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No, that is not at all the argument. The argument is that you cannot have an economy run on a deflationary currency, which bitcoin is. An effective economy requires a bit of inflation and the ability to issue new money when necessary for socio-political reasons. Crypto currencies are a cult, though the underlying tech is interesting.

While I understand the desire to have 2% inflation across the economy, wouldn't the individual parties prefer to hold their cash in a deflationary currency?

Put differently and going fast forward; how can you have a mildly inflating currency (eg. EUR) when there's a deflationary currency (eg. BTC) as a viable alternative around?

Would you propose we prohibit crypto currencies? (What would you propose?)

Crypto currencies can exist for those who want them, I don't see any reason to block them beyond ponzi scheme and marketing issues - similar to stock issues. So probably they need some regulation to not defraud unwitting people.

Bitcoin is not an alternative to Euros. That is the whole point. If you switched all euros to bitcoins and asked people to trade those, the economy would collapse as no one would want to trade their bitcoins because mathematically, they increase in value due to the limited issuance of them. Without modest inflation, the economy cannot grow as no one would spend money for investment purposes.

Well, inflationary currencies have the natural tendency of displacing deflationary ones out of the market. Not the other way around. It takes a lot of inflation to reverse that relationship.

"While I understand the desire to have 2% inflation across the economy, wouldn't the individual parties prefer to hold their cash in a deflationary currency?"

Typically, they'd prefer not to hold currency; they'd prefer to make an investment that gives a supra-inflationary return. This is, in general, good for the economy and the society.

"Put differently and going fast forward; how can you have a mildly inflating currency (eg. EUR) when there's a deflationary currency (eg. BTC) as a viable alternative around?"

I dunno, why isn't everyone parking their money in gold?

> wouldn't the individual parties prefer to hold their cash in a deflationary currency?

Net (currency-denominated) creditors would.

Net (currency-denominated) debtors would prefer inflation-adjusted currency.

Those whose significant assets and obligations are not currency-denominated (e.g., who own mines or are committed to deliver commodities) don't really care, directly.

I don't disagree, but I suppose on a technical side it's possible to allow inflation in a cryptocurrency. The rate could possibly also be determined via some distributed consensus approach, though this again would likely not be particularly democratic without some central instance to keep track of voting identities (else you have to use stuff like proof-of-work which definitely isn't democratic in the least).

What if they fork it? I agree with your main point though.

You are just delaying the problem, not actually fixing it and who forks and when? Unless you change the way crypto currencies are made and allow for unlimited creation of new money, it cannot work as a general purpose currency.

Even that raises interesting questions, though. That only works as long as people choose or are de-facto forced into using the state currency.

What if enough people would rather have their money increase in value than allow others in power to deflate it for "necessary socio-political reasons?"

Then you would not have an economy.

Then the author does not understand how cryptocurrencies work. There is nothing preventing to have inclationary currency, and indeed many such exists.

Isn't bitcoin limited in the number of coins that can be issued?

> You can already see this in Bitcoin[1], where relative volatility is dropping every year.

Curious - Is that really due to bitcoin stabilizing or is it because of the deflationary nature of bitcoin? I mean if bitcoin does have some promise, then holding is better than trying to trade in and out of it.

I also went through the quoted link on volatility: http://woobull.com/bitcoin-volatility-will-match-major-fiat-...

One of the things holding cryptocurrencies back is that there is lot of misinformation. Specially in form of articles written without understanding financial fundamentals. It excites the crowd but the takeaways are mostly nonsense. This article is also along the same lines.

There is no concept called "peak volatility" as highlighted in the conclusion. There is only volatility.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. (from: http://www.investopedia.com/terms/v/volatility.asp)

There is average volatility which is a measure of volatility across a >particular period<. In most cases, if I have a data point for say July 2016, the data point will actually be "average volatility" of all July price movements.

And that makes the 2nd graph even more confusing. What is the average volatility is being talked about here? Is it the rolling average of the average of data points or something else? This is so confusing.

I don't think that's an accurate summary. The author's own summary (last three slides) doesn't mention volatility.

Volatility isn't the problem so much as a symptom of the problem, which is a lack of central control. Crypto enthusiasts like the lack of centralization on supposed ethical grounds, but the author draws a separation between ethical considerations and considerations of effectiveness. The author makes the point that fiat is effective.

I'm a big advocate of cryptocurrency but am unconvinced that stable value coins can work. The Sai was recently released:

https://blog.makerdao.com/2017/06/05/introducing-sai/

and BitUSD has been out for years:

https://bitshares.org/technology/price-stable-cryptocurrenci...

but neither have a significant amount of value riding on them and I personally wouldn't trust them with significant value.

The problem with any stable value coin is that its stability depends on the underlying cryptocurrency collateral. As long as the value of cryptocurrencies is significantly more volatile than that of fiat, I wouldn't trust a stable value coin's ability to remain solvent and maintain its peg.

I would rather bear the greater volatility of holding the underlying cryptocurrency, and get to enjoy the upside potential, than hold a stable value coin that has no potential to appreciate and a greater than zero probability of going to zero.

When cryptocurrencies get stable enough to make good collateral for stable value coins, they will be stable enough to use directly as a low-risk store of value.

The one wildcard in my estimation is decentralized options and futures markets. By creating a market for volatility hedging, it might make it possible for parties to 'buy' the requisite stability for a price.

I would rather bear the greater volatility of holding the underlying cryptocurrency, and get to enjoy the upside potential, than hold a stable value coin that has no potential to appreciate and a greater than zero probability of going to zero.

That's about what kind of risks and rewards you want for your investments or savings. If you consider the unit of account for a debt, it seems unlikely that you'll have the same preference.

If a trustworthy stablecoin arrives, you will probably want to collateralize some of your other assets to lend stablecoin just to participate in trades and contracts. Most people don't want stuff to be priced in a volatile unit.

Of course I have to believe this because I do some work on Maker!

By the way, Maker's idea of a stablecoin (the dai, the planned successor to sai) isn't pegged. The dai value floats on exchanges while the issuance system reacts to the market prices and tweaks its own parameters to incentivize medium term stability. In the longer term, the stablecoin might be somewhat deflationary or inflationary even compared to its own stability anchor (the SDR currency basket).

What's the best introduction to the Maker system? Something that explains clearly how the current design works.

A pretty good introduction would be the three videos linked on https://makerdao.com/ (overview, how dai works, and how MKR works).

The current revision of the white paper should lay out the motivation and mechanics of the system without being too verbose:

https://github.com/makerdao/docs/blob/master/Dai.md

If there's something about it that doesn't make sense to you or seems poorly explained, let me know, or you can join the chat/subreddit to discuss.

>>That's about what kind of risks and rewards you want for your investments or savings.

True, if I were a retailer and not looking to invest long-term in cryptocurrency for example, I might prefer to receive a stable coin rather than a cryptocurrency, and then eventually liquidate it for fiat it or exchange it for goods/services.

>>If a trustworthy stablecoin arrives, you will probably want to collateralize some of your other assets to lend stablecoin just to participate in trades and contracts.

That's true, but that's a big 'if' in my opinion.

For anyone saying that, in spite of digital currencies being poor candidates for replacing fiat, they're still legit "stores of value", I have an alternative "store of value" that is also guaranteed to never inflate its supply. It's called: me!

There is only one of me, forever! The supply of me will eventually go to zero! Get in now- only $4999.95 for one 1/1000th share of me! Want to trade shares of me? Just use craigslist. I'm sure I'll be on Poloniex soon. I hear there's a double bottom pattern so get in now!

Don't like me? Well I also hand-made a copper wire sculpture! It's truly one of a kind and guaranteed to last forever! A 1/1000th share of my sculpture is $15,000 though because it'll make you feel sophisticated and artistic (I'm more of a lowbrow investment myself)

In the last two or three weeks BTC has been down to around 3k USD and is now approaching 6k. It's still massively volatile.

"And as author admits fiat is terrible as "store of value" - so with this combination - fiat pegs in blockchain for accounting and native crypto as store of value (keep bitcoin for your grandchildern instead of dolar that looses 95% value over century), it might be the best combination of both worlds."

Why do you want a long-term "store of value"?

Buy your grandchildren a pleasant mixture of diversified stocks and bonds---they and the economy will be better off.

Or, buy your grandchildren gold; it's had a much longer track record as a store of value and is prettier to look at while it is value-storing.

Crypto can remain in this initial state longer than you can remain solvent and longer than your wife will decide to tolerate your adventures in being right at some point.

Source: I was long certain CDS that eventually did pay off.

Volitilty will be inherent with bitcoin, and any blockchain database where the supply has been distributed for low computational/energy/capital input to the small pool of users who aquire majority stake in the total supply, thus devaluing any long term inherent store of value.

additionally, bitcoin and the exchanges can rapidly plummit to zero if and when there's a run to get out as the value requires demand from another just buyer. no buyers, and the price freefalls.

> Volatilty will be inherent with bitcoin... majority stake...

You're making a strong claim here -- and I think this applies to any scarce resource. Why is bitcoin different from, say, gold?

> additionally, bitcoin and the exchanges can rapidly plummit to zero if and when

Here too -- how is that different from any other traded instrument?

The production curve Satoshi designed was to produce the largest supply of Bitcoins for the least amount of effort/resource input to the smallest group of users running the software. Half of the supply was produced this way in the first few months.

Blockchain and Bitcoin is different than physical resources because it's so easily produced.

Crypto tokens are different from other traded instruments because of the exchanges they're traded on are unregulated exchanges which can easily manipulate prices, fake orders, front run, or entirely falsify their deposits until there's run on the withdraws.

> designed was to produce the largest supply of Bitcoins

No; he simply designed for a fixed total amount of bitcoins, namely 21 million.

> Half of the supply was produced this way in the first few months.

No; half the supply is produced in 4 years. Then the next 4 years halves that again. And so on every 4 years.

"Satoshi" choose to produce the largest percentage of the total Bitcoin supply to the smallest group of users for the lowest computational effort/value input.

Rather than designing the supply distribution to coincide with increasing computational and energy value input, the production curve was crafted to gain control of as many coins as possible before anyone else joined the network.

This is a catastrophic design flaw as it means the majority of BTC in circulation was created with very low value input. i.e. 10,000 bitcoins shouldn't surpass the value of two pizzas.

The current value is a mix of passing on the "coins" to greater fools who only think someone else will buy their coin at a higher price. Combined with exchanges which arnt required to publish their reserves, or prevent insider trading or falsifying bids.

More stability will come if verifiable liquidity is offered at any of the exchanges. As we've seen many times, panic sells over trivial news and rumors create freefalls in price from the absence of buyers willing to hold the bag.

> The production curve Satoshi designed was to produce the largest supply of Bitcoins for the least amount of effort/resource input to the smallest group of users running the software.

The total supply was fixed from the start and the supply curve was designed to incentivize mining. When it was initially deployed, there was no reason to believe that Bitcoin would become as huge as it is now, and lots of coins were simply lost in frivolous transactions, faucets, and destroyed data.

> Half of the supply was produced this way in the first few months.

This is not true.

> Blockchain and Bitcoin is different than physical resources because it's so easily produced.

The whole point of PoW is that it is not easy to produce Bitcoin -- physical goods have scarcity enforced by nature; Bitcoin has scarcity enforced by mathematics.

> Blockchain and Bitcoin is different than physical resources because it's so easily produced.

  The whole point of PoW is that it 
  is not easy to produce Bitcoin -- 
  physical goods have scarcity 
  enforced by nature; Bitcoin has 
  scarcity enforced by mathematics.

This is not true. The math in Satoshi's mining algorithm produced most of the coins for extremely low value input.

Most people are simply unaware how the supply was gathered very early on, effectively in the style of a pump and dump scheme.

To be more specific, half the supply was minted at low computational effort from 2009-2013. Mining was made easy so Satoshi could maximize ownership of the supply, hoping speculators would purchase the units for a sum surpassing the value it took to produce the coins.

Bitcoin advocates try to dismiss how easy it is to produce blockchain tokens. Satoshi could just as easily have made the algorithm produce bitcoins in limited quantities early on especially with each coin being divisible to 100000000 units each. Instead Satoshi choose a very easy way to generate the coins before other users took notice of his network.

Along with how easy it is to manipulate prices on exchanges. Exchanges will make huge profits during freefalls because they have no oversight on their order books. There's a reason the exchanges often set up shell companies and use off shore banks in jurisdictions often associated with gambling and credit card fraud.

The market is hardly user driven, it's now at the whim of which exchange can fake their order books while surviving public relations to avoid their solvency getting called out for. Take note how often exchanges have delays with customer withdraws.

> keep bitcoin for your grandchildern instead of dolar that looses 95% value over century

Whereas bitcoin has a proven track record of almost a decade of... existence?

Anyway, why would anybody preserve value in cash over those time scales? The alternative isn't bitcoin or US$ or gold, it's stocks or bonds or real estate or fuck them let's spend it on blow.

Its like pink sheets. Don't tell people who are invested in pumping them that they are not investing into NASDAQ listed securities.

"The alternative isn't bitcoin or US$ or gold, it's stocks or bonds or real estate or fuck them let's spend it on blow."

This is the true question.

Being a terrible store of value is a good thing in a currency, because the encourages investment in actual productive assets as a store of value.