Comment by runeks | Hacker News Reader

Comment by runeks | Hacker News Reader

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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.

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.

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