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According to Wikipedia [1]:

Whether deflationary spirals can actually occur is controversial.

Now I'm not an economist, but I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin.

Suppose the value keeps going up, and a few years from now it's at $1,000 / bitcoin -- lots of poeple have been buying bitcoins wherever they can, and not spending them. Well, at some point people will decide that the price is ridiculous, because it's all based on speculation -- suppose it's $10,000 / bitcoin. And it will either stop increasing in value, or crash a bit.

Well, I don't see how this has prevented it from acting as a currency at any point in this, since it always has a value. There are always going to be some people willing to trade some bitcoins for some price -- and that's just the price, and whether you're dealing with whole bitcoins, or millionths of bitcoins, I don't see what further consequences this has.

And when you're talking about the macro-economic level, running a whole economy on bitcoins would be a separate issue, but there could be tools to deal with that too. For example, not denominating debt or salaries or goods in Bitcoins, but in a multiple of a consumer-price-index or something, that can change relative to current Bitcoin values.

[1] http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral

I have yet to see a solid, intuitive argument as to why deflation is necessarily a bad thing for Bitcoin

So deflation is a general decline in prices which usually caused by the reduction in the money or credit supply (in Bitcoin’s case it’s the Money Supply). However if prices are falling through deflation then, you’re not incentivised to spend because; you’re going to get a better deal tomorrow. Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.

In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation. Raising the prices is the essential foundation of an economic recovery because; businesses can increase their profits which takes pressure off debtors etc and an example of this is the fiscal stimulus used by the Obama Administration with the American Recovery and Reinvestment Act of 2009[1]. However, Bitcoin can only produce 25 Bitcoins every 10 minutes (which is being halved every 4 years from 2017) and this can create a liquidity trap because the injections of cash fail to stimulate economic growth – as a result, if Bitcoin is in a recession and is unable to stimulate economic growth it will eventually turn into deflation & deflation is only bad for people who cannot borrow more and unlike fiat currencies who can borrow more, Bitcoin has a fixed supply (and isn't even backed by a commodity) which means that, there could potentially be serious issues for the economy’s wealth.

[1] http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestm...

Thanks for writing all that up. What I still don't understand is,

> Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.

Well, if people are expecting deflation, then that expectation becomes built into the value of the currency, such that there exists an equilibrium between people expecting it to deflate further, and people expecting it do the opposite, because it's already overly valuable.

I can't see how everyone would just hoard it until there's infinite demand and zero supply, and a bitcoin has infinite value. There's always a semi-stable price.

And like I said, I don't see how the standard macroeconomic arguments apply, because right now bitcoin is just a currency "on the side", totally unable to affect economies on a large scale. And if it ever did reach that scale, governments could do things like force contracts to be denominated in some government-controlled ratio to bitcoins, so that the government would still be able to "control" the money supply, and increase or decrease it as desired. (That's just one crude example of how.)

Just because people are using bitcoins, doesn't mean that long-term contracts have to be denominated in bitcoins.

So I guess this is what confuses me about people saying that bitcoin deflation is bad. Deflation=bad arguments seem to rest on entire countries being solely dependent on a single currency, which is not the case with bitcoin. And even that became the case, it would presumably take place in a whole new way. But I still don't see anything inherently wrong with a deflationary currency, especially one used alongside "official" ones.

So by the "economy" think of Bitcoin like they are a country (a really small one) and that’s the only currency for them and in some cases deflation can be beneficial to some people in an economy. For instance as I was saying in the previous comment it's beneficial for those with the cash and income streams as they become more valuable as time goes on and its good for the debtor.

However, you are correct in that there is always going to be a semi-stable price (or a price floor) when the money supply starts to help create inflation and grow the economy again. In terms of how it’s bad for Bitcoin building on the previous comment, let’s pretend that people have bought coins at $200 and deflation kicks which means that, people either hoard it (to try and get something cheaper tomorrow) OR once it hits a certain level everyone tries to recover their losses and starts selling the coins which causes an economic crash to a highly volatile market (a $500k trade can usually cause a lot of issues) and the market will not level out until, there are enough buyers interested to buy back into Bitcoin.

Maybe I'm misunderstanding the argument, so can anyone please point out the flaw in my dismissal of this argument ?

1) assuming bitcoin will deflate 2) this means that existing bitcoin holders will be able to exchange their bitcoins for more $ than ever on mtgox/... 3) the conclusion is that this will make people leave bitcoin

Needless to say, if this is the argument, that people will leave bitcoin because they earn too much without doing anything, good luck with that one. So where is the flaw in my thinking here ?

I would also like to point out that a deflationary system won out over a debt based one many times in history. Saying it can't happen doesn't seem like it's based on anything. The obvious big example would be the end of the (west) Roman Empire, but there's dozens of examples in the last 2 centuries alone. This is yet one more case of people in the west thinking that because it hasn't happened in the west in the last 60 years, that it cannot happen (and they simply don't know just how often it happened before that).

Debt based currencies are fundamentally pyramid schemes, slightly obscured by the fact that the growth phase can last a very long time, but that doesn't change anything, not really (except opening up the possibility of a person being born into a pyramid scheme and aging and dying normally while the pyramid scheme is still growing). This will not work for bitcoin because bitcoin itself depends on infrastructure that depends on those existing pyramid schemes (ie. USD/EUR/...). It will work for house ownership and maybe for gold ownership.

Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.

Please correct me if I am wrong, but isn't the value of the total money supply supposed to equal something like the total value of the goods and services in the economy that that money supply represents (not sure if the wording is correct but hopefully I got the idea across). If that is the case, then won't a decrease in spending cause the total value of the money supply to decrease, meaning the expectation of deflation will cause some amount of inflation, such that the system stabilizes? Because of this, I don't see how you can have a deflationary spiral in a depressed economy based on anything other than speculation (and thus a Bitcoin bubble which will eventually pop). I do agree that Bitcoin is naturally deflationary; if there is economic growth, the money supply can't expand to keep up. And Bitcoin's deflationary nature slows this economic growth. Thus, I think that Bitcoin will eventually reach a stable real value. I think there must be a flaw in this reasoning because I'm sure many economists would disagree but I can't seem to find it myself.

>Now as currencies are supposed to be used as a medium of exchange to facilitate transactions, spending is really important because it’s how the market participants interact with one and other (and considering Bitcoin isn’t backed by a commodity this is important). Once people are reluctant to spend then, the economy will stay depressed because, people expect deflation AND deflation will continue because the economy remains depressed.

People not spending money is generally a good thing. There are more resources to go around for everyone else and other people can afford more things with the same amount of money. Most people who save money invest it, which benefits the economy in the long term.

>In order for an economy to get out of the deflationary trap and to counter deflation, fiat currencies can use monetary policy to increase the money supply and deliberately induce rising prices, causing inflation.

This hurts everyone though. Everyone has the same amount of money they did before, but suddenly everything costs more. No wealth is actually created by doing this, the same amount of goods are in the economy. But the person who gets the printed money buys a bunch of them, and then has a larger share of the pie, leaving everyone else with less.

Yes bitcoin has a mechanism for creating new currency, but this was a necessary evil in order to distribute the first bitcoins relatively fairly. It doesn't actually benefit anyone to give free bitcoins to some people just for running their computers a lot.

What you have described sounds like the opposite of a stable currency.

Also, the fact that the supply of bitcoins is fixed by the population of the human race is not means that bitcoins are inherently deflationary.

The principle of dual circulation and 'bad money driving out good' is formulated as Gresham's Law. While this is typically applied to two currencies pegged by fiat, it would also apply to a pair of circulating currencies in which one is appreciating and the other depreciating.

The only problem is that Bitcoin does have an end use—as an anonymous digital currency (c.f. Silk Road). And furthermore, whether you believe it to be 'macroeconomic cancer' or not, it exists and cannot be shut down as a matter of policy.

Not completely, no, but it could certainly be stunted. The first question anyone asks about bitcoin is "What can you actually buy with it?" If it becomes illegal for American or European companies to accept bitcoin payments, that would certainly certainly do a lot to prevent it from taking over.

Just yesterday I would have rather used Bitcoin instead of a credit card to buy a game on my nephew's PS3 over the Playstation Network. The process of entering my contact details took several minutes. Afterwards, we had no idea how to remove my credit card from the system.

Simply checking out with a QR code and sending the Bitcoin from my phone would have been easier and not required any of my personal information. Instead I had to enter everything required for identity theft and to make fraudulent charges. It was the only way to pay and it was a hassle.

I can enter my credit card details in about 15 seconds (30 on mobile). "Qr code" and "simply" do not belong in the same sentence.

Bitcoin Wallet on Android makes it pretty simple, at least for me.

15 seconds? Including your address and phone number? With a PS3 controller?

IMHO, this isn't a failure. We know that it's not going to be a business-as-usual currency. Easy credit is an incentive for business; inflation is an incentive for consumers. Governments have much better control over that.

BC is better understood as a commodity market with a simpler financial instrumentation. Instead of trading contracts for goods, you are able to trade the good itself, at internet speed and scale. That's a big innovation and we've only started to realize the consequence of it.

Except that Bitcoin is not a commodity (as the term is commonly understood) because it has no use other than as a currency.

Which only means that its value can drop to zero, unlike other commodities.

Actually bitcoin is great for laundering, so it will always have "some" value

Only as long as there are legal uses for it; otherwise, it is as good as laundering money by buying and selling cocaine.

It creates discussion. That has to have some value on the internet, especially for ad based sites.

http://blog.oleganza.com/post/42262765318/direct-use-value-o...

Bitcoin is a commodity backed by Mathematics with the convenience of transfer of ownership through electronic rather than physical means. When the last coin is mined in 2140 the point of deflation might hold if it was a currency, but it's not. It is a faith based value store based on supply and demand, just like gold, which has next to no useful properties other than being shiny, non-tarnishing, conductive AND PEOPLE THINK IT'S VALUABLE.

With the FED and Monetary Easing the total amount of dollars in the economy is increasing, but the actual value (purchasing power) of every dollar is decreasing. But since the number of dollars (numerically) that people are holding is increasing there is no speak of deflation because prices aren't going down due to the inflation of the amount of dollars. The actual purchasing power is deflating but due to economic slieght of hand everyone has more dollars. Win win!

The value of money is not the number of dollars but the distribution of the dollars throughout society. Double everyone's bank account and nothing would change after the initial emotional frenzy - prices would settle at twice the original values.

Deflation may be an 'economic carcinogen' but what name is given to the systematic reduction of value and spending power in an economy where there is almost no saving and for what saving there is there's no interest?

The price of gold has been increasing to greater and greater highs for the past decade due to the monitary policies during that time. Bitcoin is reaching a point where it can stand along side with it in some people's minds because it has a strong Mathematical backing rather than a flimsy backing by governments. Gold was taken over as a currency by paper; maybe BTC will end up the same way some day.

Bitcoin isn't backed by anything.

"Backing" is also grossly misunderstood in general.

Any "Backing" a currency has can generally be thought of as an put option on something fungible.

For example, gold will never drop below $10-$20 per Oz because of the industrial/jewelry/etc uses people find for it. However, that "backing" only makes up a small percent of the price of gold.

> Bitcoin isn't backed by anything.

True; in a sense, its a formalized potlatch system in which the publicly-demonstrated destruction of wealth (energy and wear-and-tear on hardware, demonstrated via computation proofs) is rewarded instead of with informal social regard, with concrete exchangeable tokens.

> Bitcoin isn't backed by anything.

It's unusual in that it does have a cost of creation - the expense of the machinery and power required to mine a bitcoin. So it does have a "base value" of a sort, you just can't redeem it.

Backed in the structural sense not the monetary sense. I should have written 'Bitcoin is a commodity with a solid foundation of Mathematics.'

>With the FED and Monetary Easing the total amount of dollars in the economy is increasing

Not true. QE is a swap. Take away a bond, replace with reserves. No net change. If anything it's deflationary, as the bond yields more interest than reserves.

Even if the amount of net financial assets in the private sector does increase, it doesn't necessarily follow that the purchasing power of the dollar decreases. It all depends on the capacity of the economy to absorb the extra spending. If there is excess capacity that is mobilized by the extra spending, you get more dollars chasing after more goods. If there is no excess capacity, you get more dollars chasing after the same amount of goods.

1. There's an equilibrium rate that will be reached.

2. Time preference exists.

3. If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?

Re: 3: If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?

http://www.comedycentral.com/video-clips/tw2ltp/chappelle-s-...

> If this is the one thing in the world that can only get more valuable as time goes on, why aren't you spending your entire net worth on it as we speak?

The conclusion that Bitcoin will only get more valuable as time goes on depends on the assumption that it will acheive and then durably retain a certain degree of importance as a currency.

The people that are pointing to the problems associated with that are not arguing that they believe that will occur, they are making an argument about either why it shouldn't occur or why they believe it will not occur (and, often, both simultaneously.)

Except that the point of the parent post was that people would always hoard bitcoins and never spend them because the value would always rise.

If you don't expect it to always rise, then you don't have the issue (not that it would necessarily be one) in the first place.

"Deflation is terrible" is a myth propagated by mainstream economists. Its probably true for the fiat money, fractional reserve (fictional reserve?) system we live in but Bitcoin by its construct is a very cool experiment to see if an alternative would work. The smartphone industry has been in continuous deflation for years - you can buy a better phone or same phone cheaper if you wait a year. But that dosent stop us from buying now does it. Hasent caused a recessionary death spiral yet.

It is interesting how the deflation argument is always raised when talking about Bitcoin. Sure, deflation is an "economic carcinogen" in the current financial system (which is inevitably tied to the currency specs), but it won't be a problem in a Bitcoin world. Let me show an example:

Imagine I need to buy a house. Today, I would go to the bank, ask them for money and they will give it to me under the condition of giving it back, plus inflation, plus a fee. I need to give back more money than I received in order to pay the government (inflation) and the 'professional' lender (fee), for their 'services'.

In a Bitcoin world, if I needed to buy a house, I have two choices: Pay it now, if I have enough money (exactly as today) or pay it later (in several installments). As simple as that. Then, the housing market will decide if this is acceptable or not, or how much time the seller is willing to wait. The only difference is that in the Bitcoin world the "professional" lender will cease to exist (the seller will be at the same time the lender). And since there is no inflation, I will not need to pay the government either.

Actually it would be much easier to buy a house.

The boom and bust cycle wasn't caused by deflation and it hasn't gone away today either.

> it will always be tempting to keep your Bitcoins in your pocket and let them appreciate instead of using them for needed goods and services.

What's wrong with this? If you choose to take a choice which actually makes you better off, how is that a bad thing? Shouldn't people saving/investing their money be encouraged?

>And certainly, no one will take on debt denominated in Bitcoins.

They would if the interest rates became low enough to make up for deflation. As you claim, more people would save a deflating currency, which will further push down interest rates (since when people save money they usually invest it or put it in a bank which loans 90% of it back out.)

Inflation necessarily makes everyone worse off. The person that prints money can now buy more goods. But the amount of goods in the economy doesn't change. So there is less for everyone else. It's effectively a very confusing and indirect method of wealth redistribution.

Or, people might be more careful what they spend on, ie things that could provide more utility than the rate at which bitcoins would appreciate.

Again, the same is true for gold and several other metals.

Yeah, and there are very few markets in the world where the weight of some quantity of metal is used as currency. Let's put it this way: if you had no money at all, and I gave you a gold coin, how would you pay for your dinner?

Same way I'd pay for it if you gave me a Euro. Except that I know where I can turn gold into cash.

Except that there are markets where Euros are the currency. Can you actually name a market where weights of gold or other metals are used as currency without first looking it up?

Yes, there are gold dealers all over the place. You might get a lousy deal, but the currency exchange at the airport will give you a lousy deal on a pocket full of Euros, too.

That is like saying that beer is a currency because there are beer dealers all over the place.

Sort of. I suppose there is some secondary market in beer. Near a college, maybe?

You can readily hock a car for money, so that's a few levels closer to being a currency. You can sell used media.

But there are people in the business of buying and selling gold for the sole purpose of readily converting it to currency and vica versa so that gold can be used as an alternative to paper currency managed by a nation's central bank. That's almost all that gold is used for, and that's what dealers in gold coin and gold bars are in business to enable.

Except that in practice, weights of gold are not used as a medium of exchange in almost every market in the world. Gold may be used as a store of value, but so can land, buildings, collector's items, etc. One of the defining characteristics of currency is its use as a medium of exchange in a market.

> Yeah, and there are very few markets in the world where the weight of some quantity of metal is used as currency.

Well, now there are few. Historically, though...

The US went off the gold standard before the great depression.

http://en.wikipedia.org/wiki/Federal_Reserve_Act

The Federal Reserve Act did not take the U.S. off the gold standard, Roosevelt did it in 1933. http://en.wikipedia.org/wiki/Executive_Order_6102

On the flipside, doesn't this also incentivize vendors to accept BTC?

no, because if persons with BTC hoard them as a value store rather than spending them as a currency, the merchant won't see (significant) spending from BTC holders.

Not all sellers pin their BTC values to USD. What if I were offering you a $400 video card for $300 of BTC? (This is especially true of Silk Road prices, by the way).

I have a suspicion that many people are spending their "hoarded" bitcoins, and also immediately moving to buy/mine more...

The only reason to hoard bitcoins is if you plan on spending them eventually. In the long run the same amount of bitcoins will get spent.

Tell that to the merchant who needs to make payroll this month, not in the long run.

You should always take your debt in currency you earn.