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Deflationary spiral - Bitcoin Wiki
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Bitcoin - The Currency of the Internet
A community dedicated to Bitcoin, the currency of the Internet. Bitcoin is a distributed, worldwide, decentralized digital money. Bitcoins are issued and managed without any central authority whatsoever: there is no government, company, or bank in charge of Bitcoin. You might be interested in Bitcoin if you like cryptography, distributed peer-to-peer systems, or economics. A large percentage of Bitcoin enthusiasts are libertarians, though people of all political philosophies are welcome.
Stupid question I have already asked but I am still a total newbie here and would like your updated opinion on that : bitcoin is supposed to be an hedge to inflation and was kind of build for that. But it looks like we may head to deflation instead, at least for some weeks / months. So how is bitcoin supposed to react to a deflationary environment ? I would say it would drop hard like any other asset but I don’t know well bitcoin and would love to see if I miss something as everyone seems to be confident that bitcoin is the solution for problems ahead. I will probably get insulted but isn’t cash the best answer to deflation (just asking, not saying !) ? I am quite surprised not to find lectures/topics about bitcoin in a deflationary environment, please tell me if there is. Thanks
Bitcoin and Deflation. Can someone teach me the basics?
Hi guys, I see all the posts about how much less certain currencies are worth after X amount of years due to inflation. Can anybody here provide a link or short explanation about how running on a deflationary currency can work out? When I think about living in a country that has one currency and that currency keeps getting more valuable, I do think that I will still use it to buy the things I need to live. But I would probably be way more hesitant about spending it for unnecessary goods. All this depends on the rate of deflation of course. That has to impact the economy in a bad way right? Less progress in certain markets because people hold on to their money more, waiting for its value to grow. Although less consummation might also lead to less excess products and therefore be better for our environment.. but that's an entirely different argument I suppose. TLDR; Is inflation a "necessary evil"?
I'm a big fan of the technologies and ideas, and ultimately I would love to see it replace fiat money and centralized banks one day. There is just one problem that I cannot reason myself around: deflation. I understand that in it's current state, it does not have a deflation problem. But if it did in fact one day replace fiat currency, then I can't see how it wouldn't. Are there currently any prevailing thoughts/solutions to this?
08-31 07:48 - 'Did the FED buy iphones? Furthermore, stocks do well in an inflation range of 2-5%. And you probably meant deflation which would be pretty bad for stocks.' by /u/Spl00ky removed from /r/Bitcoin within 524-534min
This post is more of a question than a statement. Recently I’ve been thinking about what it would look like if a decentralized cryptocurrency (such as bitcoin) gets adopted. Everyone knows the danger of inflation. But would Bitcoin adoption (assuming that the scalability issue is resolved) lead to deflation? And does deflation really lead to unemployment? (As I have read)
Can we have a grown up debate about the consequences of deflation for Bitcoin without ad-hominem attacks? If there is a reason to suggest that deflation is realistic, how will this affect the market price and realized market-cap of bitcoin?
Convince me that deflation in this scenario isnot the issue I think it is
Just read the "Common Myths" section before posting this and was impressed at how terrible the answer was: "As deflationary forces may apply, economic factors such as hoarding are offset by human factors that may lessen the chances that a Deflationary spiral will occur." You have to do better than that at tackling probably the #1 issue with Bitcoins. This is the most likely scenario that I see happening: Bitcoin becomes a widely used currency/commodity for online trade with a couple of million adopters. During the years to come there is an ever slowing pace of mining along with a constant drop-off in coins as accidents/server crashes/forgotten stashes takes its toll on the total availible ammount. This WILL lead to an ever increasing value as long as people use BTC. (No-one is arguing this and the solution touted is that BTC can be divided into ever smaller part, I.E deflation) Now the people that get into Bitcoins understand how the system works and you guys all know that it WILL increase in value. Why would you ever spend the BTC that you have accumulated? Why not use your USD´s that is doomed to always loose it´s value? This leads to a clearing out of the user base I believe: The only people selling BTC are those who treat it as a commodity, an investment. They feel that it´s time to cash in the profits. Eventually the only people holding bitcoins are those who still believe in it´s value but at the same time less and less actual trade is taking place. You can allready see this happening; the ammount of people selling is slowing down (selling btw is the same as trading). Also, those who actually purchase goods and services with bitcoins are (I believe) those who have made a killing by now and feel good about the unrealized profits so they splurge on consumption. In the end I think Bitcoin will be traded as a commodity with nothing to back up its value other than the belief in the system. Fewer and fewer will actually use their Bitcoins for trade thus further debasing it as an acceptable payment (at the moment more and more are accepting it as payment because of the increase in popularity. This will likely continue for a while but once the retailors realize that the number of BTC transactions is drying up this trend will reverse). The deflation spiral will keep prices going ever higher until that one day when you realize that everyone was in it for the long run but suddenly it no longer holds any use. When that day come you are not looking at a 50% drop, that day is the end of Bitcoin. EDIT: Aaaand I fucked up the title EDIT #2: This is going better than expected, I have actually gotten some good answers and I will think about them for a while tonight and answer in a few hours (also, I got a big finals two days from now that needs my immidiate attention.) Ferretinjapan gave the most thought through answer yet and It might be beyond me to analyse what he says to it´s full extent but I will do my absolute best. Either way, ferretinjapan´s should write the answer to the deflation question in the "Common myths" section as he has a way better grasp at this than whoever wrote "...are offset by human factors that may lessen the chances that a Deflationary spiral will occur.". That argument is just... unsubstansiated. Final thought before I take a break here; Don´t downvote this thread as a whole. Downvote my answers if anything but you guys need to allow a serious discussion about this issue because it is a big one and this subreddit do hold some weight in the debate. Well thought out answers here can ripple out and convince more people to join in on BTC, just shunning me out as someone who doesn´t understand BTC and markets is not in your interest. EDIT #3: Nooo! All my karma! My old stuff is getting downvoted to nothing... How sad :) EDIT #4: Interesting read
When a #fiatcurrency dies, first it contributes to #deflation (because in the face of uncertainty the value of #money increases), but then #inflation accelerates, which ultimately turns into #hyperinflation. And #Bitcoin was designed with that in mind.
While it's becoming abundantly clear that I need to find a new subreddit to stalk, /Bitcoin has yet again provided me with material. In this episode, we have SearchForTruthNow2's assertion that
Bitcoin cannot prevent loaning [sic.] but discourages it due to deflation unlike fiat
For the sake of good-sportsmanship, I should note that my singling him out is a bit unfair since this is a sentiment that I have seen several times. And, to be fair, it should be admitted that deflationary shocks make debt harder to repay. However, the bitcoin-style expected deflation is something that can be easily factored into the terms of a loan. In fact, in a simple Fisher effect model, one would expect the (continuously compounded) interest rate on a loan to be (expected inflation) + (risk premium) + (minimum acceptable real profit). In other words, the difference between lending under 2% deflation and 2% inflation is that you just charge the guy 4% less. That is not a disincentive to lend. It is a disincentive to borrow at the same rate as one would borrow under different macro-economic circumstances. Further, at the risk of stereotyping, one might suspect that the typical payday loan customer (what's being discussed there, and whom I am assuming are not, typically speaking, the most financially savvy) would be more inclined to borrow at 14% under 2% deflation than at 18% under 2% inflation, because 14 < 18. Now for the fiat part (because the Dunning-Krugernauts' constant use of that term to dismiss actual currency really grinds my gears): The currency's being asset-backed or fiat has nothing to do with debt. Behold, I present you with total US household mortgage debt as a fraction of GDP. Before the Nixon Shock in 1971, the USD was pegged to gold. Shockingly, real mortgage debt existed before then. Not only that, but one might reasonable look at the graph and suspect that debt creation has nothing to do with the currency's backing. Shocking! Of course, what really confuses me here is why on earth would you want to eliminate borrowing? Imagine for a minute a world in which houses must be bought for cash, in which cities can't float bonds to build bridges, and companies can't take out loans to build factories. This is not to suggest that there is nothing wrong with predatory lending (because there definitely, definitely is), but that Bitcoin and deflation are not magical economy wands that will suddenly make people engage in prudent financial planning. Edit: Typos
04-26 18:54 - 'The Brrrrrr memes are fun, but completely inaccurate. This tweet from legendary Macro investor Raoul Pal explains why Brrrrr is necessary and why a USD debt deflation will preface any USD inflation.' (twitter.com) by /u/trickledownmumpsimus removed from /r/Bitcoin within 52-62min
Probably one of the most revolutionary aspects of Bitcoin is its model of deflation. This means that the number of Bitcoin that is produced decreases over time and even will stop eventually once ... Source: St. Louis Fed. This inelasticity makes Bitcoin and any other similarly constructed crypto-currency…. Deflationary. A deflationary currency is closely related to being inelastic, but we need to look specifically at the deflationary aspects of Bitcoin because conventional economic thought is that “deflation is bad,” and it is — if you’re using debt for money. Die Deflation. Das Protokoll des Bitcoin limiert die Geldmenge auf einen fixen Wert. Diese Begrenzung der Auflage verdammt die virtuelle Währung im Falle ihres Erfolges zur Deflation. Derzeit ist der Bitcoin zwar noch hochinflationär – die gegenwärtige Rate sollte zwischen 6 und 9 Prozent liegen – doch je geringer die Anzahl noch zu erzeugender Bitcoins wird und je weiter sich die ... As a result, Bitcoin mining becomes more expensive, and miners get less coins as Bitcoin mining progresses, so mining will only continue if the bitcoin rewards are worth more than the cost of the electricity that the Bitcoin mining process requires. So deflation is literally hard-wired into the Bitcoin protocol. Furthermore, contrary to mainstream economic arguments, deflation is actually a ... Deflationary spiral is an economic argument that proposes that runaway deflation can eventually lead to the collapse of the currency given certain conditions and constraints. It is a common criticism made against the viability of Bitcoin.The ‘deflationary spiral’ is a real condition that affects the popular fractional reserve backing system.
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