The future of Bitcoin/altcoins/cryptocurrencies

[meg]

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.

The truth is, psion10, that I don't know what I believe about hoarding deflationary currencies. I find myself thinking something that I often end up thinking when confronted with “simple truths”, which is, I think it's more complicated than that.

I think there are perhaps a lot more factors that need to be considered before deciding whether something is good or bad. Factors that I don't think we know yet.

For instance, what rate of deflation are we talking about? Is the currency gaining in value so quickly that no one would ever want to lend it out, because they would not earn as much interest as they could just hanging onto it? Or is it slow enough that lenders would still lend, because the interest they earn is more profitable?

If we change the word hoarding to the word saving, does that make a difference in how we look at it? Is a currency that encourages saving and discourages debt always worse than a currency that encourages spending and borrowing?

I get your point about the borrower paying a steeper price when borrowing a deflationary currency, but I wonder how likely it is that people would be locked in to only being able to borrow a deflationary cryptocurrency, and unable to borrow in their native currency? I don't envision any cryptocurrency removing national currencies. Lenders compete with each other. A bitcoin lender would have to offer something attractive to compete with a regular bank lender.

I understand what you're saying about not wanting to automatically make the rich richer. I too have no desire to give rich people another advantage over everybody else. I think the difference here is that with a deflationary currency, you are also making the not so rich richer, so perhaps that makes it more neutral than an inflationary currency. The rich, just because they are rich, have a variety of investment tools at their disposal to help them beat inflation. The poor are the losers. Our current inflation rate is 1.5% and savings accounts are earning less than 1% interest. So what money a poor person can squirrel away trying to save for a car downpayment, or pay for next christmas, or to buy school clothes next fall is actually worth less when they withdraw it than it was when they put it into the bank.

A deflationary currency in your savings account, though, might act as a hedge against inflation. That $200 worth of bitcoin I put away now for school clothes, come next September, might not only be able to buy $200 worth of clothes, but there might even be a little something left over. That $50/week I can sock away for a car downpayment will grow a little faster. Christmas might just be a little bit nicer.

Of course that is assuming that the market is not in a downturn, which is another factor in the just what rate are we talking about here category. No market anywhere just steadily goes up with no downturns. There are booms and busts, growth and corrections. If you look at the NYSE chart here http://www.forecast-chart.com/historical-nyse-composite.html you can see that pretty much always climbs. It's always growing in value. If you look a little closer though: http://finance.yahoo.com/echarts?s=...n;ohlcvalues=0;logscale=off;source=undefined; you see there are a whole bunch of downturns, some of which are huge. Whether a person makes money or not depends on timing. If you bought in in 1990 and cashed out in 2000, you did great. But if you bought in in 2000 and had to cash out in 2010, you didn't do nearly as well. And if you bought in in 2007, you waited over 6 years just to regain everything you lost in 2008.

So a deflationary currency is not an automatic win for the rich. I think an inflationary currency is an automatic lose for the poor, though.

But anyway, even after writing all this, which I know makes it look like I'm “pro deflation”, I really just don't know.

I just think it's complicated.

 

[psionl0]

However if we compare the bitcoin numbers to the above USD numbers, they seem similarly proportioned.

Comparing a bitcoin economy with the banking system is a bit like comparing apples with oranges. Most of the money in bank accounts (both savings and transaction) are bank created credit and not the result of people depositing money into their bank account. Since bank credit can be created at will, the ratio of savings to checking deposits is not as significant a factor.

The truth is, psion10, that I don't know what I believe about hoarding deflationary currencies. I find myself thinking something that I often end up thinking when confronted with “simple truths”, which is, I think it's more complicated than that.

We had simplified matters by considering what a bitcoin only economy might be like.

Fiat currencies are likely to always be around (although it will be interesting to see what happens when the government can no longer borrow from social security). However, even if fiat vanished, it is more likely that there would be several alt-currencies rather than just bitcoin that would step in to replace the fiat. Shortages in one currency might be made up by the emergence of another crypto-currency and it is difficult to say if the effect of hoarding would be the same.

If we change the word hoarding to the word saving, does that make a difference in how we look at it?

They are not quite the same thing. "Saving" would imply that the bitcoins were deposited into a bank savings account where they could be lent out again. "Hoarding" is more akin to "burying your gold in the ground". There is no credit creation in a bitcoin only economy. If the bitcoins are not available, they can't be lent out. Thus the supply would be smaller than the total bitcoins mined.

Investing in a savings account or purchasing shares or securities would earn you interest on your bitcoin holdings. However, this also comes at some risk. Taking risk is necessary with an inflationary currency but not a deflationary currency. Since the value of bitcoins would be expected to increase over time, there is no need to get greedy and seek interest as well.

 

[Startz]

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


That's interesting.

I'm afraid you're right about not making those comparisons. How quickly deposits turn over is called "transactions velocity." I can't find any current numbers, but I think the average demand deposit circulates about 1,000 times per year. In other words, the average demand deposit changes hands about three times a day.

 

[meg]

We had simplified matters by considering what a bitcoin only economy might be like.

Fiat currencies are likely to always be around (although it will be interesting to see what happens when the government can no longer borrow from social security). However, even if fiat vanished, it is more likely that there would be several alt-currencies rather than just bitcoin that would step in to replace the fiat. Shortages in one currency might be made up by the emergence of another crypto-currency and it is difficult to say if the effect of hoarding would be the same.

Well, I guess I'm not interested in simplified arguments that hinge on something impossible happening. X is a bad currency because if X were the only currency in the world Y would happen is right up there with You should not raise pigs on your farm because if pigs evolve wings, they would all fly away.

They are not quite the same thing. "Saving" would imply that the bitcoins were deposited into a bank savings account where they could be lent out again. "Hoarding" is more akin to "burying your gold in the ground". There is no credit creation in a bitcoin only economy. If the bitcoins are not available, they can't be lent out. Thus the supply would be smaller than the total bitcoins mined.

Investing in a savings account or purchasing shares or securities would earn you interest on your bitcoin holdings. However, this also comes at some risk. Taking risk is necessary with an inflationary currency but not a deflationary currency. Since the value of bitcoins would be expected to increase over time, there is no need to get greedy and seek interest as well.

Well again, that all comes down to rate, though, doesn't it? Greed is what keeps the rich getting richer. I'm pretty sure that most capitalists would laugh at your notion that there's ever a time when there's “no need to get greedy”. If the rate I can obtain just sitting on my coins is 3% (on average, not counting if we're in a downturn which means I'm not earning anything or even losing money), but I could earn 6% or more by lending some to someone, I might choose to start lending.

If I did not want to take all the risk myself, I could see group sourced lending like https://www.lendingclub.com/ the Lending Club or http://www.prosper.com/ Prosper coming into play.

 

[meg]

I'm afraid you're right about not making those comparisons. How quickly deposits turn over is called "transactions velocity." I can't find any current numbers, but I think the average demand deposit circulates about 1,000 times per year. In other words, the average demand deposit changes hands about three times a day.

Ok. I understand. Are there any comparisons between the two that you think might be appropriate?

 

[psionl0]

Well, I guess I'm not interested in simplified arguments that hinge on something impossible happening.

And yet you started this thread. If you can't decide whether a single deflationary currency is good or bad then you will never make head nor tail out of a situation where there are multiple deflationary currencies or a mixture of inflationary and deflationary currencies.

It is normal in economics (and other fields) to use simplified models (eg "pure competition") to identify the main parameters of a situation and to refine the model to take secondary effects into account.

X is a bad currency because if X were the only currency in the world Y would happen is right up there with You should not raise pigs on your farm because if pigs evolve wings, they would all fly away.

Strawman arguments are not such a valid tool for analyzing a situation.

 

[meg]

Ok, let me try again.

Another feature that I believe a “winning” altcurrency would be able to do is to interface with my lines of credit. In the US at least, we like our credit cards, and many of us use them daily.

I believe a digital wallet that offered the security features of bitcoin, but not only held “cash” but also held my visa and mastercard so that I could choose at checkout how I wanted to pay for something, could quickly overtake bitcoin to become the preferred payment option for both users and merchants.

 

[psionl0]

I believe a digital wallet that offered the security features of bitcoin, but not only held “cash” but also held my visa and mastercard so that I could choose at checkout how I wanted to pay for something, could quickly overtake bitcoin to become the preferred payment option for both users and merchants.

Strictly speaking, credit cards are not a currency but a means of borrowing money.

I guess what you mean is that you would like to be able to make credit card payments in alt-currencies as well as USD. That shouldn't be a problem but since a merchant is more likely to want bitcoins deposited directly into his wallet than to have his bank account credited with bitcoins, your credit card company would need to have bitcoins on hand (wallet?) to pay the merchant.

The Ripple system I mentioned earlier is probably what you are looking for here and it looks like it could be a winner. Since there is no waiting for confirmations, payments are a lot faster than with bitcoin. Ripple actually appeared on the NBC TV show, "The Blacklist ". Most of the alt-currency websites make explanations of their particular brand about as clear as mud. However, Ripple's WIKI is remarkably clear and informative.

You might like to look at these primers:
Ripple for Users.
Ripple for Gateways.

 

[meg]

I'm still reading about Ripple. While some of it sounds pretty exciting, there are several things I don't really understand, so I'm reserving judgement for now.

After all the posts you've spent on deflationary currencies and how bad they are, I don't really understand why you like it, psion10. It, like Bitcoin, also has a finite amount of coins. 100 billion XRP which have all been created. 20 billion given to the original creators and financers, Ripple Labs (a for profit corporation) received the remaining 80 billion, 30 billion of which they kept, they plan to give away or otherwise distribute the remaining 50 billion.

So, if you worried about bitcoin hoarding, aren't you concerned about XRP hoarding, too?

 

[meg]

Strictly speaking, credit cards are not a currency but a means of borrowing money.

Yeah. I get that. I think maybe I should try to explain again what I mean by cryptocurrency.

The way I understand it, is that all these new “altcoins” are not doing this because everybody wants to have a go at making their own new fangled kind of money. (Other than dogecoin. I'm pretty sure they just did it for some giggles.) What is actually going on is that folks have figured out (40+ years of work in cryptography) that by using public/private key encryption, we now have a far more secure way of transacting business and transferring payments directly to each other digitally. However the powers that be within the banking and credit processing community will not let just any old Tom, Dick or Harry connect right into their networks and start mucking about transferring things all over the place. Naturally. That would be a horrible security risk, and also, this is where they make all their money. Why would they allow someone into their own network who's intention is to make most of what they do obsolete?

So what these developers have done in the interim is to create a go-between. Create a digital unforgeable “coin” that represents [x amount of value] and then use this new more secure encryption system to transfer these coins back and forth to each other, and transact business this way.

These digital coins that represent some amount of cash are only the first tiny baby step. The whole idea is that eventually we all will have on our computers or phones some version of a virtual digital wallet/safe-deposit-box/vault that could house everything, from cash to credit lines to bank accounts to property titles and loan papers. Perhaps even birth certificates, medical records, or anything else of importance that we need to keep securely. Your paycheck could come directly into your wallet from your employer's wallet. Your mortgage payment could automatically shoot from your wallet to your mortgage company on the day it's due. Anything you do now with online banking could be done directly from your wallet, no bank required. If you are a business, every sale you make could pop directly into your wallet, and your wallet could interface directly with your ordering system, payroll, and bookkeeping system.

That sort of thing.

So when I talk about these various cryptocurrencies, that is what I'm talking about. The whole shebang. Not just the “coin”. It's difficult, because they all are named after their “coin”, so people tend to focus on the coin, and since they're called a currency people tend to focus on the various rules for currencies and governmental monetary policies, etc, which I think misses the whole purpose of the thing. Which is to eventually allow people to manage every aspect of their financial business themselves, without the need for an intermediary.

I don't know. Maybe if we came up with another word for them.. cryptosystems? Financibits? We could talk about them without having to keep going over and over what is a currency and what is not.

I guess what you mean is that you would like to be able to make credit card payments in alt-currencies as well as USD. That shouldn't be a problem but since a merchant is more likely to want bitcoins deposited directly into his wallet than to have his bank account credited with bitcoins, your credit card company would need to have bitcoins on hand (wallet?) to pay the merchant.

No. What I meant was that I think for any of these payment systems to really take off with wide acceptance, they need to be able to make the act of shopping or paying bills with your digital wallet more similar to your behavior when you're shopping or paying bills with your real life wallet. I open my wallet, I choose which method I want to use to pay for the item, which could be cash, check/debit card, or one of a few different credit cards, and then I pay for it.

We middle class Americans use our credit cards a lot. I think one of the things that dampens wider acceptance of bitcoin right now is that you have to have bitcoins in your wallet before you go shopping. That's like having to go to the bank or atm to put cash in my wallet before I go real life shopping. That's a bother. I've got my cards on me, so I should be able to pay with them. Also, sometimes I don't have that much cash in the bank right now, but I still have to make that car repair, or buy the new refrigerator or whatever it is. So I use a credit card.

So, I think any cryptosystem developer that can figure out how to seamlessly merge visa /mc credit lines into their digital wallet payment system will be more popular with American consumers.

Hope that's clearer.

 

[psionl0]

So, if you worried about bitcoin hoarding, aren't you concerned about XRP hoarding, too?

Although XRP can be used in a similar manner to bitcoin and has a fixed supply, trading with XRP is not its primary purpose. It has been designed to prevent denial of service attacks through overloading:

XRP Reserves

Another security measure is the XRP reserve system. The XRP reserve is a minimum amount of XRP needed for actions that requires network resources. These XRP reserves are negligible for any normal user, the equivalent of less than dollar. However attempts to overload the network with excessive actions become more costly.

The Two Types of XRP Reserves

The Account Reserve is a minimum amount of XRP needed to activate a Ripple account. It prevents the creation of excessive accounts that could overload the network.

The Action Reserve is a minimum amount of XRP needed for each action that requires network resources. For example, each open trust line or open order in the distributed currency exchange requires the action reserve.

https://ripple.com/currency/

 

[psionl0]

We middle class Americans use our credit cards a lot. I think one of the things that dampens wider acceptance of bitcoin right now is that you have to have bitcoins in your wallet before you go shopping. That's like having to go to the bank or atm to put cash in my wallet before I go real life shopping. That's a bother. I've got my cards on me, so I should be able to pay with them. Also, sometimes I don't have that much cash in the bank right now, but I still have to make that car repair, or buy the new refrigerator or whatever it is. So I use a credit card.

That's what I understood before. If bitcoin is the currency of your choice, you want to be able to use your credit card to make payments to your merchant's bitcoin wallet without taking bitcoins out of your own bitcoin wallet - in the same way that you wouldn't have to withdraw money from your bank account now. If you want a "cash" advance, you want to be able to use your credit card to transfer bitcoins from your credit card company's bitcoin wallet to your own bitcoin wallet. When you have to make a repayment to the credit card company you just want to transfer bitcoins from your own wallet to the credit card company's wallet.

Like I said above, there is nothing stopping a credit card company doing that (legal issues aside) but the credit card company would have to have a supply of bitcoins in order to do so. Unlike bank transaction accounts where deposits can be created out of "thin air", the only way to create a deposit into a bitcoin wallet is to transfer the bitcoins from another wallet. This is how credit would work under a full reserve banking system.

 

[meg]

Some Mastercoin news in my inbox today:

http://www.cryptocoinsnews.com/2014...launching-a-distributed-exchange-on-march-15/

 

[Almo]

Dogecoin has chosen to be "inflationary".

https://github.com/dogecoin/dogecoin/issues/23#issuecomment-33893149

The codebase allowed more coins after the 100 billion mark, but they planned to cap it at some point. They have decided against this, choosing to keep Dogecoin as a used currency, not a hoarded one.

I think it will be very interesting to see how this plays out vs what Bitcoin is doing.

Ostensibly, they want the number of coins to be stable, and have assumed a 5% per year leakage rate from the system, and are allowing more coins to fill that in.

Some people in the community are freaking out, since it means they are not in at the beginning of something hoardable like Bitcoin. Others are happy since they like the Dogecoin community's lighter atmosphere, and hope non-hoardability will help keep this.

 

[Wildy]

Well if their FAQ is to be believed, Dogecoin is supposed to be used as a currency and not as a speculation tool. So it doesn't surprise me if they are adopting a somewhat inflationary mechanism.

But then I prefer using ActualMoney.

 

[Almo]

But then I prefer using ActualMoney.

Hahaha!

 

[Beelzebuddy]

Dogecoin has chosen to be "inflationary".

...

Ostensibly, they want the number of coins to be stable, and have assumed a 5% per year leakage rate from the system, and are allowing more coins to fill that in.

Heh. I'd just popped in this thread to see if anyone these days were going the inflationary route. Much ninja. So impress.