5 ms·

The arguments you make (speculation + deflation) have been discussed many times. The answer is always the same. Bitcoin proponents argue that they are not a pro

by mrb 12y ago

The arguments you make (speculation + deflation) have been discussed many times. The answer is always the same. Bitcoin proponents argue that they are not a problem because: 1. As the use of Bitcoin increases over time, as the exchange markets become bigger and deeper, as economic activity is surpassing speculative activity, etc, the effect of speculation are becoming smaller and smaller. There is evidence that this happening right now: graphs showing the volatility level of Bitcoin (at a coarse level: 6 months) is decreasing... I can't find a link at this moment unfortunately. 2. Although deflation is, as of today, "generally" believed to be detrimental, it is disputed. For example the very famous 1939 paper "A Program for Monetary Reform" argues (amongst many things) that deflation is healthy and normal[1]. One thing is certain: our understanding of financial systems is imperfect, and just because more economists think, today, that deflation is generally negative, does not mean it is true. Bitcoin is an experiment that will perhaps disprove it. [1] "Some authorities regard prices falling, to some extent at least, with technological improvements, as a proper result of a successful monetary policy" http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform http://en.wikipedia.org/wiki/A_Program_for_Monetary_Reform

polshaw 12y ago
Bitcoin proponents tend to have a vested interest and can be.. less than objective. @1: A trade alone does not help BTC stabilise. We ARE seeing an increase in BTC trade, but all of this is pegged to local currency, and usually traded out for that immediately. As it is held for a very short period, there is no real effect on price, and is essentially the same as cashing out.[1] What might help BTC stabilise would be if there were a true, significant BTC economy, that is, items priced in BTC, rather than pegged to local currency. When I wake up tomorrow I can reasonably expect my loaf of bread is going to cost the same as it did when I went to bed. But that can't happen (yet) with BTC, because pegging goods to BTC carries far too much risk due to the volatility. Frankly, I can't see an attractive way to get to a situation where there is a substantial, viable BTC-first economy-- displacing local currencies as the first-choice isn't going to be easy. The only thing affecting the price of BTC is people buying and continuing to hold BTC (ie, in the absence of a real BTC economy-- speculators). Further, I’m sure you can paint BTC stability as improving/worsening based simply on altering the time frame involved. The fact is the volatility is way too high (for consistent pricing), and we certainly don't have enough evidence to predict the future. You might have thought it was stabilising in October of last year before all hell broke loose. @2: Not really a coherent argument there. An upward price trend (existing for whatever reason) encourages hoarding, which reduces liquidity. This creates a feedback loop, resulting in bubbles and crashes. Deflationary + speculation inherently leads to this, and we've seen it over and over already with BTC. Again, there is a chicken/egg problem because only speculators are interested in it, making it volatile, making it no good for non-speculators, which keeps it volatile! I think the best we could hope for is a little worse than gold (as it continues to be mined), which AFAIK still carries a significant amount of instability. All this is not to say that bitcoin can't, or won't, be a long term success. It may well be; it has first-mover advantage, there is significant vested interest in it succeeding from those who have bought in, and it has a vast computing army. But it could be displaced. Or marginalised by an unlimited number of clones. 1. Ironically it is in a way simply passing half the transaction cost onto the customer.
- mrb 12y ago
  1: I did not explain myself clearly. What I meant is: when more and more bitcoins are being used for regular economic transactions, the proportion of bitcoins used by speculators is, by comparison, decreasing. And the smaller this proportion is, the less volatile the currency is. 2: "encouraging hoarding": no, this is not what was observed in practice with Bitcoin. I can't remember if it was Bitpay or Coinbase, but they have explained in a blog post seeing the exact opposite effect: during a Bitcoin bubble, people tend to spend or sell more bitcoins (to cash in on their newfound fortunes).
  - Mandelbug 12y ago
    The general literature on deflation is that deflation is much much worse in the long run. In particular, borrowing becomes significantly more difficult and those who have loans are trapped with them, as their wages are pushed downwards by deflationary forces but the nominal loan remains the same. While run-away inflation and run-away deflation are both awful, an economy which slowly inflates is better than one that slowly deflates. http://www.nytimes.com/2010/10/17/world/asia/17japan.html?pagewanted=all http://www.nytimes.com/2010/10/17/world/asia/17japan.html?pa... http://www.businessweek.com/magazine/content/11_06/b4214014587950.htm http://www.businessweek.com/magazine/content/11_06/b42140145... http://www.bis.org/publ/bppdf/bispap70c.pdf http://www.bis.org/publ/bppdf/bispap70c.pdf http://www.kyotobank.co.jp/houjin/report/pdf/201305_02_e.pdf http://www.kyotobank.co.jp/houjin/report/pdf/201305_02_e.pdf http://www.nber.org/digest/jun05/w10938.html http://www.nber.org/digest/jun05/w10938.html
    - mrb 12y ago
      Thanks for the links, but: - Japan's GDP grew by 12% between 1990 and 2010, from 430 to 482 billion Yen (the NYT author incorrectly assimilates it to "an economy remaining the same size"?!) - GDP per capita is 16% higher in Japan in 2010 than it was in 1990 [1] - The NYT article gives absolutely zero other economic numbers, no objective evidence, nothing (it merely gives annecdotal evidence as in "so and so lost their house") Why is this NYT article so bad and vague, when economic indicators I quoted above ARE actually (slightly) improving? I am not the only one to criticize it, see this response by the Center for Economic and Policy Research: http://www.cepr.net/index.php/blogs/beat-the-press/deflating-the-japanese-horror-story http://www.cepr.net/index.php/blogs/beat-the-press/deflating... [1] http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weorept.aspx?pr.x=49&pr.y=14&sy=1990&ey=2015&scsm=1&ssd=1&sort=country&ds=.&br=1&c=158%2C112%2C111&s=NGDPRPC%2CPCPI%2CPCPIPCH&grp=0&a= http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weor...
crdoconnor 12y ago
Deflation will PREVENT economic activity from surpassing speculative activity. This is the problem with deflation - people hoard instead of spending, which is why it is "generally" believed to be detrimental. It is detrimental. Bitcoin's volatility is a direct result of this feature. >Bitcoin is an experiment that will perhaps disprove it. The hilarious thing is that the experiment already proved it. You want a cryptocurrency that isn't absurdly volatile? Make it steadily inflationary, not steadily deflationary.
- Houshalter 12y ago
  If your theory is correct, people would hoard any resource that is increasing in value relative to something else. Currency deflation is just a special case. It's not entirely clear why "hoarding" is an inherently bad thing either. Bitcoin isn't inherently deflationary. It isn't even a fixed supply, it will grow for the foreseeable future. For short periods of time it was deflationary as people speculated that it was actually worth a lot more, but that seems to have stopped. An inflating currency would never catch on. It's a hot potato situation of "I don't actually want to own it because it's decreasing in value. If I do have some, I want to dump it on the next sucker as fast as possible to minimize my losses."
  - crdoconnor 12y ago
    >If your theory is correct, people would hoard any resource that is increasing in value relative to something else. People do indeed have a tendency to do exactly that. Take gold hoarders, for instance. >An inflating currency would never catch on. It's a hot potato situation of "I don't actually want to own it because it's decreasing in value. If I do have some, I want to dump it on the next sucker as fast as possible to minimize my losses." The point of the inflation would be to offset the natural hoarding instinct with an incentive to actually spend it. If inflation goes TOO high, you will, of course, end up with everybody trying to dump the currency off on to everybody else. There is a sweet spot in the middle, however.
    - GFischer 12y ago

by mrb 12y ago

polshaw 12y ago

Bitcoin proponents tend to have a vested interest and can be.. less than objective. @1: A trade alone does not help BTC stabilise. We ARE seeing an increase in BTC trade, but all of this is pegged to local currency, and usually traded out for that immediately. As it is held for a very short period, there is no real effect on price, and is essentially the same as cashing out.[1] What might help BTC stabilise would be if there were a true, significant BTC economy, that is, items priced in BTC, rather than pegged to local currency. When I wake up tomorrow I can reasonably expect my loaf of bread is going to cost the same as it did when I went to bed. But that can't happen (yet) with BTC, because pegging goods to BTC carries far too much risk due to the volatility. Frankly, I can't see an attractive way to get to a situation where there is a substantial, viable BTC-first economy-- displacing local currencies as the first-choice isn't going to be easy. The only thing affecting the price of BTC is people buying and continuing to hold BTC (ie, in the absence of a real BTC economy-- speculators). Further, I’m sure you can paint BTC stability as improving/worsening based simply on altering the time frame involved. The fact is the volatility is way too high (for consistent pricing), and we certainly don't have enough evidence to predict the future. You might have thought it was stabilising in October of last year before all hell broke loose. @2: Not really a coherent argument there. An upward price trend (existing for whatever reason) encourages hoarding, which reduces liquidity. This creates a feedback loop, resulting in bubbles and crashes. Deflationary + speculation inherently leads to this, and we've seen it over and over already with BTC. Again, there is a chicken/egg problem because only speculators are interested in it, making it volatile, making it no good for non-speculators, which keeps it volatile! I think the best we could hope for is a little worse than gold (as it continues to be mined), which AFAIK still carries a significant amount of instability. All this is not to say that bitcoin can't, or won't, be a long term success. It may well be; it has first-mover advantage, there is significant vested interest in it succeeding from those who have bought in, and it has a vast computing army. But it could be displaced. Or marginalised by an unlimited number of clones. 1. Ironically it is in a way simply passing half the transaction cost onto the customer.

mrb 12y ago
1: I did not explain myself clearly. What I meant is: when more and more bitcoins are being used for regular economic transactions, the proportion of bitcoins used by speculators is, by comparison, decreasing. And the smaller this proportion is, the less volatile the currency is. 2: "encouraging hoarding": no, this is not what was observed in practice with Bitcoin. I can't remember if it was Bitpay or Coinbase, but they have explained in a blog post seeing the exact opposite effect: during a Bitcoin bubble, people tend to spend or sell more bitcoins (to cash in on their newfound fortunes).
- Mandelbug 12y ago
  The general literature on deflation is that deflation is much much worse in the long run. In particular, borrowing becomes significantly more difficult and those who have loans are trapped with them, as their wages are pushed downwards by deflationary forces but the nominal loan remains the same. While run-away inflation and run-away deflation are both awful, an economy which slowly inflates is better than one that slowly deflates. http://www.nytimes.com/2010/10/17/world/asia/17japan.html?pagewanted=all http://www.nytimes.com/2010/10/17/world/asia/17japan.html?pa... http://www.businessweek.com/magazine/content/11_06/b4214014587950.htm http://www.businessweek.com/magazine/content/11_06/b42140145... http://www.bis.org/publ/bppdf/bispap70c.pdf http://www.bis.org/publ/bppdf/bispap70c.pdf http://www.kyotobank.co.jp/houjin/report/pdf/201305_02_e.pdf http://www.kyotobank.co.jp/houjin/report/pdf/201305_02_e.pdf http://www.nber.org/digest/jun05/w10938.html http://www.nber.org/digest/jun05/w10938.html
  - mrb 12y ago
    Thanks for the links, but: - Japan's GDP grew by 12% between 1990 and 2010, from 430 to 482 billion Yen (the NYT author incorrectly assimilates it to "an economy remaining the same size"?!) - GDP per capita is 16% higher in Japan in 2010 than it was in 1990 [1] - The NYT article gives absolutely zero other economic numbers, no objective evidence, nothing (it merely gives annecdotal evidence as in "so and so lost their house") Why is this NYT article so bad and vague, when economic indicators I quoted above ARE actually (slightly) improving? I am not the only one to criticize it, see this response by the Center for Economic and Policy Research: http://www.cepr.net/index.php/blogs/beat-the-press/deflating-the-japanese-horror-story http://www.cepr.net/index.php/blogs/beat-the-press/deflating... [1] http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weorept.aspx?pr.x=49&pr.y=14&sy=1990&ey=2015&scsm=1&ssd=1&sort=country&ds=.&br=1&c=158%2C112%2C111&s=NGDPRPC%2CPCPI%2CPCPIPCH&grp=0&a= http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weor...

crdoconnor 12y ago

Deflation will PREVENT economic activity from surpassing speculative activity. This is the problem with deflation - people hoard instead of spending, which is why it is "generally" believed to be detrimental. It is detrimental. Bitcoin's volatility is a direct result of this feature. >Bitcoin is an experiment that will perhaps disprove it. The hilarious thing is that the experiment already proved it. You want a cryptocurrency that isn't absurdly volatile? Make it steadily inflationary, not steadily deflationary.

Houshalter 12y ago
If your theory is correct, people would hoard any resource that is increasing in value relative to something else. Currency deflation is just a special case. It's not entirely clear why "hoarding" is an inherently bad thing either. Bitcoin isn't inherently deflationary. It isn't even a fixed supply, it will grow for the foreseeable future. For short periods of time it was deflationary as people speculated that it was actually worth a lot more, but that seems to have stopped. An inflating currency would never catch on. It's a hot potato situation of "I don't actually want to own it because it's decreasing in value. If I do have some, I want to dump it on the next sucker as fast as possible to minimize my losses."
- crdoconnor 12y ago
  >If your theory is correct, people would hoard any resource that is increasing in value relative to something else. People do indeed have a tendency to do exactly that. Take gold hoarders, for instance. >An inflating currency would never catch on. It's a hot potato situation of "I don't actually want to own it because it's decreasing in value. If I do have some, I want to dump it on the next sucker as fast as possible to minimize my losses." The point of the inflation would be to offset the natural hoarding instinct with an incentive to actually spend it. If inflation goes TOO high, you will, of course, end up with everybody trying to dump the currency off on to everybody else. There is a sweet spot in the middle, however.
  - GFischer 12y ago