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Comment by JumpCrisscross | Hacker News Reader

"the currency is not wildly deflating right now"

Yes it is. $1 in 2012 bought as much as $1.01 today [1]. 1 Bitcoin a year ago bought about 1/27th what one does today [2]. Thus, U.S. dollars have inflated by 1% while Bitcoins have deflated by some 95%.

Inflation is not calculated from the monetary base or FX rate. It is a function of the price level of real goods and services. Since most goods and services are priced in U.S. dollars (and U.S. CPI isn't inflating ridiculously) BTC/USD does double as an estimator of Bitcoin deflation.

[1] http://www.bls.gov/data/inflation_calculator.htm

[2] http://bitcoincharts.com/charts/mtgoxUSD#rg360ztgSzm1g10zm2g... 4 April 2013 versus 11 April 2012

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An alternative way of saying that Bitcoin is deflating is that the purchasing power of Bitcoins is growing. Recognizing that the purchasing power of any currency is driven by two long-run factors -- changes in productivity and in the money supply (and money demand) -- BTC will have a natural mean (trend) in terms of a basket of goods. The question is whether, in this initial adoption / speculation phase, we are above or below that mean trend.

So while you might technically describe it as deflation, it might simply be reversion to the mean, in which BTC becomes more valuable until it reaches a saturation point.

Inflation and deflation are the price of money correcting to balance supply and demand. I would describe it as reversion to a moving equilibrium versus a mean. This does not change that volatile hyperdeflation is a problem.

<blockquote>The question is whether, in this initial adoption / speculation phase, we are above or below that mean trend.</blockquote>

Since Bitcoin has a hard upper limit in supply which has not been reached yet, its pretty clear that -- barring a major loss in Bitcoins popularity as a currency (which is actually quite probable, and which will counteract this effect) -- its current rate of deflation while its still in the supply-expansion phase is almost certainly <i>less than</i> its long-term expected rate of deflation.

Bitcoin's hard upper limit might make it attractive as an investment, but makes it undesirable as a currency (of course, even with the upper supply limit, the lack of utility value and the fact that bitcoins are essentially intangible make it somewhat dubious long-term value as an investment, but perhaps intangible collectibles will end up as a popular collectors item.)

Intangible ? Bitcoins ? I would say the dollar is pretty much intangible. Only 7% of it is printed, all the rest is on computers. And my $10 in 2005 had more purchasing power than my $10 do now.

Effectively having bitcoin means each time you buy something over a period of time they cost you less.

> Intangible ? Bitcoins ?

Yes, like all digital goods, bitcoins are intangible.

> I would say the dollar is pretty much intangible.

Aside from the physical ones, that is correct. So what? I didn't argue that being intangible distinguished Bitcoins for dollars. I presented problems with Bitcoins as a currency, and then noted the "intangible" as an issue with them as a non-currency collectors item if they failed as a currency.

> And my $10 in 2005 had more purchasing power than my $10 do now.

So?

> Effectively having bitcoin means each time you buy something over a period of time they cost you less.

Yes, the fact that BTC has a built-in hoarding incentive and disincentive both for spending and investment is a problem for it as a currency (medium of exchange), since, were it widely accepted as a primary currency it would drive resources out of productive investment, and reduce the rate of technological progress and economic activity.

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