Hacker News Reader

Comment by lordCarbonFiber | Hacker News Reader

That is the fundamental misconception in regards to the crypto-currrency and (in my opinion) indicative of why they will probably never catch on in any mainstream fashion. If the currency was successful, the end user was never intended to be able to mine a meaningful level of currency themselves. The act of mining is required to facilitate transactions and miners get a small part of those transactions for participating. The initial payouts are there solely (in theory) as incentive for the early adopters to mine when the transaction volume is small and to allow them to give the currency an early liquidity. In practice, because of the deflationary nature of the coin and the domination of speculation over transactions involving some tangible goods or services, people are hoarding them expecting increases in value. This is not a good hallmark of a currency and is a flaw that all the derivative coins fail to address.

View on HN

> people are hoarding them expecting increases in value. This is not a good hallmark of a currency and is a flaw that all the derivative coins fail to address.

This is the fundamental problem with all non-fiat currencies and is why the world moved off the gold standard

This. Currencies function well when they grow in-line with the growth in the economies they serve. When they fail to do so, people become reticent to actually use them in commerce, which increases hoarding, increasing theoretical value, but reducing actual utility.

could you please point me to any theories or papers that discuss this? (genuinely curious)

There are some citations in the Disadvantages Section of the Gold Standard article on Wikipedia: http://en.wikipedia.org/wiki/Gold_standard#Disadvantages

Read up on the theory around liquidity traps. It's not a popular idea among certain schools of economists, but it is a pretty mainstream idea.

It's one reason given for moving off the gold standard, and may even have been the actual reason for some to support that. The primary reason, however, was for governments to take control of the money supply and use it for political goals. Inflation is less visible than taxation.

No, it's a fundamental problem with all upstart currencies that have yet to gain widespread adoption. All currencies are going to start off at $0, being worth nothing. Obviously the price can only go up as adoption occurs. So any start-up currency has a "growth phase" during which its value increases exponentially. It will never make sense to spend a start-up currency during this phase.

The utility of the currency will depend on how many vendors ultimately accept it. And during the growth phase the number of vendors also increases exponentially. For the very same reason it doesn't make any sense to spend the currency during this time it makes a lot of sense to accept the currency during this time.

The reason a lot of us have invested in BitCoins at this stage is that we believe the growth phase will be followed by a stable phase, where adoption has reached an equilibrium or a saturation point. It is during this phase that the coin becomes a currency which makes sense to spend, and its utility as a currency can be realized.

We may be wrong; we may be right. Currencies have always been issued by governments before now, and up-start currencies have only really been possible since the advent of the Internet. Economists have never really had a chance to study a currency growing from $0 value in real time as they have had with BitCoin.

> All currencies are going to start off at $0, being worth nothing.

That's far from guaranteed.

Gold started off as a commodity, worth much more than nothing. It ended up being a means of exchange because its properties are suitable: it's highly valuable, easily divisible and durable, and other stuff I forget now. But those are the reasons it started being used as money.

In fact, it's possible that nothing that will be widely used as a currency in the future will start off at zero value.

Planet Money has a great episode on why gold: http://www.npr.org/blogs/money/2011/02/07/131363098/the-tues...

I don't see why new currencies should start at $0. Think of AWS and getting a "100 EC2 m1.large instance hours" only instead of a single voucher you get 100 amcoinz.

>All currencies are going to start off at $0, being worth nothing.

Bull. At this moment, I'm issuing an AqueousCoin to your pessimizer-account. In order to spend it, all you have to do is prove your identity by logging into HN in front of me or in front of a notary public, and I will send you $1 (minus postage.)

Done?

Sometimes (or possibly always by definition) the vendor comes before the currency.

Right, but it's not worth $1 until we actually engage in that transaction. Right now it's sitting in my pessimizer account worth exactly $0. I have no guarantee that you're going to pay me $1 for it until we actually engage in that exchange.

I suppose that's kind of an epistemic question. But to me, since how much someone buys something for is the central determinant of its price, it's not worth that price until someone buys it for it. So, perhaps it isn't even $0. The price of my AqueousCoin is (undefined)

> All currencies are going to start off at $0, being worth nothing.

Recent counterexample: The Euro started off at about $0.80. From the moment it came online, it had some intrinsic value because of its status as legal tender in the eurozone. That meant that it was essentially guaranteed that from moment zero, there was some non-zero rate at which people with dollars were willing to trade them for euros.

The only currencies that one should expect to start off at $0 are completely un-backed ones such as cryptocurriences.

Right. That's what I mean. I'm talking about start-up currencies here; the EU could offer its currency higher than $0 because it was putting its own credibility behind it. But that's the only because people agreed to buy it at $0.80. There's nothing intrinsic about the Euro that makes it worth more than $0; everything about the Euro that's valuable is extrinsic to it.

If you create a currency from scratch, and you are not a representative of some country or corporation, it's only ever going to be worth $0 at the beginning. But in both cases it's the people who buy it who decide what it's worth.

> There's nothing intrinsic about the Euro that makes it worth more than $0; everything about the Euro that's valuable is extrinsic to it.

I suppose this is just quibbling about minor details, but what the hey. The euro is, by definition, the official currency and legal tender of the eurozone. If we're going to count the essential characteristics of what something is as extrinsics, then we've wandered off into some epistemological bizarro-world where you can probably get away with whatever you want about anything.

Right - I count being the official money of the eurozone as an extrinsic quality, not an intrinsic one. Fiat money is intrinsically worthless, just like BitCoin. Unlike gold which has utility in that its market value isn't just based on its speculative value, but also what it's used for - a lot of things like electronics and jewelry that make it so that demand for gold will always be non-zero - fiat money is just paper, at the very most, and at the very least just bits being willed into existence by a central bank that may or may not later be printed into paper money.

Its officialness gives it two extrinsic qualities: 1) It can be used to pay taxes in some countries and 2) It is unlikely to be outlawed.

To me 1) is not special. In my view this just means there will always be at least one vendor that accepts the US Dollar (the US government) and while that's a nice guarantee, it makes the dollar different only in degree, but not kind, from BitCoin.

2) is slightly more interesting because it means that while Bitoin may be outlawed, the dollar will most likely never be outlawed, and the current regulatory framework governing money transfers, financial reporting, etc. is likely to stay consistent.

I believe BitCoin will be regulated more heavily, but not altogether more heavily than the dollar, but it will be not outlawed. Thus I think BitCoin in the end will not be meaningfully different from other fiat money, but it will offer things that fiat money can't offer, like unlimited electronic transfers over the Internet at small cost.

Of course, like anything I don't know the future. Here's to hoping.

Bitcoin may be deflationary, but can you really say crypto-currencies as a group are deflationary?

Cryptsy, for example, makes a market in more than 70 crypto-currencies [0]. If there's a low barrier to creating new currencies, then is the supply really limited?

[0] https://www.cryptsy.com/

Exactly, crypt-currencies as a whole are inflationary. There's even a site now to create your own -- coingen.io.

And it's not too hard to picture intermediaries, like bitpay and coinbase, to support many of the alternative currencies... helping adoption immediately.

Reply on news.ycombinator.com