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> Suppose we all switch immediately to a gold standard. When the value of the currency rises too high, more people will go and mine it.

An interesting twist on the basic problem with fixed-price gold standards but you might be right for countries that have gold in the ground outside of controlled mines. But a fixed-price gold standard is a big fail no matter what price is set and subsequently has to be defended by the central bank. It worked "somewhat, sub-optimally, for a while" in the old days of a handful of developed slower-non-realtime economies that could coordinate policy and had the rest of the world colonized, today, no chance. Central bankers will never again go for it because they have learned that politics and private banking will always screw with the money supply for short-term objectives.. and no matter what fixed gold price you set, before long there'll always be a run on your gold. Better to mark reserves to market (as France has pioneered in the 70s and the ECB and others do today), so you don't need to constantly defend or redefine your fixed price, can manage the currency supply based on both long-term mandates and short-term needs and have its performance evaluated in gold and/or other currencies by the market forces, too.

"Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high" ;)

It's funny that the "free-market advocates" these days favour a government-controlled fixed gold price, which they call "the return to an honest gold standard". Right now we have an "almost free-market gold price" in "almost free-FX-market floating (competing!) currencies". Not quite there yet according to some pundits but that's where the world is heading and has ever since the Nixon shock. Definitely a pretty impressive move that has emerged toward a "free market in moneys", what's not to like! ;)

Meanwhile, the supply of bitcoins is fixed. For all time. And they are destructible in a way that gold is not.

But they are divisible in a way which gold (or even dollars) are not: https://en.bitcoin.it/wiki/FAQ#How_divisible_are_bitcoins.3F

"A bitcoin can be divided down to 8 decimal places. Therefore, 0.00000001 BTC is the smallest amount that can be handled in a transaction. If necessary, the protocol and related software can be modified to handle even smaller amounts."

I'm not arguing that bitcoin is very fungible; that is by design. I'm arguing that bitcoins, unlike gold, can be irreversibly destroyed.

Even the "leaks" from the gold supply are predictable and reversible. A lot of gold is used in electronics these days. It winds up either in recycling centres, where it can be recovered, or in landfill, where if the price of gold rises high enough it becomes commercially viable to mine the landfills.

Bitcoins cannot be un-destroyed. They are information without physical laws to guarantee their continued existence. Their manufacture and destruction are both one-way functions.

The supply of bitcoin will peak and begin an irreversible process of shrinkage.

Indeed, those who cannot steal bitcoin will be incentivised to cause the destruction of other's bitcoin. Call it the Bitfinger Scenario.

That is commonly claimed, but lost coins isn't a reason to raise the cap. That is because there is no reason why 21 million coins has to indicate that there are 21 million units of the currency. In fact, the present cap is 2,100,000,000,000,000 units of currency, easily enough to serve the Bitcoin community. By comparison, there are 231,100,000,000,000 cents in M1 (the narrow money supply of the US)--there's about 10 times as many units of Bitcoin as there are cents, and cents are already so small they're a burden on the economy.

The point still stands, though, what happens when those 2.1 quadrillion units of currency get destroyed trillions at a time? Wont' we run out? Well, yes. However, when that happens we just slap another zero on the end. At present you can break a single Bitcoin into 100,000,000 pieces (known as Satoshis), but perhaps in the future we'll decide to add another 6 zeros on the end. Thus you could have 0.000 000 000 002 Bitcoins (we would almost certainly not speak of full Bitcoins by that point--there are already major movements wanting to use mBTC and uBTC as the standard units since 1 BTC is impractically large for most commerce). This maintains the scarcity model that Bitcoin enthusiasts are so enthused about while dealing with the money supply issue.

Source: http://www.reddit.com/r/explainlikeimfive/comments/1rls76/of...

Creating smaller or larger denominations of an existing currency is fairly simple. That's not the fundamental problem with deflation or a currency irrevocably committed to it.

I can only repeat myself. Fungibility isn't the same as indestructibility. Once bitcoin is destroyed, it cannot be regained. The total supply, no matter how denominated or subdivided, has shrunk.

You think gold can't be divided into arbitrarily small units? Really? The smallest unit of gold is (179/(6*10^23)) grams. That's pretty small.

Dividing bitcoins into small micro-denominations does not solve the problems of deflation in the same way that adding zeros to Zimbabwean currency doesn't solve the problems of inflation.

Arbitrarily small. Can it be divided down to (179/(6*10^24)) grams? And can you do international online micro transactions with it?

Bitcoin is what it is. It doesn't have to become the only currency. It's a useful, fungible, easily transferrable commodity.

The argument that bitcoin should not to succeed because it's deflationary is silly. Lots of deflationary assets exist and people are free to put their money into them, e.g. gold, stocks, and real estate. That doesn't stop people from transaction.

> It doesn't have to become the only currency.

No, but arguing from the analogy of a gold standard hints at doing so.

> The argument that bitcoin should not to succeed because it's deflationary is silly.

Deflation and inflation are both, at the extremes, destructive. Bitcoin, by intention, is deflationary. However I have already demonstrated that it can easily turn inflationary.

Not through the dynamism of an open market, and not through the governance of a central bank. Simply because it is a closed system. Entropy will eventually destroy all bitcoins. And then what?

Entropy will eventually destroy the entire universe.

I think 22M bitcoins, given that (with minor changes to the network) can be infinitely sub-divisible with last us until then.

Fungibility is not the same as indestructibility.

Subdividing a unit of value does not create new value.

I was responding to your concern that all bitcoins are going to vanish.

Regarding fungibility, bitcoins are definitely fungible. They are interchangeable, of equal value, and sub-dividable.

Fungibility does not require that all parts be identical, only of equal value and utility.

By your argument, USD is not fungible because old 100 dollar bills may not be accepted in some places.

From Investopedia: "A good or asset's interchangeability with other individual goods/assets of the same type. Assets possessing this property simplify the exchange/trade process, as interchangeability assumes that everyone values all goods of that class as the same."

http://www.investopedia.com/terms/f/fungibility.asp

> Regarding fungibility, bitcoins are definitely fungible.

Where have I argued otherwise? Fungibility is not the issue.

Irreversible shrinkage of the monetary base is the issue.

> By your argument, USD is not fungible because old 100 dollar bills may not be accepted in some places.

You are now confusing fungibility with liquidity.

And I note that, unlike bitcoin, if I have a damaged $100 note, I can exchange it with the central bank for an new equivalent note.

I conflated you with the other response to my post saying bitcoin was not fungible.

Regardless, you seem very adept at unfairly attacking my vocabulary usage and finding inconsequential issues with bitcoin. Other than that I don't see much in what you are saying.

It doesn't matter that the number of bitcoins will slowly decline. Bitcoin is infinitely divisible, and whoever lost the money is the only it's a problem for. For everyone else that's a benefit.

Even if you were correct, such theoretical long-term concerns will not stop the adoption of bitcoin.

I'm "attacking" the vocabulary because, by repeatedly raising fungibility, I felt you were talking about a tangential matter.

> It doesn't matter that the number of bitcoins will slowly decline.

I don't agree. And it needn't be gradual.

> Bitcoin is infinitely divisible, and whoever lost the money is the only it's a problem for. For everyone else that's a benefit.

Hence the "Bitfinger" scenario I alluded to.

> Even if you were correct, such theoretical long-term concerns will not stop the adoption of bitcoin.

No, but I think they would be sufficient to prevent bitcoin ever becoming legal tender.

Bitcoin is legal tender in Germany.

I'll go back to your original response here.

"Subdividing a unit of value does not create new value."

So what? Neither does printing money. Mutually beneficial economic activity creates value.

The point is, the decline in the number of bitcoins does not impact it's usefulness for those who possess and transact with bitcoins.

Value was the wrong term. Substitute "unit of account" if you wish. Bitcoin units are summative and the maximum is fixed by design.

Way up at my original post I was pointing out that bitcoin is not the gold bug's Huckleberry, because the monetary base will peak and shrink.

Rothbardians are very exercised by the problems of monetary policy. They take the view that a growing money supply causes distorted behaviour. They view a fixed money supply as less distortionary (and deflation as a net positive over time).

Bitcoin's fixed upper limit for total circulating monetary base, at first blush, fits neatly into that worldview. Except that, as I have pointed out, it doesn't. Bitcoin is not like gold because it can be destroyed. In fact I don't think any economic theory has ever seriously addressed the problem of an irreversibly shrinking money supply.

The thing is that we know inflation does cause problems. And so does deflation. That's why most monetary policy these days aims at neither. Instead the goal is to maintain approximately stable price levels over time. To do that you must grow the monetary base in rough correspondence to the size of the economy.

> The point is, the decline in the number of bitcoins does not impact it's usefulness for those who possess and transact with bitcoins.

The point is that it affects the ratio of bitcoins to goods and services in a way that cannot be governed or reversed. Some consider that to be a feature. I don't.

I don't think the money supply will shrink at a rate that has any significant impact. Maybe it will increase deflation from 5% to 5.1% annually. It's money - people don't like to destroy money. There's a natural incentive to keep it. :)

The problem with having a mechanism to adjust the money supply in proportion to economic growth is that someone has to make those decisions, and historically they have ALWAYS ended up abusing that privilege.

Currently we have representatives of banks, hedge funds, and investment trusts making those decisions. Who's interest do you think are reflected in monetary policy?

> It's money - people don't like to destroy money.

They don't have to want to do it.

> Currently we have representatives of banks, hedge funds, and investment trusts making those decisions.

US anti-banking conspiracy theories aren't generalisable to all central banks.

useful? not really, unlike money it requires digital equipment, bitcoin is NOT fungible (each bitcoin is uniquely identifiable and can be separated, isolated and even removed from circulation and it is not 'easily transferrable' (a bitcoin transaction takes several hours until it is confirmed)

bitcoins are definitely fungible. They are interchangeable, of equal value, and sub-dividable.

Fungibility does not require that all parts be identical, only of equal value and utility.

Also, regardless of whether you find bitcoin useful, clearly others do. And several hours for confirmation of a borderless, nearly fee-less, irreversible financial transaction certainly falls with the bounds of "easily transferrable" for me.

I'm not really sure what the point of your contrarian position is. Seems just that... contrarian.