[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.