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> but it feels as though there's an innate conflict between its role as a speculative investment and its role as a currency. Exactly the reason a deflationary

> but it feels as though there's an innate conflict between its role as a speculative investment and its role as a currency. Exactly the reason a deflationary by nature currency isn't going to succeed as a currency. Bitcoin might want to be a currency, but it isn't a currency, it's a commodity like Gold and its deflationary nature dooms it to be.

polarix 13y ago
Pulverizing the dead horse: it will hold value like gold, but its infinite divisibility and ease of transport make it more like an evolved currency.
- gnaritas 13y ago
  Good currencies aren't about divisibility or about holding value long term, they're about being useful for exchange. Being deflationary by nature makes Bitcoin a bad currency, but a good commodity (once it settles down). A good currency slowly inflates.
  - rsynnott 13y ago
    Not even a good commodity; its extreme volatility makes it more like a penny stock.
    - gnaritas 13y ago
      Yes, true for now, but I'm assuming it'll settle down eventually after and if it goes mainstream. Edited above to reflect.
      - rsynnott 13y ago
        Bit of a chicken and egg problem, really; if you're selling something, you probably don't want to be using bitcoin unless you're either a True Believer, or your product has extremely high margins and you're confident that use of bitcoin won't cannibalise use of more stable payment options. If you make a 5% margin on your product, you don't want that to be erased by a currency shift. The big non-True Believer users thus far have largely been either illegal materials, or ultra-high-margin things (reddit gold, Humble Indie Bundle etc).
        gnaritas 13y ago
        I agree.
  - polarix 13y ago
    "A good currency slowly inflates." This is the "common wisdom" which BTC assaults frontally.
    - gnaritas 13y ago
      And it's proving the common wisdom true, as history has already done.
- kaonashi 13y ago
  What difference does divisibility make wrt deflation?
  - aianus 13y ago
    Because you'll still be able to buy a $1 coke if BTC is at $10,000.
    - PeterisP 13y ago
      "Convenient denominations" is not the problem of deflationary currencies, it's a red herring. The problem with deflationary currencies is that there is a huge behavioral difference between currency having 1% annual deflation and 1% annual inflation - it greatly slows the money velocity, as people are not motivated to spend it or invest it in means of production, so there's less of demand for goods/services causing less income for everyone and even more less demand in a reinforcing feedback loop. It is widely considered that a low rate of inflation brings a very significant positive impact on prosperity compared to a deflationary environment or a very high-inflation one. If bitcoin is growing in value, and is expected to grow in value in the mid-future, then that is a disincentive to spend it -> then that means a disincentive to sell stuff or provide services for bitcoins (because buyers don't want to use it) -> then that means that it has lower liquidity and usability. In the extreme, 'everybody saves bitcoin, nobody buys pizzas with bitcoin' turns into 'the only way to get rid of bitcoin is to find someone else who wants to hold it for no good reason, but wants to pay you a lot'. A healthy currency, on the other hand, gets used to buy pizzas and services primarily, and gains value because of it's utility in buying stuff.
      - aryastark 13y ago
        I think this all remains to be seen. Right now the currency is experiencing rapid growth due to network effects. This is an entirely new type of currency in an entirely new environment. Until initial growth reaches an equilibrium, we're not going to notice any deflationary issues with the currency. I suspect that once we do reach the top, we'll discover that bitcoin deflates rather predictably and boringly. So much so that it will make the interest rate in your bank's savings account look interesting. You'll still want to invest for the same reasons you want to invest right now--greater returns. I just don't see the doom and gloom here. Maybe if Bitcoin was the primary currency in use. But it's not, and I don't think it's in danger of becoming so anytime soon.
jowiar 13y ago
You shall not crucify mankind upon a cross of ... err... bitcoin? </snark> Anyway, in all seriousness, Bryan's speech still holds true today. Currency's role is to facilitate the exchange of goods and services. The value created by doing something today decreases over time, such that a thousand years from now, it is a mere blip in history. A deflationary currency runs counter to this -- some nerds who decided to buy some video cards in 2013 end up with a measurable percent of global wealth in 2020? That bag of weed someone sold in 2011 is worth a house in 2020?
Hermel 13y ago
At some point in time it will reach an equilibrium price and it will only deflate as quickly as its economy is growing. Also note that gold-backed currencies have a much longer track record historically than fiat currencies. The US economy grew significantly under the gold standard and prices were much more than today.
- gnaritas 13y ago
  > and it will only deflate as quickly as its economy is growing. Which is bad. Deflation is not good for a currency, people don't want to spend it, people hoard, liquidity dries up, vendors don't like lowering prices and won't as quickly as they'd raise them. End result, deflationary spiral as the feedback loop of hoarding ensues. > Also note that gold-backed currencies have a much longer track record historically than fiat currencies. Yes, a much worse one. Fiat currencies stabilized our economy and eliminated the continual severe boom/depression cycles that occurred under gold. Fiat currencies have a far better track record than gold, despite being a shorter one.
  - _delirium 13y ago
    In addition to that, most semi-recent "gold economies" have been of a fairly fictional variety, not literally trading physical gold as the medium of exchange, but rather trading paper money that is theoretically backed by gold, with the theory supposed to be bolstered by the fact that it's exchangeable on demand for gold. But these economies depended on not too many people at once actually demanding the exchange for gold, which is why the American 19th century economy was littered with bank runs. There hasn't been a real test of what a purely "hard money" gold-based economy would look like in centuries. Could turn out well, could not. I would guess not.
    - gnaritas 13y ago
      I agree and I'd say we know not; currencies need to be able to expand to match demand in growing markets, the idea that a fixed supply currency can work as a medium of exchange to represent wealth that is not fixed in supply simply doesn't make sense. A boom in wealth would cause severe depreciation and recession as the currency adjusted to the new amount of wealth it represents; that's just logically a terrible medium of exchange.
Houshalter 13y ago
Er, Gold was a currency for a few thousand years. Deflation is a good thing in a currency since it increases it's value when you aren't spending it. I've heard some argue that that might be bad for the economy at a large enough scale, but at an individual level that is certainly a positive.
- dragonwriter 13y ago
  > Deflation is a good thing in a currency since it increases it's value when you aren't spending it. Its a good thing in a store of value and a bad thing in a medium of exchange. Modern currency mostly tries to optimize for the medium of exchange use case, which encourages investment in other things -- like businesses, land, etc. -- for store of value of purposes.
  - Houshalter 13y ago
    Yes that could possibly have a slight impact on the economy, but as I said, from an individual perspective increasing value is definitely a good thing.
    - dragonwriter 13y ago
      > Yes that could possibly have a slight impact on the economy In the same wall that a concrete wall across a freeway could have a slight impact on traffic. > from an individual perspective increasing value is definitely a good thing. From an individual perspective, its only "definitely a good thing" if you ignore all of the effects of everyone else using it except the effect of providing you the opportunity to use it and actually causing the increase in value.
      - Houshalter 13y ago
        >>Yes that could possibly have a slight impact on the economy >In the same wall that a concrete wall across a freeway could have a slight impact on traffic. Well you'd have to have a significant percent of people invest in bitcoin instead of investing in something else. And even then I'm not certain how much an effect it would have as speculating on commodities is very common already and a necessary part of the economy. Also it's impossible to avoid if the supply of currency isn't finite. If so then whoever is increasing the supply is also going to significantly affect the economy. Like a tax from everyone that has money to the government or banks or gold miners or whoever. And from an individual perspective, having slightly more money in your pocket or bank account everyday is definitely a good thing.

polarix 13y ago

Pulverizing the dead horse: it will hold value like gold, but its infinite divisibility and ease of transport make it more like an evolved currency.

gnaritas 13y ago
Good currencies aren't about divisibility or about holding value long term, they're about being useful for exchange. Being deflationary by nature makes Bitcoin a bad currency, but a good commodity (once it settles down). A good currency slowly inflates.
- rsynnott 13y ago
  Not even a good commodity; its extreme volatility makes it more like a penny stock.
  - gnaritas 13y ago
    Yes, true for now, but I'm assuming it'll settle down eventually after and if it goes mainstream. Edited above to reflect.
    - rsynnott 13y ago
      Bit of a chicken and egg problem, really; if you're selling something, you probably don't want to be using bitcoin unless you're either a True Believer, or your product has extremely high margins and you're confident that use of bitcoin won't cannibalise use of more stable payment options. If you make a 5% margin on your product, you don't want that to be erased by a currency shift. The big non-True Believer users thus far have largely been either illegal materials, or ultra-high-margin things (reddit gold, Humble Indie Bundle etc).
      - gnaritas 13y ago
        I agree.
- polarix 13y ago
  "A good currency slowly inflates." This is the "common wisdom" which BTC assaults frontally.
  - gnaritas 13y ago
    And it's proving the common wisdom true, as history has already done.
kaonashi 13y ago
What difference does divisibility make wrt deflation?
- aianus 13y ago
  Because you'll still be able to buy a $1 coke if BTC is at $10,000.
  - PeterisP 13y ago
    "Convenient denominations" is not the problem of deflationary currencies, it's a red herring. The problem with deflationary currencies is that there is a huge behavioral difference between currency having 1% annual deflation and 1% annual inflation - it greatly slows the money velocity, as people are not motivated to spend it or invest it in means of production, so there's less of demand for goods/services causing less income for everyone and even more less demand in a reinforcing feedback loop. It is widely considered that a low rate of inflation brings a very significant positive impact on prosperity compared to a deflationary environment or a very high-inflation one. If bitcoin is growing in value, and is expected to grow in value in the mid-future, then that is a disincentive to spend it -> then that means a disincentive to sell stuff or provide services for bitcoins (because buyers don't want to use it) -> then that means that it has lower liquidity and usability. In the extreme, 'everybody saves bitcoin, nobody buys pizzas with bitcoin' turns into 'the only way to get rid of bitcoin is to find someone else who wants to hold it for no good reason, but wants to pay you a lot'. A healthy currency, on the other hand, gets used to buy pizzas and services primarily, and gains value because of it's utility in buying stuff.
    - aryastark 13y ago
      I think this all remains to be seen. Right now the currency is experiencing rapid growth due to network effects. This is an entirely new type of currency in an entirely new environment. Until initial growth reaches an equilibrium, we're not going to notice any deflationary issues with the currency. I suspect that once we do reach the top, we'll discover that bitcoin deflates rather predictably and boringly. So much so that it will make the interest rate in your bank's savings account look interesting. You'll still want to invest for the same reasons you want to invest right now--greater returns. I just don't see the doom and gloom here. Maybe if Bitcoin was the primary currency in use. But it's not, and I don't think it's in danger of becoming so anytime soon.

jowiar 13y ago

You shall not crucify mankind upon a cross of ... err... bitcoin? </snark> Anyway, in all seriousness, Bryan's speech still holds true today. Currency's role is to facilitate the exchange of goods and services. The value created by doing something today decreases over time, such that a thousand years from now, it is a mere blip in history. A deflationary currency runs counter to this -- some nerds who decided to buy some video cards in 2013 end up with a measurable percent of global wealth in 2020? That bag of weed someone sold in 2011 is worth a house in 2020?

Hermel 13y ago

At some point in time it will reach an equilibrium price and it will only deflate as quickly as its economy is growing. Also note that gold-backed currencies have a much longer track record historically than fiat currencies. The US economy grew significantly under the gold standard and prices were much more than today.

gnaritas 13y ago
> and it will only deflate as quickly as its economy is growing. Which is bad. Deflation is not good for a currency, people don't want to spend it, people hoard, liquidity dries up, vendors don't like lowering prices and won't as quickly as they'd raise them. End result, deflationary spiral as the feedback loop of hoarding ensues. > Also note that gold-backed currencies have a much longer track record historically than fiat currencies. Yes, a much worse one. Fiat currencies stabilized our economy and eliminated the continual severe boom/depression cycles that occurred under gold. Fiat currencies have a far better track record than gold, despite being a shorter one.
- _delirium 13y ago
  In addition to that, most semi-recent "gold economies" have been of a fairly fictional variety, not literally trading physical gold as the medium of exchange, but rather trading paper money that is theoretically backed by gold, with the theory supposed to be bolstered by the fact that it's exchangeable on demand for gold. But these economies depended on not too many people at once actually demanding the exchange for gold, which is why the American 19th century economy was littered with bank runs. There hasn't been a real test of what a purely "hard money" gold-based economy would look like in centuries. Could turn out well, could not. I would guess not.
  - gnaritas 13y ago
    I agree and I'd say we know not; currencies need to be able to expand to match demand in growing markets, the idea that a fixed supply currency can work as a medium of exchange to represent wealth that is not fixed in supply simply doesn't make sense. A boom in wealth would cause severe depreciation and recession as the currency adjusted to the new amount of wealth it represents; that's just logically a terrible medium of exchange.

Houshalter 13y ago

Er, Gold was a currency for a few thousand years. Deflation is a good thing in a currency since it increases it's value when you aren't spending it. I've heard some argue that that might be bad for the economy at a large enough scale, but at an individual level that is certainly a positive.

dragonwriter 13y ago
> Deflation is a good thing in a currency since it increases it's value when you aren't spending it. Its a good thing in a store of value and a bad thing in a medium of exchange. Modern currency mostly tries to optimize for the medium of exchange use case, which encourages investment in other things -- like businesses, land, etc. -- for store of value of purposes.
- Houshalter 13y ago
  Yes that could possibly have a slight impact on the economy, but as I said, from an individual perspective increasing value is definitely a good thing.
  - dragonwriter 13y ago
    > Yes that could possibly have a slight impact on the economy In the same wall that a concrete wall across a freeway could have a slight impact on traffic. > from an individual perspective increasing value is definitely a good thing. From an individual perspective, its only "definitely a good thing" if you ignore all of the effects of everyone else using it except the effect of providing you the opportunity to use it and actually causing the increase in value.
    - Houshalter 13y ago
      >>Yes that could possibly have a slight impact on the economy >In the same wall that a concrete wall across a freeway could have a slight impact on traffic. Well you'd have to have a significant percent of people invest in bitcoin instead of investing in something else. And even then I'm not certain how much an effect it would have as speculating on commodities is very common already and a necessary part of the economy. Also it's impossible to avoid if the supply of currency isn't finite. If so then whoever is increasing the supply is also going to significantly affect the economy. Like a tax from everyone that has money to the government or banks or gold miners or whoever. And from an individual perspective, having slightly more money in your pocket or bank account everyday is definitely a good thing.