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Comment by vyrotek | Hacker News Reader

"There is no capital nor wealth creation to speak of; only as much money as was put in. While somebody may buy a bitcoin for $1 and then sell it for $200, no value was added in this process, so it is simply a transfer of wealth. The people who profit will do so by taking from those who lose.

As the deflationary feedback amplifies the desire to hoard, the exchanges will become illiquid. Eventually, buyers will give up while waiting in absurdly long queues, and demand will loosen. Soon after, things will turn pear-shaped as the world's fastest liquidation occurs. The exchange rate will fall faster than orders can be fulfilled, so that less than $2.5 billion is recovered. After all, it was never really there anyway."

Nailed it.

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This describes what happens in the short term, probably repeatedly. But what happens in the long term? Traders learn; they adjust with respect to risk. People will become acquainted with the volatility of the BitCoin currency and adjust their buying and selling practices as a result. People will hold onto the currency longer because they've seen it crash before and recover. The curve will flatten and become a slope. As the rate of deflation steadies and shrinks transactions will begin again. As more and more users flow into the BitCoin economy mass-sellings will have less and less effect because most people who hold the currency will not be responding to short term blips in the price - i.e., day trading. As the volume goes up the chance that a small number of people can destabilize the currency will shrink. There will still be bubbles but they will become cyclic on a longer period, happening on intervals of years as opposed to hours and days, much like in national economies.

>Traders learn; they adjust with respect to risk.

Ha ha ha ha

No. Traders learn, and then they die, and are replaced by new traders, who haven't learned.

Or perhaps the masses will never adopt a currency that requires them to become "acquainted with the volatility of the BitCoin currency and adjust their buying and selling practices as a result", especially when the current status quo offers none of these pitfalls.

Long term? People stop using bitcoin.

You theorize that the boom/bust swings will diminish in intensity until eventually bitcoin becomes stable.

Others theorize that the boom/bust cycles will grow in severity until eventually everyone just gives up on bitcoin.

So far there's very little evidence for the stability option and a lot of evidence (and economic theory) for the speculative bubble theory.

Do you have any evidence of the "market share" of bitcoin users who are in the market for purely currency reasons growing relative to that of those who are in the market for purely speculative reasons? From everything I can find out it seems as though the reverse is true.

This is exactly right. The problem is in some respects worse than stated. After the last bubble, it appears as though speculators did leave. However, every time the demand increases sharply for bitcoins, they return. After all, who could resist such a fantastic arbitrage opportunity?

I've very rarely seen something with a > 1 Billion market cap and millions of users simply disappear. (To use an unrelated example, even MySpace still exists :)

Very simply, the more users are in Bitcoin the more vendors there will be who accept BitCoin. The more goods and services can be bought in Bitcoin during the relatively smooth periods the greater the proportion of people who like to have the currency for currency purposes, because it can be used to buy goods and services. There will be 'induced traffic', a network effect - more roads into Bitcoin will pop up because there's an incentive to start an exchange (you make money off of each transaction, after all!). More roads = greater demand for more BitCoin. It is the fact that some buying power of BitCoin still exists even given the boom/bust cycles that will support the currency in the long run, and that this buying power will on average be higher on every contraction than the previous contraction. The fact that an anonymous, decentralized currency that prevents double-spending is desirable (i.e. has inherent value) to a lot of people will also support this buying power, and support the currency in the long run.

Geocities, lycos, CompuServe, Excite@Home, so many others.

Those were all companies which sold at a billion dollars or many billions of dollars and have sense been shut down or are worth a tiny fraction of that amount today.

And those are just examples from the last 20 years, we could go back to nearly countless examples of other speculative bubbles going back centuries.

If ever there were a textbook example of apples/oranges, this would be it.

The example is helpful, though. In each of those cases something very much better came along to replace it.

The same thing could very well happen with BitCoin. Someone mentioned forking BitCoin and tweaking the algorithm to remove the artificial ceiling of 21 million units, and replace it with an algorithm which monitors all the transactions taking pace and adjusts monetary policy in response to them, in order to produce a steady inflation rate. Such a currency might very well be more desirable than one with deflationary tendencies.

Bottom line - unless someone figures out a way to replace BitCoin with something better, I see no reason to believe BitCoin is going away anytime soon.

Oh, the memories seeing those names bring back.

So happy to have been there for the through the 90's.

The Zimbabwe M1 was worth $2.4 billion in 2001, and millions of users are forced to use it. (Zimbabwe professors, teachers, etc. etc.). And of course, that entire money chain is practically worthless today.

There is no guarantee that BTC will survive. Larger currencies have fallen before it.

What a false dichotomy. So people are either buying Bitcoin purely for its use as a currency or purely speculating? You're missing the forest for the trees.

Do you want to see real political and economic change in your lifetime? Campaign finance reform: not the answer. Term limits: not the answer. Voting Libertarian: waste of time. "Balance the budget": too little, too late. Political activism: occupy my asshole.

The only solution: flip societal power structures upside down, and let us geeks take the reigns.

Now, you may argue that everything is Hunky Dory like tptacky, but I'd beg to differ. We need real social and economic change, right now, to ensure our continued prosperity into the forseeable future, and we're just not getting it from Washington. Make excuses or justify a Big Brother Statist tyranny driven by propaganda and ignorance all you want, ultimately none of that shit works long term and meanwhile we have a lot less freedom.

Let's play a different game now ...

You are so full of yourself and living in a fantasy world it's sad to watch. Bitcoin isn't a revolution, you've been duped. It's just another pyramid scheme being used by those with more power, more money, more information, and fewer morals to take advantage of folks like you who just want to believe.

Do you really want to change the system? Write blogs. Write books. Start a business. Do investigative journalism. Speak at rallies. Work on a campaign. Run for mayor. Run for congress.

There are a million ways to empower yourself and others, using bitcoin isn't any of them.

Imagining that bitcoin is the answer is about as naive as imagining that hitting "like" on your facebook feed is going to magically feed some starving child somewhere.

To be fair, bitcoin has a number of interesting technical promises. The economics of bitcoin are... probably going to be bad, for many reasons.

But some decentralized digital coin in some form seems like a good idea. The concept of a transaction log that tracks your money from start to finish is also interesting.

Bitcoin will remain a pyramid scheme due to its deflationary nature. But maybe a future coin can be invented that solves the problems with bitcoin?

To be truly decentralized you need something like "digital cash", but nobody's been able to come up with a good way of implementing that, yet. Also, I'm not sure people are prepared to mix the problems of cash and electronic transactions just yet, there are some advantages to the banking system we have now, such as the ability to reverse fraudulent transactions.

I think the example from fiction, Cryptonomicon, is actually very helpful, because they understood they needed a big honking pile of gold to kick-start the legitimacy of the whole thing, if it's just free floating then it too easily becomes a pyramid scheme and you have people who just do currency exchanges but who never actually use the new currency as money. You want people to hold onto money because it's money, not because they think the money can go up in value, that's precisely what you don't want.

Unfortunately, there are now a lot of people in the bitcoin world who do what the exchange rate of bitcoins to go up, because they view bitcoin's as an investment and they still view dollars as "real money". And in most ways they aren't wrong. But they're also making it harder for anyone else to use bitcoins just as money.

>Long term? People stop using bitcoin.

Long term? People stop using Weimar Deutschmarks, Austro-Hungarian Whatevers, French Francs, shells/wampum, doubloons, US dollars ...

I think it does describe what happens in the long term. Basically, if the thing can never get off the ground in the short term, then it will never get off the ground in the long term. Every surge in popularity has the high likelihood of setting off a speculative bubble. As the rate of increase in the stock of bitcoins decelerates, this problem will only get worse.

Long term someone takes the core technical advances and detaches it from the libertarian economic* ideals and creates bitcoin ++ with a fixedish rate inflationary money supply and maybe some limits on trade volumes to limit volatility. Oh, and you don't use a fucking magic card exchange as the primary way people get into or out of your currency.

*you may or may not agree with those ideals but it probably wasn't the best idea to try a new technical solution to currency and a economic philosophy about currency/central banks at the same time)

Two quick remarks. First, there already are many virtual/digital currencies, some of which simply peg their currencies to the dollar. But nobody really cares. Why? Well, what's the point? It's just a slightly less convenient form of a dollar.

Second, we all already do use digital currency. Actual, physical currency (and deposits at the Fed) are called the monetary base or "high powered money". However, most people transact goods using debit cards, which is called "inside money". These are privately created dollars, and they change hands digitally. So, we're already there. (I'm avoiding credit cards since those are technically loans, not money).

Im general I agree with you and I'm not sure bitcoin++ will work either. But I think it has to happen and fail before the idea is really and truely dead.

I think no one cares for a large number of reasons but one of them is because you'd need to trust the people who run most of those currencies(i'm ignoring the bitcoin clones) and if you are going to trust someone, might as well trust a regulated entity like a bank.

Just look at how paypal screws people? Why trust someone else even more sketchy. However, precisely because pay pall screws people it might end up being the case that there is some market for a non centralized online payment system. But it certainly can't be deflationary and it ought to avoid rampant speculation.

I wonder what would happen if every 30 minutes the currency inflated by 100% percent. It would make sure no one ever held inflatcoin. You'd just use it as a transaction medium.

Here's the problem. You're talking about traders, but where is the capital? You can't have a financial market purely based on currency speculation. If we're going to talk about bitcoins as though it were an asset (store of value), rather than a money supple (unit of account or medium of exchange), then we need to verify which properties of an asset it possesses.

Do bitcoins provide a consumption utility stream? Do they yield dividends. What sorts of productive risk-taking do they represent? When I buy a stock, it will perform well if the risks it takes in providing mutually beneficial exchange with business and households are successful. For bitcoins, there is no systematic market risk, because there is no capital stock. Why? The same reason as always. Deflation increases the burden of debt which decreases investment, even though the economy is awash in savings.

Our national economies do not possess cycles as you describe them. Here's a good article about macroeconomic business cycles: http://noahpinionblog.blogspot.com/2013/02/is-business-cycle.... While the level of inflation fluctuates in our economy, it does so on a much smaller scale: http://en.wikipedia.org/wiki/File:US_Historical_Inflation_An.... What really jumps out from that graph is how the best economic prosperity the world has ever seen coincides with fiat currency ending the threat of deflation.

I don't get this argument. Bitcoin lets you do things you can't do without it. That's not zero sum, that's creating value that wasn't there before. And we are only at the beginning. Pretty much no one understands what can be done with it in the future. Smart property, oracles, etc.

Such as?

I listed two examples, not sure what you're looking for. But, this page has more: https://en.bitcoin.it/wiki/Contracts

I'm pretty sure I explained the value of use of bitcoins as a medium of exchange in footnote 2. The convenience and ability to facilitate transactions on the black/grey market might cause bitcoins to trade at a slight premium. On the other hand, volatility, concerns over hacking, exchange lag, and the threat of future government regulation may overshadow this and cause them to trade at a slight discount. I split the difference and assume that prices in the bitcoin economy adjust relative to the spot price, so that the real exchange rate is one-to-one. The problem isn't with the utility of a crypo currency in the abstract. It's that this will never come to fruition with built-in flaws like deflation, which inevitably lead to bubbles.

But you seemed to leave out an important component of valuation, unrealized capability. The protocol supports more than has been implemented.

Did he? Time will tell. Every article that portends doom via deflationary measures trots out the same 'ol tired arguments and examples (great depression, hoarders, etc.) You have to admit this is new ground. There are a lot of new ideas here (i.e. divisible to 8 decimal places, de-centralized, etc.) The charts were interesting, but the headline is pure bunk. No one knows -- but one thing is for sure: this is disruptive technology. Bitcoin may not survive, but finance won't be the same hereafter.

> Every article that portends doom via deflationary measures trots out the same 'ol tired arguments and examples (great depression, hoarders, etc.) You have to admit this is new ground.

In what relevant sense to deflation and its effects is it new?

> There are a lot of new ideas here (i.e. divisible to 8 decimal places, de-centralized, etc.)

How are any of these relevant to the incentives created by deflation?

Bitcoin is an infant. Hoarders will happen, sure. We'll see what happens in the long term. Gold as a fixed medium may not be practical to slice to 8 decimal places, but then again...the central authority that is in charge of deciding that never tried. They just gave up and Keynes won. Let's see what happens.

Continuing to repeat "Bitcoin is new; Bitcoin is sudividable; Keynes bad; central bank bad" isn't actually an argument as to how any new features of Bitcoin, including its subdivisability, change any of the incentives related to deflation.

If you've got an argument, make it, but as far as I can see there's just conspiracy theories about the status quo and wishful thinking with no coherent basis for Bitcoin.

Sure, you can continue to try to discount the things I've already said, and tell the world none of it matters according to you, and yet here we are in an endless loop.

I am not discounting them, I am asking you to provide reasons to believe that they have some substance. I am interested in knowing whether there is any substantive reasoning behind the "but Bitcoin is new and different" response to deflation concerns, but from what I can tell from the responses of proponents of that position when asked for a rationale, it amounts to a bare article of faith, rather than a position with any rational support.

I'm always peeved by this reference to Keynes. This is a topic that is universally recognized by almost all economists, with the exception of a few Austrians. In fact, the main proponent of this concept was a conservative economist from the University of Chicago named Irving Fischer. Because the Great Depression was a period of absolute deflation (falling prices and falling output), this was a central concern to Keynes as well. However, it was none other than Milton Friedman, a lead figure in the resurgence of neo-liberal (libertarian) thought in the mid 20th century. In fact, Milton Friedman's most famous work (the work with Anna Schwartz), was all about how the Fed caused the double-dip in the Great depression by enforcing the gold standard and contracting the money supply. See? Friedman (a libertarian) rose to fame for his claim that the Fed destroyed too much money during the Great Depression!

Edit: One quick thing I forgot. Keynesian economics is all about the idea that, if prices are "sticky" and cannot fully adjust in real time, then that leads to drops in output. The flip side of this, which is evident in the current crisis, is downward nominal wage rigidity. The fact that prices are slow to adjust partially mitigates the threats of deflation. So if anything, Keynesians have less to worry about from deflation than other factions of macroeconomists.

It isn't entirely clear to me what you're trying to say. With respect to Friedman and the Great Depression, he drew the conclusion that the Fed a) failed to act as a lender of last resort (i.e. they could have adjusted the price of gold -- which they never tried), but more importantly b) the crisis would have never occurred, and the economy as a whole would have been better off if the Fed were never created in the first place [1].

[1] http://www.fee.org/the_freeman/detail/the-great-depression-a...

Anyway, this is all taking a left turn here. It has been fun, but there are probably better forums than HN for discussing macro-econ. Maybe I'll see you in one of the subreddits, and we can debate it in more depth there.

Looks like the title has been changed. For anyone curious it was something along the lines of "Why bitcoins will fail"

"You have to admit this is new ground."

No. It's always "different" ground, same outcome.

"As the deflationary feedback amplifies the desire to hoard, the exchanges will become illiquid."

The rest of it makes perfect sense, but why would we think this, rather than that market forces will drive prices up, and people will sell as a result, fulfilling demand?

market forces will drive prices up, and people will sell as a result, fulfilling demand?

I'm no economist, but I'm pretty sure this state of affairs is not guaranteed.

I am an economist, and I have no idea what that means. Sounds to me like confusion over two things: (i) the difference between "supply and demand" and the "quantity supplied" or "quantity demanded" and (ii) equilibrium. The circular logic is a tell tale sign. Price goes up, so people demand less, so price goes down, so people demand more... That's the whole point of equilibrium. Where does all of that net out.

I think they are trying to say that demand forces supply.

Exactly, that's a huge mistake. Shifts in demand cause shifts in supply? That's not obvious at all. The whole point is that supply and demand have different determinants, but they mutually determine quantities and prices.

If you see it going up, why would you sell? In the deflationary spiral scenario, it'll just keep on going up, so it's in your interest to hold on.

We see people selling at $100 and $200; would we expect people to not sell at $10,000?

Sure, some people will sell, the question is whether or not the amount of selling is large enough to keep the price from spiraling upward. If you predict that there will be lots of selling, then you're assuming that people aren't (on average) responding to the incentive to hold.

>There is no capital nor wealth creation to speak of; only as much money as was put in. While somebody may buy a bitcoin for $1 and then sell it for $200, no value was added in this process, so it is simply a transfer of wealth.

So like 90%+ of what the stock market does then?

Sure, lots of the stock market is arbitrage. While bubbles form in different markets, they are all eventually followed by a correction. The problem with bitcoin is that there is no fundamental asset underlying the currency. So when there's a correction, there's no sense of where the bottom is.

> Nailed it

Can you point to a specific event in history where this actually occurred? Because so far all I've seen are people theorizing what will happen in this situation. Your argument would carry more weight if you backed it up.

> The exchange rate will fall faster than orders can be fulfilled

Is that possible? In the event of a crash all buy orders will be fulfilled, ordered by price/time. The exchange rate can't move if there are no orders being executed.

Well, here's Mt. Gox today: http://bitcoinity.org/markets/mtgox/USD

And here's what happened on another exchange while Mt. Gox was down: http://bitcoinity.org/markets/btce/USD

So people haven't priced their knowledge of the limited supply of bitcoins into their bids? They're too stupid to realize growth will slow asymptotically despite this having been announced years ago and built into the protocol?

Are you the kind to suggest "hey, I know how to make money! Invest in hot dogs like, right before the 4th of July, and then sell right after!"?

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