The future of Bitcoin/altcoins/cryptocurrencies

[meg]

What might the “winning” altcurrency look like?

There have been several statements in the other bitcoin thread to the effect of (my paraphrasing) while I believe cryptocurrency is the wave of the future, I think bitcoin is only the first iteration, and that something else will come along that is better.

Let's talk about that. What features/aspects of bitcoin do you think might be troublesome in the future? What features/aspects of a cryptocurrency do you think must be addressed in a better version? Are there any features of bitcoin that you think should be carried into the next generation?

I'll start.

There are a couple of things about bitcoin that I question whether they can scale to what I believe is the future of this technology.

One is that the size of the blockchain is getting unwieldy. I think a successful cryptocurrency has to be designed in such a way to make it easy for businesses and developers to layer new applications into/on top of the archetecture. Right now, if a developer wants to design an app that uses bitcoin, it has to either download and keep up with the entire blockchain, (13G and climbing) or it has to keep in contact with other servers that keep track of the blockchain for it. I know there has been some work on the idea that perhaps they don't need the entire blockchain, only the last X number of blocks. I question whether that weakens the security. Those apps that contact other servers which maintain the blockchain for them, I believe are possibly adding in another point of failure that could become corrupted, also potentially weakening the security. This is not to say that bitcoin cannot fix this problem. I know many developers are working on it. But it is something I wonder about.

Another is the scripting language. Satoshi Nakamoto designed bitcoin knowing that it could be much more than just a currency or a payment processor. Marc Andreesen discusses this in his recent article Why Bitcoin Matters and David Morris also expounds on this vision in Bitcoin is not just digital currency. It's Napster for finance. There are several projects in the works now, like Mastercoin, ( http://www.mastercoin.org/ ) attempting to move forward this kind of vision.

Satoshi created a scripting language for bitcoin just for these kinds of applications, which really was a bit of genius, imo. Unfortunately, some developers that are trying to design these more complicated applications are coming to the realization that the bitcoin scripting language is just not all that robust. It is difficult to create the complicated financial instrument they need with this limited tool. So the question arises. Is the future with layers on top of bitcoin, like the Mastercoin project? Or do we need to kind of start over from scratch?

One such “start over form scratch” project I am watching is Ethereum. They have addressed the blockchain problem head on, and redesigned the entire protocol using a far more robust language to make it much easier to not only create your own coins, - translate coin here to mean any object of value. It could represent a stock certificate, a property title, or a derivative, for example, but also to create more complicated business instruments like loans, escrows, dividend payouts, etc and layer them right on top.

More info here:
http://www.coindesk.com/ethererum-launches-cryptocurrency-2-0-network/
http://ethereum.org/

I admit readily that 90% of this stuff is way over my head. If I have misunderstood something, or misstated something, please feel free to correct me. I am absolutely in learning mode here, as I know many of you are too. I think discussing what we learn can lead to better understanding. I think this stuff is going to be important, so I really want to understand it, and I think others do too. I hope by talking through some of these things, we all can learn it together, and achieve a deeper understanding than what we might get just reading other articles or other forums.

So what are your thoughts? What do you see as necessary for a successful cryptocurrency? How do you see this technology moving into the future?


I would like to respectfully request that we try to stay on topic here, and that this is not the place for arguing about what defines a currency, the price of any particular coin, Mt Gox, or political ideologies. The other bitcoin thread seems to hold those just fine. I would also like to request that if your reply consists entirely of a one liner with a rolly eyes, “am not” or “are too”, just, well.. just please don't.

Thanks very much!
Meg

 

[CriticalThanking]

Apologies - I don't know enough to intelligently comment on your post, but I just got this in a news feed. Bitcoin exchange CEO arrested: http://money.cnn.com/2014/01/27/technology/security/bitcoin-arrest/

 

[meg]

Apologies - I don't know enough to intelligently comment on your post, but I just got this in a news feed. Bitcoin exchange CEO arrested: http://money.cnn.com/2014/01/27/technology/security/bitcoin-arrest/

Yeah. That's kind of old news, really. BitInstant has been shut down since July. Multiple lawsuits have been filed for bad treatment of customers. And the rumormill has been pretty solidly sure that federal investigations were underway for a long time.

 

[The Fallen Serpent]

I am still not convinced the advantages and disadvantages of cryptocurrencies is altogether a winning solution as a supplementation for or replacement of state controlled fiat currencies for the majority of society.

I think predicting the the nature of a winning cryptocurrency requires defining what purposes it will serve that enough of society will accept.

Personally, I see cryptocurrencies pushing the development of better digital functions of state and international controlled fiat currencies with a more decentralized finance system. There will still be banks and other traditional institutions but they will operate under altered profit schemes and be more dynamic to the needs of the economy.

I predict any crytpocurrency that evades taxation and disclosure of ownership, by either design or practice, will eventually butt heads with governing institutions.

 

[meg]

I am still not convinced the advantages and disadvantages of cryptocurrencies is altogether a winning solution as a supplementation for or replacement of state controlled fiat currencies for the majority of society.

I think predicting the the nature of a winning cryptocurrency requires defining what purposes it will serve that enough of society will accept.

Personally, I see cryptocurrencies pushing the development of better digital functions of state and international controlled fiat currencies with a more decentralized finance system. There will still be banks and other traditional institutions but they will operate under altered profit schemes and be more dynamic to the needs of the economy.

I think many people get too caught up in the word “currency” and how it is defined and used from a government or economic view of fiat currency, rather that what it means when we're talking about cryptocurrencies. IF I am understanding what I am learning about this technology, the word “currency” really should be thought of more as shorthand for “a secure and verifiable unit of value”. This unit of value could represent anything in your future crypto-wallet from access to your lines of credit, to money in your bank account, to stocks you own, to the title for your home. Bitcoin, as it is now, and several other altcoins, represents another unit of value equal to X amount of another currency, as defined by the going exchange rate.

I believe the whole development of these technologies is to do exactly what you said, provide for better digital functions of state and international controlled fiat currencies with a more decentralized finance system. It allows parties that don't know or necessarily trust each other to transact business securely without having to go through an intermediary.

What do you mean by “banks and other traditional institutions [ will ] operate under altered profit schemes and be more dynamic to the needs of the economy.”? Do you have any specific thoughts as to how you envision our banking system changing?

I predict any crytpocurrency that evades taxation and disclosure of ownership, by either design or practice, will eventually butt heads with governing institutions.

I think you are exactly right there, also. And I believe a lot of criminals are coming to the realization that this isn't nearly as anonymous as they originally thought. And that features like being able to trace the route of every transaction not only make it difficult to spend stolen goods, it provides law enforcement evidence of criminal activity once your wallet has been identified.

I also think the only way any cryptocurrency will get widely accepted is if the regulations surrounding it are clear. Most people and most businesses want to abide the law. It doesn't really matter how the government treats the currency/commodity/thing of value. It only matters that they acknowledge it as something, so all the law abiding people and merchants will know how to keep their books and pay their taxes properly.

 

[The Fallen Serpent]

Surprisingly, I think by and large we might be fairly lined up on this issue! Your use of "unit of value" is very much how I think of currency. It is an abstract relationship and its power is mostly in its representation of that relationship as opposed to commodities which have a use other than representing value.

As for traditional banking institutions, my lay person predictions are we will see them take up even further the role of direct processing of transactions. Sort of a blend between how crytpocurrencies operate and electronic debit accounts work. Currently electronic debit accounts are filtered heavily through the electronic credit networks. The two systems are already very similar and I suspect a more midpoint system might be more robust and dynamic than either currently is, see your discussion on blockchain issues above. Perhaps we will see banks and credit unions paying and maintaining the electronic processing equipment of merchants directly, instead of each merchant having to purchase and maintain the equipment individually, allowing for more security and reliable upgrades to the system as a whole. Banks will still be in the middle but the cost of entry will be greatly reduced allowing a greater variety of types of banking institutions to serve the needs of its members.

Further on that, I also see the way credit is handled being more able to handle crowdsourcing and direct manipulation. Imagine banks still operating under the same general principle as they do today. They store and provide services in exchange for using your money as investments, or rarely in exchange for nominal fees. By and large people give up their investment rights in exchange for the services instead of paying fees. However a more robust system may allow micro lending at a wider level. They have a list of investment seekers that the bank is not willing to invest with directly, but the seeker creates an investment account under certain terms and individuals can transfer their funds to the loan seeker account under the prestated terms.

I know, all of this already exists today but I am envisioning a greater aggregation of services coupled with lowered ease of entry creating more competition (and likely risk) among institutions and seekers of financial instruments. With good regulation to account for risk management, I can imagine a rather dynamic economy compared to our current. Much as electronic banking providing a major shift in dynamism while increasing risk compared to paper only banking. More of what we already have, but with greater convenience and reliance on industry standards over specific institutions.

I see little room for independent cryptocurrencies as they exist now, other than as shadow economies. I don't think that level of unchecked monetary policy will be left in the hands of the free market. Most likely I predict the various algorithms being used for different market manipulation purposes. Automation, more precision in market manipulations, ect. In addition, I could possibly see a sort expansion of fractional reserve banking. All cryptocurrencies will be pegged to a reserve of state issue currency, but is restricted in worth to no more and no less than that reserve. So regulated institutions can create their own internally regulated currencies but the monetary policy effect is diminished by being pegged to a range of the state's central currency.

 

[Almo]

"Satoshi Nakamoto designed bitcoin knowing that it could be much more than just a currency or a payment processor."

I thought we didn't even know for sure who this guy is? How could we know what he knew or not? Just curious.

 

[pantsorama]

I think (s)(t)he is/are Skynet.

 

[psionl0]

What might the “winning” altcurrency look like?

If there is to be such a thing as a "winning" altcurrency then the inelasticity of supply issue would need to be addressed. A fixed currency supply is deflationary and encourages hoarding. It is also likely that the bulk of such a currency would end up being owned by a relatively small percentage of users who would profit from it by lending it out. This would tend to nullify the benefit of switching away from a centralized government currency.

One possible option would be to have an altcurrency with a built-in rate of inflation. Instead of tapering off, the mining rate would increase over time. Although this would tackle the hoarding problem it would not necessarily prevent the concentration of ownership. The fact that no altcurrencies have been developed along these lines suggests that inflation is not as popular for individuals as it is for governments and economists.

I have found a couple of altcurrencies that tackle these problems.

Freicoin (http://freico.in/) is a similar concept to bitcoin but with an additional feature: it also includes a demurrage fee (http://en.wikipedia.org/wiki/Demurrage_(currency)). Holders of this currency pay this fee automatically (about 5% per year) which is distributed to the miners.

A currency with demurrage fees was actually trialled in the Austrian town of Wörgl between 1932 and 1934 with some good results. However, the Austrian central bank stopped this experiment.

Ripple (https://ripple.com/) represents another approach. Although it has its own XRP currency, ripple is more of a decentralized payments system (payments can be made in almost any currency) and self-issued credit system. It is sort of the next step in LETS trading systems (like Digital Coin is).

 

[meg]

"Satoshi Nakamoto designed bitcoin knowing that it could be much more than just a currency or a payment processor."

I thought we didn't even know for sure who this guy is? How could we know what he knew or not? Just curious.

Whoever Satoshi Nakamoto may be, he/she/they didn't just drop one white paper on the world and vanish. They were quite active in the project, coordinating and communicating with many developers and users for over two and half years, while the bitcoin network got started.

Another way we know this is explained in the articles and in my own paragraph. By the fact that they put this scripting language in there. If all they envisioned bitcoin to be was a simple transaction ledger, they could have hard coded that into it. The fact that they put the language in there indicates that they realized others may want to do more complicated or other types of transactions with this, and they laid the groundwork for that to happen.

 

[meg]

If there is to be such a thing as a "winning" altcurrency then the inelasticity of supply issue would need to be addressed. A fixed currency supply is deflationary and encourages hoarding. It is also likely that the bulk of such a currency would end up being owned by a relatively small percentage of users who would profit from it by lending it out. This would tend to nullify the benefit of switching away from a centralized government currency.

I don't understand how this really could happen, because bitcoin is divisible to the eighth decimal. Theoretically, the system could still work if there was only 1 BTC trading, as that would be equal to 100 million satoshis (.00000001 Btc). And there is no reason it could not be further divided, if there was consensus to do so.

From here: https://en.bitcoin.it/wiki/Myths
“One Bitcoin is divisible down to eight decimal places. There are really 2,099,999,997,690,000 (just over 2 quadrillion) maximum possible atomic units in the bitcoin system. The value of "1 BTC" represents 100,000,000 of these. In other words, each is divisible by up to 10^8. As the value of the unit of 1 BTC grows too large to be useful for day to day transactions, people can start dealing in smaller units, such as milli-bitcoins or micro-bitcoins.”

One possible option would be to have an altcurrency with a built-in rate of inflation. Instead of tapering off, the mining rate would increase over time. Although this would tackle the hoarding problem it would not necessarily prevent the concentration of ownership. The fact that no altcurrencies have been developed along these lines suggests that inflation is not as popular for individuals as it is for governments and economists.

I understand why a government would want inflation (to a point). Inflation encourages spending = growing economy = more jobs = less people on the dole. I cannot see any reason whatsoever why any non-government entity would want to artificially create inflation. I also think you are getting, as I said above to The Fallen Serpent, too caught up in the word “currency”, and missing what these “coins” actually represent, which is a unit of value in a secure public ledger of transactions.

I also wonder just how real the theoretical problem of hoarding is, given that in the real world most of the people spend most of their money, not because they want to, but because they have to. Most of us do not have the luxury to decide when to pay the rent or buy food or put gas in the car or get medical care, etc. So you've got only the rich that can afford the luxury of buying and holding for a long time. However then you've got the question of is the rate of deflation so stable and so profitable that no one would try to “beat the market”? One has only to look at the stock market to see the answer to that question.

I also have a hard time seeing how any proposed system with built in inflation could get early adopters. Why would I want to spend my time, money, and computer power to mine something that is worth nothing now, that is by design destined to be worth less as time goes by, on the hopes that a whole bunch of people will use it so somehow it will grow in value?

I have found a couple of altcurrencies that tackle these problems...

Perhaps reading up on these will answer my question. Thanks for the links. I will read them.

 

[pantsorama]

I don't understand how this really could happen, because bitcoin is divisible to the eighth decimal. Theoretically, the system could still work if there was only 1 BTC trading, as that would be equal to 100 million satoshis (.00000001 Btc). And there is no reason it could not be further divided, if there was consensus to do so.

Monetary supply is an aggregate measure of the total amount of buying power there exists in the system. The flexibility in the supply needs to come from increasing or decreasing the total value (ie buying power) of all outstanding BTC. The ability to divide BTC does nothing to aggregate supply.

Put another way. If I have a gallon of gas, it will get me so far in my car. There are things I can do to make it go further, but dividing the gallon into quarts is not one of them.

 

[The Fallen Serpent]

Basic supply and demand. Each unit of labor or article of property you put under bitcoin must compete against every other unit of labor or article of property already represented by bitcoin. Since there is no method of increasing the number of bitcoin (once we reach the set mined limit of course) the new item's added value must be accounted for by decreasing values elsewhere in the system. The more items bitcoins represents, the more items each individual unit of bitcoin must represent, bringing individual values of items down. In current practice, bitcoins are still increasing. However if the number of bitcoins are increasing at a smaller rate than the comparative worth of items being added to bitcoin, then those items still suffer deflation.

Simpler: As bitcoin demands out pace supplies, bitcoin inflates and everything else deflates.

 

[psionl0]

I don't understand how this really could happen, because bitcoin is divisible to the eighth decimal.

The divisibility of bitcoin means that 21M BTC is enough to supply the whole world but it doesn't prevent unequal distribution of bitcoins nor does it stop anybody with enough earning potential from stockpiling bitcoins.

We can print as much fiat currency as we want but there is still a top 1% who have a considerable portion of the money and McMansions as well.

I also think you are getting, as I said above to The Fallen Serpent, too caught up in the word “currency”, and missing what these “coins” actually represent, which is a unit of value in a secure public ledger of transactions.

I don't know how you got that idea from anything in the post that your are responding to. In other posts in the bitcoin thread I have conceded that if the main use (at present) of bitcoin is as a store of value rather than a medium of exchange then it is technically not a currency. Of course, money is money whether you spend it or not so the distinction is not that important to me.

I also wonder just how real the theoretical problem of hoarding is, given that in the real world most of the people spend most of their money, not because they want to, but because they have to.

Bitcoin is being hoarded all right and data presented in the bitcoin thread suggests that the ownership of bitcoins is highly concentrated. Many people are holding on to their bitcoins in anticipation of the day when it can be spent anywhere or its value gets high enough to make it worthwhile selling. If you look at the daily trading volumes at the bitcoin exchanges, you will see that only a very small percentage of the bitcoins in existence are actually being traded.

The mining difficulty of bitcoin has reached such a level that only those who can afford massive computing power can do any mining. This means that the bulk of the new coins being mined go to the rich and bypass ordinary people.

Unless you happen to be rich, you will need finance to buy a new car or make some other major expenditure. This won't change if bitcoin displaces other currencies. It just means that you will have to borrow bitcoins to buy a car and that means paying interest to people who have enough spare bitcoins to lend out. That can only further the concentration of bitcoins in the hands of the rich.

I also have a hard time seeing how any proposed system with built in inflation could get early adopters. Why would I want to spend my time, money, and computer power to mine something that is worth nothing now, that is by design destined to be worth less as time goes by, on the hopes that a whole bunch of people will use it so somehow it will grow in value?

That is pretty much the point I made. Maybe for the same reason, a currency with demurrage may not take off. The FAQ section of the Freicoin website suggests that freicoin and bitcoin would operate side by side. I guess that the idea is that people would conduct their daily business in freicoin and if they want to save money, they would convert their surplus into bitcoin.

 

[meg]

Monetary supply is an aggregate measure of the total amount of buying power there exists in the system. The flexibility in the supply needs to come from increasing or decreasing the total value (ie buying power) of all outstanding BTC. The ability to divide BTC does nothing to aggregate supply.

Put another way. If I have a gallon of gas, it will get me so far in my car. There are things I can do to make it go further, but dividing the gallon into quarts is not one of them.

However the global economy is not your car. It's more like every possible vehicle of any type on the planet. And bitcoin (or any cryptocurrency) is not the only fuel. A cryptocoin is a unit of value, which can translate fluidly into X amount of $USD or Y amount EUR, or Z amount of biodiesel or gasoline or pedal power or electricity, at a fixed moment in time. It is a unit of accounting representing an asset, useful in some circumstances.

While I understand (at probably a third grade level ) the basic ideas and theories behind monetary policies, and why governments believe it is necessary to manipulate their own money supply to suit their economic goals, I also understand that users of a cryptocoin are not in any similarly closed economy. They are moving in the global economy. At any time, if the cryptocoin market behaves in such a way that the user doesn't like, they can “opt out”, and simply cash out into whatever is their currency of choice or nation, or purchase goods with their coins, and not receive any more. Theoretically, if enough people behave that way, the coin market will adjust, and the price will become attractive again.

Nations do not have that option. They have to twiddle and tweak their currency to keep it stable. And they make up rules for how it must be measured and what to do when this ratio equals that as compared to GDP, etc etc and as far as I can tell, absolutely none of those rules are necessarily applicable to bitcoin.

Similarly, with the whole supply and demand thing, if hoarders keep hoarding to the point it somehow makes even using satoshis unusable, people would stop using it, which would make the price go down, which would make hoarders quit hoarding it, and it would become usable again.

If it is even possible, (which I doubt), I think we are a long way off from any kind of cryptocurrency becoming the one world monetary unit that requires the kind of closed system accounting you are talking about. Until the United Federation of Planets starts issuing credits we will live in a world that uses almost as many currencies as there are nations. And there will be some cryptocurrencies living in between. Intertwining with every currency, yet answerable to and defined by only its self.

 

[meg]

The divisibility of bitcoin means that 21M BTC is enough to supply the whole world but it doesn't prevent unequal distribution of bitcoins nor does it stop anybody with enough earning potential from stockpiling bitcoins.

We can print as much fiat currency as we want but there is still a top 1% who have a considerable portion of the money and McMansions as well.

Are you saying this is a problem? The rich get richer. Sucky as I think that is for me, it's just kind of a fact of life in this world.

I guess I don't get your point here. Are you saying that any new cryptocurrency has to have in it some kind of protection against the rich trying to take it all? Why?

Bitcoin is being hoarded all right and data presented in the bitcoin thread suggests that the ownership of bitcoins is highly concentrated. Many people are holding on to their bitcoins in anticipation of the day when it can be spent anywhere or its value gets high enough to make it worthwhile selling. If you look at the daily trading volumes at the bitcoin exchanges, you will see that only a very small percentage of the bitcoins in existence are actually being traded.

I'm curious, in USD, how much is in cash and checking accounts vs savings accounts and other investments? Do you know how to find this information? I've tried googling a number of times, but haven't found anything that really spells that out.

Either way, real or imagined, bitcoin hoarders just don't concern me that much. As you said, once the price reaches what they deem the right price, or once they can buy whatever it is they wish to buy with the bitcoins, those coins will start moving.

And some of them already are. Watching the Bitcoin Days Destroyed charts is informative as to when the “old money” starts moving, which, looking at the chart here: https://blockchain.info/charts/bitc...ageString=1&show_header=true&scale=0&address= you can see certain days where they've started to come out.

The mining difficulty of bitcoin has reached such a level that only those who can afford massive computing power can do any mining. This means that the bulk of the new coins being mined go to the rich and bypass ordinary people.

Yup. Once something becomes of value, the rich figure out how to get more of it. Although right now those richie riches buying up huge mining rigs are not getting rich on bitcoins. They're getting rich on mining leases.

Unless you happen to be rich, you will need finance to buy a new car or make some other major expenditure. This won't change if bitcoin displaces other currencies. It just means that you will have to borrow bitcoins to buy a car and that means paying interest to people who have enough spare bitcoins to lend out. That can only further the concentration of bitcoins in the hands of the rich.

Well that sort of solves your hypothetical hoarding problem, though, doesn't it?

Wealth gets concentrated into the hands of the few. It has always been that way. Why do you think a cryptocurrency would or should be different?

 

[Startz]

I'm curious, in USD, how much is in cash and checking accounts vs savings accounts and other investments? Do you know how to find this information? I've tried googling a number of times, but haven't found anything that really spells that out.

I'm not sure this exactly answers your question, but the basic data on checking accounts, etc., can be found at http://www.federalreserve.gov/releases/h6/current/default.htm#t3tg1link
At the end of 2013, currency was about $1.1 trillion, checking accounts held a little over $1 trillion, savings deposits were around $7 trillion.

 

[The Fallen Serpent]

However the global economy is not your car. It's more like every possible vehicle of any type on the planet. And bitcoin (or any cryptocurrency) is not the only fuel. A cryptocoin is a unit of value, which can translate fluidly into X amount of $USD or Y amount EUR, or Z amount of biodiesel or gasoline or pedal power or electricity, at a fixed moment in time. It is a unit of accounting representing an asset, useful in some circumstances.

It was intended as a simple analogy, but I do agree that a global economy is a more fitting one. Not all cars can use all fuels. There are costs to conversion. The recent spike in gasoline usage really shows how fuels in general can skyrocket in relative worth when it is unable to keep pace. When petroleum goes up, so do other fuel sources because there is greater strain on the whole system.

While I understand (at probably a third grade level ) the basic ideas and theories behind monetary policies, and why governments believe it is necessary to manipulate their own money supply to suit their economic goals, I also understand that users of a cryptocoin are not in any similarly closed economy. They are moving in the global economy. At any time, if the cryptocoin market behaves in such a way that the user doesn't like, they can “opt out”, and simply cash out into whatever is their currency of choice or nation, or purchase goods with their coins, and not receive any more. Theoretically, if enough people behave that way, the coin market will adjust, and the price will become attractive again.

Actually I think you have it a bit backwards here. Compared to most western currencies, bitcoin is more difficult to cash out of, but easier to get in to. If I wanted to I could go online and convert my life savings into bitcoin very quickly. However, once I have done so I am looking at a very long wait time to convert into a national currency. If on the other hand I instead wanted to convert my USD life savings into GPB I could arrange that through a bank much more simply. I think the most I have ever moved was about 50k USD to CNY which took about 48 hours.

Nations do not have that option. They have to twiddle and tweak their currency to keep it stable. And they make up rules for how it must be measured and what to do when this ratio equals that as compared to GDP, etc etc and as far as I can tell, absolutely none of those rules are necessarily applicable to bitcoin.

However bitcoin and other crytpocurrencies have shown massive stability issues. They are acting more as short term investment opportunities than stable currencies. It has improved the past month or so in stability but I have seen no where near the same level of stability in a cryptocurrency in comparable scale to a stable national currency. The way you are saying bitcoin is not bound to the law of supply and demand is by saying it can be supplemented by other currencies. Now however we are just going in the opposite direction, instead of deflation we now have inflation.

Similarly, with the whole supply and demand thing, if hoarders keep hoarding to the point it somehow makes even using satoshis unusable, people would stop using it, which would make the price go down, which would make hoarders quit hoarding it, and it would become usable again.

That period of hoarding and limited economic activity can be a major drain on the economy that relies on bitcoin. This leads a very pronounced cycle of booms and busts. Not that national currencies have solved that for all time, but it looks like you are suggesting retreading the ground of the 1800's through 1940's.

If it is even possible, (which I doubt), I think we are a long way off from any kind of cryptocurrency becoming the one world monetary unit that requires the kind of closed system accounting you are talking about. Until the United Federation of Planets starts issuing credits we will live in a world that uses almost as many currencies as there are nations. And there will be some cryptocurrencies living in between. Intertwining with every currency, yet answerable to and defined by only its self.

Keep in mind that is not a new situation to cryptocurrencies. Currencies are already working in a global situation and being self defined. The major difference is that cryptocurrencies individually make internal changes to reflect current conditions. That puts cryptocurrencies at the same risks of collapse that an unyielding national currencies had experienced in previous centuries. Cryptocurrencies will be subject to the same sort of market manipulations by a small set of individuals that we have seen previously. This doesn't seem like an attractive feature.

 

[psionl0]

Well that sort of solves your hypothetical hoarding problem, though, doesn't it?

Wealth gets concentrated into the hands of the few. It has always been that way. Why do you think a cryptocurrency would or should be different?

When you wandered "just how real the theoretical problem of hoarding is" I assumed that you believed that there wouldn't be a significant amount of hoarding or that it would taper off once it reached a certain level.

It appears now that you believe that hoarding wouldn't be a problem because the divisible nature of bitcoin ensures that even if there was only 1 BTC in circulation, it could be divided up among all the users. That idea needs a little more thought. If 99% of bitcoins were removed from circulation by hoarders then the remaining 1% would be 100 times more valuable. Although the number of bitcoins being hoarded from then on would be 100 times less, the value of the bitcoins being hoarded would still be the same. There would never be an end to hoarding.

The fact is that a deflationary currency encourages hoarding. This removes money from circulation and since there is a fixed supply of bitcoins, this enhances the deflationary aspect of bitcoin.

The cost of servicing a debt is higher with a deflationary currency than with an inflationary currency and this cost is born by the poor and by businesses. This means more money flowing to those who can afford to hoard it (or lend it out for profit).

I am the last person to object to anybody being Bill Gates rich but making the rich richer shouldn't be an automatic feature of a currency system. It should be neutral at the very least.

 

[meg]

I'm not sure this exactly answers your question, but the basic data on checking accounts, etc., can be found at http://www.federalreserve.gov/releases/h6/current/default.htm#t3tg1link
At the end of 2013, currency was about $1.1 trillion, checking accounts held a little over $1 trillion, savings deposits were around $7 trillion.

Thank you Startz!

While we can't make any comparisons from the above on how quickly our dollars move around or how long they stay in savings, I think from the above we might could infer that, in general:

23% of our available money is kept “mobile” in cash and checking accounts
77% of our available money is kept in savings

I asked because there were a couple of articles psion10 referred to regarding the movement of bitcoins, which said that only around 1/3 of all bitcoins are being actively frequently traded, and that over half of all bitcoins had not moved for three months or longer. 1/3 of all bitcoins haven't moved in over 1 year. Some people took those numbers as evidence of hoarding.

However if we compare the bitcoin numbers to the above USD numbers, they seem similarly proportioned. A minority portion of the currency moves actively, while the majority is saved and moves less often.

That's interesting.