Comment author: lsparrish 21 April 2013 04:24:33PM *  0 points [-]

You can spend in a deflationary currency but if you spend on stuff which isn't worth it then you get to experience buyers remorse or guilt over all the money you could have saved if you had not bought that Pizza.

This is an example of why I don't like deflation, at least not for the economy as a whole. It makes you get buyer's remorse about things like pizza, which actually are a pretty good deal in some situations. You can get fed without having to make food, you can arrange a party without hiring a catering service. The time spent by humans on making the pizzas is drastically reduced on a per-pizza basis because the pizza maker has specialized tools and skilled personnel.

So to me the fact that it discourages people from buying pizza is a sign of economic inefficiency. If they were not buying pizza in a market where the choice to hold onto your cash does nothing aside from retaining the ability to make other purchases, it would be a clearer signal that pizzas are not needed, that other things are more important.

Comment author: sinclaire 22 April 2013 11:42:21AM 2 points [-]

Not really. There will be people who like to eat. There will be morbidly obese people who will eat until a heart attack. But there is nothing fundamental about pizza that it's essential to the planet, the survival of the species, the sustainability of the environment, or staying happy and healthy. If it were important then people would buy more pizza, such as if pizza were shown to extend human lifespan then yes people will buy a lot of pizza. But if pizza doesn't do that but vitamins do then people will spend Bitcoin on expensive vitamins instead of pizza but the Bitcoin will always be spent.

Comment author: gwern 21 April 2013 12:32:57AM *  11 points [-]

Does it even matter just so long as the code is released, it works, and it solves problems?

Yes. It tells us information about currently unknown or uncertain variables. Having the source code and seeing that it works by no means screens off any inferences from its origin, any more than reading carefully a paper on smoking should make you not care that it was sponsored by the tobacco industry.

In the spirit of 'name three examples', here are 4 off the top of my head:

  1. future (ab)uses of the <1m bitcoins Satoshi is believed to have mined based on the minimal initial uptake by other miners and leaked nonce information; the orderbook on MtG implies that if all 1m were dumped, that could take Bitcoin down well into the <$1 range and could destroy Bitcoin as a currency and possibly destroy the prospects of any future currencies

  2. backdoors

    • in the source code itself (the Underhanded C Contest, and the history of cryptography, demonstrating that backdoors or weaknesses can persist for a long time, despite review by very talented people - in Bitcoin's case, Kaminsky and others - and note that the coding style of Bitcoin has been described as very weird and Bitcoin is also an implementation-defined standard, 'whatever the Satoshi client does or accepts')
    • in the primitives it uses (canonical example: NSA & DES)
  3. likelihood of future government crackdown or crackdowns based on blockchain movements
  4. future government uses of Bitcoin (mandatory public transactions, eg. using the colored coins mechanism, leading to a complete loss of all financial privacy?)
Comment author: sinclaire 21 April 2013 02:49:56AM *  0 points [-]

a) Future abuses via Satoshi having too many Bitcoin or from a Bitcoin elite can be countered right here and right now by supporting alt-cryptocurrencies. If one government backed Bitcoin then back the alts so that that one government competes with all those other government backed alt currencies. My attitude and behavior remains unchanged regardless of who backed Bitcoin initially or who Satoshi is.

b) Backdoors should be assumed to be in Bitcoin already. If you run it on Windows and you didn't compile it yourself then assume the NSA and FBi backdoor is already there in the code you either didn't compile yourself or you ran on a closed source operation system which once again you didn't compile yourself. If your behavior would be the same whether the backdoor exists or not then you're okay, and in my case my behavior would be exactly the same whether a backdoor exists or not so I don't fear the possibility.

c) The government crackdown possibility is real but the best way to defend against it is to actually support many cryptocurrencies knowing that some governments are possibly going to benefit from them. When enough governments stand to benefit from the technology in general, then sort of like the Internet it's here to stay and for the same reasons.

d) Even if the government designed Bitcoin it does not control it, and it's highly unlikely that any single government could maintain control of cryptocurrencies as a technology let alone control Bitcoin. So in a way Bitcoin is decentralized enough that no single government can dominate it but I'm sure many governments are involved at the clandestine level.

Comment author: lsparrish 21 April 2013 12:25:56AM *  0 points [-]

Of course I do not advocate people buying (or selling) junk. The whole point is to allow suppliers to more accurately gauge the level of interest in things on the part of consumers, by measuring their willingness to spend money without confusing interference from a changing currency supply.

I would argue that both deflation and inflation are forms of noise that inhibit market signals from traveling because they introduce more complex variables to the equation which don't actually do anything. Volatility is probably worse than either of these things. Any of the three is probably tolerable in small amounts, but they will tend to act as a burden on the system.

If people are saving rather than spending, it's a signal that products aren't good enough to spend on, which should trigger investment in better products. If people hold cash savings instead of loaning it out to businesses, this makes it harder for businesses to find adequate capital to produce a better product.

Comment author: sinclaire 21 April 2013 02:41:01AM *  2 points [-]

I could agree with you if people were rational but they aren't. People need incentives to do what is rational and deflation provides those incentives by rewarding the rational and punishing the irrational. You can spend in a deflationary currency but if you spend on stuff which isn't worth it then you get to experience buyers remorse or guilt over all the money you could have saved if you had not bought that Pizza. I think that is a really good thing because it makes people give considerably more thought into their investments.

And you're right if people are saving rather than spending it means products aren't good enough. And most products truly aren't good enough which is why people are sending that signal. Businesses who need capital in the Bitcoin world can get it from USD which is inflationary. There is plenty of credit and cheap USD money that angel investors can supply to Bitcoin businesses. This is why USD and Bitcoin will have to co-exist.

Comment author: Kevin 20 April 2013 08:40:13PM 0 points [-]

See this (somewhat unreasonable) speculation from Paul Graham that bitcoin was created by a government. https://news.ycombinator.com/item?id=5547423

Comment author: sinclaire 21 April 2013 12:11:47AM *  1 point [-]

It could have been created by the UN or by multiple governments. Does it even matter just so long as the code is released, it works, and it solves problems? It wouldn't surprise me at all if Intel agencies utilize Bitcoin nor would it surprise me if operatives helped to develop it. It does not change the utility of Bitcoin for me just because of it's origins.

Comment author: lsparrish 20 April 2013 10:56:45PM 1 point [-]

a) Bitcoins are deflationary in the sense that supply does not increase as fast as demand. If you have any bitcoins, your incentive is to hold onto them for dear life -- unless your expenditure is a very safe strategy to net you more bitcoins. You can't easily loan them because as the value increases over time the pressure to default will increase. Maybe this creates creative pressure to minimize risk or some other positive trait, but I'm cautious of labeling it good for the long term economy. The strategy I've outlined minimizes risk of losing your bitcoins by letting you loan them out in a form that will be worth the same later, which means defaulting on a loan has less severe consequences and less extreme incentives.

b) Volatility is a huge concern for contracts. If you can't count on it being worth the same tomorrow, a given contract costing you so much makes it much harder to juggle long term financial gains and losses from holding many contracts with many different businesses and individuals. This imposes extra accounting costs that I would argue make it much harder to do complex business without incurring extreme risk.

c) I do agree that bitcoin does not need to replace the dollar to coexist with it. However, the case for it being a major financial instrument is better if we can define a niche that it fills better than the dollar. Also, if you are planning to hold long-term, it is important to distinguish whether its value is mainly fad/signaling based or not. Right now it seems like something geeks and hipsters use to buy each other coffee -- which is neat, but could easily lose popularity when something else comes along.

Comment author: sinclaire 21 April 2013 12:05:22AM *  -1 points [-]

Yes I know Bitcoins are deflationary and I think that is one of the best things about Bitcoin. I think demand should always increase faster than supply if you look at it holistically. We have a world where population growth is increasing faster than job growth can ever keep up, we have a sustainability problem with pollution and waste, and we have inflationary currencies, credit, and debt contributing to diminished liberty and justice for all. Spending isn't always a good thing when we currently spend on stuff which destroys the planet, which isn't necessary, which doesn't make sense, it's growth for growth sake and it's as bad as economic cancer.

Volatility is bad for large contracts but this can be solved technologically. There are ways to make Bitcoin less volatile for use in contracts and colored coins, Ripple and smart contracts may be a part of the solution.

I think Bitcoin is in a niche, that niche being it is the best currency for the digital space and for digital content. If you're offering digital content then it makes much more sense to exchange that content for Bitcoin because there is no micropayment structure which makes sense in fiat currency and there is no easy way to do it which would be obviously better than Bitcoin. I'm not going to tip you with my credit card number but I might with Bitcoin.

Long term Bitcoin is probably going to be replaced by something better. It will last for 10 years, perhaps 15, but it's dominance will mainly be in the next 5 years. How long did Netscape last? This is why it's good to invest in alternative cryptocurrencies which promote innovative solutions. Rather than change Bitcoin's protocol it's important to help fuel competition for Bitcoin so we can find out from the market which alternatives are necessary. For certain niches Litecoin might be better, but for certain things Bitcoin may be best and for other things we might have other coins like PPcoin and anything which comes after it. The point is the more cryptocurrencies we have the more solutions we have and the more niche markets we fill. So if you want to encourage that then you should buy the alt-crypto currencies.

The main thing in my opinion is getting infrastructure built. I think once Bitcoin has infrastructure built then all the alt currencies will piggy back on Bitcoins infrastructure whether Bitcoin fails or is a success or falls into a niche does not matter as long as the infrastructure is built.

Comment author: lsparrish 20 April 2013 10:29:16PM *  1 point [-]

I agree that it encourages saving. But does it really encourage investing? It would seem that the faster bitcoin's value is rising the less incentive there is for me to allocate my scarce bitcoins towards stocks, startups, etc. -- it's safer to hold onto them.

Also note that in the absence of as much spending, there are fewer profitable investments. That would also mean less jobs, less income, and possibly a deflationary spiral where nobody spends more than the bare basics for survival.

Comment author: sinclaire 20 April 2013 11:38:17PM *  2 points [-]

So what you're basically saying is that we must increase the supply of fools by offering cheap money so they can buy stuff which isn't valuable(junk) so as to inflate the economy. I disagree if that is what you suggest.

The reason for my disagreement is because I disagree when you say people wont be willing to spend. People are willing to spend on entertainment provided they have an income. People will spend on entertainment because there is no guarantee any of us will be alive in 10 years when Bitcoins could be worth 1 million a coin or whatever high value number people are throwing around. There is also no guarantee Bitcoin will be there 10 years from now. So basically the deflationary anti spending argument is actually an argument in favor of saving.

If you think people shouldn't save anything then you basically have another USD where everyone is living on credit, living on debt, and no one can afford to save. That is no better than what we already have honestly except perhaps it's an Internet dollar but it maintains all the flaws of the fiat monatary system.

Investing is something I would entertain right now because its one of the few ways to spend money to make money. There is risk involved but depending on how many Bitcoins you have the incentive for taking those risks might or might not be worth it. It also depends on how many Bitcoins you invest, but to have some Bitcoins invested in Silver, in Stocks, in alternative cryptocurrencies, or in promising technologies, that is what I see going on quite a bit. I see people investing in cryptostocks, I see people buying Gold and Silver physical Bitcoins, I see people buying mining equipment like Avalon ASICS using Bitcoins. This behavior will increase in the future when the ROI becomes high enough to make more people invest.

The entertainment market will not suffer during deflation. People want comfort and happiness and will spend any amount of money to achieve it. Gaming sites, movies/music, gambling sites, cam/porn sites, etc., will all do well under Bitcoin. These all count as spending, and over time more money will be spent on these activities.

What people will spend Bitcoins on does not have to be what people spend USD on. People will spend Bitcoins on virtual or digital content, this could be e-books or access to academic journals. The only thing Bitcoin is missing is infrastructure and exclusive content which can only be bought with Bitcoin. You have both those in place and people will have to spend Bitcoin to get content and anyone can make content.

Comment author: lsparrish 20 April 2013 04:10:38PM 3 points [-]

This simply doesn't change anything, because you can still trade two barrels of tomatoes for one barrel of oil.

That is true as far as it goes, but for people deciding what portion of their savings need to be in bitcoin versus some other form from one week to the next it is very relevant. A counterexample would be countries with runaway inflation, where people are forced to spend their money extremely quickly. I'm not sure that runaway deflation ruins commerce to the degree that inflation does, but it seems like it would slow it down quite a bit by placing greater incentive pressure towards cash savings rather than investment or expenditure.

Comment author: sinclaire 20 April 2013 10:21:15PM *  3 points [-]

Saving and investment are the solution to debt. Bitcoin encourages both saving and investing. Investing isn't the same as mere spending because you earn profits on investing. The majority of people in the USA are in debt because of inflation, credit, loans, etc.

Comment author: knb 20 April 2013 01:24:33PM 8 points [-]

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.

Comment author: sinclaire 20 April 2013 10:12:14PM 2 points [-]

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.

Comment author: sinclaire 20 April 2013 09:59:11PM *  3 points [-]

a) When I can earn Bitcoins I will be more likely to spend them. Dollars as inflationary but I'm not likely to spend the last dollar in my pocket on something I don't actually need. Bitcoins are inflationary but I'm not likely to spend my last Bitcoin on something I don't really need. It's currently very hard to earn a significant amount of Bitcoins so no one is ready to spend them and at the same time there aren't many places to spend them either. So while the deflation is good we need to be able to replace every Bitcoin we spent to make it spendable like a currency. When I can spend X amount a week based on an income of Y amount a week then why not spend Bitcoins in that scenario? I don't lose any Bitcoins so there is no reason not to spend my profits. I'm not however going to spend my savings and who exactly would?

b) Volatility isn't a problem. Bitspend and Bitpay can handle it. Better designed payment processors can handle it. Better designed exchanges can handle it. But for now volatility means increased profits for speculators and right now speculation is one of the only ways to turn 1 BTC into 2 BTC. So if that is the best source of income in the Bitcoin economy it's going to create a natural incentive to pump and dump which drives volatility up.

c) Bitcoin does not have to replace the dollar to be a success it merely has to coexist. Alternative cryptocurrencies don't have to replace Bitcoin but merely compete. Bitcoin is like the first web browser when no one knows how the web works but experts from other fields expect it to work like something else. Bitcoin is unique and we cannot base how it works around fiat currency, gold or anything else.

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