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Any thoughts on the currency vs hoarding issue? Quick background for those unfamiliar with the issue - Bitcoin was built to be a currency, to be used to trade

Any thoughts on the currency vs hoarding issue? Quick background for those unfamiliar with the issue - Bitcoin was built to be a currency, to be used to trade for goods and services. However, a significant portion of BTC is being hoarded and not traded, thus leading some (like Nobel Prize laureate Paul Krugman) to argue that it's not a currency at all, and any value is purely speculative. For the record, I don't agree with Krugman's argument.

sethist 14y ago
I also wonder what percentage of the "hoarded currency" is actually currency that has been destroyed and if it will have any long term consequences. For example, in the early days of Bitcoin I mined a few blocks with an old laptop. The computer eventually died without any backup of my wallet thereby destroying the those Bitcoins. There doesn't appear to be anyway for anyone to know whether I am simply hoarding those Bitcoins to dump on the market at a later date or if they have been permanently removed from the money supply.
- vyrotek 14y ago
  I'm in the same boat. I played around with BitCoin in the early days and never really cared for the coins I earned. I wiped the machine I used and only recently realized they were gone forever. Apparently I just flushed a few hundred bucks, meh.
- gwern 14y ago
  > There doesn't appear to be anyway for anyone to know whether I am simply hoarding those Bitcoins to dump on the market at a later date or if they have been permanently removed from the money supply. Yeah, this is the big problem with the papers or blog posts pointing out how many coins are not moving around and then insinuating that Bitcoin is a scam or that it will soon be destroyed as an old miner dumps a few hundred thousand coins: for most of them, the parsimonious explanation for them not moving is simply that they've been lost. But there's no way to prove this! Did Satoshi wipe his hard drive when he moved on to other 'projects'? We have no way of knowing. (There apparently are ways to verifiably destroy bitcoins - send them to impossible addresses or something like that - but I haven't heard that anyone has bothered doing that and this wouldn't apply to people losing coins accidentally or apathetically.)
- new299 14y ago
  If a few blocks is 3 or 4, you might want to keep that HD around. Could be worth sending it to a professional data recovery firm and having the platters removed etc.
johnrob 14y ago
I think there is a precedent here: deflation, which is the classical way of describing a currency whose spending power is increasing. I'm not well versed in the history of currencies, but that's one place I'd investigate to see how the "buy and hold" efforts will play out (the modern version of filling a mattress with money).
narrator 14y ago
To get the other side of the issue, you have to go back to the 1930s and read F.A Hayek's critique of "The Paradox of Savings" ( http://mises.org/daily/2804 http://mises.org/daily/2804 ). Hayek, incidentally, was an advocate of competing currencies.
willholloway 14y ago
My thoughts are that we need a new crypto currency without the deflationary flaw of bitcoin. The rate of new coins mined should increase as time goes on in a controlled fashion. A crypto currency with managed inflation wouldn't make early adopters as wealthy, but it would be a better medium of exchange.
- ohazi 14y ago
  Yes. Finally, someone levelheaded. Every bitcoin supporter I've ever spoken to has basically dismissed deflation as a non-issue. It is important, and if the bitcoin economy grows, the deflationary effects are only going to become more visible.
  - snitko 14y ago
    I have never met a single person who was able to convincingly raise at least a little bit of suspicion about deflation in me. Why is deflation bad? Because people stop spending? Can't you see how ludicrous this explanation is?
    - betterunix 14y ago
      "Why is deflation bad?" Deflation is bad because it makes loan repayment more difficult during both recessions and periods of growth. In the extreme, deflation will worsen recessions and hinder expansions of the economy.
      - snitko 14y ago
        Then we have to ask, bad for whom? For those who take loans certainly it's bad. For those who loan, it's great. Inflation creates a reverse situation. It is possible, I would imagine, to create contracts that adjust for the fluctuations in currency valuation, but it is unwise to blame deflation for all the bad luck of those who take loans. Deflation would only mean that people taking those loans would think really hard about the prospects of any future profit they are hoping to get from investing the loaned money. Which means we'll have a more, not less, stable economy.
nawitus 14y ago
I personally think economists don't have that good models on deflatory currencies. Since pretty much all currencies are designed to be inflationary, it's easy to fall into the trap of thinking only inflation can make currencies work. The best thing is to wait and see the empirical data. My bet is that some people will hoarde money, but it doesn't really matter. There will always be people who will use bitcoins for real economic activity, and 'speculators' will keep the value inline with other currencies. Prices will be adjusted for deflation just like they're adjusted for inflation. Saying that the rational action is to hoarde the money until it rises in value is like saying that the rational action when buying computers is to wait an infinite amount of time, since you're always going to get a better computer by waiting 6 months.
- Minthos 14y ago
  Some early adopters would be filthy rich. Not so different from other filthy rich people. Hoarding would be more profitable than investing. Would everyone stop investing, would the currency just keep on deflating? Forever? When a really rich person doesn't have to do anything at all to keep getting richer, what will he do? If he hoards until he dies, how will that affect the economy? I too want to see empirical data on this.
  - Evbn 14y ago
    If he hoards until he dies, his currency is effectively worhless. If he tries to spend it all at once, hyperinflation. Money is not a store of value. It is currency, for current exchange.
    - LnxPrgr3 14y ago
      Someone should call the banks and warn them their depositors' accounts are worthless then. I think the argument is a sufficiently deflationary currency creates an investor's dream: once you get enough of it, you can spend just what you need and what you have left gains value just sitting there. You don't have to work anymore or invest in anything besides the currency itself. If that becomes the most profitable investment strategy, it's in each individual's best interest to hoard money, but if enough people do that the economy collapses. If one person "cheats" the system by hoarding money and gets to spend less and less of it every day because it's actively gaining value, that person gets something out of the deflation. If everyone tries it, the system's in deep trouble. That seems to be the argument, anyway. What would actually happen? I don't know… I'm a programmer, not an economist.
RickHull 14y ago
> Bitcoin was built to be a currency, to be used to trade for goods and services. However, a significant portion of BTC is being hoarded and not traded This could easily be an instance of http://en.wikipedia.org/wiki/Gresham%27s_law http://en.wikipedia.org/wiki/Gresham%27s_law in action, whereby BTC is considered "good money" by its holders and USD (etc.) considered "bad". i.e. When you take your sack of coins to the market, you spend the shaved and nicked coins first, reserving the finest coins for some more important transaction. > thus leading some (like Nobel Prize laureate Paul Krugman) to argue that it's not a currency at all, and any value is purely speculative This doesn't necessarily follow, if you understand Gresham's law. i.e. it's not a question of what is or isn't currency, but rather which form of currency is held more dear. This is, of course, a form of "speculation", in the broadest sense of the term.
- vrotaru 14y ago
  Gresham law works only when the exchange between the good/bad money is fixed. Usually by a government/sovereign decree. Otherwise quite the opposite is observed in real world. There's even a word for it. Dollarization.
  - RickHull 14y ago
    Yes, I agree that the strict interpretation of Gresham's law is not exactly applicable here, since there is no enforced BTC-USD rate. But the broader sense can still inform, along the lines of Rolnick and Weber: > They also focused mainly on the interaction between different metallic monies, comparing the relative "goodness" of silver to that of gold, which is not what Gresham was speaking of. (from the wikipedia article)
Zafolo 14y ago
People behave economically. People take risks according to their preferences and perception of risks and chances. So, if they are willing to invest and hold bitcoins, they will be holding some amount which balances chances and risks accordings to their perception - this can be as little as 10 $ or tens of thousands of dollars. Behaving rationally, they do not take efforts and go lengths to buy bitcoins, only to spend them for something they can buy otherwise more easily and with less hassle. But, Bitcoins also have advantages in costs, speed, safety and privacy. For example, due to creditcard costs for backcharges etc., goods paid in bitcoins could be 5 % cheaper. Because margins in online trade are small and costs matter, this is a very significant advantage. Also, time matters. Once these savings are larger than the cost and effort needed for refilling their bitcoin wallet, people will use them for sure.
- betterunix 14y ago
  "Bitcoins also have advantages in costs, speed, safety and privacy" I think "cost" is the only place Bitcoin is actually a winner. Banks can clear transactions far more rapidly than Bitcoin will. Bitcoin does not meet the formal definition of security and there is a known polynomial time attack on Bitcoin (this is another way of saying "broken crypto"). Bitcoin has been repeatedly shown to not offer the anonymity or privacy that people think it offers. I am a big fan of digital cash. The problem is that Bitcoin is not a secure digital cash system, and it should not be advertised as such.
  - jl6 14y ago
    What attack are you referring to?
    - betterunix 14y ago
      This attack: https://en.bitcoin.it/wiki/Double-spending#Brute_force_attack https://en.bitcoin.it/wiki/Double-spending#Brute_force_attac... The description dances around the issue, but what they are basically saying is this: the work needed to successfully attack Bitcoin is proportional to the total work done by all Bitcoin participants. That is an amount of work that is polynomial in the parameters of the system.
ankeshk 14y ago
Blockchain.info has this chart that tracks the number of bitcoins traded on known exchanges vs the number of bitcoins exchanged in all other transactions. This chart gives a somewhat measure of if the hoarding has gone up or not. It gives us a good idea about bitcoin speculation. http://blockchain.info/charts/tx-trade-ratio http://blockchain.info/charts/tx-trade-ratio The lower the number on this chart, the less the speculation. Recently, the number has almost always been under 20. This number was at 225 during the July 2011 bitcoin bubble. (More explanation about this chart: http://codinginmysleep.com/measuring-bitcoin-speculation/ http://codinginmysleep.com/measuring-bitcoin-speculation/) So while we would think that more people would be hoarding bitcoins, the data shows thats not necessarily true. Combining this chart with the number of bitcoin transactions per day chart gives us a good indication that the price is increasing because more people are hearing about bitcoins and using it. (Number of transactions per day have gone up from 6,000 a year ago to 70,000 today.)

sethist 14y ago

I also wonder what percentage of the "hoarded currency" is actually currency that has been destroyed and if it will have any long term consequences. For example, in the early days of Bitcoin I mined a few blocks with an old laptop. The computer eventually died without any backup of my wallet thereby destroying the those Bitcoins. There doesn't appear to be anyway for anyone to know whether I am simply hoarding those Bitcoins to dump on the market at a later date or if they have been permanently removed from the money supply.

vyrotek 14y ago
I'm in the same boat. I played around with BitCoin in the early days and never really cared for the coins I earned. I wiped the machine I used and only recently realized they were gone forever. Apparently I just flushed a few hundred bucks, meh.
gwern 14y ago
> There doesn't appear to be anyway for anyone to know whether I am simply hoarding those Bitcoins to dump on the market at a later date or if they have been permanently removed from the money supply. Yeah, this is the big problem with the papers or blog posts pointing out how many coins are not moving around and then insinuating that Bitcoin is a scam or that it will soon be destroyed as an old miner dumps a few hundred thousand coins: for most of them, the parsimonious explanation for them not moving is simply that they've been lost. But there's no way to prove this! Did Satoshi wipe his hard drive when he moved on to other 'projects'? We have no way of knowing. (There apparently are ways to verifiably destroy bitcoins - send them to impossible addresses or something like that - but I haven't heard that anyone has bothered doing that and this wouldn't apply to people losing coins accidentally or apathetically.)
new299 14y ago
If a few blocks is 3 or 4, you might want to keep that HD around. Could be worth sending it to a professional data recovery firm and having the platters removed etc.

johnrob 14y ago

I think there is a precedent here: deflation, which is the classical way of describing a currency whose spending power is increasing. I'm not well versed in the history of currencies, but that's one place I'd investigate to see how the "buy and hold" efforts will play out (the modern version of filling a mattress with money).

narrator 14y ago

To get the other side of the issue, you have to go back to the 1930s and read F.A Hayek's critique of "The Paradox of Savings" ( http://mises.org/daily/2804 http://mises.org/daily/2804 ). Hayek, incidentally, was an advocate of competing currencies.

willholloway 14y ago

My thoughts are that we need a new crypto currency without the deflationary flaw of bitcoin. The rate of new coins mined should increase as time goes on in a controlled fashion. A crypto currency with managed inflation wouldn't make early adopters as wealthy, but it would be a better medium of exchange.

ohazi 14y ago
Yes. Finally, someone levelheaded. Every bitcoin supporter I've ever spoken to has basically dismissed deflation as a non-issue. It is important, and if the bitcoin economy grows, the deflationary effects are only going to become more visible.
- snitko 14y ago
  I have never met a single person who was able to convincingly raise at least a little bit of suspicion about deflation in me. Why is deflation bad? Because people stop spending? Can't you see how ludicrous this explanation is?
  - betterunix 14y ago
    "Why is deflation bad?" Deflation is bad because it makes loan repayment more difficult during both recessions and periods of growth. In the extreme, deflation will worsen recessions and hinder expansions of the economy.
    - snitko 14y ago
      Then we have to ask, bad for whom? For those who take loans certainly it's bad. For those who loan, it's great. Inflation creates a reverse situation. It is possible, I would imagine, to create contracts that adjust for the fluctuations in currency valuation, but it is unwise to blame deflation for all the bad luck of those who take loans. Deflation would only mean that people taking those loans would think really hard about the prospects of any future profit they are hoping to get from investing the loaned money. Which means we'll have a more, not less, stable economy.

nawitus 14y ago

I personally think economists don't have that good models on deflatory currencies. Since pretty much all currencies are designed to be inflationary, it's easy to fall into the trap of thinking only inflation can make currencies work. The best thing is to wait and see the empirical data. My bet is that some people will hoarde money, but it doesn't really matter. There will always be people who will use bitcoins for real economic activity, and 'speculators' will keep the value inline with other currencies. Prices will be adjusted for deflation just like they're adjusted for inflation. Saying that the rational action is to hoarde the money until it rises in value is like saying that the rational action when buying computers is to wait an infinite amount of time, since you're always going to get a better computer by waiting 6 months.

Minthos 14y ago
Some early adopters would be filthy rich. Not so different from other filthy rich people. Hoarding would be more profitable than investing. Would everyone stop investing, would the currency just keep on deflating? Forever? When a really rich person doesn't have to do anything at all to keep getting richer, what will he do? If he hoards until he dies, how will that affect the economy? I too want to see empirical data on this.
- Evbn 14y ago
  If he hoards until he dies, his currency is effectively worhless. If he tries to spend it all at once, hyperinflation. Money is not a store of value. It is currency, for current exchange.
  - LnxPrgr3 14y ago
    Someone should call the banks and warn them their depositors' accounts are worthless then. I think the argument is a sufficiently deflationary currency creates an investor's dream: once you get enough of it, you can spend just what you need and what you have left gains value just sitting there. You don't have to work anymore or invest in anything besides the currency itself. If that becomes the most profitable investment strategy, it's in each individual's best interest to hoard money, but if enough people do that the economy collapses. If one person "cheats" the system by hoarding money and gets to spend less and less of it every day because it's actively gaining value, that person gets something out of the deflation. If everyone tries it, the system's in deep trouble. That seems to be the argument, anyway. What would actually happen? I don't know… I'm a programmer, not an economist.

RickHull 14y ago

> Bitcoin was built to be a currency, to be used to trade for goods and services. However, a significant portion of BTC is being hoarded and not traded This could easily be an instance of http://en.wikipedia.org/wiki/Gresham%27s_law http://en.wikipedia.org/wiki/Gresham%27s_law in action, whereby BTC is considered "good money" by its holders and USD (etc.) considered "bad". i.e. When you take your sack of coins to the market, you spend the shaved and nicked coins first, reserving the finest coins for some more important transaction. > thus leading some (like Nobel Prize laureate Paul Krugman) to argue that it's not a currency at all, and any value is purely speculative This doesn't necessarily follow, if you understand Gresham's law. i.e. it's not a question of what is or isn't currency, but rather which form of currency is held more dear. This is, of course, a form of "speculation", in the broadest sense of the term.

vrotaru 14y ago
Gresham law works only when the exchange between the good/bad money is fixed. Usually by a government/sovereign decree. Otherwise quite the opposite is observed in real world. There's even a word for it. Dollarization.
- RickHull 14y ago
  Yes, I agree that the strict interpretation of Gresham's law is not exactly applicable here, since there is no enforced BTC-USD rate. But the broader sense can still inform, along the lines of Rolnick and Weber: > They also focused mainly on the interaction between different metallic monies, comparing the relative "goodness" of silver to that of gold, which is not what Gresham was speaking of. (from the wikipedia article)

Zafolo 14y ago

People behave economically. People take risks according to their preferences and perception of risks and chances. So, if they are willing to invest and hold bitcoins, they will be holding some amount which balances chances and risks accordings to their perception - this can be as little as 10 $ or tens of thousands of dollars. Behaving rationally, they do not take efforts and go lengths to buy bitcoins, only to spend them for something they can buy otherwise more easily and with less hassle. But, Bitcoins also have advantages in costs, speed, safety and privacy. For example, due to creditcard costs for backcharges etc., goods paid in bitcoins could be 5 % cheaper. Because margins in online trade are small and costs matter, this is a very significant advantage. Also, time matters. Once these savings are larger than the cost and effort needed for refilling their bitcoin wallet, people will use them for sure.

betterunix 14y ago
"Bitcoins also have advantages in costs, speed, safety and privacy" I think "cost" is the only place Bitcoin is actually a winner. Banks can clear transactions far more rapidly than Bitcoin will. Bitcoin does not meet the formal definition of security and there is a known polynomial time attack on Bitcoin (this is another way of saying "broken crypto"). Bitcoin has been repeatedly shown to not offer the anonymity or privacy that people think it offers. I am a big fan of digital cash. The problem is that Bitcoin is not a secure digital cash system, and it should not be advertised as such.
- jl6 14y ago
  What attack are you referring to?
  - betterunix 14y ago
    This attack: https://en.bitcoin.it/wiki/Double-spending#Brute_force_attack https://en.bitcoin.it/wiki/Double-spending#Brute_force_attac... The description dances around the issue, but what they are basically saying is this: the work needed to successfully attack Bitcoin is proportional to the total work done by all Bitcoin participants. That is an amount of work that is polynomial in the parameters of the system.

ankeshk 14y ago

Blockchain.info has this chart that tracks the number of bitcoins traded on known exchanges vs the number of bitcoins exchanged in all other transactions. This chart gives a somewhat measure of if the hoarding has gone up or not. It gives us a good idea about bitcoin speculation. http://blockchain.info/charts/tx-trade-ratio http://blockchain.info/charts/tx-trade-ratio The lower the number on this chart, the less the speculation. Recently, the number has almost always been under 20. This number was at 225 during the July 2011 bitcoin bubble. (More explanation about this chart: http://codinginmysleep.com/measuring-bitcoin-speculation/ http://codinginmysleep.com/measuring-bitcoin-speculation/) So while we would think that more people would be hoarding bitcoins, the data shows thats not necessarily true. Combining this chart with the number of bitcoin transactions per day chart gives us a good indication that the price is increasing because more people are hearing about bitcoins and using it. (Number of transactions per day have gone up from 6,000 a year ago to 70,000 today.)