any given moment. Dividing this by 21 million BTC gives a price of about $7.15 per BTC. Even if people do hold all of their liquid value in BTC, they aren't going to hold it all for a year before spending it. A more realistic estimate might be 79 trillion $ * 3 days -- most people and businesses are operating pretty hand-to-mouth. 237 trillion dollar-days per year comes out to $648 billion at any given moment. This does give a fairly appealing target price for BTC-optimists, about $31k per BTC, and puts the upper bound on the value of a satoshi at $0.0003.
- notahacker 14y ago
  Why make a "realistic estimate" without reference to actual figures? US GDP ~$15 trillion USD (notes and coins) >$1 trillion; USD (M1 aggregate) >$2 trillion i.e. a dollar gets "spent" on activities that contribute to GDP between 7 and 15 times a year, depending on what aggregate you count as a dollar (of course the actual picture is complicated by a lot more non-productive transfers not counted in GDP) Velocity of circulation (the ratio of national income to money supply) in real world economies is a surprisingly low number, and whilst Bitcoins are a little more efficient to transact with than electronic bank interchanges, they're also not designed to be inflationary to encourage turnover.
- Glyptodon 14y ago
  You make a good point in noting that I didn't address the issue of short term holding and possible frequent circulation. It would certainly seem to make the valuation of a bitcoin smaller. That said, I can't think of a back-of-the-envelope type calculation that I'm happy with, though I'll grant that my crude calculation is likely too high. Does anybody have any idea what the rate of bitcoins being 'stranded' is?
NateDad 14y ago
Why is 37 cents too large for the granularity of a currency? In 1913 terms, 37 cents of today's money was the equivalent of 2 cents, only double their smallest coinage. Would you really be upset if any particular transaction was rounded up or down by 18 cents? Yes, if you're buying a single gumball, the price might be a little high today. But you let me know when gumball machines start taking bitcoins. For anything else, a resolution of +-18 cents is perfectly acceptable.... over any reasonable number of transactions, the round ups and round downs will come out to the same value anyway.

altertoad 14y ago

Deflation is a good thing

Glyptodon 14y ago
Why? I'd think you'd generally rather not have all that much inflation or deflation... (Obviously particular parties would have interests to the contrary is specific circumstances, but outside of the short term single party advantage...)
pbreit 14y ago
The article makes a decent case that it is not. Care to elaborate?
- vrotaru 14y ago
  Price deflation or money deflation? Price deflation is a good thing. I'm typing on something which is a "living" proof of these.
  - danielweber 14y ago
    If a specific good becomes cheaper because the means of production become more efficient, that's awesome. If everything is becoming cheaper because everything is getting more efficient, that's super awesome. If things are getting "cheaper" because the currency is becoming more valuable, that is a disaster. You have society-wide rent-seeking instead of wealth creation.
    - vrotaru 14y ago
      Well, that's exactly my point. In a system with a fixed money supply (all things equal) the only way to have price deflation is to have greater output, greater productivity. Now tell me again, how this is awful? EDIT: As for the rent seeking.. If you hold your money for a while, while the productivity soars, then after a while you can buy more stuff, but only because the stuff has become cheaper. As a fraction of total buying power you are still were you were before. Do you really call it rent-seeking?
      - Nursie 14y ago
        In a system with a fixed money supply (all things equal) the only way to have price deflation is to have greater output, greater productivity. Uh, what the hell gave you that idea? Another way would be people hoarding cash, making the rest of it more valuable -> deflationary spiral.
        vrotaru 14y ago
        First you have missed the all things equal caveat, second people hoarding cash will not lead to a deflationary spiral, who give that idea? It will lead to a new equilibrium. The greater the cash balances and lower the prices the greater the temptation to spend, and to break the spiral.
        Nursie 14y ago
        Why spend when you can buy tomorrow even cheaper? A deflationary currency is not a good idea.

fnordfnordfnord 14y ago

Berkshire Hathaway BRK-A doesn't seem to have been harmed by not being watered-down.

SkyMarshal 14y ago
It's not a currency either.

tlrobinson 14y ago

The protocol is malleable (the majority of miners need to agree on changes) and can be migrated to use sub-Satoshi units if necessary.

Glyptodon 14y ago
So bitcoin miners as a whole become a de-facto central bank based on majority adoption? That's actually a very interesting possibility.
- drcode 14y ago
  Yes the "central bank" in bitcoin is essentially a diffuse network of trust established via a large network of people.
  - olefoo 14y ago
    And we know for a fact that it's not possible to manipulate large networks of people in an organized manner...
    - polarix 14y ago
      Certainly it's easier to do that than to manipulate a small group of mostly hidden individuals with severe conflicts of interest.
      - knowaveragejoe 14y ago
        How is consensus reached? Who has the 'final say' to merge in the patches necessary to make such a fundamental change?
        BrokenPipe 14y ago
        You know, open source. I can decide not to take the new version or I can even fork it. The majority decides, democracy like.

saalweachter 14y ago

You're implicitly assuming that everyone holds all of their BTC for one year before spending them. To illustrate, let's assume that BTC are used for all transactions, but no one holds them. Everyone holds dollars, or euros, or gold, or whatever. When they need to make a transaction they hop on an exchange, buy some BTC, and buy their cup of coffee with the BTC. Then the coffee-seller unloads his new BTC immediately and holds gold or silver or tulip bulbs as his store of value. Given a reasonably automated system, each transaction might take 1 minute. This means that you need 79 trillion _dollar-minutes_ per year, or about $150 million at any given moment. Dividing this by 21 million BTC gives a price of about $7.15 per BTC. Even if people do hold all of their liquid value in BTC, they aren't going to hold it all for a year before spending it. A more realistic estimate might be 79 trillion $ * 3 days -- most people and businesses are operating pretty hand-to-mouth. 237 trillion dollar-days per year comes out to $648 billion at any given moment. This does give a fairly appealing target price for BTC-optimists, about $31k per BTC, and puts the upper bound on the value of a satoshi at $0.0003.

notahacker 14y ago
Why make a "realistic estimate" without reference to actual figures? US GDP ~$15 trillion USD (notes and coins) >$1 trillion; USD (M1 aggregate) >$2 trillion i.e. a dollar gets "spent" on activities that contribute to GDP between 7 and 15 times a year, depending on what aggregate you count as a dollar (of course the actual picture is complicated by a lot more non-productive transfers not counted in GDP) Velocity of circulation (the ratio of national income to money supply) in real world economies is a surprisingly low number, and whilst Bitcoins are a little more efficient to transact with than electronic bank interchanges, they're also not designed to be inflationary to encourage turnover.
Glyptodon 14y ago
You make a good point in noting that I didn't address the issue of short term holding and possible frequent circulation. It would certainly seem to make the valuation of a bitcoin smaller. That said, I can't think of a back-of-the-envelope type calculation that I'm happy with, though I'll grant that my crude calculation is likely too high. Does anybody have any idea what the rate of bitcoins being 'stranded' is?

NateDad 14y ago

Why is 37 cents too large for the granularity of a currency? In 1913 terms, 37 cents of today's money was the equivalent of 2 cents, only double their smallest coinage. Would you really be upset if any particular transaction was rounded up or down by 18 cents? Yes, if you're buying a single gumball, the price might be a little high today. But you let me know when gumball machines start taking bitcoins. For anything else, a resolution of +-18 cents is perfectly acceptable.... over any reasonable number of transactions, the round ups and round downs will come out to the same value anyway.