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Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever. Traditi

Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever. Traditional currencies, on the other hand, are at least fractionally backed by (usually) gold and government bonds which in itself are backed by a government's ability to tax its citizens. There is also a second problem in that BTC is deflationary by design. Deflation leads to hoarding of currency units while reducing the velocity of money and suffocating the economy. Most people will agree that deflation is the worst thing that can happen to an economy which is why central banks will do everything in their power to avert it. It is hard to imagine how a stable Bitcoin economy could develop under these inherently flawed circumstances.

dragonwriter 13y ago
> Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever. Well, no, its not; the purest form of fiat currency is a currency backed purely by government fiat (hence the name). Bitcoin is one of the purest forms of speculative "currency".
ericb 13y ago
You could argue that deflation is the cure to consumerism, and the start of environmentalism. HDTV's have had strong deflation for years, but I still have one.
- dasil003 13y ago
  I like your first point, but your second point makes no sense. Products are not currency, and talking about inflation/deflation in products does not make sense, unless people buy them as a long-term value-store in which case "assets" might be more appropriate. Except they're still not fungible so they can appreciate or depreciate, but that's not inflation or deflation.
  - ericb 13y ago
    To explain: The fear that often is associated with deflationary currency (like bitcoin) is that no one will spend it, because waiting always gets you a slightly better deal. And if that happens the economy will grind to a halt with everyone waiting to spend. The point of my second statement is that we have examples of cases where even though every month your money buys more, people still do buy things.
    - fiesycal 13y ago
      There may be specific examples (HDTV) where waiting means your money buys more, but overall the more you wait the less your money is worth in the economy due to inflation. Technology making products cheaper is not an example of deflation. Inflation and deflation pertain only to currency not products. If however you hold your currency and everyday its worth more, besides the bare essentials there is barely an incentive to spend it. Also there is no guarantee that the HDTV will become cheaper, however it is guaranteed that a deflationary currency will gain value the more you hold on to it.
      - cbr 13y ago
        Inflation and deflation pertain only to currency not products. Inflation is when your currency buys you less stuff tomorrow than today. Deflation is when it buys you more. Falling prices due to efficiency gains caused some deflation during the industrial revolution, and technology making products cheaper is definitely a kind of deflation. From Wikipedia: Growth deflation: an enduring decrease in the real cost of goods and services as the result of technological progress, accompanied by competitive price cuts, resulting in an increase in aggregate demand. A structural deflation existed from 1870s until the cycle upswing that started in 1895. The deflation was caused by the decrease in the production and distribution costs of goods. It resulted in competitive price cuts when markets were oversupplied. The mild inflation after 1895 was attributed to the increase in gold supply that had been occurring for decades.
    - dasil003 13y ago
      Ah I see, that makes more sense. Yes, I think fears of deflationary currency are probably quite a bit less rational than fears of environmental cataclysm as long as society doesn't come to term with the fact that there are in fact physical limits to growth on some time scale.
- steveklabnik 13y ago
  You don't buy things in HDTVs so that doesn't really matter.
  - ericb 13y ago
    In the frame of a single transaction, and the point I'm making, it doesn't matter which side of the purchase equation causes the deflationary more-for-your money effect. The point is that the more-for-your-money effect does not stop even discretionary purchases like TV's from happening.
    - Nursie 13y ago
      It slows some things like computer purchases. Puts a lag on a variety of things. Also, why bother to invest money if you can just sit on the cash and benefit from everyone else's economic activity? Deflation bad.
mkramlich 13y ago
The deflation risk can be solved, I think, if the core developers and core decision-makers (key movers and shakers in the community, like miners and vendors) all agree to a "split" event moment where every 1 previous BTC transmutes into say 1000 subsequent BTC (or whatever, picking numbers out of thin air). Making it easier to get BTC because old values which were too close to the smallest fraction floor now become splittable and more easily transferrable again. The core folks driving Bitcoin at the moment are already well aware of this risk scenario and what the set of decent mitigation actions can be. This mitigation/evolution is not unlike when key folks in the Internet community realized that IPv4 would run out one day and thus something with a much bigger pool of addresses would be needed: IPv6. A similar hack is possible with Bitcoin too, or with any other e-currency or cryptocurrency. It's all just software. We can make it do anything we want, revise it, migrate to something else. Everything's based on trust and honor system anyway, even the notion of physical property ownership in RL: a home is only "yours" as long as your neighbors/community/government continues to honor that notion, or until/unless people with guns come and forcibly take it from you under threat of violence. The lack-of-guaranteed-taxability risk is a larger one, imo. But I know it's possible to build a kind of wrapping/middleman service on top of Bitcoin, to give one example, if a government wanted to, and legally require citizens to use it in order to ensure their income/sales are tracked and automatically taxed (with fees taken out automatically to act as tax inflows to that gov). It's physically possible, anyway, without requiring any physical change to the protocol or blockchain. Just the Ages Old solution governments everywhere have used: the threat of violent force for non-compliance.
- VMG 13y ago
  I don't think you understand the deflation argument. Also Bitcoin can already be split into 10e8 subunits (Satoshis)
  - mkramlich 13y ago
    1. I do 2. they can be split further, if ever needed. which is what I just said. if enough people agree to it and enough people migrate forward, via cooperation and "this-will-only-hurt-briefly" actions
digitailor 13y ago
>> Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever. It's backed by the tremendous amount of electricity required to run the transaction processing network (ie. "mining"). Remember this is the world's largest distributed supercomputer. BTC is a proxy for electricity, that's why mining equipment ended up at ASICs so quickly- in mining, less W = more $$. By a lot. The USD is currently backed by absolutely nothing. There is no way we could print the $2000 trillion dollars[1] of derivatives now in existence. You couldn't cash out all of it or even too much of it. The USD is "fake". And high finance is not ignorant to this fact, at all. [1] Or more, no one actually knows. Goldman Sachs would have the best idea of this.
- Groxx 13y ago
  The USD is backed by the material value of everything USA, at a minimum. It's practically impossible for the USD to go to absolute zero, there's still some gold in the reserves and oil and mining to be done at absolute worst. Obviously our debts exceed this, but that's a different issue. Say everyone cashed in at once - they'd get a percentage of our debts, not zero, since there's still material value. You can't "undo" Bitcoin's power -> money exchange, though. There's no gold sitting in vaults providing some real, physical insurance. If I lift this brick, I've done work (but nobody cares) but even that has intrinsic value as it can be "redeemed" by lowering it, powering something. Bitcoin is different.
  - maxerickson 13y ago
    If the U.S. government fell, any bodies of power that arose in the aftermath would be quite likely to repudiate the debts of the old government. So no, the dollar isn't quite backed by the material value of everything in the U.S. It is backed by the stability of the U.S. government though.
    - Groxx 13y ago
      True, though it won't fall in an instant, so there's some warning. And other governments seem likely to hold at least some power over any brand-new government, so it's still unlikely/impossible that they'll get nothing back from the debts.
knowaveragejoe 13y ago
With regards to the deflation, it would be interesting to see some graphs comparing exchange volume with actual trade conducted with bitcoins. I'd be willing to bet we'd see actual trade drop off with the recent surge in exchange rates. Not sure how possible this would be, however - the charts on blockchain.info don't seem to be granular enough to pick up on such a trend, and it's hard to determine what is "trade" vs. bitcoins changing hands because of a sale on an exchange.

dragonwriter 13y ago

> Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever. Well, no, its not; the purest form of fiat currency is a currency backed purely by government fiat (hence the name). Bitcoin is one of the purest forms of speculative "currency".

ericb 13y ago

You could argue that deflation is the cure to consumerism, and the start of environmentalism. HDTV's have had strong deflation for years, but I still have one.

dasil003 13y ago
I like your first point, but your second point makes no sense. Products are not currency, and talking about inflation/deflation in products does not make sense, unless people buy them as a long-term value-store in which case "assets" might be more appropriate. Except they're still not fungible so they can appreciate or depreciate, but that's not inflation or deflation.
- ericb 13y ago
  To explain: The fear that often is associated with deflationary currency (like bitcoin) is that no one will spend it, because waiting always gets you a slightly better deal. And if that happens the economy will grind to a halt with everyone waiting to spend. The point of my second statement is that we have examples of cases where even though every month your money buys more, people still do buy things.
  - fiesycal 13y ago
    There may be specific examples (HDTV) where waiting means your money buys more, but overall the more you wait the less your money is worth in the economy due to inflation. Technology making products cheaper is not an example of deflation. Inflation and deflation pertain only to currency not products. If however you hold your currency and everyday its worth more, besides the bare essentials there is barely an incentive to spend it. Also there is no guarantee that the HDTV will become cheaper, however it is guaranteed that a deflationary currency will gain value the more you hold on to it.
    - cbr 13y ago
      Inflation and deflation pertain only to currency not products. Inflation is when your currency buys you less stuff tomorrow than today. Deflation is when it buys you more. Falling prices due to efficiency gains caused some deflation during the industrial revolution, and technology making products cheaper is definitely a kind of deflation. From Wikipedia: Growth deflation: an enduring decrease in the real cost of goods and services as the result of technological progress, accompanied by competitive price cuts, resulting in an increase in aggregate demand. A structural deflation existed from 1870s until the cycle upswing that started in 1895. The deflation was caused by the decrease in the production and distribution costs of goods. It resulted in competitive price cuts when markets were oversupplied. The mild inflation after 1895 was attributed to the increase in gold supply that had been occurring for decades.
  - dasil003 13y ago
    Ah I see, that makes more sense. Yes, I think fears of deflationary currency are probably quite a bit less rational than fears of environmental cataclysm as long as society doesn't come to term with the fact that there are in fact physical limits to growth on some time scale.
steveklabnik 13y ago
You don't buy things in HDTVs so that doesn't really matter.
- ericb 13y ago
  In the frame of a single transaction, and the point I'm making, it doesn't matter which side of the purchase equation causes the deflationary more-for-your money effect. The point is that the more-for-your-money effect does not stop even discretionary purchases like TV's from happening.
  - Nursie 13y ago
    It slows some things like computer purchases. Puts a lag on a variety of things. Also, why bother to invest money if you can just sit on the cash and benefit from everyone else's economic activity? Deflation bad.

mkramlich 13y ago

The deflation risk can be solved, I think, if the core developers and core decision-makers (key movers and shakers in the community, like miners and vendors) all agree to a "split" event moment where every 1 previous BTC transmutes into say 1000 subsequent BTC (or whatever, picking numbers out of thin air). Making it easier to get BTC because old values which were too close to the smallest fraction floor now become splittable and more easily transferrable again. The core folks driving Bitcoin at the moment are already well aware of this risk scenario and what the set of decent mitigation actions can be. This mitigation/evolution is not unlike when key folks in the Internet community realized that IPv4 would run out one day and thus something with a much bigger pool of addresses would be needed: IPv6. A similar hack is possible with Bitcoin too, or with any other e-currency or cryptocurrency. It's all just software. We can make it do anything we want, revise it, migrate to something else. Everything's based on trust and honor system anyway, even the notion of physical property ownership in RL: a home is only "yours" as long as your neighbors/community/government continues to honor that notion, or until/unless people with guns come and forcibly take it from you under threat of violence. The lack-of-guaranteed-taxability risk is a larger one, imo. But I know it's possible to build a kind of wrapping/middleman service on top of Bitcoin, to give one example, if a government wanted to, and legally require citizens to use it in order to ensure their income/sales are tracked and automatically taxed (with fees taken out automatically to act as tax inflows to that gov). It's physically possible, anyway, without requiring any physical change to the protocol or blockchain. Just the Ages Old solution governments everywhere have used: the threat of violent force for non-compliance.

VMG 13y ago
I don't think you understand the deflation argument. Also Bitcoin can already be split into 10e8 subunits (Satoshis)
- mkramlich 13y ago
  1. I do 2. they can be split further, if ever needed. which is what I just said. if enough people agree to it and enough people migrate forward, via cooperation and "this-will-only-hurt-briefly" actions

digitailor 13y ago

>> Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever. It's backed by the tremendous amount of electricity required to run the transaction processing network (ie. "mining"). Remember this is the world's largest distributed supercomputer. BTC is a proxy for electricity, that's why mining equipment ended up at ASICs so quickly- in mining, less W = more $$. By a lot. The USD is currently backed by absolutely nothing. There is no way we could print the $2000 trillion dollars[1] of derivatives now in existence. You couldn't cash out all of it or even too much of it. The USD is "fake". And high finance is not ignorant to this fact, at all. [1] Or more, no one actually knows. Goldman Sachs would have the best idea of this.

Groxx 13y ago
The USD is backed by the material value of everything USA, at a minimum. It's practically impossible for the USD to go to absolute zero, there's still some gold in the reserves and oil and mining to be done at absolute worst. Obviously our debts exceed this, but that's a different issue. Say everyone cashed in at once - they'd get a percentage of our debts, not zero, since there's still material value. You can't "undo" Bitcoin's power -> money exchange, though. There's no gold sitting in vaults providing some real, physical insurance. If I lift this brick, I've done work (but nobody cares) but even that has intrinsic value as it can be "redeemed" by lowering it, powering something. Bitcoin is different.
- maxerickson 13y ago
  If the U.S. government fell, any bodies of power that arose in the aftermath would be quite likely to repudiate the debts of the old government. So no, the dollar isn't quite backed by the material value of everything in the U.S. It is backed by the stability of the U.S. government though.
  - Groxx 13y ago
    True, though it won't fall in an instant, so there's some warning. And other governments seem likely to hold at least some power over any brand-new government, so it's still unlikely/impossible that they'll get nothing back from the debts.

knowaveragejoe 13y ago

With regards to the deflation, it would be interesting to see some graphs comparing exchange volume with actual trade conducted with bitcoins. I'd be willing to bet we'd see actual trade drop off with the recent surge in exchange rates. Not sure how possible this would be, however - the charts on blockchain.info don't seem to be granular enough to pick up on such a trend, and it's hard to determine what is "trade" vs. bitcoins changing hands because of a sale on an exchange.