I don’t really get the “deflationary money is bad because people will hold on to it” criticism of #Bitcoin / #cryptocurrency – it’s not like other appreciating assets that you can exchange $USD with (and similarly hoard) don’t exist.
must be used commonly as a medium of exchange
That’s kind of the point of a currency though, so it’s a reasonable assumption that’s the goal of something that purports to be a crypto-currency. If bitcoin fans called it a crypto-asset or something instead and stopped trying to push it as an alternative to fiat currency, people would probably stop pointing out why it sucks in that role.
The argument is that a deflating currency discourages investment if loans are denominated in it. Only investments that appreciate faster than the currency make financial sense. So the economy suffers because value-generating enterprises can’t get startup capital if the bankers would rather sit on the money than lend it out.
@khird @casualwp Semantics. The point is that the criticisms are pointless, bordering on nonsense. "It sucks in that role" is just your opinion. I find it very easy to use. I accept it as payment for my business services. That not many people use it as such, yet, does not make it not a currency. Our community is still relatively tiny, but that does not make it any less a currency than a tiny country's relative to that of a larger one, say the Belizean dollar compared to the Euro.
I mean, as someone who got into Bitcoin quite early and dreamed of it (or other cryptocurrencies) replacing fiat altogether, I would say that using it commonly as a medium of exchange is pretty important. It’s just that even from that perspective I don’t quite get the argument.
Hmm, the loan denomination perspective makes more sense. That being said, I’m not entirely convinced that
i) interest rates in a free market won’t converge to where people are willing to lend anyway
ii) making a startup do better than deflation when currency is deflationary is significantly harder than making it do better than inflation in the current world.
Or to put it in another way, I don’t see a large difference between deflation and accelerated technology progression/production increases (cf. Defending the Undefendable).
@casualwp @khird The answer to that is: give it time. In our context, Bitcoin is not commonly used as a MoE because thus far USD (assuming you're in my context) still has reasonable exchange utility. We have the luxury of having Bitcoin before hyperinflation renders USD all but useless as a MoE (Weimer Germany, Zimbabwe, etc.), so we don't use it commonly, yet.
There are places that do, now, however, where it's necessary already. Here's one:
@casualwp @khird Further, in our context, our .gov makes it inconvenient to use as a MoE, the IRS having declared it "property" rather than "currency" and taxing it as such. That's the interference of a third party influencing how people choose to use it, not something inherent to the thing itself that makes it a "failure". Again, this is like my foreign currency example from earlier: take it out of our context, say to El Zonte, and it is being used as currency.
@casualwp @khird It's similar to the Belizean dollars I have sitting on the little counter where I keep my wallet and keys. They're useless here in the U.S., but few would say that they're "not currency." I can't use them here (whereas I choose not to use my Bitcoin here, for the most part), but if I take them into another context, Belize, they become useful. Nothing changed about them, only where they are.
@casualwp @khird Similar: my customers who have paid me with Bitcoin, as best I can tell, they're not working, so under current U.S. tax law a long term hodler filing single and keeping realized gains below $40k pays no tax. Their individual tax context/lifestyle makes it more useful to them to spend than it does me, who makes enough from my business that I would get nailed with a punishing bill.
@casualwp @khird It's a young tech, so the community skews younger and therefore this situation is not very common (yet... or perhaps "yet"... I hope). As Bitcoin continues to increase in value and perhaps more people achieve a crypto net worth that would perhaps let them leave the rat race, and if capital gains tax law retains its current structure or something similar, we may see more of this. Again, context, no fundamental difference in the asset itself.
@Aurelius_17_6
_313@bitcoinhackers.org
To be clear, I don’t disagree with what you said. It’s just that my question is mainly about why people think Bitcoin deflation is bad.
(IMO the fee situation needs to be improved for BTC to be a common MoE, but I digress.)
… using it commonly as a medium of exchange is pretty important. It’s just that even from that perspective I don’t quite get the argument.
It’s the same argument, really, because loans are some of the most economically important exchanges in terms of dollar value. Bitcoin might operate in certain niches (and to be fair to @Aurelius_17_6_313, I don’t think it’s “failed” yet - the experiment is ongoing) but the fact that it is deflating is a good reason not to expect it to be useful in the rest of the economy.
I’m not entirely convinced that
i) interest rates in a free market won’t converge to where people are willing to lend anyway
Interest rates converge to where people are willing to lend and borrow. The upper limit for the borrower (appreciation of the business) has to be greater than the lower limit for the lender (appreciation of the currency) for such a point to exist. Very little of the economy is at that point wrt Bitcoin.
ii) making a startup do better than deflation when currency is deflationary is significantly harder than making it do better than inflation in the current world.
These mean slightly different things. “Doing better than inflation” means keeping your real growth above zero; “doing better than deflation” means keeping your denominated growth above zero. The degree to which the one is harder than the other corresponds to the degree to which real growth outstrips denominated growth; i.e. the rate of deflation. Whether that’s “significant” is a judgement call, although with Bitcoin deflation as high as it’s been this winter, I don’t really think it’s reasonable to conclude otherwise.
Interest rates converge to where people are willing to lend and borrow. The upper limit for the borrower (appreciation of the business) has to be greater than the lower limit for the lender (appreciation of the currency) for such a point to exist.
This is sort of my point in the original toot – the existence of appreciating assets (like BTC) raises the opportunity cost of lending and thus the lower limit for the lender, but this is regardless of the base currency.
My mind is also unset on whether deflation can raise the upper limit for the borrower, hence the ii) part.
the fact that it is deflating is a good reason not to expect it to be useful in the rest of the economy
I would say its deflation is an incentive for individuals to hold and (eventually) use it, once it reaches a critical mass and enough convenience. BTW, from a moral PoV I also prefer BTC over an inflationary currency.
Whether this is good for “the economy” is another story, I have to admit.
These mean slightly different things. “Doing better than inflation” means keeping your real growth above zero; “doing better than deflation” means keeping your denominated growth above zero.
Certainly. I was mostly wondering about the possibility that deflation also benefits the business via, e.g., lowered denominated costs.
although with Bitcoin deflation as high as it’s been this winter
I would say that the recent price increase is basically speculation instead of inherent deflation caused by the limited supply.
(Honestly, as someone who got into Bitcoin quite early, I’m a bit disappointed that the price keeps going up but the adoption still leaves a lot to be desired.)
@casualwp @khird Question: are either of you familiar with the crypto-backed lending platforms that are out there now? This might be a sort of "middle ground" for people in our economic/tax context that is in play here. It is for me, anyway: because of learning and putting into practice "infinite banking" concepts years ago, I pretty much no longer invest in anything I can't collateralize for a private loan. Reason: taking a loan is not a capital gain nor is it income.
@casualwp @khird These kinds of loans also typically lack a set repayment schedule, which is a huge benefit to someone like me, self-employed in a seasonal business.
As such, I very, very rarely "use" crypto directly in direct exchange, but mine is actually active in the day-to-day economy in that I use it to secure USD loans which I then spend/invest in other ways. So by proxy, my hodl is "out there", just without liquidating it.
@casualwp It primarily seems to be a criticism used by people who insist that Bitcoin must be used commonly as a medium of exchange or else it has "failed". They pretty much deny that anyone could have a legit alternative use for it (i.e. as a store of value), and if it is being used as such then it is somehow in turn delegitimized. Nonsense from people who just want to hate it.