Comment by nl | Hacker News Reader

Comment by nl | Hacker News Reader

His arguments are valid to some extent. They may not be fatal though. Taking each one in turn:

1) Seeding Initial Wealth

This isn't really a problem. It's not very fair, but I don't think he argues that is actually a problem.

2) Built in Deflation

This is a big, big problem. It seems the creators of Bitcoin have a philosophical disagreement with conventional economic theories that state that increases in money supply (and some limited inflation) are outcomes of a healthy economy. Unconventional thinking is fine, but the outcomes he predicts here are real problems.

3) Lack of Convertibility

Yes, there is a problem here. It could actually be worse than the author suggests, because if state actors move against Bitcoin they could easily introduce high penalties for Bitcoin conversion. Even without that state actors, the dependability and predictability of convertibility is currently unacceptable.

At the same time, it's possible this could be overcome. It is basically a matter of trust, and modern fiat currencies all rely on trust. Usually that is trust in a government (or system of governments in the case of the euro), but it isn't inconceivable that "the internet" could be as trustworthy as a government. People trust billions of dollars or transactions to operating systems and databases that were built by "the internet", so it is possible this could be the same.

4) When Something Goes Wrong, It Will Die

This is the trust issue again.

However, there is one additional point - if someone wanted to deliberately attack the currency it would be fairly easy to buy a large number of Bitcoins, then deliberately destroy them. Once that occurs, they disappear from circulation, which causes instant deflation.

#1) This happens historically with many curencies. Making things more attractive to early adopters (but nto TOO attractive) gives this momontum to take off.

#2) Deflation is bad with real currencies because real currencies are tied to real economies and key things like food bein grown, healthcare, etc - and they are run on debt. In deflation, things get cheaper. Money buys more. But people only need so many cards, so many houses, so many rolls of toilet paper - so produces get net less money for their product over time. You now have to sell twice as many shoes to keep up payroll. BTC could be fine because in this - as it's position of a value store is somewhat different - it's not attached to anyone or anything, and it works digitally in the true sense of a crypto currency. The fact that it has an exchange rate demonstrates that it is working.

Convertibility: This is the same with every other form of electronic-transfer today. State actors telly ou how much, when, where, and what kind you are and are not allowed to do. Some states forbid their citizens from removing currency from the country period. They still "work"

4) This is the same as any other e-commerce provider out there (e-gold, etc) - except in those cases we feel we have someone to sue or whatever. But we're not just talking electronic payment methods - we're talking about an actual crypto currency. If the algorithm turns out to be flawed, yes, it will collapse totally. Thankfully it's open and transparent - and hopefully strongenough. If someoen wanted to damage any currency, tehy could buy up tons of it (with real money! and zap it from circulation. All that buying might drive the price up as well. If they then destroy it - right on, they've driven the price ven higher.

Again, the deflation would only be a problem if people start denominating debts in bitcoins - rather than at market rates set against other currencies they actually get paid in, which seems to be where this will go. If it turns out to be managed and run the way it's planned out - I'd have no problem telling someone "Yup, you can pay me $x USD in BTC calculated at the average closing rate over the last week" or whatever was a mutually agreeable term.

Also - as I haven't read the whole protoocl (but mean to) - if someone deliberately destroyed them - hwo would that affect value - they'd have to let everyone know, right? How do you prove you destroyed them?

I think agree with everything you said, except that you didn't spell out the negative impacts deflation has.

If people stop spending (which is what deflation implies - as people keep their money to hold onto its increasing value) then the economy slows, and growth stops or becomes negative.

If we look at the Bitcoin economy, the same thing could happen. There are ways around that (eg, an increasing exchange rate that could occur naturally), but it is a valid problem.

deflation would only be a problem if people start denominating debts in bitcoins - isn't this the idea of any currency?

(Edit: BTW, I didn't downvote you - I think your points are valid, and I hate how people just downvote things rather than discuss them)

Why is deflation a problem? Keep in mind that it's just one currency out of many worldwide. If inflation is required in the service of a country, nothing stops them from inflating. Same with point 4 - instant deflation would just raise the value of existing bitcoins, unless it affected the confidence levels in the currency. What would happen if somebody smoked half the gold world-wide? Deflation of gold, which most gold investors would love.

Yes, you are right about deflation increasing the value of Bitcoins. That might make them a great investment.

But Bitcoins are supposed to be a currency, not an investment. A currency needs to be used to transfer value, not sit around appreciating.

If people sit on their Bitcoins as an investment then it will fail, because no one will ever accept it as a currency.

Ideally (from a consumer's standpoint), a currency should be relatively stable. I should be able to either buy things with it, or just keep it for the time when I need to buy something.

I don't think deflation in itself is a problem, but the current rate of deflation of BC does worry me. I wonder whether this might be caused by a relative lack of way to spend it.

The current rate is insane, yes, but it's almost solely because there's been so much attention around it lately. People want to get in on it, but don't have mining rigs handy, so they buy from an ever-decreasing supply of sellers who were around earlier. The rate will slow down significantly if it gets a lot bigger, until it's just a trickle.

In the short term, over the next year or so, there isn't going to be a deflation problem with Bitcoins; there will be significant inflation. The BTC supply is set to increase something like 30% next year.

Right now the value of BTC has been going up (relative to USD) hand over fist due to increased demand. But eventually -- and I think it's going to be pretty quickly -- the buying spree is going to end and the miners are still going to be churning out new Bitcoins.

It's going to feel more like holding Zimbabwe dollars than Krugerrands for a while, I suspect.

Long term, yes, Bitcoins are designed to deflate. If they remain popular past c.2020, prices will gradually decrease and smaller and smaller fractions of Bitcoins will need to be used for transactions. (Actually the number of Bitcoins in existence will probably go down slowly over time, as people lose Bitcoin wallets and thus take the BTC out of circulation forever. There are 9000+ BTC "lost" this way at present.)

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