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Bitcoins are not the future. But they're a great start. Bitcoins have two major problems stopping mainstream adoption; excessive volatility that isn't managed

Bitcoins are not the future. But they're a great start. Bitcoins have two major problems stopping mainstream adoption; excessive volatility that isn't managed and the fact that is a deflationary monetary system, with the latter being a much bigger issue. Fundamentally a currency needs to move around fungible value. That's it. If it doesn't do that - it's useless. Bitcoin incentivises hoarding - the opposite of value transmission - and that's the main reason it'll remain as nothing more than a mere speculative currency, like modern day tulips, and why it won't ever become an actual alternative to actual cash. Now - this isn't a knock against crypto-currencies - which are awesome - it's merely a knock at the fact that monetary supply in the bitcoin system isn't adaptive. Bitcoin needs a central decentralized bank that will help to stabilise the system and inflate (punish hoarders) as the economy grows in fits and starts. I'm sure that one day in the not too distant future, another crypto-currency will come about that takes all the advantages provided by bitcoin, and combines them with stability/incentives of a nation-backed currency such as the US dollar. When that happens, we can finally end the monopoly held by large financial institutions that so clearly have literally no idea what they are actually doing (see Deutsche bank just recently). Bitcoins are just the beginning of a whole new financial world, free from restriction, fees and abuse (hopefully :). But they most certainly are not the end.

3825 14y ago
Isn't a central decentralized bank an oxymoron?
- deleted 14y ago
  [deleted]
- contingencies 14y ago
  Perhaps the intended meaning was 'multi-legal-jurisdictional'.
tensafefrogs 14y ago
The deflation argument is brought up a lot around here, I wonder if you've read this article: http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-deflation/ http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-d... > Contrary to the central banking and political class insistence that deflation must be prevented at all costs, an economy with a monetary unit that increases in value over time provides significant economic benefits such as near zero interest rates and increasing demand through lower prices. Let’s look at some remarks from leading thinkers on deflation.
- nhaehnle 14y ago
  > increasing demand through lower prices This sounds nice in theory. In practice, prices fall only very slowly, if at all, due to the way that prices are set in practice: Producers decide how much they want to charge, and they are naturally inclined to charge more rather than less. This might be different in a world where the price tags are made by customers, but we have to work with the world we live in. By the way, this is probably the best argument for tolerating a modest rate of inflation (e.g. 5% or so): For "the market" to work well, relative prices need to change to reflect the changing reality of production and consumption. Since the mechanisms of how prices are set allow prices to rise faster than they can fall, it is a good idea for the average price level to be increasing at a modest pace.
- lolcraft 14y ago
  Indeed, let's look at some remarks from some leading "thinkers" on deflation: > Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. - Doug Casey Moralistic pseudo-economical bullshit. Want to know some scandalous borrowers' names? Steve Jobs, Thomas Edison, Warren Buffet, I could go on. The last sentence is so wrong it hurts; a pro-capitalist economist should know very well that, in a market economy, production equals consumption. Shame on him. > Deflation puts a break–at the very least a temporary break–on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch. It dampens the growth of the welfare state, if it does not lead to its outright implosion. - Jörg Guido Hülsmann Holy fucking shit Batman, you just did not make the case for deflation based on your pet political fringe worldview. For the record: one, the "executive branch" is not a monolithic entity, and the central bank is quite independent from say, the president; two, what you call "nanny state" is my "minimum decency and human rights state", so thanks for the monetary coup d'etát; three, what about constant, steep deflation favouring by nature the concentration of power into a oligopoly of capitalists. But I guess, since it's a oligopoly of capitalists, it's all OK. > George Selgin rightly distinguishes between malign demand-driven deflation which is an unfortunate secondary effect of a central bank-manipulated, inflationary malinvestment phase and benign deflation which is the result of an increase in productivity. Yeah, dude should also talk about malign deflation that's designed into your currency. Nothing to do with increased productivity, incidentally. One wonders whom these leading thinkers lead, and where... Really, I'm most sympathetic with the notion that lowering prices will increase demand. True, however, we're interested here in the matter of lending and borrowing, which is, in my opinion, very worrying. Of course, I'm not an economist, so I might very well be wrong. However, these gentlemens' arguments do nothing to persuade me.
snitko 14y ago
You may think that deflation and hoarding is bad. However people are drawn to it. Fortunately, you can't tell people what to do and where to store their money. Thus, a currency that allows hoarding will always be more attractive to people than the one which doesn't. Soon enough people will learn that there is no deflationary spiral. They will also learn that currency can be both deflationary and move around. Bitcoin is divisible, so it doesn't matter if someone hoards a significant amount of it - trade will still flourish and enough transactions will take place precisely because you can divide one bitcoin into smaller parts.
- agravier 14y ago
  This point disturbs some people because it implies that they should not mind hoarders, and continue business with BTC as usual. But people mind (more or less) hoarders because they are: 1> worried about their apparent (and seemingly growing) power over the value of the currency, or/and 2> jealous.
- pyoung 14y ago
  I like your point about adoption. It makes sense that a deflationary currency would attract more people due to its speculative nature. Without this aspect of bitcoin, it would still probably be trading for pennies and languishing in relative obscurity. Any digital currency designed with an inflationary system will probably fail to attract a critical mass of users, because outside of anonymity, which is only important for a small minority, there is no significant upside to owning the currency. Where I don't agree with you is that the divisible nature of bitcoin somehow makes it viable (most currencies are divisible by the way, 100 cents = $1). The fact is deflation suppress spending (and hence economic activity) because the currency will be worth significantly more in the future than it is now, and therefore, I would prefer to hold onto it rather than spend it. Divisibility does not change this. Where I am still up in the air, is whether or not a digital currency needs to be inflationary. Gold has some industrial uses, but it's value is largely due to tradition and speculation. It has long been used as a common store of value and is bought by traders as a hedge against fluctuations in the global economy. Bitcoin could become the 'Gold of the internet'. A new way to hedge against the global economy, but other than that, not something that really affects everyday life, except maybe at the fringes (when was the last time you bought something with gold).
temphn 14y ago
This is fundamentally the difference between the left and right economic worldviews. The left prizes inflation, spending, and centralized nation states. The right supports deflation, saving ("hoarding"), and powerful individuals or voluntary groups. And now we are finally going to have an empirical test where the left can't wave a gun at the right to force them into inflation.
- sneak 14y ago
  Fuck yeah. Great time to be a cypherpunk.
- mtrimpe 14y ago
  Excessive hoarding is obviously dangerous to a currency though. Imagine a fixed supply of 1.000.000 coins and suppose 99 people managed to nab 10.000 coins initially and are just sitting on them. The bitcoin economy will then run as though the remaining 10.000 coins is the entire economy, but 99 people will have spending power equal to the value of the entire economy.
  - snitko 14y ago
    "Buy an economy" is a meaningless term. They can either buy products and services or invest. And this is dangerous why? If they decide to start spending their money, this would indeed mean temporary inflation as the money supply circulating would increase. But this also means that they themselves, the rich ones, will lose a lot of the value of their remaining money. Also, they wouldn't be able to spend it all at once, so with each new chunk of investment the value of their money will be less and less and less. The truth, as it turns out, that in a deflationary system rich are only rich as long as they don't spend too much and invest wisely. Thus the incentive is there to continue hoarding, even though this incentive is quite different from the incentive of the poor: for the poor in a deflationary system the incentive to hoard is making money. For rich the incentive is not losing them.
    - makomk 14y ago
      I don't think you're thinking this through properly. The same loss of value will happen no matter how they spend or invest their money, so a rational wealthy person should conclude that it was never really "worth" the face value in the first place. (What good is money that only holds its value if you never spend it?) So that's not an incentive against spending.
Houshalter 14y ago
For most people the deflationary part is a good thing. If you don't spend them they actually increase in value. Or the people selling things for bitcoin who will get more and more value over time without having to increase prices. It would hurt people who borrow money, but that's not what bitcoin is primarily used or was intended to be used for, and the interest rate people borrow money at could just be adjusted accordingly. (Which would then encourage people to loan instead of hoard as the amount of bitcoins they get back at the end of the day would be the same either way, but this way they would get interest on top of it. So your "hoarding" problem is self correcting anyways.) If someone was hoarding bitcoins it doesn't hurt or affect anyone else. Your central bank inflating it wouldn't just punish hoarders, but everyone who used the currency. To the benefit of whatever group controlled it or got the newly "minted" bitcoins. Bitcoin does have a built in way of inflating the currency by people "mining" more of it, but that was a necessary evil of getting the first bitcoins into circulation relatively fairly. There is no actual benefit of having people wasting vast amounts of computing power otherwise, or making everyone else's money worth less.
mrb 14y ago
"that is a deflationary monetary system, [...] being a much bigger issue" The market currently proves you wrong. This is not an "issue". Everybody knows about deflation, yet spending is massively increasing. BitPay alone recorded a merchant transaction volume increasing from $687k in February to $5.2M in March. (BitPay is the largest Bitcoin transaction processor, providing a very clear indicator of whether people are spending or hoarding). http://www.marketwatch.com/story/bitpay-eclipses-silk-road-in-bitcoin-sales-with-explosive-52m-march-2013-04-02 http://www.marketwatch.com/story/bitpay-eclipses-silk-road-i...
- makomk 14y ago
  How much of that volume is ASIC purchases, which are essentially a form of speculation on the future price of Bitcoin themselves?
  - eru 14y ago
    What are the ASIC producers doing with all their bitcoins?
    - makomk 14y ago
      In many cases, they're not receiving bitcoins in the first place. BitPay allows merchants to receive the USD equivalent of their incoming payments minus a small fee, and at least one major ASIC manufacturer does it this way.
- zanny 14y ago
  It works because people value goods they can get with their coins more than the appreciating value of coins in the future. The problem everyone is having is not about coins being used for exchange - any money will provoke people to spend it on the things they value more than the money itself - but on how a deflating currency makes investment less prominent because it requires even higher returns than the rate of the currency appreciating value.
contingencies 14y ago
Additional issues with bitcoin include significant and growing implementation complexity, legal environs, and latency.
zby 14y ago
What we are moving into is not a world with one cryptocurrency that is hoarded or inflated - but rather a world of many many cryptocurrencies where people will move from one to another adjusting to the circumstances. There will be the 'lateral inflation' in creation of new cryptocurrencies. When the old ones become stuck into the deflation spiral - new currencies will be used eventually unstucking the old ones, by making them less attractive. I have not looked into the details - but Ripple looks like hitting the nail on the head.
aminok 14y ago
It's not excessively volatile. Relative to its market capitalization, its volatility is quite low: http://bitcoin.stackexchange.com/questions/3338/how-does-bitcoins-price-volatility-compare-to-commodities-stocks-with-comparabl http://bitcoin.stackexchange.com/questions/3338/how-does-bit... As for being deflationary, that hasn't stopped the rapid growth in the number of transactions per day: http://blockchain.info/charts/n-transactions http://blockchain.info/charts/n-transactions I posted this elsewhere, but it applies here: 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.
edwtjo 14y ago
You would probably like http://freico.in http://freico.in which incentivize sustainable investment.
aneth4 14y ago
This is so wrong. Bitcoin is excessively volatile now, and probably will be for a while. This is due to many, many reasons related to its age as a currency. The exchange rate will never be stable, but will not always be so volatile. Regarding deflationary monetary systems, there is much debate. However people exchange things of value when there is mutual benefit - when something I have is worth more to you than to me, and vice versa, we will exchange as it is mutually beneficial. If an asset is appreciating, it affects what value I give it and for what I am willing trade, but it does not disincentive trade - it only changes the value calculation. If I have $100 that will probably be worth $90 in 5 years, I'm willing to trade it for something that adds about $90 of value to me over the next 5 years. If I have $100 that will probably be worth $110, I'm willing to trade it for something that adds $110 of value over the next 5 years. I think the anti-deflation argument is entirely bunk, and inflation has dire consequences for those who have fewer assets and education to protect themselves.
dwild 14y ago
Royal Canadian Mint tried a "crypto-currency" called Mintchip. They only had 500 devkits and it had probably a ton of security issue, but it's great to know that they are interested in this kind of technology.

3825 14y ago

Isn't a central decentralized bank an oxymoron?

deleted 14y ago
[deleted]
contingencies 14y ago
Perhaps the intended meaning was 'multi-legal-jurisdictional'.

tensafefrogs 14y ago

The deflation argument is brought up a lot around here, I wonder if you've read this article: http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-deflation/ http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-d... > Contrary to the central banking and political class insistence that deflation must be prevented at all costs, an economy with a monetary unit that increases in value over time provides significant economic benefits such as near zero interest rates and increasing demand through lower prices. Let’s look at some remarks from leading thinkers on deflation.

nhaehnle 14y ago
> increasing demand through lower prices This sounds nice in theory. In practice, prices fall only very slowly, if at all, due to the way that prices are set in practice: Producers decide how much they want to charge, and they are naturally inclined to charge more rather than less. This might be different in a world where the price tags are made by customers, but we have to work with the world we live in. By the way, this is probably the best argument for tolerating a modest rate of inflation (e.g. 5% or so): For "the market" to work well, relative prices need to change to reflect the changing reality of production and consumption. Since the mechanisms of how prices are set allow prices to rise faster than they can fall, it is a good idea for the average price level to be increasing at a modest pace.
lolcraft 14y ago
Indeed, let's look at some remarks from some leading "thinkers" on deflation: > Deflation rewards the prudent saver and punishes the profligate borrower. The way a society, like an individual, becomes wealthy is by producing more than it consumes. - Doug Casey Moralistic pseudo-economical bullshit. Want to know some scandalous borrowers' names? Steve Jobs, Thomas Edison, Warren Buffet, I could go on. The last sentence is so wrong it hurts; a pro-capitalist economist should know very well that, in a market economy, production equals consumption. Shame on him. > Deflation puts a break–at the very least a temporary break–on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch. It dampens the growth of the welfare state, if it does not lead to its outright implosion. - Jörg Guido Hülsmann Holy fucking shit Batman, you just did not make the case for deflation based on your pet political fringe worldview. For the record: one, the "executive branch" is not a monolithic entity, and the central bank is quite independent from say, the president; two, what you call "nanny state" is my "minimum decency and human rights state", so thanks for the monetary coup d'etát; three, what about constant, steep deflation favouring by nature the concentration of power into a oligopoly of capitalists. But I guess, since it's a oligopoly of capitalists, it's all OK. > George Selgin rightly distinguishes between malign demand-driven deflation which is an unfortunate secondary effect of a central bank-manipulated, inflationary malinvestment phase and benign deflation which is the result of an increase in productivity. Yeah, dude should also talk about malign deflation that's designed into your currency. Nothing to do with increased productivity, incidentally. One wonders whom these leading thinkers lead, and where... Really, I'm most sympathetic with the notion that lowering prices will increase demand. True, however, we're interested here in the matter of lending and borrowing, which is, in my opinion, very worrying. Of course, I'm not an economist, so I might very well be wrong. However, these gentlemens' arguments do nothing to persuade me.

snitko 14y ago

You may think that deflation and hoarding is bad. However people are drawn to it. Fortunately, you can't tell people what to do and where to store their money. Thus, a currency that allows hoarding will always be more attractive to people than the one which doesn't. Soon enough people will learn that there is no deflationary spiral. They will also learn that currency can be both deflationary and move around. Bitcoin is divisible, so it doesn't matter if someone hoards a significant amount of it - trade will still flourish and enough transactions will take place precisely because you can divide one bitcoin into smaller parts.

agravier 14y ago
This point disturbs some people because it implies that they should not mind hoarders, and continue business with BTC as usual. But people mind (more or less) hoarders because they are: 1> worried about their apparent (and seemingly growing) power over the value of the currency, or/and 2> jealous.
pyoung 14y ago
I like your point about adoption. It makes sense that a deflationary currency would attract more people due to its speculative nature. Without this aspect of bitcoin, it would still probably be trading for pennies and languishing in relative obscurity. Any digital currency designed with an inflationary system will probably fail to attract a critical mass of users, because outside of anonymity, which is only important for a small minority, there is no significant upside to owning the currency. Where I don't agree with you is that the divisible nature of bitcoin somehow makes it viable (most currencies are divisible by the way, 100 cents = $1). The fact is deflation suppress spending (and hence economic activity) because the currency will be worth significantly more in the future than it is now, and therefore, I would prefer to hold onto it rather than spend it. Divisibility does not change this. Where I am still up in the air, is whether or not a digital currency needs to be inflationary. Gold has some industrial uses, but it's value is largely due to tradition and speculation. It has long been used as a common store of value and is bought by traders as a hedge against fluctuations in the global economy. Bitcoin could become the 'Gold of the internet'. A new way to hedge against the global economy, but other than that, not something that really affects everyday life, except maybe at the fringes (when was the last time you bought something with gold).

temphn 14y ago

This is fundamentally the difference between the left and right economic worldviews. The left prizes inflation, spending, and centralized nation states. The right supports deflation, saving ("hoarding"), and powerful individuals or voluntary groups. And now we are finally going to have an empirical test where the left can't wave a gun at the right to force them into inflation.

sneak 14y ago
Fuck yeah. Great time to be a cypherpunk.
mtrimpe 14y ago
Excessive hoarding is obviously dangerous to a currency though. Imagine a fixed supply of 1.000.000 coins and suppose 99 people managed to nab 10.000 coins initially and are just sitting on them. The bitcoin economy will then run as though the remaining 10.000 coins is the entire economy, but 99 people will have spending power equal to the value of the entire economy.
- snitko 14y ago
  "Buy an economy" is a meaningless term. They can either buy products and services or invest. And this is dangerous why? If they decide to start spending their money, this would indeed mean temporary inflation as the money supply circulating would increase. But this also means that they themselves, the rich ones, will lose a lot of the value of their remaining money. Also, they wouldn't be able to spend it all at once, so with each new chunk of investment the value of their money will be less and less and less. The truth, as it turns out, that in a deflationary system rich are only rich as long as they don't spend too much and invest wisely. Thus the incentive is there to continue hoarding, even though this incentive is quite different from the incentive of the poor: for the poor in a deflationary system the incentive to hoard is making money. For rich the incentive is not losing them.
  - makomk 14y ago
    I don't think you're thinking this through properly. The same loss of value will happen no matter how they spend or invest their money, so a rational wealthy person should conclude that it was never really "worth" the face value in the first place. (What good is money that only holds its value if you never spend it?) So that's not an incentive against spending.

Houshalter 14y ago

For most people the deflationary part is a good thing. If you don't spend them they actually increase in value. Or the people selling things for bitcoin who will get more and more value over time without having to increase prices. It would hurt people who borrow money, but that's not what bitcoin is primarily used or was intended to be used for, and the interest rate people borrow money at could just be adjusted accordingly. (Which would then encourage people to loan instead of hoard as the amount of bitcoins they get back at the end of the day would be the same either way, but this way they would get interest on top of it. So your "hoarding" problem is self correcting anyways.) If someone was hoarding bitcoins it doesn't hurt or affect anyone else. Your central bank inflating it wouldn't just punish hoarders, but everyone who used the currency. To the benefit of whatever group controlled it or got the newly "minted" bitcoins. Bitcoin does have a built in way of inflating the currency by people "mining" more of it, but that was a necessary evil of getting the first bitcoins into circulation relatively fairly. There is no actual benefit of having people wasting vast amounts of computing power otherwise, or making everyone else's money worth less.

mrb 14y ago

"that is a deflationary monetary system, [...] being a much bigger issue" The market currently proves you wrong. This is not an "issue". Everybody knows about deflation, yet spending is massively increasing. BitPay alone recorded a merchant transaction volume increasing from $687k in February to $5.2M in March. (BitPay is the largest Bitcoin transaction processor, providing a very clear indicator of whether people are spending or hoarding). http://www.marketwatch.com/story/bitpay-eclipses-silk-road-in-bitcoin-sales-with-explosive-52m-march-2013-04-02 http://www.marketwatch.com/story/bitpay-eclipses-silk-road-i...

makomk 14y ago
How much of that volume is ASIC purchases, which are essentially a form of speculation on the future price of Bitcoin themselves?
- eru 14y ago
  What are the ASIC producers doing with all their bitcoins?
  - makomk 14y ago
    In many cases, they're not receiving bitcoins in the first place. BitPay allows merchants to receive the USD equivalent of their incoming payments minus a small fee, and at least one major ASIC manufacturer does it this way.
zanny 14y ago
It works because people value goods they can get with their coins more than the appreciating value of coins in the future. The problem everyone is having is not about coins being used for exchange - any money will provoke people to spend it on the things they value more than the money itself - but on how a deflating currency makes investment less prominent because it requires even higher returns than the rate of the currency appreciating value.

contingencies 14y ago

Additional issues with bitcoin include significant and growing implementation complexity, legal environs, and latency.

zby 14y ago

What we are moving into is not a world with one cryptocurrency that is hoarded or inflated - but rather a world of many many cryptocurrencies where people will move from one to another adjusting to the circumstances. There will be the 'lateral inflation' in creation of new cryptocurrencies. When the old ones become stuck into the deflation spiral - new currencies will be used eventually unstucking the old ones, by making them less attractive. I have not looked into the details - but Ripple looks like hitting the nail on the head.

aminok 14y ago

It's not excessively volatile. Relative to its market capitalization, its volatility is quite low: http://bitcoin.stackexchange.com/questions/3338/how-does-bitcoins-price-volatility-compare-to-commodities-stocks-with-comparabl http://bitcoin.stackexchange.com/questions/3338/how-does-bit... As for being deflationary, that hasn't stopped the rapid growth in the number of transactions per day: http://blockchain.info/charts/n-transactions http://blockchain.info/charts/n-transactions I posted this elsewhere, but it applies here: 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.

edwtjo 14y ago

You would probably like http://freico.in http://freico.in which incentivize sustainable investment.

aneth4 14y ago

This is so wrong. Bitcoin is excessively volatile now, and probably will be for a while. This is due to many, many reasons related to its age as a currency. The exchange rate will never be stable, but will not always be so volatile. Regarding deflationary monetary systems, there is much debate. However people exchange things of value when there is mutual benefit - when something I have is worth more to you than to me, and vice versa, we will exchange as it is mutually beneficial. If an asset is appreciating, it affects what value I give it and for what I am willing trade, but it does not disincentive trade - it only changes the value calculation. If I have $100 that will probably be worth $90 in 5 years, I'm willing to trade it for something that adds about $90 of value to me over the next 5 years. If I have $100 that will probably be worth $110, I'm willing to trade it for something that adds $110 of value over the next 5 years. I think the anti-deflation argument is entirely bunk, and inflation has dire consequences for those who have fewer assets and education to protect themselves.

dwild 14y ago

Royal Canadian Mint tried a "crypto-currency" called Mintchip. They only had 500 devkits and it had probably a ton of security issue, but it's great to know that they are interested in this kind of technology.