General question: if you expect the price of Bitcoin to continue this rate of growth, does the rational consumer have any reason to spend? I don't follow BTC too closely, but it feels as though there's an innate conflict between its role as a speculative investment and its role as a currency.
Exactly the reason a deflationary by nature currency isn't going to succeed as a currency. Bitcoin might want to be a currency, but it isn't a currency, it's a commodity like Gold and its deflationary nature dooms it to be.
The big non-True Believer users thus far have largely been either illegal materials, or ultra-high-margin things (reddit gold, Humble Indie Bundle etc).
The problem with deflationary currencies is that there is a huge behavioral difference between currency having 1% annual deflation and 1% annual inflation - it greatly slows the money velocity, as people are not motivated to spend it or invest it in means of production, so there's less of demand for goods/services causing less income for everyone and even more less demand in a reinforcing feedback loop.
It is widely considered that a low rate of inflation brings a very significant positive impact on prosperity compared to a deflationary environment or a very high-inflation one.
If bitcoin is growing in value, and is expected to grow in value in the mid-future, then that is a disincentive to spend it -> then that means a disincentive to sell stuff or provide services for bitcoins (because buyers don't want to use it) -> then that means that it has lower liquidity and usability. In the extreme, 'everybody saves bitcoin, nobody buys pizzas with bitcoin' turns into 'the only way to get rid of bitcoin is to find someone else who wants to hold it for no good reason, but wants to pay you a lot'. A healthy currency, on the other hand, gets used to buy pizzas and services primarily, and gains value because of it's utility in buying stuff.
I suspect that once we do reach the top, we'll discover that bitcoin deflates rather predictably and boringly. So much so that it will make the interest rate in your bank's savings account look interesting. You'll still want to invest for the same reasons you want to invest right now--greater returns.
I just don't see the doom and gloom here. Maybe if Bitcoin was the primary currency in use. But it's not, and I don't think it's in danger of becoming so anytime soon.
What remains to be seen, everything he said it well known economics.
> we're not going to notice any deflationary issues with the currency.
You're already seeing it. Who wants to spend a currency that keeps increasing in value... that _is deflation_.
> I suspect that once we do reach the top, we'll discover that bitcoin deflates rather predictably and boringly.
I don't think you understand deflation.
> I just don't see the doom and gloom here.
Because you don't appear to grok deflation. When the demand for a currency spikes, as bitcoin is now, and the supply is unable to increase to handle that demand, deflation occurs and the price of the currency sky-rockets. Deflation isn't just about the size of the money supply, it's about the size of the demand of the market in relation to the size of the money supply and if a currency can't expand supply to meet that demand then it'll deflate to meet it and that makes it a terrible currency because it punishes spending and rewards saving, exactly the opposite traits of a good medium of exchange.
USD <-> BTC Trade Volume is spiking, while BTC Transaction is staying the same.
If you believe that BTC is experiencing "rapid growth", can you post some statistics that back your claims? Currently, the charts I'm watching indicate that the only "growth" BTC has right now, is USD <-> BTC exchange volume... which indicates increased speculation.
It also hits credit hard, because lending money is less attractive as you say, but also because taking on credit becomes a riskier proposition; your debt grows even if you pay the interest and some of the capital! It's extremely difficult to see how a modern capitalist economy could function under these constraints.
Anyway, in all seriousness, Bryan's speech still holds true today. Currency's role is to facilitate the exchange of goods and services. The value created by doing something today decreases over time, such that a thousand years from now, it is a mere blip in history. A deflationary currency runs counter to this -- some nerds who decided to buy some video cards in 2013 end up with a measurable percent of global wealth in 2020? That bag of weed someone sold in 2011 is worth a house in 2020?
Also note that gold-backed currencies have a much longer track record historically than fiat currencies. The US economy grew significantly under the gold standard and prices were much more than today.
Which is bad. Deflation is not good for a currency, people don't want to spend it, people hoard, liquidity dries up, vendors don't like lowering prices and won't as quickly as they'd raise them. End result, deflationary spiral as the feedback loop of hoarding ensues.
> Also note that gold-backed currencies have a much longer track record historically than fiat currencies.
Yes, a much worse one. Fiat currencies stabilized our economy and eliminated the continual severe boom/depression cycles that occurred under gold. Fiat currencies have a far better track record than gold, despite being a shorter one.
There hasn't been a real test of what a purely "hard money" gold-based economy would look like in centuries. Could turn out well, could not. I would guess not.
Have you heard about the MMO Wakfu? They faced a problem a while back where their player base grew faster than the supply of virtual currency. And since the currency was not divisible (integer values only) all low value items were not being traded.
They solved this problem by increasing everyones supply and increasing all store prices by a factor of (10?), effectively moving the decimal point.
They could have solved it by giving a few players a massive supply of the currency which would have eventually spread out but they chose not to.
Its a good thing in a store of value and a bad thing in a medium of exchange. Modern currency mostly tries to optimize for the medium of exchange use case, which encourages investment in other things -- like businesses, land, etc. -- for store of value of purposes.
In the same wall that a concrete wall across a freeway could have a slight impact on traffic.
> from an individual perspective increasing value is definitely a good thing.
From an individual perspective, its only "definitely a good thing" if you ignore all of the effects of everyone else using it except the effect of providing you the opportunity to use it and actually causing the increase in value.
>In the same wall that a concrete wall across a freeway could have a slight impact on traffic.
Well you'd have to have a significant percent of people invest in bitcoin instead of investing in something else. And even then I'm not certain how much an effect it would have as speculating on commodities is very common already and a necessary part of the economy. Also it's impossible to avoid if the supply of currency isn't finite. If so then whoever is increasing the supply is also going to significantly affect the economy. Like a tax from everyone that has money to the government or banks or gold miners or whoever.
And from an individual perspective, having slightly more money in your pocket or bank account everyday is definitely a good thing.
Right. Bitcoin is mostly harmless so long as its not a significant currency.
> And even then I'm not certain how much an effect it would have as speculating on commodities is very common already and a necessary part of the economy.
Speculation on commodities that are outputs of production/extraction provides a useful function in terms of signal for resource allocation in a market economy.
> And from an individual perspective, having slightly more money in your pocket or bank account everyday is definitely a good thing.
If you have a net positive position in a currency, sure; if you're a debtor, having the value of the currency in which your debt is denominated being slightly more valuable each day is definitely a bad thing. Deflationary currency basically serves as an continuous upward transfer of wealth.
Interest rates would go down to match the deflation rate for that reason, or people could always make contracts that adjust for deflation. Besides bitcoin is meant for trading over the internet which until now has been an extreme pain. Loans and contracts will continue to be made in their nations currency for the most part, even if it does become widely adopted. (The benefit of competing currencies.)
Also many people argue the same thing about printing money to cause inflation being a continuous upward transfer of wealth.
>Speculation on commodities that are outputs of production/extraction provides a useful function in terms of signal for resource allocation in a market economy.
It's more than that. Even for purely finite resources, someone buying a bunch of it up because they predict the price will go up, helps stabilize the price. They conserve the resource in the present for future buyers who value it more/are willing to pay more for it. And the speculator benefits of course.
The opportunity cost is that they could have invested in another resource/investment instead of that one. Instead someone with a lower time preference will buy that resource (ie someone who values using it in the short term more than the long term.) But is that objectively a bad thing? In this scenario the people with higher time preferences are better off because they make more profit off their investments. The people with lower interest rates are better off because all other resources become cheaper. Is anyone actually worse off?
Huh? Why? Look at it from the bank's perspective. Lending money would be more costly for them than it would be in a normal mildly inflationary economy, so they'd _further reduce_ their profit on lending money? In a transition to a deflationary economy, banks would likely have to raise consumer rates just to stay in the black.
> Also many people argue the same thing about printing money to cause inflation being a continuous upward transfer of wealth.
Do they? Who?
The market clearing interest rate would probably go down, sure, as would the quantity of money lent.
Demand for credit would drop (that is, the amount that people would be willing to borrow at any given interest rate would drop), because the real cost at any given interest rate would be higher.
Supply (the quantity of money lenders are willing to loan at any given interest rate) would not increase, though. It might naively seem they would at first because the value of the payments on a loan with a given principal and interest rates would seem to be more, but in relation to the value of just holding the money in cash there would be no difference, so nothing to drive an increased propensity to lend.
So, while interest rates would probably go down, it wouldn't be a source of benefit to lenders, it would be a consequence of the decreased attractiveness of borrowing.
> Also many people argue the same thing about printing money to cause inflation being a continuous upward transfer of wealth.
Inflation is a downward transfer of current wealth (more precisely, its a transfer of wealth from net creditors to net debtors.)
Insofar as inflation has a negative direct effect on the less wealthy, its because it decreases the real value of income streams of fixed (or pegged to some index that grows slower than inflation) income streams, and the less wealthy are more likely to be dependent on such streams.
OTOH, inflationary currency is a big part of what makes such streams (defined benefit pensions, etc.) possible in the first place; so a deflationary currency wouldn't actually make that situation any better.
Of course. This allows _control_. For instance, the UK currently has a rate of inflation that's a bit higher than optimum, and there are methods for the BoE to influence that downwards. The Eurozone has an uncomfortably low rate of inflation, and it's likely that there'll be intervention there (there has already been some in the recent surprise rate cut).
In a system where nobody controls the money supply (or in, say, Milton Friedman's automatic money printing system), if severe deflation or inflation threatens, there is very little that the authorities can do. This seems like a bad thing.
> And from an individual perspective, having slightly more money in your pocket or bank account everyday is definitely a good thing.
But that wouldn't actually happen for most people. Normal people would be paid less, and might lose their jobs as lack of investment and credit hit industry. Rich people would make less as their holdings in companies and so on performed worse (your modern rich person typically doesn't just have a big stack of money in the living room; it's mostly in use). It's hard to see who would actually benefit.
It could arguably be a good thing for an individual provided that (a) they are relatively wealthy, and thus have significant amounts of money sitting around to benefit from deflation and (b) that their wealth doesn't come from industry, which is fueled by investment and credit, both of which can be expected to suffer severely in a deflationary economy, and (c) that their wealth doesn't come from employment, where wages would be expected to drop, and which is of course also fueled by investment and credit.
Basically, it might make sense if you were a member of the pre-19th century landed gentry, but probably not otherwise.
If the deflation was large enough then it might have an affect on investments but even then I'm not sure that's a negative thing. What's true of a finite currency is also true of any finite resource. Is the economy suffering because everyone is hoarding gold and oil and every other commodity rather than investing?
The reason it might not be a negative thing is because investments aren't inherently a good thing. That is people with a higher time preference take up resources at the expense of people with a lower time preference. E.g. if you build a factory you take a ton of steel and concrete and land out of the economy which all becomes more scarce/expensive for everyone else. Sure the factory might benefit them when it's finished in a few years, but if they cared about that they would have invested in it in the first place.
Anyways none of these things are true for bitcoin which is just for trading things online. It's not a replacement for national currencies, it's economy won't be that huge.
With victims that number "in the tens of millions", many people are being FORCED to use BTC, whether they want to speculate or not.
http://www.coindesk.com/tens-millions-uk-may-targeted-crypto...
For example, Joe wants drugs, he takes $1000 to Frank for a bitcoin. Joe sends the bitcoin to Charlie's address for some cocaine. Charlie sells the bitcoin for $1000 in order to buy some cocaine from his importer. Its status as sole-use currency for certain transactions provides liquidity to the market.
If X starts to fail as the transfer medium, then the value collapses as well.
No matter if X is dollars, gold coins, bitcoin, cowrie shells or whatever - in practice the transactional usage is so much larger than 'store of value' that it dominates value/pricing.
This seems very simplistic. Is there evidence that the value of a currency is directly related to transactional volume? It's obviously not the case that that is the sole factor. Even if that were true, your point is contradictory. As you say, 'If X starts to fail as the transfer medium, then the value collapses as well', and there's nothing that guarantees Bitcoin will become a serious transactional currency, or if it does, won't be supplanted by something else. Under no circumstances is this a place where you'd want to store substantial savings that weren't set aside for speculation.
2) I don't recall anything about a relation to pure transactional volume, but there is definitely very direct relation between the liquidity and ease of transactions and currency value; any significant changes in liquidity have a quick and lasting effect on value.
Why? Currently, if you're using bitcoin as a token of exchange, the safest approach is to get rid of it as soon as you receive it (particularly if you're in a low-margin business, though few currently selling things for bit coins are in low-margin businesses).
Velocity of money will certainly be lower under a deflationary currency in a highly speculative environment, but nothing gets around the fact that when I want a soda, or when I need to buy a house I'm going to do so, regardless of the 'price' of Bitcoin.
And long long term, why would I, in my day to day life, even care what the price of Bitcoin is against the Dollar any more than I care about the price of the Dollar against the Thai Baht?
Do people living in Eurozone countries still convert back to their pre-€ currencies to get a sense of value?
They may not know they do, but it's likely that their employer, say, is dependent on investment and/or cheap credit. They are also rather likely to have long-term debt (mortgages etc); that can get very ugly in a deflationary spiral, as wages drop but the debt remains.