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Other currencies are (mostly) stable because they have a stable demand. For example, demand for USD is not increasing to tenfold over a year randomly. Bitcoin

Other currencies are (mostly) stable because they have a stable demand. For example, demand for USD is not increasing to tenfold over a year randomly. Bitcoin is a very young currency / commodity and needs to find some form of equilibrium first. This will be reached once all people who potentially want to use Bitcoin do. Until then, each influx of new users will require a price correction as the supply is fixed.

nhaehnle 13y ago
On top of that, other currencies have flexible supply as well. Banks create and destroy money based on demand, because bank loans are essentially newly created money (and paying back a bank loan means that the money is destroyed). So the situation is exactly reversed wrt Bitcoin.
- skriticos2 13y ago
  Yes, basically. Two nitpicks: 1. Money is created by normal and central banks, which are somewhat different types of organizations. Central banks can directly "print" money while banks can buy IOU's for future money (loans). 2. Now the difference that is created with the loans is indeed payed back and increases the money supply. It's not destroyed. Here is a chart of money supply of USD [1]. As you can see, the amount of money in existence is increasing continuously. It's one of the core elements that influence inflation. [1]: http://en.wikipedia.org/wiki/Money_supply#United_States http://en.wikipedia.org/wiki/Money_supply#United_States
  - bdcs 13y ago
    Great explanation. I would add that a written-off defaulted loan does destroy money. Hence the need for the fed to create money when the private banks destroy it. MZM from St. Louis FRED: research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=MZMNS&log_scales=Left
    - nhaehnle 13y ago
      Actually, I would say it's the other way around. A bank loan is like "anti-money": it is created at the same time as the new money, and when the money and the loan a.k.a. "anti-money" meet again, both are destroyed. When a loan is written off, the loan is destroyed without money being destroyed at the same time. That is, writing off a loan leads to what is effectively (in hindsight) net money creation. That actually makes a lot of sense when you think about it: Writing off a loan means that the bank gives out money without the money being paid back. Of course there's going to be a net plus of money in circulation afterwards, because the "paying back" part is missing.
  - nhaehnle 13y ago
    I agree that central banks also create money, but I'm afraid I can't agree with how you frame the rest of your reply. Let's look at it from a balance sheet perspective. When a bank creates a loan, it adds an asset and a liability to its balance sheet. The asset is the loan (that is, the bank's customer's promise to pay back the loan), while the liability is newly created money in the customer's bank account. The money supply is defined as the sum of all money in existence, and this includes money in bank accounts. That is, when a loan is made, the money supply grows. When the loan is paid back, the reverse happens and the money supply shrinks again. And yes, the amount of money in existence is increasing continuously, but so is the amount of outstanding bank loans. In other words, the evidence you present is perfectly compatible with what I'm saying.
gnaritas 13y ago
Absolutely correct.

nhaehnle 13y ago

On top of that, other currencies have flexible supply as well. Banks create and destroy money based on demand, because bank loans are essentially newly created money (and paying back a bank loan means that the money is destroyed). So the situation is exactly reversed wrt Bitcoin.

skriticos2 13y ago
Yes, basically. Two nitpicks: 1. Money is created by normal and central banks, which are somewhat different types of organizations. Central banks can directly "print" money while banks can buy IOU's for future money (loans). 2. Now the difference that is created with the loans is indeed payed back and increases the money supply. It's not destroyed. Here is a chart of money supply of USD [1]. As you can see, the amount of money in existence is increasing continuously. It's one of the core elements that influence inflation. [1]: http://en.wikipedia.org/wiki/Money_supply#United_States http://en.wikipedia.org/wiki/Money_supply#United_States
- bdcs 13y ago
  Great explanation. I would add that a written-off defaulted loan does destroy money. Hence the need for the fed to create money when the private banks destroy it. MZM from St. Louis FRED: research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=MZMNS&log_scales=Left
  - nhaehnle 13y ago
    Actually, I would say it's the other way around. A bank loan is like "anti-money": it is created at the same time as the new money, and when the money and the loan a.k.a. "anti-money" meet again, both are destroyed. When a loan is written off, the loan is destroyed without money being destroyed at the same time. That is, writing off a loan leads to what is effectively (in hindsight) net money creation. That actually makes a lot of sense when you think about it: Writing off a loan means that the bank gives out money without the money being paid back. Of course there's going to be a net plus of money in circulation afterwards, because the "paying back" part is missing.
- nhaehnle 13y ago
  I agree that central banks also create money, but I'm afraid I can't agree with how you frame the rest of your reply. Let's look at it from a balance sheet perspective. When a bank creates a loan, it adds an asset and a liability to its balance sheet. The asset is the loan (that is, the bank's customer's promise to pay back the loan), while the liability is newly created money in the customer's bank account. The money supply is defined as the sum of all money in existence, and this includes money in bank accounts. That is, when a loan is made, the money supply grows. When the loan is paid back, the reverse happens and the money supply shrinks again. And yes, the amount of money in existence is increasing continuously, but so is the amount of outstanding bank loans. In other words, the evidence you present is perfectly compatible with what I'm saying.

gnaritas 13y ago

Absolutely correct.