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Comment by cs702 | Hacker News Reader

Interesting. I used essentially the same methodology nearly three years ago to estimate the potential maximum price of Bitcoin over time, but I reached a different conclusion: http://cs702.wordpress.com/2011/05/29/on-the-potential-adopt...

The main difference between BofA's analysis and mine is that I see Bitcoin as a far superior alternative for many financial and other types of applications. For one, Bitcoin as a platform provides a global, decentralized, irreversible log of programmable transactions. For another, bitcoins as "money" are easier to secure, transport, hide, and backup than all prior forms of money ever used by civilization. (Actually, no prior form of money ever used – whether made of bank credits, paper, metal, or other substances[1] – could be backed up like a Bitcoin wallet.)

Therefore, if Bitcoin continues to work as intended (i.e., proves immune to attacks) and gets easier and safer to use (for non-technical people), it will slowly gain credibility in the public’s mind, not just as medium of exchange and store of value, but also as application platform. Over a period of many years or even decades, as the world gradually learns via trial-and-error how to use it, becomes familiar with its properties, and ultimately comes to trust it, nothing can prevent Bitcoin from gaining as much credibility as other alternatives, including gold.

[1] I highly recommend Nick Szabo's essay on the origins of money: http://szabo.best.vwh.net/shell.html

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In my view, public acceptance requires stability. There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility.

"Store of value" acceptable to laypeople will never happen, so long as Btc is volatile.

"Medium of exchange" will be hampered by volatility because the use of Bitcoin by laypeople will require them to exchange Btc for a stable currency such as government money. This exchange is unnecessary when using a mechanism such as PayPal, thus Btc inherently suffers a higher load of transaction fees.

It's a vicious circle. Liquidity of the exchange between currency and Btc would help to address both of these problems, but is beyond the scope of the Btc concept itself. It will require further innovation. A possible scenario for success is that competition drives Btc transaction costs below credit card swipe fees, thus breaking the oligopoly of the credit card processing business.

Disclaimer: I use a PayPal merchant account for my side business.

> In my view, public acceptance requires stability. There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility.

I think we're missing the data, but I feel fairly certain that bitcoin has, on average, become less and less volatile since it started being traded.

What would be helpful is a chart that plots a price average across exchanges, where the price on each exchange is weighted by the daily volume of the exchange in question. This would show a more accurate picture of volatility, and I bet that this is slowly decreasing, ever since bitcoins became tradable for USD.

We've already seen the market depth increase dramatically over the past few years. One can purchase or sell $1M worth of bitcoins with a slippage of 4.35% and 1.47%, respectively - if you spread it out over exchanges. That's unprecedented, I believe, although I don't have a consolidated historical BTCUSD order book to back it up.

I think we're missing the data, but I feel fairly certain that bitcoin has, on average, become less and less volatile since it started being traded.

You've missed the part about $100->$1,000? = Not stabile. Unfortunately.

The argument would be that going from $1 to $100 is more volatile than going from $100 to $1000 and it is therefore getting more stable. But I don't think the general public will view it that way. Normal people think on an linear and not a logarithmic scale.

It's certainly possible the general public won't view it that way, but it's clearly the right way to view it.

By calculating volatility using nominal values, we can conclude that the Google stock is 200 times more volatile than the AMD stock (because the Google stock has risen by $10 today ($1057 to $1067) and AMD only $0.05 ($3.64 to $3.69). And that a share of Berkshire Hathaway is 130 times more volatile than Google (and 26,000 times as volatile as AMD). We can also conclude that a company can reduce the volatility of its stock by performing a stock split.

Clearly this doesn't make sense, and it doesn't serve its purpose: to assess the how much money you gain/lose when buying $x worth of something and the price changes. Whether you buy $1000 worth of bitcoins at $1 and they drop to 50 cents, or you buy $1000 worth of bitcoins at $1000 and they drop to $500, you've lost the same: $500. That's the relevant metric.

Ask the general public whether they would rather hold $1000 worth of bitcoins going from $1 to $15 or $1000 worth of bitcoins going from $500 to $1000 and I'm fairly sure you'll get the right answer.

I said more stable (over time). Not stable compared to conventional currencies.

When BTC prices do not deflate in any way and only experiences inflation of 2-3% on an annual basis, call me.

While I'm on the topic, you realize that because the money supply can't be increased in any meaningful way once mining is no longer viable, prices will experience constant deflation? This alone makes BTC worthless as money.

I think there is a difference between an inflationary/deflationary currency and inflation/deflation of value.

The USD currency experiences inflation by adding dollars to circulation which causes the value of individual dollars to drop.

Bitcoin is deflationary. Bitcoin, as a currency, experiences deflation (bitcoins can only be lost, never added, over time after all bitcoins are 'found'), therefore the value of bitcoin value can only be increased as supply diminishes.

I'm aware of this, and I think it's the reason that BTC will never replace any of the national currencies, but I think it still has a tremendous value for smaller-scale things and has room to get a lot more popular and widespread.

> While I'm on the topic, you realize that because the money supply can't be increased in any meaningful way once mining is no longer viable, prices will experience constant deflation?

Yes. I consider an annual deflation rate of 2-3% just as stable as an annual inflation rate of 2-3%.

but the data show rates of change at <orders of magnitude> in variation. that simply is the problem. its not that its accelerateing or not, simply absolute level is not consistent with any concept of a (stable) store of value. Its a false argument to think that because the asset itself is inflating it's "storing value"; the variance of returns to the asset in increasing and the volatility as a risk factor is agnostic to direction. If it were not, it would be a fault in any event because its value as an investment would (essentially) preclude its use as a currency (because the forecasting/bookeeping overhead).

> Yes. I consider an annual deflation rate of 2-3% just as stable as an annual inflation rate of 2-3%.

Please provide a single example of a viable currency that has deflated over a long period of time. Because bitcoin, by design, will force deflationary pricing forever.

Deflation is horrible. It is much much worse than inflation and any sustained deflation destroys the economy.

> Please provide a single example of a viable currency that has deflated over a long period of time.

Please provide a single example of a decentralized digital peer-to-peer payment network based on virtually fraud-immune proof of work. My point is that Bitcoin is fundamentally different than anything before it.

> While I'm on the topic, you realize that because the money supply can't be increased in any meaningful way once mining is no longer viable, prices will experience constant deflation? This alone makes BTC worthless as money.

On the contrary, I think its deflationary nature makes it worth a lot as money, and as long as a few other people agree, then we can use Bitcoin as a means of exchange.

The currency will be hoarded with only a tiny proportion of the stock being used for transactions. The price will increase rapidly so long as the transactional demand increases and the hoarders do not sell.

One day, of course, the currency will crash when hoarders finally try to cash out.

Commodity prices are always unstable. There's a very good reason that only people with specialized needs write contracts in pork bellies, bbls of oil, or other highly volatile commodities.

BTC is a virtual commodity, and as such it's exceptionally unlikely that it will ever be more stable than other highly volatile commodities.

We're not talking about all commodities: we're talking about money.

There's no point in comparing pork bellies to gold: removing an entire year's supply of pork bellies from the market would send the price sky rocketing (in fact, it's probably not even possible since an entire year's supply of pork bellies isn't in stock), while the price of gold would hardly be affected.

The stock-to-flow ratio of gold is several orders of magnitude higher than that of non-monetary commodities (indeed that's one of the defining characteristics of money), so changes in supply don't affect them as much. This will also be the case of Bitcoin, in a couple of decades.

>We're not talking about all commodities: we're talking about money.

BTC isn't money. You make a great comparison of BTC to gold, a commodity. Gold isn't used anymore as money because there isn't enough of it for that role. BTC is in even worse situation. BTC is a great collectible commodity that will be growing in value, like Campbell soup paintings or Ferrari California. Great storage of value, yet not usable as money.

The next cryptocurrency which would contain infinite mining, balanced by infinitely increasing complexity, will very possibly make it as a money. It is understandable that BTC in order to crack the glass ceiling and gain trust and acceptance had deflation built-in. Now that POC succeeded the full-featured release is to come (though lets see about alpha/beta/etc... :)

However, if Bitcoin is expected to be completely mined by 2140, then for all intents and purposes it has no glass ceiling. Note that our current post Bretton-Woods system has 42 years, and that Bretton-Woods lasted ~40 years before collapsing (leading some to postulate, with the current crisis, that monetary systems blow up every 40 years).

Bitcoin can last 40 years of use without hitting the ceiling.

i meant "glass ceiling" is the acceptance beyond narrow niche of "cyber-punks-nerds"-etc...

What is it about traditional commodities that make them inherently volatile, and does Bitcoin share these qualities? I'm not familiar with commodities markets, but the only thing I can think of that would cause inherent volatility is the inherent volatility of the physical commodities themselves, like crops reliance on weather patterns and oil's reliance on shaky international political relations.

Some possibilities:

-Bitcoin is not legal tender. Governments force banks to accept USD to pay debts, no matter what they perceive the dollar's value to be. Meanwhile banks have no obligation to accept bitcoin. This means that bitcoin volatility is more closely tied to perception than currency. This is a trait shared by other commodities.

-Bitcoin's finite supply. Once the supply of bitcoins is growing substantially slower than the size of the economy, there will be deflation until demand for bitcoins adjusts. With a fiat currency, money supply can be increased or decreased as the size of the economy changes. In a growing economy, a small level of inflation discourages hoarding and helps ensure that the currency accurately reflects the value of goods and services.

People say this means "bitcoins are deflationary" but that's not precisely true. It's true only if the size of the economy using bitcoins for currency is growing. In an economy that is stable and not growing, there should not be much deflation even if there is a finite amount of currency. If the economy grows, then a fiat currency can print money to cover the growth. Bitcoin cannot.

Thus, I would predict that unless bitcoin experiences a hoarding/deflationary spiral and crash into irrelevancy, it will wind up stabilizing in a particular niche of the economy, one that will likely become proportionally smaller over time as the world economy grows. This particular niche is likely to grow and contract more frequently than the larger economy meaning that demand for bitcoin will continue to fluctuate more than major fiat currencies. Given bitcoins fixed supply, this means price volatility.

Is this identical to other commodities? In some ways, I suppose, but I'm not sure that's a particularly interesting question one way or the other.

"There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility"

Well, yes: as trading volume and price grow, market depth will be bigger, hence reducing volatility.

He's probably comparing it to central bank currencies that can be pegged to a stable interest rate. I don't think market depth alone will ever get BTC close to that, though imho it won't matter. People will just live with the instability, keeping some of their money in rate-backed currencies and some in cryptocurrencies.

> He's probably comparing it to central bank currencies that can be pegged to a stable interest rate.

What does that mean exactly? Interest rates haven't been stable for the past 100 years, and the USD isn't pegged to anything (nor is the Euro for that matter).

In fact, the interest rate volatility increased after going off the gold standard: http://static.safehaven.com/authors/weiner/30046_b.png

> There's nothing that I can think of in the theory or history of Bitcoin to suggest that it should, can, or will ever, overcome its volatility.

What is it about Bitcoin that you think leads to inherent volatility? The only explanations for its current volatility that I can think of are the fact that many new people are constantly learning about it, the financial services for it are still very young (like exchanges), and governments have yet to address it. But Bitcoin has only existed for 4 years, and has only been known in mainstream publications for 1 year.

(If you didn't read the article, cs702 thinks bitcoin could hit $90k.)

I still think you are off. The fractional reserve system warps incentives too much.

1. The world needs more than $600 of float. And most people think they have that. The difference is that its wrapped up in the fractional reserve banking system.

2. Due to inflation uninformed people are bullied into investing in mutual funds, stocks, housing, etc. with their savings. Just the existence of bitcoin as a major worldwide currency could transform the traditional saving model. If a 30 year old puts a days wages into an account and can expect a days wages out when he's 80 years old then he can drastically simplify his retirement. He can avoid speculative bubbles and bad mutual fund managers.

3. National currency reserves are currently done with sovereign debt - with the idea being that if a nation goes bankrupt they'll just inflate their currency anyway and the currency reserve may as well be in bonds. If Bitcoin were to become a major world currency, the reserves could be in actual Bitcoins.

All of this to say I still think that there is a 90+% chance that bitcoin will fail, but on that remaining percent, the limit higher than 100 times today. I've done the math a couple ways and I end up with $100k to $10m as my outliers given that bitcoin becomes a world currency.

I've wonder about #2 though. We see the downsides of saving in an inflationary system, but a finite currency system... do we really expect that to be stable for 50 years, and if so, based on what precedent?

I was surprised to see BOA list "It's finite" as an advantage. It seems like this mentality is all anti-inflation (which seems justifiable) yet the alternative is taking a wildly experimental approach to savings. BTC hasn't proven stability within a month really yet, why trust it for 50 years? And then if you put in that 1 day's wage of Bitcoins, what happens when the market cap for BTC fluctuates? It won't always be in a steady demand, it will depend a bit on how many people are using it, no?

I am a doomsdayer also I think that it can only succeed if it always remains the same price or keeps going up, but the belief that this is possible is obviously intellectually malformed.

>but a finite currency system... do we really expect that to be stable for 50 years

No, it's deflationary. And while deflation isn't "evil" in and of itself, it causes the same problems as inflation (in reverse, obviously).

For example, if Bitcoin are restricted to 21MM units, as the population of the planet increases, an individual's wages must decrease in Bitcoin terms to maintain their real value.

That means that prices for goods will have to drop as well, which leads to terrible menu costs, and hoarding (why buy my car now when it will be cheaper in bitcoin terms next year?) In a predictably deflationary environment, it's always better to spend your money "later".

yea i hear ya... i've always been wondering what fraction of current market volatility is due to speculation & how much is just the flaw of the deflationary nature exposing itself too soon

If in say 100 years human population growth stopped, would it still be deflationary? Surely the population cannot grow infinitely?

> In a predictably deflationary environment, it's always better to spend your money "later".

So if I'm saving up in a deflationary currency, it's better for me to wait upgrading my computer until the day before I die, instead of doing it now?

The thing with saying something is "always better later" is that it logically means that it never gets done, because there's always a "later" (until there isn't (ie. you die)).

>"So if I'm saving up in a deflationary currency, it's better for me to wait upgrading my computer until the day before I die, instead of doing it now?"

If you're maximizing your economy, yes.

In that case your original statement was inaccurate. It should have read:

> In a predictably deflationary environment, you maximize your economy by spending your money "later".

Which, in fact, is better said as:

> In a predictably deflationary environment, you maximize your economy by not spending money.

And that leads us to the obvious fact that saving up money in order to not spend them is absolutely pointless.

Okay but stop thinking in extremes for a second.

Imagine I need a car and I hear there is a 30% off sale in January. Yes, I'll wait. Im considering the lost marginal value to me (keeping my shitty car in December) vs marginal gain (saving 30%). That's what deflation feels like.

But as far as I can see, you wouldn't have bought the car without deflation (or a sale, as it were), because you couldn't afford it. So in this case it causes you to spend money that you wouldn't have spent otherwise.

Then the best possible job is to sell food. You're basically forcing people to give up currency that will insanely increase in value if they don't want to die..

hah yeah this is what i was thinking about too. if you follow deflationary logic through to the end it makes you think of a Mad Max kinda world. But they expect it to stabilize when it hits the cap, no? I don't know.... experiments that take hundreds of years to run. Why not just dollar-back it? lol, i know i knowwww, they hate that. But the Canadian gov has a cryptocoin, right?

Deflation doesn't eliminate the demand curve, it just shifts it a bit to the left. It reduces consumption. It reduces investment. It increases savings. It does not cause a 100% reallocation from consumption and investment to savings.

So people get wealthier, because they save more and consume less?

No. You failed to recognize two key points:

1) Savings erodes investment. Savings is the non-productive hoarding of cash. Investment is when one takes cash and deploys it in a way that creates value. In a slightly inflationary economy, a wealthy person can only remain wealthy if they deploy their capital in a way that creates more value for the entire economy. In a deflationary economy, they can get wealthier by doing literally nothing.

The net effect of this is a reduced pace of innovation for the whole economy.

2) My consumption is your income. Thus, if I spend less money, you make less money.

The net effect of this is a huge pile of pernicious effects (reduced economic mobility, reduced productivity gains, reduced innovation, reduced opportunity, reduced incomes for all, etc...).

"why buy my car now when it will be cheaper in bitcoin terms next year?"

Because you want to go on vacation this year?

"If a 30 year old puts a days wages into an account and can expect a days wages out when he's 80 years old then he can drastically simplify his retirement."

Your idea here seems to be that bitcoin could help you not only hedge against "inflation", but also against rising economic productivity. I.e., what a saver really wants is some kind of guarantee that at age 80 they will be able to consume the same fraction of economic output that they were able to at age 30. Could you spell out how bitcoin helps solve this problem?

(I take it for granted that hedging purely against inflation is actually a solved problem, because you can just invest in short term bonds, which provide excellent hedges against inflation. But of course they don't help at all with rising productivity).

Edit: Another - massive! - issue with retirement savings is longevity risk. How can you ensure that you won't run out of savings before you die? Bitcoin won't help you here.

Bitcoin solves that problem by being finite. Since scientific advances are cumulative and directly impact worker productivity, it is reasonable to assume that a stable currency that does not inflate will at least preserve purchasing power.

Investing in short term bonds is not only not riskless (lots of governments and corporations have either defaulted or written down their debt), but often times do not even match inflation.

Saving as a logevity risk: Yes. You don't know how long you will live, we could very well develop medicine that would keep me as a functioning senior until I'm 100 years old. But against all other alternative forms of saving, if bitcoin was a world-currency it would be the safest way to assure purchasing power.

How big a problem is it that bitcoins are finite ? The minimum unit of a bitcoin today is a satoshi, there can ever be max about 2200000000000000 satoshi. Is 2200000000000000 units of currency going to be enough to run a global economy ?

Finite being no-inflation. There is actually no technical limitation from stopping the subdivision of bitcoins.

One way money becomes less valuable is because demand for goods and services increases. So there can be Bitcoin inflation without an increase in the BTC supply.

Obviously if a comet is hitting the earth a month from now the relative demand shifts from dollars to Viagra, but we're speaking in term relative to dollars. Since the supply of Bitcoins is not increasing after it hits 21 million, there is no reason to suspect inflation.

Bitcoins isn't going to preserve your purchasing power contrary to your claims even if it preserves it more than USD.

how the f is it reasonable to assume that it will preserve purchasing power, based on the assumption that it will be stable?

I can set up a chain of assumptions about the dollar based on actual historical precedence & Bitcoiners will whine & whine but because Bitcoin is "so pure" or something you think it's safe to chain a set of dependent assumptions together & say "This is how its goin down"?

Basic supply and demand theory. When supply goes up, price falls. Since Bitcoin's supply does not go up after a certain point, all other things being equal it will preserve purchasing power vs the USD.

but why would demand remain constant? In Bitcoin, a buyer & seller are needed in order to exchange. The idea of demand remaining constant only really holds true in a scenario where Bitcoin is the 1 world currency, and even then there are fluctuations in population and productivity.

I get that you're saying all other things being equal but that doesn't really float in a real-world simulator.

>"Due to inflation uninformed people are bullied into investing in mutual funds, stocks, housing, etc. with their savings."

It's not bullying, it's the foundation of capitalism; that is putting capital to work, not putting it under your mattress.

I'm satisfied that Bitcoin (or whatever succeeds it) exists, merely as a check against corrupt government. It's good that the money printers know there's an alternative. But I'm not ready to ditch the current economic paradigm, which has created more wealth for more people in the past 200 years than any point in human history.

People are disillusioned if they believe there were significantly more economically stable periods in history. Believe it or not, smart people are actually concerned about, working on, and resolving current issues. It doesn't happen overnight.

I think the introduction of bitcoin into the current paradigm would only serve to deepen and strengthen it. A universal currency with no barrier of entry and a slew of other features and benefits can and should be leveraged.

No, the foundation of capitalism is private property. Coercing individuals to accept a currency for debt payments and then inflating that currency thereby manipulating individuals to invest in markets that they don't understand is not capitalism.

Why Bitcoin and not any other crypto currency?

Your #2 would be monumentally awful for the economy. The individual might like it if they can let their money just sit there and hold value, but if everybody can save like this, then there is very little incentive for anybody to ever lend out their money. If nobody wants to lend, then nobody can borrow either.

(Technically, the price of lending/borrowing, i.e. interest rates, would skyrocket until lenders were willing to lend, but then almost nobody would be able to afford to borrow anything unless they had something with the potential for monumental returns)

If nobody can borrow, then how does anybody start or expand a company? If starting and expanding companies gets massively more difficult, then who will employ that 30 year old in the first place? How would any new product or technology ever get created and distributed?

The Austrian theory is that this problem solves itself: 30 yr olds try to hide their money in "inflation-proof" non-fiat currencies for 50 years, and then when they cash out they get a crash course in Supply and Demand -- all these BTC flooding the market and no one producing anything for sale drives the (nominal, BTC) price of everything up, so those BTC don't actually buy much anymore, and people have to go back work to make things for each other.

A big part of the issue with Bitcoin is that our global economic system is, and for the foreseeable future will continue to be based on fiat currencies issued and controlled by central banks.

I see Bitcoin's role in all this as a way to exploit arbitrage in currency exchange rates for restricted currencies. This is exactly why it's popular in China. It is a currency whose supply is algorithmically limited and theoretically should track global inflation. The world has always had nominal exchange rates and de-facto exchange rates for restricted currencies; but until something like Bitcoin emerged there was no legal way to perform exchanges at the de-facto rates at scale.

My big worry with Bitcoin is that the supply is too limited. Currency is subject to manipulation by many forces; much of the job of a central bank in control of money supply is to counteract any intentional manipulation. With unstable prices and a limited circulation value (the total value of all BTC in circulation is only ~$12 billion) it is very open to manipulation by investment banks and hedge funds. Until BTC reaches economic scale, it's going to be subject to all sorts of shenanigans; and with no central authority to counteract the manipulative influences, I don't know that there will ever be enough trust in it for it to reach that scale.

Most of such rhetoric is just a word acrobatics. The confusion comes from using inappropriate words, because this phenomena needs some new words for a correct description.

We cannot call this a currency because having few exchanges does not make it as such. There are option exchanges and futures exchanges and other specialized institutions.

It the first place, a currency cannot be this volatile, or, if so, it is a worthless currency.

The current observable behavior is alike of futures and options - the price (not a value) is determined by expectations that people are holding about further movements of the price, so, basically it is a commodity futures speculation.

The particular properties of the underlying technologies, such as decentralization and publicly available log of all transactions are just nice (and unique) properties, but they does not magically create any value for a bitcoin, which is just a set of unique numbers.

Therefore, it is not a currency, it is a internet powered and hence globally available digital (virtual) commodity, (as worthless and dangerous as means of legal tender as derivatives) which now is in a stage of a truly global ponzi scheme, where prices are based on the pure speculation about it further movements.

The usage of familiar words in a new context is what makes the ponzi scheme rolling - people make their snap-judgments based on old "rules" about "currencies" which are not appropriate for bitcoins along with peer and bandwagon effects. Very clever.

Very interesting article, it looks very prescient right now, kudos. I agree with you that the bitcoin protocol as a p2p irreversible log of transactions is a real and still misunderstood great invention.

It's akin to the gunpowder: the Chinese were the first to toy with the volatile stuff in the 8th century B.C. But the killer app (!!) took a long time to emerge.

The current state of affair with bitcoin looks a lot like a bubble, there's no question in my mind. As long as it's a speculative device, it's actually dangerous/endangered. It needs to find a use and stability, which might take a while.

One of the strong cases you laid out is hyperinflation: I can see local bourgeois looking for a safer place to park reserve purchasing power before escaping abroad. That's a limit case, however. The rest of the people are by definition struggling if there is such a crisis.

Cheers!

What's stopping another crypto currency such as Litecoin from superceding Bitcoin?

In short, network effects resulting from Bitcoin's massive first mover advantage.

Although LTC is certainly playing into being "silver" to BTC's "gold"

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