[jondtaylor]

"However, they are wrong because converting $100 into 10 x $10 bills or even 100 x $1 bills does not make you feel richer."

This was also quoted in a Forbes article but I don't get it. Can someone explain what this means? What does lack liquidity or limited supply have to do with feeling richer by funging your bills?

I'm not joking I seriously have no idea what this has to do with anything...

[mpyne]

I think the idea is that it's a classic supply/demand equation: With a fixed supply of Bitcoin available to transact with, each individual Bitcoin will become more expensive as demand goes up.

If you sub-divide Bitcoins further to purchase the same items then it's still a deflation: What you used to be able to sell for 1 BTC now you can only get 0.1 BTC for. If all prices drop proportionally at the same time that's not really so bad, but it is bad for any kind of delayed payment agreements (e.g. credit, loans, etc.) as your ability to repay, say, a 40 BTC loan continually gets less and less.

If you don't sub-divide then you make it more and more difficult for currency exchange to happen at all; i.e. the BTC becomes more valuable, which is also deflationary.

In a deflationary economy it's better to hoard your money (which is growing in value without action on your part), which reduces the pool of BTC available to spend, which leads to more deflation, etc. etc.

Of course this is a disaster only if BTC becomes the only currency, but it would seem to put a hamper on the idea that BTC could completely supplant our current currencies. I'd certainly never take out a loan in BTC at this point; even if the lender agreed to "deflate" the principal at a certain APR, the volatility of the BTC value is too high to be sure I wouldn't get taken to the cleaners on the loan.

[thornkin]

Why couldn't loans be made which devalue at a rate pegged to a basket of goods? We track the rate of inflation today, we could just as easily track deflation and loans could be pegged to that. Doesn't that solve the loan problem?

[mpyne]

The way I see it, that's simply shifting the problem around. Before your loan was based in BTC, now it's based in (essentially) "Number of equivalent baskets of goods".

I don't think lenders would appreciate the volatility inherent in their loaned-out money having value fixed to the amount of crop yield the farmers can deliver this year, or the amount of oil extracted, etc. Similar logic would apply for those trying to get a loan.

[jondtaylor]

Ahh, Thanks.

[psychboo]

When the whitepaper and subsequent code for the Bitcoin system was drafted, they created a set limit of 21 million bitcoins. After this limit is reached (designed to happen in 2140) there will be no new coins introduced into the network.

The concern then, is that when there is a fixed amount of coins available, people will begin to hoard them because they will appreciate in value. The system avoids this by allowing coins to be subdivided to 8 decimal places (the smallest unit is called a Satoshi). This results in 21 * 10^48 possible Satoshis available to the economy. It is expected that this will be a sufficient amount of currency for the network to avoid hoarding. If hoarding is still an issue, the code can be changed to further subdivide a coin.

The mistake Nicholas makes in this article is confusing the comparison between the dollar and the bitcoin. If you divide a $100 bill into 100 $1 bills, you will not feel any richer because the value of a single dollar bill does not change. If you divide a bitcoin into 100,000,000 Satoshis, the demand for more currency will cause an inflation in the value of an individual Satoshi.

[defen]

It's stupid. If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces. Bitcoins can be divided up, but then uninformed people forget why this is important and then make nonsensical arguments about splitting a $100 bill into 10 $10 bills.

[dragonwriter]

> If a physical currency like physical gold or paper experienced the kind of deflation bitcoin currently is, it would be problematic because those things are difficult to subdivide into (effectively) arbitrarily small pieces.

Its actually pretty trivial to issue new paper currency in smaller denominations and exchange existing currency for it; the problem with deflation is that it creates a disincentive to spend or invest, not that there is a logistical difficulty in subdividing currency.

[defen]

Has there been a currency (assuming bitcoin is a currency) that's deflated by 2000x in a few years? Not saying it can't be done with paper money, but it's less convenient than it is with bitcoin.

[dragonwriter]

> Has there been a currency (assuming bitcoin is a currency) that's deflated by 2000x in a few years?

Not a major one recently, because considerable effort is expended to avoid that for reasons which have nothing to do with the logistical difficulties of subdivision.

> Not saying it can't be done with paper money, but it's less convenient than it is with bitcoin.

It could be done with paper money, but nobody involved in managing currency wants it to be done. People managing currencies for use as exchange media don't want the currency to be an attractive investment. But the logistics are pretty obvious; paper money in circulation is already replaced regularly, all you have to do account for deflation is print bills with smaller denominations on them, and replace bills coming out of circulation in appropriate ratios. If the value of the currency is appreciating and you do this at a ratio which keeps the smallest new bills being currently issued at the same value, the ratio of the cost of printing money to the value of the circulating money remains the same as if you had a relatively-constant value currency and were just replacing bills 1:1. Its not really a logistical problem.

Having a rapidly deflating currency, if it was a main currency rather than a novelty currency operating at a trivial scale compared to the whole economy, may produce economic problems for the economy as a whole, but its not really a logistical problem for the currency issuing system with paper currency. So Bitcoin "solving" the logistical non-problem is a non-accomplishment.

[SODaniel]

I agree that this argument is purely stupid. How does the 'feeling richer' psychological factor somehow play into the success or downfall of a currency as a 'flaw' in the mechanics of it?

Some people feel 'richer' with 1 OZ of gold then $1700 in bills, some feel 'richer' with 100x $1 then a check for $100. But why does that matter as a success factor of a currency?

I don't get it.

[dragonwriter]

> How does the 'feeling richer' psychological factor somehow play into the success or downfall of a currency as a 'flaw' in the mechanics of it?

Because the success or failure of a medium of exchange lies in how it affects human behavior, which it does through its impact on human psychology.

[bcoates]

It doesn't make sense outside the context of an argument that a lot of pro-bitcoin people make:

That the problem with gold as a currency is not the unpredictable supply, but the lack of divisibility, causing it to be hard to buy a can of coke with gold because of the tiny amount of gold involved.

[drinchev]

I also don't agree with this argument.

Dividing $100 into 100 x $1 bills makes sense if yesterday an orange cost $100, but one week later it costs $1 ( because of changing the value of money ).