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Comment by InclinedPlane | Hacker News Reader

That much has always been obvious to anyone paying attention. It's not a currency. Currencies can either be deflationary or inflationary. Cryptocurrencies are inherently deflationary* which makes them bad currencies but perfect for speculative investment. That's the core of every cryptocurrency out there today. The utility as a currency is at best secondary, or even tertiary. It's only a matter of time until those bubbles burst.

Edit: fine, amend what I said to be "the vast majority of current cryptocurrencies with high market caps are deflationary". Most usage of cryptocurrencies today is in "investment", not monetary exchange.

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Though this has been a feature of the vast majority of cryptocurrencies, it is not inherent. For example Monero has an inbuilt tail emission once the initial supply is exhausted that will continue indefinitely. See more here: https://getmonero.org/resources/moneropedia/tail-emission.ht...

That's true for pure currencies (e.g. Bitcoin), however most of the newer ones have various functionalities. You may or may not like Ethereum, but its use as a currency is a small part of what it has on offer. And technically at the moment it is inflationary, as well.

> Cryptocurrencies are inherently deflationary* which makes them bad currencies but perfect for speculative investment.

It's so funny that people think that deflationary makes something a bad currency. On the other hand an inflationary currency inherently steals from the poor and gives to the rich. I'd call that a "bad" currency. Inflationary currencies are also perfect for speculative investment. Imagine starting up a 3x leveraged ETF with the underlying debt instrument denominated in bitcoin. Of course with an inflationary currency, the real value of that underlying debt will go down, (and usually, the interest rates stay low), which makes institutionalized risky plays possible.

> On the other hand an inflationary currency inherently steals from the poor and gives to the rich.

How so?

The poor have nothing, in fact what they usually have is debt. Inflation makes that shrink over time.

And yes, inflationary currencies encourage investment, as you can#'t make gains just by sitting on the medium of exchange.

Failing to see why these are bad.

I'd rephrase the parent comment to say "inflationary currency steals from savers". Imagine someone like me, without debt but trying to save money for something (larger deposit so I don't have to take 30 years mortgage for example).

I am not rich by any stretch but I am not poor either. Probably I would fall into middle class (if middle class still exists as it's been disappearing). Inflation is really harming me and people like me.

Basically what inflationary currency does is it forces frugal people who would otherwise not go into debt to take loans anyways as they realize that saving is a lose lose idea right now. Better to take a mortgage or two and let inflation slowly erase value of your debt.

Saving's a poor idea at the moment because the interest rates on offer are so tiny.

Looking at the last 25(ish) years of UK data the base rates have tended to be above inflation, until the 2008 crisis.

But yes, inflation will slowly devalue your debt if the debt is a static amount, borrowing can be a good driver of growth, when managed well. And sitting on piles of currency is not good either - the currency is a medium of exchange, not a store of value, it's better to encourage the economy by encouraging investment over hoarding.

Further, deflationary currency values work yesterday over work today, helping people lock in value and higher wealth purely by being older entrants into the market.

The thing is I really entered economy (got a university degree and started working full time and getting paid) around 2011. So in my life I have never experienced a time period which was good for savers.

Just seems to me that as a saver I never get a break in this economic system. I feel pressure to go into debt and take some crazy loans just not to be left behind.

I think my work experience is quite short though, just 6 years or so. Over longer period of time, since economy moves in cycles, there will be a cycle with higher interest rates (like 5-10 percent) which will again be good for savers. Waiting for this cycle to arrive :)

The advice today is pretty much the same as it was 5 years ago: buy into a low cost fund. Since you're in the UK, through a Stocks & Shares ISA.

I recall the same complaints about low interest rates back in 2012, but the returns from, for example, the Vanguard LifeStrategy 80% Equity over the last 5 years were 16.07%, 9.16%, 8.00%, 10.84%, 17.04%. A bit better than a savings account. Of course, when there's another market crash the value will drop, but there you go.

Inflationary currency values work done tomorrow over work done yesterday. If there's a major catastrophe, like, say a giant hurricane that devastates a coastal state with a healthy economy, then the returns on work done tomorrow have a effect that can cascade through the economy magnified by the money multiplier. On the other hand, if you valued work done yesterday, and a bunch of value is destroyed by a major disaster, it is a sunk cost, not an unfunded liability that affects the person who depends on the payment of that liability, and the person who depends on that person, and so forth.

Which country do you live in and what inflation rate (and what metric) are you suffering under? Versus what rate of return on basic index fund?

Plenty of countries have lived through double-digit inflation. The real issue there is not so much savings as wages: inflation means needing to renegotiate wages more often. This caused a lot of the UK's labour unrest in the 70s, for example, or the problems of Brazil leading to the "Real".

Also people keep thinking inflation is purely due to money supply and forgetting that eventually you have to exchange money for goods and services at some kind of price level.

I live in London, UK. I agree inflation is very low right now (has been for a decade in EU really). However this is still really bad for savers like me as there is no safe place for me to store my money with any sensible interest rate (most banks here will give you something ridiculous like 0.25% interest rate on savings now...). Feels like savers never get a break in the current economic system.

But I was making an argument about why inflationary currency might not be great for everybody. It's definitely not a win win. Inflationary currency helps some people but also harms other people, deflationary currency would just switch groups that are being advantaged/disadvantaged.

I don't believe it would, it would slow the economy a lot in many different ways.

The post you replied to asked about the returns on a tracker fund as compared to inflation, as that's generally the way to make relatively safe, modest interest on money at the moment. Investing, rather than saving.

Unless you're saving it in forms of wads of cash under the bed, you should be getting some interest from it, even if it's just parked in a bank account. And even larger interest if you actively look around for opportunities to invest. And such investment is beneficial to other economic actors, who are on the receiving end of it.

It is true that inflation will make the value of the debt shrink over time, however that is only true of wages rise at the same rate or faster, something that has not been happening. So inflation reduces the value of the debt whilst at the same time interest rates increase it to make up for the lost value and without a corresponding rise in wages then the value of the debt is not falling and becoming easier to repay as you suggest it would.

At the moment, the base rates in the UK are well below inflation, it's entirely possible to get a mortgage (for instance) at a rate lower than inflation, eroding the debt in real terms.

The wage thing is a red herring, and has effects regardless of the currency model.

Base rate is below inflation but you try and find a mortgage at that rate. HSBC currently have a fixed rate mortgage at 1.94% for 2 years, base rate is 0.25%. Inflation is currently at 2.9% so you could get a mortgage where the debt is eroding in real terms however I am not sure why you would disregard wage inflation this scenario, wages are required to pay the mortgage, and whilst there may be other factors involved wages inflating a slower rate than general inflation means that the "real term" debt reduction we are discussing is practically non-existent for most people.

I disregard wage inflation in this scenario because we are comparing inflationary and deflationary currencies. In either case if the change in your wages doesn't stay above the change in value of the currency you're stuffed.

i.e. it's not a property of the money.

Ah I see, then yes theoretically you can borrow and watch low interest rates and high inflation erode the value of the debt.

But it is a property of the money. Part of the reason why inflation is a policy is that it supposedly creates jobs, which is why professional economists fret about stagflation threatening their vaunted models. The way that inflation theoretically props up jobs is by reducing the real value of labor[0]... So wage erosion is fundamental raison d'être of the currency.

A cynic would argue that the policy works because a good way to enforce employment is by forcing people to stay afloat.

[0] https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...

> as you can#'t make gains just by sitting on the medium of exchange

So instead they speculate on assets like commodities and energy (excluded from core inflation) and real-estate. How is that any better?

> And yes, inflationary currencies encourage investment

You can't encourage investment without encouraging savings. What you end up with is too much money going after too few assets. This is why interest rates are so important. Too high and the market bubbles, too low and the market tanks.

For inflationary currencies, you have a group of dudes who declare what the rate should be. That to me is the weakest part of this whole scheme.

Instead of a council of wizards declaring the interest rate, market money works more like a feedback loop - with the rates being set by supply and demand.

The best part of market money is, instead of banks being allowed to loan out printed money - loans have to come from people who save and defer consumption.

the poor do not usually 'have debt', and when they do, the interest rate is high (payday lenders, credit cards). Inflation does not benefit people with high interest rates, it benefits people with very large pools of money borrowed at interest rates near or lower than inflation. That is mostly institutional investment and banks, and select high value leverage traders, a mostly wealthy subset.

The poor are hurt by inflation because their wages are more severely devalued by real value loss. If you're spending most of your wages on day to day expenses, the effect on "margin of survival" from a small devaluation is hugely magnified relative to if you're spending very few of your wages on day to day expenses. I suggest you work through some math on the back of an envelope to really understand this effect. An easy case: Let's say you are barely scraping by, spending nearly 98% of your wages on expenses and there's 3% inflation. What happens next? What happens if you spent 20% of your wages on expenses in the same scenario?

The common retort is that "wages catch up to inflation" but that's nonsense. The whole premise of inflation being used to stimulate jobs is that it devalues the real cost of employment: you can't have your cake and eat it too.

Finally, "encourage investment" well if you think that every investment is wise that is reasonable. However, inflation pushes people into investment. So what that effectively means is that cost of the risky business behavior of the top classes is socialized. You could also see it as 'encouraging consumption', which if you believe in conservation as a moral good, is antithetical.

"The utility as a currency is at best secondary, or even tertiary. It's only a matter of time until those bubbles burst."

The value as a currency is what would give them existential staying power.

The USD is not hugely valuable because it's backed by US treasuries - it's valuable because it's extremely liquid and can be used ubiquitously.

BTC etc. bubbles may not 'pop' like tulips, because there are a) institutional holders of major blocks that can do things to keep the price up, b) speculative holders have no need to liquidate and I think will want to 'hold' so as to avoid losses and c) there is a small 'actual' area wherein BTC is a currency, which is the black market. There is, globally enough of a 'general black market' to create some demand for BTC as a currency.

I think those 3 things combined means that it's possible BTC can hold it's 'paper value' for quite a long time.

Two other existential factors:

1) The BTC mania has yet to truly hit mainstream, and it's making it's way globally.

2) The press is still piling on the hyper. A lot of bloggers have positions in BTC they do not disclose.

But it's all ridiculous and fake speculation.

Jaimie Dimon is technically correct, this BTC 'makes no sense' - but if enough people believe in it enough, then it will exist.

yeah. Why do people buy gold for their portfolios? for the same reason BTC will exist.

As a backup, so that if the shit hits the fan they have something that's held value and fascination for thousands of years?

right. So why does it hold value when shit hits the fan? you can't eat it, you can't treat a disease with it. Will it hold value in the future? My point is, it's really just convention. So, the same logic applies to bitcoin.

Bitcoin hardly has convention on its side at this point!

It has (artificial) scarcity.

I think you'd have to be very ... optimistic to view BTC as a long term hedge like gold right now.

right. It has less convention than gold and less valuation. Bitcoin market cap is what 50-70 billion?. What is the non-industrial fraction of gold's market cap? 1 trillion? so, if bitcoin permanently stays at 10% of gold's hedging value, it justifies a valuation of 100 billion. that's not counting at all usefulness of bitcoin for money transfers.

Ugh, methinks you are deliberately missing my point.

There is no reason to think bitcoin is a good long term hedge.

there is no reason yet to think that. But my point is it could become that hedge. Because there is no fundamental reason for gold to be treated as that hedge. So, my point is, the fact that there is no fundamental reason to use bitcoin is not really a great argument against it. Because there is no fundamental reason to use gold and it is used anyway.

There's no fundamental reason, no, however it has proven desirable and valuable over thousands of years.

By your logic anything could be a hedge in future. Which is strictly speaking true, but not very useful.

You may wish to consider the ~25% drop we've seen in the last couple of weeks when deciding on how well bitcoin holds its value through the ages...

gold is also volatile and has had 25% pullbacks. Plot gold over time and you'll see. Hedging is not about the volatility per se but about correlation with other investments.

anything could not be a hedge. It needs to be liquid, transferable, international, etc. etc. bitcoin is on the way there. I am not saying it will supplant gold, I am saying it could. that probability is certainly not zero.

And I think you're looking at the world through bitcoin-tinted glasses there.

I wish I had been 5 years ago

Well likewise when they were $0.50 a piece I toyed with the idea of getting some, just in case.

That doesn't mean I think they're a reliable investment or comparable to gold, just that in hindsight I could have been very rich by for a few bucks back then.

Ah well.

"My point is, it's really just convention. So, the same logic applies to bitcoin."

Not quite ...

Gold is a 5000 year old convention - across cultures, languages, geographies and epochs.

BTC is a few years old, and nobody really cares about it that much.

Yes - they are essentially 'conventions', but they're so different in that regard they are hardly comparable.

yes, these differences are reflected in the market caps. But just cause some convention is 5000 years old, it doesn't mean new convention cannot overtake it. Bitcoin is 7 years old and doesn't seem to be going away.

"For the same reason BTC will exist."

Gold and BTC are not nearly the same thing.

> Cryptocurrencies are inherently deflationary

How so?

There's a limited amount of bitcoin to go around.

Wouldn't that make the value of a token rise, as there is demand but no supply?

Yes, that is what deflation is, is it not? More goods for the same amount of currency?

You're right, my bad.

There are other cryptocurrencies aside from Bitcoin, even if Bitcoin is not able to be a true currency (e.g. fungibility issue). See Monero. It has a tail emission.

Every cryptocurrency based on Bitcoin mechanics has the same problems as Bitcoin. That, as you rightly pointed out, does not discount other cryptocurrencies without these issues. I was aiming solely at Bitcoin (and similar cryptocurrencies).

Most of the so-far released ones have a specific cap on how many tokens will be mined. Bitcoin does, for example. But it's not a hard requirement of cryptocurrencies, I think.

Bitcoin is also designed to make future coins harder to mine, thus more expensive. The only incentive to sell bitcoin is if you think the entire thing is about to fail.

Bitcoin isn't really designed to do that. It is designed to increase difficulty with competition. If no one was interested in mining bitcoin it would be exactly the same difficulty to mine today as it was one day one.

Doesn't the reward halve every 210000 blocks?

The size of the reward doesn't actually change the difficulty though.

Eventually all the BTC will have been mined and no new BTC will ever be created again, unlike regular currencies in which the money supply can always rise alongside the expansion of the economy.

BTC will eventually become a fiscal straight jacket. It may take quite a while to take effect, but is inevitable and the more BTC become integrated into the economy, the more eventual pain it will cause down the line.

All cryptocurrencies are inherently deflationary because one example of an attempt at a cryptocurrency (BTC) is inherently deflationary?

All current attempts at cryptocurrencies, of which there are very, very many have been inherently deflationary. Can you point me to a single one either current or even planned that isn't? We are discussing the real world.

Both Ether and Monero are uncapped and deflationary. So 2 out of the top 10 at the moment. I didn't bother checking beyond that.

If you have a limited supply of currency in a growing economy, it's inherently deflationary. So far I haven't seen proposals for cryptocurrencies that can grow as a function of the underlying economy. Maybe there are some.

The 'main reason' BTC is deflationary is because it's not used as a currency, and as prices rise, people want to 'hold' thereby creating less liquidity etc.

It's a funny thing to watch.

The only way cryptocurrency would be a straightjacket on the economy is if there were only one cryptocurrency. Actually there are hundreds, and it's trivial to make more. Rather than a digital gold standard, we have a system of competing privately-issued currencies, which Hayek advocated in his book The Denationalization of Money.

> Actually there are hundreds, and it's trivial to make more.

Good argument. But people will slowly realize that, to introduce good innovations in new blockchains, they should be setup as side-chains, to not create inflation in the crypto world.

Maybe. I'm just saying cryptocurrency won't give us deflationary constraints, since we can always create new currencies if we want to. If it turns out we do fine just sticking with a few main ones, that's ok too.

What's the analogy of a fiscal straight jacket mean? BTC value could increase indefinitely but you can always trade smaller and smaller fractions of BTC.

You have a finite amount trying to represent a growing economy. Work yesterday becomes worth more than work today and the fruits of economic output are retained by those who hold currency.

I think of crypocurrencies as an escrow.

Given the bubble, I kinda wish I was brave enough to speculate. But I can't even bring myself to buy a lottery ticket. My loss.

Might also be one of those PT Barnum things. There's a sucker born every minute, and the internet is big to reach all of them.

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