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Comment by ars | Hacker News Reader

> Economic issues (deflation)

This is actually a pretty serious problem.

The value of bitcoins always settles such that the cost of the electricity to make them is approximately their value.

But because the difficulty is adjusted such that a fixed number of bitcoins are generated per time (meaning faster or more efficient computers don't help), and that the number generated per unit time is constantly shrinking, it will cost more and more electricity over time to make bitcoins.

Deflation is built into it. And I bet the creator of bitcoins never realized that the scarce resource bitcoins track is electricity.

If you want to make a ton of money, buy bitcoins just before they switch from 50 per block to 25. I'm betting the value will double.

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I don't see how this is a problem. There will only be 21 coins in existence and their cost per generation (hence their intrinsic value) will rise up until that last coin is generated. At that point coins will just be subdivided many more times -- nobody will wield around an entire coin on a day to day basis the same way most people don't carry around a roll of $100 bills. Remember coins can be divided down to the 8th decimal place.

Look up deflation, and in particular Deflationary spiral.

> This is actually a pretty serious problem.

.. with the modern understanding of deflation. Price is not a problem if the money supply is constant. Just think about it, it is *more goods chasing the same amount money". There will be no way we can have this conversation without that kind of deflation in computer industry.

Now, money supply contraction IS painful, but so is hangover. If you have an institution with the ability to inflate the money supply almost at will, don't act surprised if from to time a correction can be in order.

In theory it's the difficulty that should settle such that the cost of the electricity to make them is approximately equal to their value.

So, for example, when generation switches from 50 per block to 25 per block, the value will remain the same and it will simply become uneconomic to mine. As miners leave the network, the difficulty will automatically reduce until equilibrium is reached again. (In theory. In practice, the time lag until the difficulty changes could make this an unstable feedback loop rather than stable).

The cost of electricity per Bitcoin in turn depends on the computing power invested in the network. The strength of the next block is adjusted so that it takes approximately 10 minutes for the network to solve it. Also there are optional transaction fees.

Right, that's what I'm saying: As more people join the network it becomes uneconomic to mine bitcoins, because since it's harder now, it costs too much electricity. So those with the least efficient setups stop mining.

So the price settles at the cost of electricity.

Then they reduce the number of coins per block. So suddenly it comes even less worth it to mine. Until the value of each bitcoin rises to match, causing people to want to mine again.

If the value of each bitcoin did not rise, no one at all would mine and the network would grind to a halt (no confirmed transactions).

Unless they have a mechanism to reduce the difficulty factor at that point. I'm not sure on that point.

"If the value of each bitcoin did not rise, no one at all would mine and the network would grind to a halt (no confirmed transactions)."

This isn't true. The system has several modes of adjustment and it will always be worth it for someone to generate blocks. If the value of a coin didn't rise to match generation costs, people /should/ stop mining -- but those that remain will collect more coins or transaction fees as the difficulty drops to compensate. Overall the economy as a whole shrinks, but never grinds to a halt.

As soon as mining becomes "uneconomical" you will revert to the point that the only miners are 100-1000 geeks around the globe doing it for fun.

That is still enough computing power to make the network moderately secure.

Entities with a vested interest in Bitcoin being unhackable by those with too much CPU power might then run non-profitable mining setups.

miners will just charge a fee to verify transactions

The miners can only ignore transactions that don't carry a fee or a fee that isn't large enough. But other miners will likely accept those transactions, so the miner isn't forcing the fees up but instead letting them pass him by.

More likely the inefficient miners will be forced to quit mining as they will not be able to compete with those who either don't pay for power, or are not a commercial endeavor that is doing so at a larger scale.

Whether that is two months or four years away, who knows.

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