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I agree with your core thesis about the role of alt-coins in a deflationary spiral. There's one thing I haven't drunk the kool-aid on, though, and I'd like you

by lukifer 13y ago

I agree with your core thesis about the role of alt-coins in a deflationary spiral. There's one thing I haven't drunk the kool-aid on, though, and I'd like you to tell me if you see a hole in my logic: I don't see how a deflationary spiral is a problem at all. It's true that if a currency appreciates in value, buyers are disincentivized to spend. However, sellers also have the same knowledge, that the currency will gain value over time. Wouldn't that incentivize them to lower their prices in order to acquire the currency-as-investment, until the two meet in the middle? (Many of the merchants who accept BitCoin offer a BTC discount for this very reason.) One practical way that we see this happen is in technology, where goods rapidly decrease in value. While a dollar might lose 5% of its value over the course of a year, that's nothing compared to buying a new computer. And so the onus is on computer makers to offer a compelling enough value and price to convince the user to upgrade, as opposed to living with an old machine, or waiting for a better one. At any given point in time, to buy a computer is micro-economically foolish, and yet transactions still manage to take place, because buyers and sellers eventually meet in the middle. The trick to this, of course, is that this model only works if the currency deflates at a stable rate. BitCoin still has yet to establish itself in this regard; time will tell.

jaekwon 13y ago
Good point on technology. I also doubt that the deflationary spiral is a big issue as it's made out to be. To prove it, I assumed that it is a big issue, and then proved that it isn't -- proof by contradiction. I think ultimately it all depends on how well a currency is designed or managed. An inflationary currency could outcompete an autonomous cryptocurrency in theory if it could introduce price stability as well as manage the macro economy. In practice this seems like an exercise in futility. Time will tell what happens with the current QE practices.

by lukifer 13y ago

jaekwon 13y ago

Good point on technology. I also doubt that the deflationary spiral is a big issue as it's made out to be. To prove it, I assumed that it is a big issue, and then proved that it isn't -- proof by contradiction. I think ultimately it all depends on how well a currency is designed or managed. An inflationary currency could outcompete an autonomous cryptocurrency in theory if it could introduce price stability as well as manage the macro economy. In practice this seems like an exercise in futility. Time will tell what happens with the current QE practices.