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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

by 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...
vbuterin 12y ago
> An upward price trend (existing for whatever reason) encourages hoarding, which reduces liquidity. This creates a feedback loop, resulting in bubbles and crashes. A downward price trend encourages splurging, which provides excessive liquidity. This creates a feedback loop, resulting in Zimbabwe. Bitcoin opponents have a vested interest; the desire to attack something you missed out on due to your own lack of foresight is a known psychological effect. I don't necessarily believe all of the above, but it's a pretty symmetric mirror image of the opposite argument. You could go up a notch and make the case that inflation is worse because at least an upward bubble has to end eventually whereas a downward crash can keep going down forever until the currency is replaced. I'm known for my stance that finite supply cryptocurrency is probably more deflationary than optimal (though my concerns are more about wealth concentration and the potential for use of seignorage revenue for secondary purposes rather than some idea that spending is good), but there are good reasons why one might think otherwise. As for gold, an important point is that gold's volatility is quite recent. Before 1971, and especially before 1913, it was actually quite stable: http://www.zerohedge.com/news/charting-price-gold-all-way-back-1265 http://www.zerohedge.com/news/charting-price-gold-all-way-ba... Yes, that's a 6x margin that maintained itself over six centuries. The 18th century fall and the 16th century fall can likely be attributed to the sudden introduction of new supply in North America; that's an uncertainty that cryptocurrencies do not have. I don't know why gold was stable before but is not now; perhaps it's the fact that a fixed-supply commodity is stable if used as a currency but not stable if used as a form of black-swan insurance. The former use case might have more constant demand, or price stickiness might play a role. I'm honestly not sure what will happen. Maybe cryptocurrencies will die, maybe BTC will die but others succeed, maybe BTC will become gold 2.0 and other currencies will take on other roles (if this happens, environmentalists at least would be quite happy given gold miners' current track record), or maybe something else entirely. I do agree one-world-currency domination is exceedingly unlikely though.
cornholio 12y ago
> 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. Actually, the best we could hope for has much, much higher volatility than gold: there are vast reserves of gold available and the oceans contain about 9 pounds of gold for each person on earth, 100x the total amount of gold mined throughout human history. There are many old mines that could be reopened in a few months or years if the price would justify it. On the demand side, there are technical uses of gold, medical and jewelry. So we clearly have demand and supply curves that are pretty flat and a price driven by fundamentals, yet we see significant volatility, especially related to gold's speculative and monetary use. On the other hand, Bitcoin is a digital asset designed purely for speculative and monetary use. It has NO fundamental demand and an almost vertical supply curve. There's no way to price a Bitcoin on it's fundamentals, the only driving factor is "what other people think". As a future PhD in economics, let me tell you that is not conducive to stabilization, quite the opposite, it's prone to violent and self-sustaining boom and boost cycles.
- aianus 12y ago
  The fundamental value of bitcoin is the float of all the transactions people want to engage in using the currency. Imagine that nobody speculated on the value of bitcoin, and people only entered into positions for the purpose of buying something from Silk Road. The sum of all of those positions would be the fundamental net market value of bitcoin. If it continues to become more useful as a payment network, the value will grow and the volatility will go down.
head_stomp 12y ago
@2 Not really a coherent argument there. Hoarding due to appreciation is balanced by the wealth effect. You can't just assume catastrophic runaway feedback due to upward price trends. That kind of human behavior is unknowable a priori. One could easily argue that an upward price trend will encourage buying, which increases adoption. This creates a feedback loop, which will help establish a transaction volume large enough to give bitcoin enough stability to appeal to the average person.

by polshaw 12y ago

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...

vbuterin 12y ago

> An upward price trend (existing for whatever reason) encourages hoarding, which reduces liquidity. This creates a feedback loop, resulting in bubbles and crashes. A downward price trend encourages splurging, which provides excessive liquidity. This creates a feedback loop, resulting in Zimbabwe. Bitcoin opponents have a vested interest; the desire to attack something you missed out on due to your own lack of foresight is a known psychological effect. I don't necessarily believe all of the above, but it's a pretty symmetric mirror image of the opposite argument. You could go up a notch and make the case that inflation is worse because at least an upward bubble has to end eventually whereas a downward crash can keep going down forever until the currency is replaced. I'm known for my stance that finite supply cryptocurrency is probably more deflationary than optimal (though my concerns are more about wealth concentration and the potential for use of seignorage revenue for secondary purposes rather than some idea that spending is good), but there are good reasons why one might think otherwise. As for gold, an important point is that gold's volatility is quite recent. Before 1971, and especially before 1913, it was actually quite stable: http://www.zerohedge.com/news/charting-price-gold-all-way-back-1265 http://www.zerohedge.com/news/charting-price-gold-all-way-ba... Yes, that's a 6x margin that maintained itself over six centuries. The 18th century fall and the 16th century fall can likely be attributed to the sudden introduction of new supply in North America; that's an uncertainty that cryptocurrencies do not have. I don't know why gold was stable before but is not now; perhaps it's the fact that a fixed-supply commodity is stable if used as a currency but not stable if used as a form of black-swan insurance. The former use case might have more constant demand, or price stickiness might play a role. I'm honestly not sure what will happen. Maybe cryptocurrencies will die, maybe BTC will die but others succeed, maybe BTC will become gold 2.0 and other currencies will take on other roles (if this happens, environmentalists at least would be quite happy given gold miners' current track record), or maybe something else entirely. I do agree one-world-currency domination is exceedingly unlikely though.

cornholio 12y ago

> 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. Actually, the best we could hope for has much, much higher volatility than gold: there are vast reserves of gold available and the oceans contain about 9 pounds of gold for each person on earth, 100x the total amount of gold mined throughout human history. There are many old mines that could be reopened in a few months or years if the price would justify it. On the demand side, there are technical uses of gold, medical and jewelry. So we clearly have demand and supply curves that are pretty flat and a price driven by fundamentals, yet we see significant volatility, especially related to gold's speculative and monetary use. On the other hand, Bitcoin is a digital asset designed purely for speculative and monetary use. It has NO fundamental demand and an almost vertical supply curve. There's no way to price a Bitcoin on it's fundamentals, the only driving factor is "what other people think". As a future PhD in economics, let me tell you that is not conducive to stabilization, quite the opposite, it's prone to violent and self-sustaining boom and boost cycles.

aianus 12y ago
The fundamental value of bitcoin is the float of all the transactions people want to engage in using the currency. Imagine that nobody speculated on the value of bitcoin, and people only entered into positions for the purpose of buying something from Silk Road. The sum of all of those positions would be the fundamental net market value of bitcoin. If it continues to become more useful as a payment network, the value will grow and the volatility will go down.

head_stomp 12y ago

@2 Not really a coherent argument there. Hoarding due to appreciation is balanced by the wealth effect. You can't just assume catastrophic runaway feedback due to upward price trends. That kind of human behavior is unknowable a priori. One could easily argue that an upward price trend will encourage buying, which increases adoption. This creates a feedback loop, which will help establish a transaction volume large enough to give bitcoin enough stability to appeal to the average person.