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Comment by stfwn | Hacker News Reader

I feel like I must have a misconception about bitcoin. Coins are earned by calculating hashes for transactions. As the amount of coins grow the difficulty of calculating hashes increases. This limits the creation of new coins, which increases the scarcity of coins and thus their value. This keeps the incentive to mine at a more or less steady level, thus sustaining the network.

But.. Why spend something that is guaranteed to become more valuable? If I had something in my pocket that I knew would become more valuable by systemic necessity, I’d save it as long as I possibly could. Doesn’t this completely undercut the idea of bitcoin as currency?

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> As the amount of coins grow the difficulty of calculating hashes increases.

This is wrong. As the amount of coins grow, the amount of coins generated per block decreases (it halves every ~4 years). The difficulty is completely unrelated to the amount of coins in existence and is instead derived from the hashrate: as hashrate increases, difficulty increases, to target a block rate of 1 per 10 minutes.

> Doesn’t this completely undercut the idea of bitcoin as currency?

I don't think so. Right now people can buy bitcoin which is "guaranteed to become more valuable", and yet they still choose to buy things other than bitcoin with their USD.

Why would it be different if their base currency was BTC instead of USD?

Even if you don't think bitcoin is "guaranteed to become more valuable", there are plenty of things that are close approximations to that (pick any good investment), and yet people still choose to buy things other than investments. How do you explain that? Whatever reasoning you use to explain that can be applied verbatim to explain why people will buy things with BTC instead of just holding it.

You're confusing investment use with currency use. Currencies need approximately stable values to be useful as mediums of exchange. Inflation and deflation can both wreck currencies. Investments, in contrast need to have generally increasing values to be useful as investments.

Bitcoin started as currency, but its enormously deflationary record has turned it into an investment.

You didn't address my argument. If bitcoin being deflationary would truly prevent people from buying things, then why doesn't it do so already? You can already buy bitcoin instead of anything else you want to buy, so why do people buy things other than bitcoin?

If you can explain why people might want other things more than they want bitcoin, you can explain why the existence of bitcoin won't prevent people from buying those things. And whether they already hold bitcoin or not is totally irrelevant.

I would say thanks to it's deflationary nature it is no longer a currency, just an investment.

You also haven't addressed my argument. It doesn't matter whether you call it a currency or investment.

There are already things you can buy that are likely to go up in value over time, relative to the US dollar (e.g. stock market index funds). If the existence of those investments (that people can buy instead of other things) doesn't stop people from buying other things, why would a deflationary bitcoin stop people from buying other things?

people don't buy things by paying for them with US stock index funds. They pay for them with the cash portion of their portfolio. I mean sure, at some point they convert parts of their stock portfolio to cash. the reason it matters whether it is currency or an investment is, if it is an investment, then it should be valued on principles we use for valuing other investments.

The only reason to hold off on purchases because you think your bitcoin will go up in value is because you think your bitcoin will go up in value.

But that applies just as well even if you don't already own the bitcoin (you could just buy bitcoin instead of the other thing). Why does anyone buy anything that's not bitcoin? Because they want those things more than they want bitcoin. That doesn't stop being true just because you can pay for things in bitcoin.

Identical reasoning applies if you replace "bitcoin" with anything else that you think is going to go up in value over time. And people still buy things. The sky isn't going to fall down!

It's not symmetric though. If I sell bitcoin to buy toothpaste, I will need to pay taxes and transaction costs, so I will probably just use cash to buy toothpaste, not bitcoin.

Currency and investment are two totally different use cases. People's intentions and behaviors with respect to them are totally different.

It does, nobody actually uses bitcoin to buy things. The only people making money from bitcoin are exchanges and the speculators on the winning side of bets.

I regularly buy hosting, domains, hardware (heck, I bought some electronics which would be worth $50,000 today). I don't see a problem.

> heck, I bought some electronics which would be worth $50,000 today

You don't see that as a problem? Why buy things with BTC when it's better (for now) to just hold it?

That is equivalent to saying: "Why buy anything at all when it's better to buy Bitcoin?"

It's the same thing: opportunity cost of not owning Bitcoin (or any other investment). Each person decides how confortable they are with the risk.

No it's not. I'm happy to buy things with my fiat currency because it's not increasing in value at astonishing rates. I'll just keep my bitcoins and cash out some when I want to buy stuff.

But people buy other things! Why don't they just buy bitcoin instead?

I don't think you actually have an argument. I think you are confused.

Bitcoin's deflationary nature makes it bad as a currency. The rapid price gains do indeed prevent people from using it to buy things. Here, noted investor and Bitcoin proponent Fred Wilson has said he's stopped using it for commerce: http://avc.com/2017/08/store-of-value-vs-payment-system/

This is in contrast with cash, which people don't hold on to in the same way. Nobody goes out to dinner and says, "I'm only getting a appetizer because this $20 bill will be worth more next week."

No, I think you are confused.

Bitcoin already exists in the world. People can already buy bitcoin instead of other things, and yet people still buy other things. Why is that?

Nobody says "I'm only getting a appetizer because if I invest the money instead this $20 will be worth more next week."

Investments already exist and yet they don't stop people from spending on other things.

The discussion is not about people randomly buying things higglety-pigglety. The specific point is "Doesn’t this completely undercut the idea of bitcoin as currency?" It does.

Currencies are well-studied economic entities. So are investments. They have different purposes, and people behave differently with respect to them. You can feign ignorance of the two all you like, but that does not erase the difference.

> Nobody says "I'm only getting a appetizer because if I invest the money instead this $20 will be worth more next week."

People in fact do that all the time. People spend less so they can invest more. They trade currency for an asset whose value they expect to appreciate. If that asset does indeed appreciate, they are far more likely to hold onto it than cash, especially if they expect to it to appreciate yet more.

I gave you a specific example of a prominent investor and Bitcoin advocate shifting from treating Bitcoin as a currency to treating it as an investment. Which you ignored, just like you're ignoring basics facts about finance.

The difference is semantic. You don't invest in a depreciating asset (USD). Despite this fact, you still do have and use depreciating assets - cars, inflationary currencies. It just so happens, that your preference is to get rid of bad money first (Gresham's law). When the bad money is gone, all you are left with is the next worst money/ wealth you have (money as in M0,M1 money stock etc.)

The difference is definitely not semantic when we are discussing the utility of a technology for a given use case.

It's like saying all computers are basically the same -- which they are -- and then going on to conclude desktops and smartphones and rack-mounted servers are all interchangeable.

Bitcoin may be a great investment asset. Time will tell. But its deflationary nature and its high volatility make it a bad currency. That's in obvious contrast to the original intention, which was a "purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution."

Why is deflation bad?

Deflation is bad for a currency because it means the currency will be worth more later. People hold on to things that they think will be more later. Currency, though, should be something people are comfortable spending.

See here, for example, for a prominent Bitcoin advocate explaining that he no longer uses it as a currency: http://avc.com/2017/08/store-of-value-vs-payment-system/

This is especially a problem when a currency is used by a lot of people. It discourages economic activity and increases the value of debt. Imagine, for example, that you had taken out a Bitcoin-denominated car loan on Jan 1 2016 with a monthly payment of 1 BTC. That's about $440 at the time, or 15 hours at the median US wage. Now you'd have to work 40x as much to cover the loan payment, or about 20 hours a day just for your car. Meaning you would have been driven into bankruptcy.

Luckily for its users, Bitcoin never really took off as a currency, so their debts are in much more stable national currencies. But as you see with Fred Wilson, many experience sharp regret for the times they did use it as a currency.

> If I had something in my pocket that I knew would become more valuable by systemic necessity, I’d save it as long as I possibly could.

I also save my USD “as long as I possibly can,” by which I mean “until I value something more than the USD it costs to acquire.” In practice, that very frequently ends up being relatively small purchases of things I literally need to survive and function in society, like food, rent, and clothing, but beyond that I try to save as much USD as I can despite it being nearly guaranteed to decrease in value over time.

You really keep your savings in cash beyond your emergency fund? (I'd think most people don't)

Cash or cash equivalents (savings, CD, etc) if your main goal is to finance a home. One measure of "can I afford this home" is, did you earn your money from regular work and savings or one two years of extraordinary stock market gains.

Keeping savings simple at times is prudent. I have a feeling a lot people are going to be mostly in cash in the next 18 months...

That frequency is small because the central bank targets an inflation rate of about 1-2% (and does so by pumping currency into the market, more or less). This does two things: makes it not worth it to save your money, and makes it not worth it to invest it it anything with less than a -1% yield (unless it is a good or service of some kind).

So you’ve not answered the questions of “why would I spend this currency on _anything_, including other investments, if holding onto it is the best investment out there?” And how does bitcoin not consistently stay in a deflationary spiral?

> why would I spend this currency on _anything_, including other investments, if holding onto it is the best investment out there?

Different people value different things differently, thus there is no universal agreement on what the “best investment” is. Remember that the price of Bitcoin cannot change without both a seller and a buyer. Each bitcoin bought is a bitcoin sold. The most obvious and simplistic example of a reason people might sell Bitcoins right now is that they are hungry and want food, but that generalizes to more complex differences between individuals’ time discount functions.

«If I had something that I knew would become more valuable...»

Because neither you nor anyone is certain Bitcoin will become more valuable. If you knew, you would put all your life savings into Bitcoin this very minute.

That's the reason I personally have been spending bitcoins for 7 years, and will continue spending them. For all I know BTC might crash tomorrow and never recover.

> Why spend something that is guaranteed to become more valuable? If I had something in my pocket that I knew would become more valuable by systemic necessity, I’d save it as long as I possibly could.

Why buy a computer/phone/car that is guaranteed to become cheaper next year, or obsolete within 2. If I were given the opportunity to purchase something that systematically becomes LESS expensive, I'd hold off on the purchase as long as I possibly could.

Because I get to use these items.

??? Exactly

Presumably if a real money system (like dollars for most of the 19th century) were deflationary, people could still use those dollars, and whoa. They did use those dollars.

>Why spend something that is guaranteed to become more valuable?

Yes, and this is a concern for many. Bitcoin might not be the winner for reasons like this, but it is a leader and currently is the winner. There are a lot of people now thinking about these problems and even in some cases, how to add things like inflation to Bitcoin so that people do start spending it more than hoarding it

So people are aware of it, it is just too early in a lot of ways to tell what is going to happen.

Personally, it wouldn't surprise me if Bitcoin is like Mosasic and eventually we are using Firefox, Chrome, etc equivalents of cryptocurrency years from now.

>Why spend something that is guaranteed to become more valuable?

Its not guaranteed though. Bitcoin may go out of favor and coins can become worthless, doesn't matter how limited the supply is.

Yes this is one of the problems that bitcoin has to overcome if it ever wants to be something more than an investment currency. You are not the first who notices this problem, see e.g. https://en.bitcoin.it/wiki/Deflationary_spiral

Infinite divisibility is the important point you are overlooking here.

The difficulty increases or decreases proportional to the effort expended, so that new coins are minted every 10 minutes. The 21 million coin limit is hardcoded. To your question about spending deflationary money, one theory is that people may buy more high quality, necessary goods than cheap crap.

That's not quite how it works. The difficulty of calculating hashes is dynamic -- a function of the global hashing power -- to ensure that, on average, each block takes 10 minutes to mine. The miners are rewarded for mining a block from the mining fees paid in each transaction (which can be zero, but it's then very unlikely that your transaction will be picked up) and a reward. This reward started at 50 BTC per block and halves approximately every four years (it's currently 12.5 BTC per block): this is where new bitcoins are created. This series of halvings eventually converges to a sum of 21 million BTC available.

So miners are pulling 12.5 * ~$11,555 = ~$144,437 every 10 minutes ?

    Sweet.

One miner is (currently) rewarded with 12.5BTC when they mine a block before any of the other miners; minus the expense of the energy used in mining that block plus all the other blocks which they were unsuccessful in mining before everyone else (i.e., wasted effort). Hence the race for more efficient hashing hardware, to be the one who wins that reward before anyone else, without it costing them more than what they invested.

That's one of the problems with deflationary currencies - people are less willing to spend them since they are essentially an investment, making them more volatile. Governments target 1-2% inflation for valid reasons.

But if they're more volatile wouldn't that motivate people to spend them?

Why buy an iPhone X now, when next year you could buy two?

Because even in deflation, some trades are worth it.

This drives consumerism.

>Why spend something that is guaranteed to become more valuable?

Nothing is guaranteed to become more valuable! In the US we’ve had a depression and even a recent recession to help teach us this. Guess it didn’t take.

Yes, which is why it hasn't had any significant usage as a currency. People are just calling it 'digital gold', now.

It's also not correct that bitcoins are scarce. They're only scarce as long as there's a social agreement that 'bitcoins' are the one true cryptocurrency. It's trivial to create new cryptocurrencies or even fork the main bitcoin blockchain. That could turn on a dime and wipe out all of bitcoins value, if some new cryptocurrency comes along and everyone switches to it.

You seem to be deliberately conflating the terms “Bitcoin” and “cryptocurrency,” when you clearly understand that the former is a special case of the latter.

I also tend to think that bitcoin is scarce only if it’s not forked. Can anyone elaborate?

"Bitcoin" isn't the software, or the network, or the database. It is the consensus of every player in the ecosystem: users, miners, developers, exchanges, etc. A fork doesn't fork the consensus, its by definition a deviation from consensus. Forks don't duplicate what is valuable about bitcoin.

Except bitcoin cash seems to have maintained value.

Because there are true believers who think it will overtake bitcoin in the end. It's perceived value is derived in opposition to bitcoin, rather than duplicating bitcoin's value.

Nevertheless, there are now two competing bitcoin chains, a doubling in the number of bitcoins. And I imagine there will be more and more in the future.

A common misconception is that while Bitcoin may be deflationary in that the rate of supply creation is decreasing, it does not in any way guarantee the value of the coin. Inflation and deflation of currencies are also demand based. If demand for bitcoin falls faster than the decreased rate in which coins are issued, the value must go down.

As with most financial assets with high liquidity, there is no such thing as "guaranteed to become more valuable". If it were, it would already be at that price.

What you are talking about is the speculative value. There is also a utility value for a pseudonymous currency that is difficult to block and nearly impossible to reverse for things like drug sales or laundering money. One big risk with bitcoin is that another cryptocurrency could come along that has lower fees(because of block size or different proof of work system), faster block times for more reliable transactions, more anonymity in practice, or a more useful secondary network.

Yes. You describe classic deflationary behavior. That's why central banks target a small positive inflation rate (e.g., 2%).

Fred Wilson, a prominent VC investor and Bitcoin proponent, said as much in August: http://avc.com/2017/08/store-of-value-vs-payment-system/

There are many things which are scarce — and becoming more so every day — but which are largely useless and not very valuable.

This point gets discussed ad nauseam on every thread about bitcoin. I haven't heard a good answer yet.

A pragmatic approach. The world holds incredible amounts of us dollars in the mattress.

If your expectation of bitcoin were that its value just doesnt decrease you have an incentive to turn your cash positions into bitcoin.

We could say people shouldnt have signficant cash reserves but reality shows otherwise.

> Why spend something that is guaranteed to become more valuable

At some point the expected increase in value will be on par with the utility value derived from making the transaction with the bitcoin you already have.

But it does make for a great investment asset and or store of value.

Past performance is not directly related to future performance. Yes, buying BC 5 years ago was a good bet, that says nothing about buying them today and selling them in 5 years or even 5 days.

It won't. Bitcoin is a fad. It will run out of fools and when it does there wont be a way out.

Let me illustrate it on a very simple scale. There are four participants in a market. Each one starts with 100 coins and $100 USD. Each coin is valued at a dollar. Minimum units are 1 coin and 1 dollar. What is the maximum market value?

The correct answer comes from a single pre-final stage:

One person has 400 coins another person has 400 USD and the other two people have nothing. At this point the person with 400 USD pays $400 USD for 1 coin giving all 400 coins value of $400 each i.e. $160,000, except there are no $160,000 in this market.

To the person talking about a auto:

Bitcoin is a fad - it will be worthless. Shared public ledger is where the money is.

This is easy to refute for crypto fans.

In your scenario, a third-party prints $159,600 USD. (aka inflation, government deficit/debt, quantitative easing...).

Time will tell who's right.

It does not. We have defined a totality of the market. Since it does not fit crypto-nutcases view of the world, they come up with the slogans: QE! Fiat! Inflation!

Do you at least accept that in the market described above coin value is fictitious as soon as totality of the market is value for coins is higher than $400?

[late edit]: Do note that it is not to mean that there's no money to be made before the collapse - there are tons of fools who are willing to part with it. That's why financial firms are starting to salivate looking at it.

Try switching the labels "USD" and "BTC" and try to work out where your argument breaks down.

When one person buys 1 USD for 400 BTC, that means the 400 USD is worth 160,000 BTC, but where are all the BTCs?

If that's not a good argument against the US dollar's viability as a currency (and it's not!) then your version is also not a good argument against Bitcoin's viability as a currency.

When goods and services start being quoted in BTC you would have that argument.

There are no goods and services inside your model.

There are only 2 currencies. Your assertion that the exchange rate is bogus because it is possible to buy 1 BTC for $400 applies just as well in the opposite direction.

Except that we have never seen that happen.

What does that even mean?

Was your $400 + 400 BTC model supposed to be an argument from first principles, or was it supposed to be a reference to some empirical evidence?

I don't think you're being as intellectually honest in this thread as you could be.

Ok, that was a cheap shot, I agree.

I am, however, yet to see a single article talking about USD being quoted in bitcoin. Just like I do not see any articles of USD being quoted in Samsung TVs. I do see bitcoin being quoted in USD. I see USD being quoted in Euros and I see Euros being quoted in USD.

That's why Sansung TVs and BTCs are not currency while USD and Euros are. So BTC is asset. Assets in an non-liquid markets are prone to enormous bubbles.

> ... crypto-nutcases view of the world ...

I'd suggest that discussing your point without the ad hominems makes for a stronger argument.

Kinda like how a third-party prints USDT in the cryptocurrency case ;)

Far too simple of an analogy. First there is competition between miners so there's never going to be a single source, plus there are millions mined already in the pool. Also, bitcoins are currently divisible to 8 decimal places but that can be changed as soon as it's needed.

It's quite possible in 20 years that 0.000000000001 of a bitcoin will make the average house payment and by then, we'll have friendly names for all the decimal places.

This entire thing is based around the premise that BTC is freely exchangeable for real currency. The amount currently exchanged is microscopic compared to the market value of BTC.

Here's old school BTC:

https://en.wikipedia.org/wiki/Shell_money

> It's quite possible in 20 years that 0.000000000001 of a bitcoin will make the average house payment

No, it isn't.

Thats a bold claim given the history.

No, it isn't.. and I sincerely hope you're joking.

You should do the math on that and figure out what the value of a single bitcoin would have to be to make it come true. If that doesn't wake you up to how ridiculous that claim is, I don't know what to tell you.

I'll even go incredibly easy on you and let you assume the average mortgage payment is only $100.

Hint: it's a number larger than the US GDP

It's somewhat terrifying to me that I even have to argue this with someone.

OK, I didn't do the math. Thanks for the correction :). Turns out - lets ignore your generosity there, that we are realistically talking around 1000 trillion. National debt is at like 14 trillion. Chinese M1 money stock is 7 trillion. Now at the current growth rate, which is unreasonable to continually sustain, could continue to be high for a while, and you can't ignore the incredible growth of the global narrow money stock - https://data.oecd.org/money/narrow-money-m1.htm#indicator-ch... (10x in 15 years - 62x for Turkey in 20 years!). So I'll agree with you, highly, highly unlikely - but not at all beyond the realms of possibility - given what appears to be highly improbable (yet predictable history).

This is an oversimplification. You need to add goods and services to your hypothetical situation for it to make sense.

Say there is one hotel room and the alternative is sleeping on a park bench. The cost of the hotel room is 1 BTC. The price of Bitcoin is peggged to the perceived value of the room by the market.

The reason why currently the price of BTC is rising without goods being traded is speculation by investors that this will be possible in the future.

This is the equivalent that it costs $10 a night to stay in the hotel room but in 2 days time it will cost 1 BTC. If BTC is trading at $5 USD then it will be a good deal to buy BTC today as long as I have enough money that I’m not homeless in the interim.

There are no hotel rooms quoted in bitcoin. They are quoted in real currencies.

   the question is not how scarce Bitcoin is
   the question is how abundant are fools

2. Your example is flawed, Bitcoin isn't an isolated ecosystem, it parasitizing on a global economy. HODLers even use USD as a Unit-of-Account, when bragging about paper gains.

please illustrate how my example is flawed without hand waving.

In your example you start with 4 players each having $100, but IRL there are many more players with many more dollars who can and will join this game and 4 original players will eventually willingly or unwillingly exploit them.

It's like Israeli Kibbutzim[1] had a members-only Communist-like system, by exploiting outside employees and living on government subsidies.

Most kibbutzim are not self-sufficient and have to employ non-kibbutz members as farm workers (or later factory workers).

[1] https://en.wikipedia.org/wiki/Kibbutz

market is a closed system.

The problem with your example is that there is no demand, so there's no reason for anyone to buy any bitcoin at any price and so no expectation that you could sell your 400 bitcoin for $160,000. The driver of speculative value for bitcoin is future demand, i.e. what the demand is expected to be down the line. This is partly driven by speculation/greater fools right now. But its also partly the potential of Bitcoin to be a global currency.

There's a potential that if you play the price of your chineese take out as tje powerball numbers you will win it.

Right, but the chance that bitcoin reaches widespread usage, e.g. overtakes VISA/Paypal is judged to be much higher than winning the powerball.

Bitcoin is an underdog in that fight now.

Network effects work in bitcoin's favor.

There's a chance that a shared public ledger will overtake Visa/Paypal. It is million times higher than a chance of BTC overtaking either, and it is a bad bet.

If any crypto does, it's likely to be bitcoin (with lightning network).

Now add on a system where there are years where people buy Bitcoin in dense, multi-output exchange transactions, and they suddenly all have to transfer their coins to the exchanges using inefficient 1-output transactions.

The pool has been filling with a hose and now suddenly must be drained with a straw.

Then add on a system where sudden price drops instantly lower the transaction throughput (hashrate, while difficulty takes days to adjust). The straw gets kinked.

We got a window into this nightmare on nov 13, that was enough for me.

You are overthinking it, just BUY! /s

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