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Finally, somebody with a basic understanding of economics decides to chime in. It is not possible for bitcoin to be a currency due to its deflationary nature.

by maratd 13y ago

Finally, somebody with a basic understanding of economics decides to chime in. It is not possible for bitcoin to be a currency due to its deflationary nature. Bitcoin might be an interesting investment vehicle, a storage of value, but something that will at some point replace the dollar? No.

fthssht 13y ago
There's a fixed quantity of it like gold and gold worked as a currency for a very long time. If Bitcoin fails its certainly not because of its "deflationary nature." What you think it a basic understanding of economics is obvious nonsense. How could people have it so twisted?
- chad_oliver 13y ago
  It also failed as a currency in a very bad way. Part of the reason why the Great Depression was so bad is because most countries still used (or used the mindset associated with) the gold standard. Monetary policy is a very good way of stabilising the economy, and any currency which removes monetary policy as a tool is not likely to be stable in the long term.
  - fthssht 13y ago
    You're dead wrong but even if you werent the fact that it worked for thousands of years completely invalidates the author's point.
- gnaritas 13y ago
  > There's a fixed quantity of it like gold and gold worked as a currency for a very long time. And that time has passed, the world moved on.
  - fthssht 13y ago
    "There are three eras of currency: Commodity-based, politically-based, and now, math-based." - Chris Dixon,
    - gnaritas 13y ago
      With this I'm in complete agreement.
knodi 13y ago
This! Bitcoin is an investment and good one at that for short term gains. Its the tulip craze with bytes.
- maratd 13y ago
  > Its the tulip craze with bytes. Oh, you! Tulips were better. You at least got the pretty flower after all was said and done.
jpttsn 13y ago
That proves itself: A deflationary currency can't replace the dollar, because the dollar isn't deflationary. However, the present system is perhaps not the only possible system. Some alternative schools of thought in economics see possibilities beyond systematic inflation.
- philwelch 13y ago
  That's like saying "some alternative schools of thought in biology see possibilities beyond evolution" or "some alternative schools of thought in climatology see possibilities beyond anthropogenic climate change".
  - jpttsn 13y ago
    And in astronomy, to possibilities beyond the geocentric universe. Alternative theories can be wrong or right. Don't oppose them because they're alternative: oppose them where the evidence compels you to.
    - philwelch 13y ago
      Done and done. Unfortunately, I've already used up my lifetime allowance of time spent arguing with cranks, so I have zero time left for goldbugs.
      - fthssht 13y ago
        Oh man that sucks. Good thing nobody cares about your close minded egotistical arrogant thoughts anyway.
        deleted 13y ago
        [deleted]
  - fthssht 13y ago
    Right on! The established theories are all 100% right.
kordless 13y ago
Understanding economics does not necessarily provide insight into understanding cryptocurrencies. That's been evident by the wildly varying posts about the topic over the last few months. Regardless of the nice graphs, Bitcoin is currently NOT deflationary. Every 10 minutes 25 new coins are minted and placed into circulation. The rate of new Bitcoin creation will be halved every four years until there are 21 million BTC in circulation. Additionally, there are a slew of other cryptocurrencies with varying degrees of mining rates - some have a constant rate of inflation built into them. Time will tell which ones are adopted. The miners who are minting these new coins are helping secure the currency (adding value) are putting work into the system by way of capital expenditure on equipment and costs associated with power. They expect a return on their investments and are probably the determining factor to the current price.
- philwelch 13y ago
  That's not what inflation means. Inflation is when prices rise because the growth in currency outstrips the growth in economic activity. If the growth in currency is less than the growth in economic activity, even if it's still >0, prices will drop, which is the definition of deflation.
  - nhaehnle 13y ago
    Even that is a problematic take on it, because you ignore savings and what MVPQ people call the "velocity of money". When firms like Apple sit on hoards of cash, the amount of currency can grow quite a bit faster than the economy without inflation.
    - philwelch 13y ago
      Yeah, the actual definition relies solely upon whether prices rise or fall in aggregate, for reasons that can be solely attributed to monetary factors. Which is a bitch to figure out, because you have all these libertarians screaming about how gasoline and groceries are more expensive, therefore inflation, when really it's because petroleum is expensive.
- 13y ago
lettergram 13y ago
Actually, I studied economics in the past and technically you can have a currency which is deflationary in nature, it just does not make it ideal. The Dollar has a similar disadvantage in many respects due to inflation. It would actually be better to have some sort of currency which expands based on the number of transactions... There's a pretty large theory behind it and I out line some of it on my blog, where I also explain how a crypto currency can "potentially" work[1] or you could read one of Friedman[2] or Knights[3] books. [1] http://austingwalters.com/the-currencies-of-tomorrow/ http://austingwalters.com/the-currencies-of-tomorrow/ [2] http://en.wikipedia.org/wiki/Milton_Friedman http://en.wikipedia.org/wiki/Milton_Friedman [3] http://en.wikipedia.org/wiki/Frank_Knight http://en.wikipedia.org/wiki/Frank_Knight Further, economic system and in turn the manipulation of the Dollar in the U.S. is based largely off Kaynes work, which for the most part (we now know) is an inaccurate portrial of economics.
- philwelch 13y ago
  I think some variety of Friedman coin would be ideal. You even have the information necessary to implement it because Bitcoin mining is already based on blockchain data, right?
- zanny 13y ago
  This. Bitcoin is digital gold. Once it proves itself, we will probably transition into something like peercoin, or more appropriately an unimplemented proof-of-work payment scheme that calculates the payments not only on difficulty but also on the transaction rate across the last several blocks. You would want a median 1% inflation, but if exchange slows significantly (indicating money hoarding) you want the inflation rate to increase. If too many transactions are happening, you would turn down the inflation rate to compensate. The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.
  - fragsworth 13y ago
    I strongly suspect that the Bitcoin developers and mining community will eventually choose to inflate the currency. Not for any economic reasons, but rather to provide the funding for a large and secure mining network, because future transaction fees might prove to be insufficient. That 21 million number is not set in stone, and will change if there is a need for it.
fragsworth 13y ago
The author is wrong on several points. The great depression was caused by an overestimation of how much the currency would inflate as a result of the Federal Reserve's lending practices, along with an expectation that the gold standard would be returned. It was an overprinting and contraction of fiat, deflation of which was totally unexpected, that caused it.
rglullis 13y ago
Why does it need to replace the dollar, though? Why can't it be just some form of hedge? Why can't I negotiatiate my salary to be 70% paid in USD, and the rest paid in some X BTC, with X being the remaining 30% at the day's rate of BTC/USD? People keep saying that just because it's deflationary, they are never going to spend the coins. But as someone who grew up with hyperinflation (1980's Brazil) I can tell you that people still saved, they just used other currencies. I clearly remember my father buying dollars after getting his paycheck. Investment-wise it was a bad idea, but all people wanted was some sense of safety. When hyperinflation finally came to an end and I knew that my lunch at school would cost the same thing every week (instead of costing 20% more every Monday!), people started spending/selling their dollars. The problem of BTC now is a problem of trust. And this lack of trust is due to the crazy volatility, not its deflationary nature. So, it is a chicken-and-egg problem. The more merchants you have accepting BTC, the more people will be able to spend their coins. Sure, the merchants buy be turning the 100% of their BTC into fiat right as they get them, but BTC could still be defined as the transaction currency.

by maratd 13y ago

fthssht 13y ago

There's a fixed quantity of it like gold and gold worked as a currency for a very long time. If Bitcoin fails its certainly not because of its "deflationary nature." What you think it a basic understanding of economics is obvious nonsense. How could people have it so twisted?

chad_oliver 13y ago
It also failed as a currency in a very bad way. Part of the reason why the Great Depression was so bad is because most countries still used (or used the mindset associated with) the gold standard. Monetary policy is a very good way of stabilising the economy, and any currency which removes monetary policy as a tool is not likely to be stable in the long term.
- fthssht 13y ago
  You're dead wrong but even if you werent the fact that it worked for thousands of years completely invalidates the author's point.
gnaritas 13y ago
> There's a fixed quantity of it like gold and gold worked as a currency for a very long time. And that time has passed, the world moved on.
- fthssht 13y ago
  "There are three eras of currency: Commodity-based, politically-based, and now, math-based." - Chris Dixon,
  - gnaritas 13y ago
    With this I'm in complete agreement.

knodi 13y ago

This! Bitcoin is an investment and good one at that for short term gains. Its the tulip craze with bytes.

maratd 13y ago
> Its the tulip craze with bytes. Oh, you! Tulips were better. You at least got the pretty flower after all was said and done.

jpttsn 13y ago

That proves itself: A deflationary currency can't replace the dollar, because the dollar isn't deflationary. However, the present system is perhaps not the only possible system. Some alternative schools of thought in economics see possibilities beyond systematic inflation.

philwelch 13y ago
That's like saying "some alternative schools of thought in biology see possibilities beyond evolution" or "some alternative schools of thought in climatology see possibilities beyond anthropogenic climate change".
- jpttsn 13y ago
  And in astronomy, to possibilities beyond the geocentric universe. Alternative theories can be wrong or right. Don't oppose them because they're alternative: oppose them where the evidence compels you to.
  - philwelch 13y ago
    Done and done. Unfortunately, I've already used up my lifetime allowance of time spent arguing with cranks, so I have zero time left for goldbugs.
    - fthssht 13y ago
      Oh man that sucks. Good thing nobody cares about your close minded egotistical arrogant thoughts anyway.
      - deleted 13y ago
        [deleted]
- fthssht 13y ago
  Right on! The established theories are all 100% right.

kordless 13y ago

Understanding economics does not necessarily provide insight into understanding cryptocurrencies. That's been evident by the wildly varying posts about the topic over the last few months. Regardless of the nice graphs, Bitcoin is currently NOT deflationary. Every 10 minutes 25 new coins are minted and placed into circulation. The rate of new Bitcoin creation will be halved every four years until there are 21 million BTC in circulation. Additionally, there are a slew of other cryptocurrencies with varying degrees of mining rates - some have a constant rate of inflation built into them. Time will tell which ones are adopted. The miners who are minting these new coins are helping secure the currency (adding value) are putting work into the system by way of capital expenditure on equipment and costs associated with power. They expect a return on their investments and are probably the determining factor to the current price.

philwelch 13y ago
That's not what inflation means. Inflation is when prices rise because the growth in currency outstrips the growth in economic activity. If the growth in currency is less than the growth in economic activity, even if it's still >0, prices will drop, which is the definition of deflation.
- nhaehnle 13y ago
  Even that is a problematic take on it, because you ignore savings and what MVPQ people call the "velocity of money". When firms like Apple sit on hoards of cash, the amount of currency can grow quite a bit faster than the economy without inflation.
  - philwelch 13y ago
    Yeah, the actual definition relies solely upon whether prices rise or fall in aggregate, for reasons that can be solely attributed to monetary factors. Which is a bitch to figure out, because you have all these libertarians screaming about how gasoline and groceries are more expensive, therefore inflation, when really it's because petroleum is expensive.
13y ago

lettergram 13y ago

Actually, I studied economics in the past and technically you can have a currency which is deflationary in nature, it just does not make it ideal. The Dollar has a similar disadvantage in many respects due to inflation. It would actually be better to have some sort of currency which expands based on the number of transactions... There's a pretty large theory behind it and I out line some of it on my blog, where I also explain how a crypto currency can "potentially" work[1] or you could read one of Friedman[2] or Knights[3] books. [1] http://austingwalters.com/the-currencies-of-tomorrow/ http://austingwalters.com/the-currencies-of-tomorrow/ [2] http://en.wikipedia.org/wiki/Milton_Friedman http://en.wikipedia.org/wiki/Milton_Friedman [3] http://en.wikipedia.org/wiki/Frank_Knight http://en.wikipedia.org/wiki/Frank_Knight Further, economic system and in turn the manipulation of the Dollar in the U.S. is based largely off Kaynes work, which for the most part (we now know) is an inaccurate portrial of economics.

philwelch 13y ago
I think some variety of Friedman coin would be ideal. You even have the information necessary to implement it because Bitcoin mining is already based on blockchain data, right?
zanny 13y ago
This. Bitcoin is digital gold. Once it proves itself, we will probably transition into something like peercoin, or more appropriately an unimplemented proof-of-work payment scheme that calculates the payments not only on difficulty but also on the transaction rate across the last several blocks. You would want a median 1% inflation, but if exchange slows significantly (indicating money hoarding) you want the inflation rate to increase. If too many transactions are happening, you would turn down the inflation rate to compensate. The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.
- fragsworth 13y ago
  I strongly suspect that the Bitcoin developers and mining community will eventually choose to inflate the currency. Not for any economic reasons, but rather to provide the funding for a large and secure mining network, because future transaction fees might prove to be insufficient. That 21 million number is not set in stone, and will change if there is a need for it.

fragsworth 13y ago

The author is wrong on several points. The great depression was caused by an overestimation of how much the currency would inflate as a result of the Federal Reserve's lending practices, along with an expectation that the gold standard would be returned. It was an overprinting and contraction of fiat, deflation of which was totally unexpected, that caused it.

rglullis 13y ago

Why does it need to replace the dollar, though? Why can't it be just some form of hedge? Why can't I negotiatiate my salary to be 70% paid in USD, and the rest paid in some X BTC, with X being the remaining 30% at the day's rate of BTC/USD? People keep saying that just because it's deflationary, they are never going to spend the coins. But as someone who grew up with hyperinflation (1980's Brazil) I can tell you that people still saved, they just used other currencies. I clearly remember my father buying dollars after getting his paycheck. Investment-wise it was a bad idea, but all people wanted was some sense of safety. When hyperinflation finally came to an end and I knew that my lunch at school would cost the same thing every week (instead of costing 20% more every Monday!), people started spending/selling their dollars. The problem of BTC now is a problem of trust. And this lack of trust is due to the crazy volatility, not its deflationary nature. So, it is a chicken-and-egg problem. The more merchants you have accepting BTC, the more people will be able to spend their coins. Sure, the merchants buy be turning the 100% of their BTC into fiat right as they get them, but BTC could still be defined as the transaction currency.