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Here's my proposal: let's forget exchange rates. Let's not confuse them with inflation[0]. That's a red herring. Exchange rates are important for BTC's legal us

Here's my proposal: let's forget exchange rates. Let's not confuse them with inflation[0]. That's a red herring. Exchange rates are important for BTC's legal users now because there's not (yet) production in BitCoin's economy. Apart from drugs[1], BTC is pure store of value, and it should be analyzed as such. This is important for this discussion, because exchange rates ultimately won't matter that much. By "ultimately", I mean that phase of development when (if) BitCoin becomes a full currency, that is, when there's somebody, some corporation, operating and trading significantly in the currency. I won't lend the status of currency to any commodity which is not used this way. And what's clear is that both BitCoin and gold are shit currencies. Even conceding the exchange rate could stabilize enough for a modern day Rockefeller[2] to pull it to a success, you still would have to contend with the deflation inherent in this "currency". There's a reason why gold is traded in commodities markets -- and not as a currency. There's a reason why banks and states trade and store USD, instead of gold. You simply can't grow an economy like it's the 20th century with gold, or BitCoin. In fact, BitCoin is even more ruthless than gold. 19th century economies could at least pray for the discovery of a gold vein, to alleviate their deflationary comedowns. BitCoin denies even this possibility with the cold, germanic efficiency of a mathematical proof. [0] The exchange rate we run against our future selves, if you will. [1] Which doesn't count anyhow, since you would agree there's a risk markup on them for their illegal status, which makes dubious extrapolating any analysis from them. [2] An improbably apt group of entrepreneurs, who even more improbably would decide to bet their future fortunes on a currency designed by computer geeks with a penchant for goldbuggering.

ufmace 13y ago
I agree that the critical problem with Bitcoin is the inability to inflate at a controlled rate. It inevitably follows from the idea of having a decentralized currency - something has to control currency creation rates, and if you aren't going to trust an organization of people, then math is the only alternative, which is kinda both empowering and limiting. Because of that alone, if nothing else, I don't think we'll ever have a major economy in Bitcoin only. That doesn't mean there's no use for it though. There may well be purposes and segments of the economy that find it very useful, and it may even be possible at some point for people in some niche markets/occupations to exist entirely in a Bitcoin economy. It'll just never be very big compared to any first-world national currency.
anologwintermut 13y ago
The fact that Bitcoin is deflationary is purely a product of the software/protocol. Given consensus to change it, one could make it inflationary easily. E.g. by having blocks always pay out 25 btc as a reward or even have successive blocks pay out increasing rewards.
- trts 13y ago
  Even though it's deflationary, I don't see that as necessarily a problem since it is infinitely divisible, which fiat currency is not. It may just take time for people to start thinking in hundredths and thousandths instead of hundreds and thousands. If Bitcoin becomes less volatile in the future and deflates at a predictable rate, then I could see it being used more as currency. Interesting to think of the reverse of "when I was a kid, a Snickers bar only cost 5 cents," e.g. "what I just paid for my new Macbook only bought me a pair of shoes ten years ago."
  - nhaehnle 13y ago
    Deflation, meet downward rigidity of wages (and other prices). Basically, the problem with deflation is that everybody who has only one (or very few) income stream, but at the same time many expenditure streams (especially fixed contract expenditure streams) is going to fight very hard against reduction in that income stream. And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity.
    - tbrownaw 13y ago
      And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity. I suspect that demanding constantly increasing income would be rather less successful if the system weren't rigged to make expenses never decrease.
      - nhaehnle 13y ago
        The empirical data is not about constantly increasing income. It's about a number of things, but the most striking is that in a deflationary environment, wage (and other price) changes have an abnormally large peak at a change of zero; this peak does not fit into any simple assumption about how price changes should be distributed (in particular, it is clearly not a normally distributed effect).
marcell 13y ago
> There's a reason why banks and states trade and store USD, instead of gold. Suppose you accumulate a lot of debt in a currency backed by gold. Further suppose that you control that currency, and have the power to change or remove the gold backing. It becomes very tempting to, say, issue some new currency with lower or zero gold backing to wipe out your debt.
- XorNot 13y ago
  Which isn't a currency backed by gold then, its a fiat currency. A gold backed currency can easily inflate if new gold mines are discovered - it just uselessly doesn't track with the production of things people need.
notahacker 13y ago
Exchange rates are important because they indicate a bigger design flaw than the fixed supply: there's no entity with the ability to prop up demand. By contrast, responsible governments with effective tax collecting powers can generally exert a large degree of control over the purchasing power of their currency. The dollar is backed by all taxable economic activity in the United States. Stocks, which often end up worthless after promising starts, are at least backed by assets that can generate future cashflows. Bitcoin is backed by faith. Even if BTC is better to transact with in every conceivable way, businesses will still need hard currency to pay their taxes, which makes exchange rate and liquidity risk a very real concern if you're trading real assets for BTC.
- baddox 13y ago
  > a bigger design flaw than the fixed supply: there's no entity with the ability to prop up demand. That's a strange comment, considering that seems to have been one of the fundamental deliberate choices made in the design of the currency, and is one reason why a lot of Bitcoin enthusiasts are attracted to the currency.
mrb 13y ago
"You simply can't grow an economy like it's the 20th century with gold, or BitCoin" Well, the past 4 years have proven you wrong. Explain how the Bitcoin economy has been able to grow so much since 2009? Why is it that 10,000+ merchants decided to use Bitcoin through Bitpay alone? Why is it that Bitcoin gains more and more users every day? The answer is that, even if deflation was a problem, which is itself debated [1], Bitcoin's advantages such as being censorship-resistant are unparalleled by any other currency, and that alone gives Bitcoin the ability to succeed where no other currency could. [1] http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-deflation/ http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-d...
- Guvante 13y ago
  But Bitcoin isn't a currency for vendors, that is how the problem was solved. It is an investment strategy for consumers and a transaction method for vendors, but not truly a currency. He was talking about whether Bitcoin will ever become a currency not backed by USD (or whatever) and postulating why that will never be the case. Bitcoin is currently surviving off its liquidity, not its value as a currency.
  - sounds 13y ago
    Liquidity is one of the values of a currency. You might want to study up some more on what currency is, and what it is not.
jpadkins 13y ago
I have yet to see a scholarly article showing that productivity caused deflation (currency held constant while increases in population or productivity cause prices to drop) has caused economic problems. There is much evidence of currency removal caused deflation (when a large amount of currency or credit is quickly removed from the system causing prices to drop) wreaking havoc on the economy. I am interested if you have seen any documented evidence of the former? Also, in the US under the gold standard (1776-1910), we saw history's greatest increase in individual wealth ever recorded (measured by per capita GDP). Yes it was more volatile than under a fiat currency, but it's hard to argue that a constant or slow growing currency dampens economic growth with that data point.

ufmace 13y ago

I agree that the critical problem with Bitcoin is the inability to inflate at a controlled rate. It inevitably follows from the idea of having a decentralized currency - something has to control currency creation rates, and if you aren't going to trust an organization of people, then math is the only alternative, which is kinda both empowering and limiting. Because of that alone, if nothing else, I don't think we'll ever have a major economy in Bitcoin only. That doesn't mean there's no use for it though. There may well be purposes and segments of the economy that find it very useful, and it may even be possible at some point for people in some niche markets/occupations to exist entirely in a Bitcoin economy. It'll just never be very big compared to any first-world national currency.

anologwintermut 13y ago

The fact that Bitcoin is deflationary is purely a product of the software/protocol. Given consensus to change it, one could make it inflationary easily. E.g. by having blocks always pay out 25 btc as a reward or even have successive blocks pay out increasing rewards.

trts 13y ago
Even though it's deflationary, I don't see that as necessarily a problem since it is infinitely divisible, which fiat currency is not. It may just take time for people to start thinking in hundredths and thousandths instead of hundreds and thousands. If Bitcoin becomes less volatile in the future and deflates at a predictable rate, then I could see it being used more as currency. Interesting to think of the reverse of "when I was a kid, a Snickers bar only cost 5 cents," e.g. "what I just paid for my new Macbook only bought me a pair of shoes ten years ago."
- nhaehnle 13y ago
  Deflation, meet downward rigidity of wages (and other prices). Basically, the problem with deflation is that everybody who has only one (or very few) income stream, but at the same time many expenditure streams (especially fixed contract expenditure streams) is going to fight very hard against reduction in that income stream. And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity.
  - tbrownaw 13y ago
    And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity. I suspect that demanding constantly increasing income would be rather less successful if the system weren't rigged to make expenses never decrease.
    - nhaehnle 13y ago
      The empirical data is not about constantly increasing income. It's about a number of things, but the most striking is that in a deflationary environment, wage (and other price) changes have an abnormally large peak at a change of zero; this peak does not fit into any simple assumption about how price changes should be distributed (in particular, it is clearly not a normally distributed effect).

marcell 13y ago

> There's a reason why banks and states trade and store USD, instead of gold. Suppose you accumulate a lot of debt in a currency backed by gold. Further suppose that you control that currency, and have the power to change or remove the gold backing. It becomes very tempting to, say, issue some new currency with lower or zero gold backing to wipe out your debt.

XorNot 13y ago
Which isn't a currency backed by gold then, its a fiat currency. A gold backed currency can easily inflate if new gold mines are discovered - it just uselessly doesn't track with the production of things people need.

notahacker 13y ago

Exchange rates are important because they indicate a bigger design flaw than the fixed supply: there's no entity with the ability to prop up demand. By contrast, responsible governments with effective tax collecting powers can generally exert a large degree of control over the purchasing power of their currency. The dollar is backed by all taxable economic activity in the United States. Stocks, which often end up worthless after promising starts, are at least backed by assets that can generate future cashflows. Bitcoin is backed by faith. Even if BTC is better to transact with in every conceivable way, businesses will still need hard currency to pay their taxes, which makes exchange rate and liquidity risk a very real concern if you're trading real assets for BTC.

baddox 13y ago
> a bigger design flaw than the fixed supply: there's no entity with the ability to prop up demand. That's a strange comment, considering that seems to have been one of the fundamental deliberate choices made in the design of the currency, and is one reason why a lot of Bitcoin enthusiasts are attracted to the currency.

mrb 13y ago

"You simply can't grow an economy like it's the 20th century with gold, or BitCoin" Well, the past 4 years have proven you wrong. Explain how the Bitcoin economy has been able to grow so much since 2009? Why is it that 10,000+ merchants decided to use Bitcoin through Bitpay alone? Why is it that Bitcoin gains more and more users every day? The answer is that, even if deflation was a problem, which is itself debated [1], Bitcoin's advantages such as being censorship-resistant are unparalleled by any other currency, and that alone gives Bitcoin the ability to succeed where no other currency could. [1] http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-deflation/ http://www.forbes.com/sites/jonmatonis/2012/12/23/fear-not-d...

Guvante 13y ago
But Bitcoin isn't a currency for vendors, that is how the problem was solved. It is an investment strategy for consumers and a transaction method for vendors, but not truly a currency. He was talking about whether Bitcoin will ever become a currency not backed by USD (or whatever) and postulating why that will never be the case. Bitcoin is currently surviving off its liquidity, not its value as a currency.
- sounds 13y ago
  Liquidity is one of the values of a currency. You might want to study up some more on what currency is, and what it is not.

jpadkins 13y ago

I have yet to see a scholarly article showing that productivity caused deflation (currency held constant while increases in population or productivity cause prices to drop) has caused economic problems. There is much evidence of currency removal caused deflation (when a large amount of currency or credit is quickly removed from the system causing prices to drop) wreaking havoc on the economy. I am interested if you have seen any documented evidence of the former? Also, in the US under the gold standard (1776-1910), we saw history's greatest increase in individual wealth ever recorded (measured by per capita GDP). Yes it was more volatile than under a fiat currency, but it's hard to argue that a constant or slow growing currency dampens economic growth with that data point.