Volatility. This is the natural result of deflation. As scarcity increases, people buy out of the speculative belief that value will rise forever. They fear to spend because really, who wants to have bought a million dollar pizza? Eventually, when enough of the value is due solely to this belief in future growth, people abruptly begin to sell, and the bubble bursts.
Consider the Great Deflation. US prices sagged from 1870-1890 due to a slow increase in the supply of money (gold) and a rapid increase in total economic production due to the 2nd Industrial Revolution. Prices weren’t volatile, they just steadily dropped… by about 2% per year.
This may well parallel the situation Bitcoin will face as it matures, as the supply of new bitcoins slowly increases and the Bitcoin economy grows. Before that can happen, the markets will have to go through a process of discovering things like how widely it will be used for transactions, how governments will respond, etc.
It certainly isn’t inevitable that deflation causes volatility. The cause of Bitcoin volatility is not deflation, it’s caused by speculation under conditions of extreme uncertainty.The uncertainty will be resolved eventually, one way or another.
The cause of Bitcoin volatility is not deflation, it’s caused by speculation under conditions of extreme uncertainty. The uncertainty will be resolved eventually, one way or another.
Certainly true for now, BTC currently is experiencing ~13% inflation YoY. Pricing in future deflation is inherently speculative as it assumes BTC will be around long enough for it to matter.
And speculation is popular because it’s perhaps the easiest way to make profits from Bitcoin. People don’t create money to waste money unless it’s inflationary on purpose. People tend to want to earn, save, and invest. Bitcoin allows people to earn, save, and invest, but the reason why people don’t like to spend is because it’s very hard to earn.
People do like to save, invest and speculate. The point is if I own any Bitcoins I’m not going to spend it on a Pizza which once I eat it those Bitcoins are gone forever and I can never get them back? No I’m instead going to invest my Bitcoins to either help me make more Bitcoins in the future or to protect whatever Bitcoins I already have. I would seek to increase my income in Bitcoins and decrease costs. I would seek to maximize my profits. Once I have enough income and profits that I know I’ll always have some Bitcoins to play with that is when I’ll start to spend.
The point is not to ever spend them down. It makes no rational sense to spend your life savings down, but it makes all the sense in the world to spend up or spend across. Luxury Bitcoins is not something most people have right now but that will change when the value of Bitcoins go up in relation to USD and the income sources for Bitcoins increase.
Once I can earn Bitcoins fairly easily and I know the value is over $1000 a coin it becomes a different story and at $10,000 a coin even more likely to spend. The point is people are more likely to spend also when the value of a Bitcoin in reality matches the value they have set for it in their mind. People who believe each Bitcoin is worth $100,000 aren’t going to spend until they are worth that much and this is okay because our willingness to spend is what decides how much they are worth. So maybe we shouldn’t spend them for a while.
The point is if I own any Bitcoins I’m not going to spend it on a Pizza which once I eat it those Bitcoins are gone forever and I can never get them back? No I’m instead going to invest my Bitcoins to either help me make more Bitcoins in the future or to protect whatever Bitcoins I already have. I would seek to increase my income in Bitcoins and decrease costs. I would seek to maximize my profits. Once I have enough income and profits that I know I’ll always have some Bitcoins to play with that is when I’ll start to spend.
It certainly isn’t inevitable that deflation causes volatility. The cause of Bitcoin volatility is not deflation, it’s caused by speculation under conditions of extreme uncertainty.The uncertainty will be resolved eventually, one way or another.
Right. There seems to be a broad misconception that “The currency will be fixed in [ultimate] supply (physical deflation), therefore it will undergo constant increases in value (value deflation).” But the two are very different: prices change in response to new knowledge, not old knowledge. The implications of future bitcoin supply are already factored into bids.
The belief that “it’s a perfect investment that will trend with general economic growth”? Already priced in.
The benefit of guaranteeing to yourself a known fraction of the eventual money supply? Already priced in.
I can at least imagine that your position is correct. But I still think that attaching a complex set of beliefs regarding the future value of a currency’s individual units generates noise that makes them less useful as units of price value, and really less valuable as a medium of exchange. Added complexity to a given calculation makes it harder to perform, resulting in a relatively slower, clunkier economy, with high probability of buyer’s remorse and so forth arising from miscalculation.
Don’t get me wrong; I am overwhelmingly pro-bitcoin, and see it gaining massive value for reasons I’ve stated (destroying/locking a sum of bitcoins is an extremely efficient way to add recognizable value to another currency), but I have reservations about the specific scenario of it directly filling the niche occupied by cash such as dollars, i.e as a method of. fulfilling long term contractual obligations, pricing goods, and so forth.
I can at least imagine that your position is correct. But I still think that attaching a complex set of beliefs regarding the future value of a currency’s individual units generates noise that makes them less useful as units of price value, and really less valuable as a medium of exchange. Added complexity to a given calculation makes it harder to perform, resulting in a relatively slower, clunkier economy, with high probability of buyer’s remorse and so forth arising from miscalculation.
Are you talking about bitcoin or conventional sovereign currencies? The future supply of bitcoins is much more certain than the typical currency out there because it’s laid down in advance.
Are you talking about bitcoin or conventional sovereign currencies?
Bitcoin. Traditional currencies have the same problem though, in that they tend to have variable, policy-based inflation rates that confuse the markets. I am arguing in favor of a something designed for price stability, enforced by algorithmic means in accordance to demand.
The future supply of bitcoins is much more certain than the typical currency out there because it’s laid down in advance.
Sure, the physical supply is laid out in advance, but the amount available to do transactions with at any given time, or even in the long term, is not. There’s no reliable way to predict who will choose to sit on their coins (possibly even cryptographically putting them in an unspendable stasis for an unknown amount of time) versus spending them on useful trades or engaging in short-term speculation. The market is rendered more stochastic, with more of a butterfly effect, more black swans, and so forth. Each and every transaction is impacted to some degree by this hidden complexity, which negatively impacts the use currency’s use value.
I don’t see how you’ve explained a problem more predominant with or unique to bitcoins. All currencies have the problem that their usage as a currency can shift. There’s no reliable way to predict who will sit on their money rather than spend it. You’re comparing bitcoin to perfection, not to real currencies.
versus spending them on useful trades
The whole point of money is that it has the option value to spend it now or later, so the fact that its option value isn’t being exercise doesn’t mean it’s failing at its purpose; just the opposite, in fact. If all you care about is how often a currency is used, then the optimal currency would be spent the moment it is earned—but that’s scarcely better than barter.
Consider the Great Deflation. US prices sagged from 1870-1890 due to a slow increase in the supply of money (gold) and a rapid increase in total economic production due to the 2nd Industrial Revolution. Prices weren’t volatile, they just steadily dropped… by about 2% per year.
This may well parallel the situation Bitcoin will face as it matures, as the supply of new bitcoins slowly increases and the Bitcoin economy grows. Before that can happen, the markets will have to go through a process of discovering things like how widely it will be used for transactions, how governments will respond, etc.
It certainly isn’t inevitable that deflation causes volatility. The cause of Bitcoin volatility is not deflation, it’s caused by speculation under conditions of extreme uncertainty.The uncertainty will be resolved eventually, one way or another.
This seems correct to me.
Certainly true for now, BTC currently is experiencing ~13% inflation YoY. Pricing in future deflation is inherently speculative as it assumes BTC will be around long enough for it to matter.
And speculation is popular because it’s perhaps the easiest way to make profits from Bitcoin. People don’t create money to waste money unless it’s inflationary on purpose. People tend to want to earn, save, and invest. Bitcoin allows people to earn, save, and invest, but the reason why people don’t like to spend is because it’s very hard to earn.
People do like to save, invest and speculate. The point is if I own any Bitcoins I’m not going to spend it on a Pizza which once I eat it those Bitcoins are gone forever and I can never get them back? No I’m instead going to invest my Bitcoins to either help me make more Bitcoins in the future or to protect whatever Bitcoins I already have. I would seek to increase my income in Bitcoins and decrease costs. I would seek to maximize my profits. Once I have enough income and profits that I know I’ll always have some Bitcoins to play with that is when I’ll start to spend.
The point is not to ever spend them down. It makes no rational sense to spend your life savings down, but it makes all the sense in the world to spend up or spend across. Luxury Bitcoins is not something most people have right now but that will change when the value of Bitcoins go up in relation to USD and the income sources for Bitcoins increase.
Once I can earn Bitcoins fairly easily and I know the value is over $1000 a coin it becomes a different story and at $10,000 a coin even more likely to spend. The point is people are more likely to spend also when the value of a Bitcoin in reality matches the value they have set for it in their mind. People who believe each Bitcoin is worth $100,000 aren’t going to spend until they are worth that much and this is okay because our willingness to spend is what decides how much they are worth. So maybe we shouldn’t spend them for a while.
Is that how you spend dollars already?
Right. There seems to be a broad misconception that “The currency will be fixed in [ultimate] supply (physical deflation), therefore it will undergo constant increases in value (value deflation).” But the two are very different: prices change in response to new knowledge, not old knowledge. The implications of future bitcoin supply are already factored into bids.
The belief that “it’s a perfect investment that will trend with general economic growth”? Already priced in.
The benefit of guaranteeing to yourself a known fraction of the eventual money supply? Already priced in.
I can at least imagine that your position is correct. But I still think that attaching a complex set of beliefs regarding the future value of a currency’s individual units generates noise that makes them less useful as units of price value, and really less valuable as a medium of exchange. Added complexity to a given calculation makes it harder to perform, resulting in a relatively slower, clunkier economy, with high probability of buyer’s remorse and so forth arising from miscalculation.
Don’t get me wrong; I am overwhelmingly pro-bitcoin, and see it gaining massive value for reasons I’ve stated (destroying/locking a sum of bitcoins is an extremely efficient way to add recognizable value to another currency), but I have reservations about the specific scenario of it directly filling the niche occupied by cash such as dollars, i.e as a method of. fulfilling long term contractual obligations, pricing goods, and so forth.
Are you talking about bitcoin or conventional sovereign currencies? The future supply of bitcoins is much more certain than the typical currency out there because it’s laid down in advance.
Bitcoin. Traditional currencies have the same problem though, in that they tend to have variable, policy-based inflation rates that confuse the markets. I am arguing in favor of a something designed for price stability, enforced by algorithmic means in accordance to demand.
Sure, the physical supply is laid out in advance, but the amount available to do transactions with at any given time, or even in the long term, is not. There’s no reliable way to predict who will choose to sit on their coins (possibly even cryptographically putting them in an unspendable stasis for an unknown amount of time) versus spending them on useful trades or engaging in short-term speculation. The market is rendered more stochastic, with more of a butterfly effect, more black swans, and so forth. Each and every transaction is impacted to some degree by this hidden complexity, which negatively impacts the use currency’s use value.
I don’t see how you’ve explained a problem more predominant with or unique to bitcoins. All currencies have the problem that their usage as a currency can shift. There’s no reliable way to predict who will sit on their money rather than spend it. You’re comparing bitcoin to perfection, not to real currencies.
The whole point of money is that it has the option value to spend it now or later, so the fact that its option value isn’t being exercise doesn’t mean it’s failing at its purpose; just the opposite, in fact. If all you care about is how often a currency is used, then the optimal currency would be spent the moment it is earned—but that’s scarcely better than barter.