[cs702]

It seems that with every passing day, another prominent institution or business starts accepting Bitcoin for payment, Virgin Galactic being the latest example. In just a few years, Bitcoin has gone from experiment to global phenomenon.

I wouldn't be surprised if in coming years at least some bitcoin users start measuring their wealth in bitcoins, and therefore also evaluating exchange rates, not in terms of how many US dollars, euros, etc. they can buy with a bitcoin, but the other way around: what is the cost, in bitcoins, of a single dollar, euro, etc.?

Looking at exchange rates in this manner changes people's perspective on volatility, which is always a relative measure. For example, since the beginning of this year, the price of a US dollar has declined by more than 98%, from BTC 0.074 to just over BTC 0.001, which makes the dollar look extremely volatile!

--

PS. I'm NOT saying the dollar is extremely volatile! I'm also NOT saying that Bitcoin is more stable! What I'm saying is that if and as Bitcoin adopters start measuring their wealth in bitcoins, their perspective on what is and isn't volatile will change, as demonstrated by my example.

--

Edits: expanded second and third paragraphs; added PS.

[Tyrannosaurs]

> Looking at exchange rates in this manner changes one's perspective on volatility. For example, since the beginning of this year, the price of a US dollar has declined by more than 98%, from BTC 0.074 to just over BTC 0.001, which makes the dollar look like an extremely volatile currency!

Sorry, that's clearly nonsense given that the dollar wasn't similarly volatile against other currencies.

Would you slam on your breaks in the middle of a road full of fast moving cars and believe that it was actually them all suddenly accelerating?

[girvo]

My physics is rusty... but yeah, it can be, depending on what you choose as your reference point. I think that's the OP's point there, too :)

[TorKlingberg]

No, while velocity is relative, acceleration is absolute. An accelerometer does not need any reference point. Well, it cannot tell the difference between acceleration and gravity, but that's an other issue.

[bvk]

That's actually not the case. You can tell whether you're in an accelerating frame of reference (like a car stopping) or an inertial frame of reference (like a car cruising) by the forces you feel, so they're not really co-equal.

[Tyrannosaurs]

Obviously there are problems with metaphors but my point is that to say the dollar is volatile in the OPs example, he needs to say that all non-Bitcoin currencies are volatile.

From the position of relative perspective that may be a valid theory, however in it's not the one best explains what is being observed.

[scoot]

bitcoin theory of relativity...

[lambda]

No, the volatility has been entirely in BTC. Volatility should more accurately be measured against actual real-world goods that you can buy. Since pretty much all actual goods are priced in currencies other than BTC, with the BTC price merely set based on the current exchange rate with the currency that the goods are bought at, it's BTC that's volatile, not the USD.

This kind of volatility is actually really harmful to it being adopted as a primary currency. It's pretty dumb to actually spend bitcoins if you could just hold onto them and sell a week or two later at twice the price, and then spend the USD for twice the goods you would have been able to buy last week with the same number of BTC. It's also pretty dumb to accept BTC as payment, especially when it's at an unsupportable high, because it's likely to crash soon and you'll now have half the value you had earlier. The volatility is valuable for speculators, but could be ruinous if you were trying to run a business based on it. Yes, you could get lucky and it could go in the direction that favors you, but that's speculation, that's not business.

[nilkn]

> It's pretty dumb to actually spend bitcoins if you could just hold onto them

A similar question can be asked about USD: why would you ever save it instead of spending it immediately, since it's only going to lose value over time due to inflation?

Of course, the difference right now is that the deflation rate in bitcoin is much higher than the inflation rate in USD. But clearly, if bitcoin ever becomes a major currency and the deflation levels off, there will be plenty of motivation to spend bitcoins, the same way there is currently plenty of motivation to save USD.

[bunderbunder]

> A similar question can be asked about USD: why would you ever save it instead of spending it immediately, since it's only going to lose value over time due to inflation?

The answer to this question lies at the heart of why economists generally believe a little inflation is better than no inflation nowadays. That little bit of inflation makes it more attractive to invest money in things that increase one's ability to generate money in the future instead of just stuffing it under a mattress. That makes the economy as a whole more vigorous, which means everyone tends to get more wealthy in the long run.

As for deflation in Bitcoin: Since the total number of BTC that can ever exist is asymptotically bounded, but potential economic productivity of a population of humans isn't (as far as we know), there's really only a few scenarios where BTC deflation might level off, and arguably all of them fall under the category of "economic crisis".

[Aqueous]

Then the hope is that economic productivity increases at such a slow rate that the BitCoin isn't appreciating in value quickly enough to make it irrational to spend one.

Just like monetary policy attempts to set inflation at such a rate (~1%) that it isn't irrational to save, but it is slightly more rational to spend.

I think, though, that if everyone agreed, BitCoin could eventually change to borrow some concepts from PPCoin, and restart the production of currency, once it reached a plateau of adoption. It isn't impossible to change the current production limits - just difficult. At that point BitCoin would probably splinter into two currencies, one which has a deflationary monetary policy and one which has an inflationary one.

At that point - is it still a libertarian currency? We've just traded one governing body - the US govt - for another - the BitCoin Foundation.

[dragonwriter]

> A similar question can be asked about USD: why would you ever save it instead of spending it immediately, since it's only going to lose value over time due to inflation?

Except for relatively small amounts for liquidity for known or potential immediate needs, it doesn't make sense to hold US dollars (or any other modern fiat currency), it makes a lot more sense to invest them in productive assets which can be converted easily back to US dollars (or other fiat currency) when necessary.

This is not an accidental feature of modern fiat currency, its pretty much the whole point of the transition from commodity-based (e.g., gold standard) to fiat currency -- so that broad downturns don't have a dangerous positive feedback effect where poor investment market conditions lead to currency being a more attractive place to hold money than the investment markets, which leads to even poorer performance in the investment markets and even more people pulling money out of those markets and into currency, etc.

> But clearly, if bitcoin ever becomes a major currency and the deflation levels off [...]

Please explain how increasing interest in using bitcoin is going to cause the price increase relative to other currencies or goods to slow down.

> [...] there will be plenty of motivation to spend bitcoins, the same way there is currently plenty of motivation to save USD.

What motivation to save USD?

[nilkn]

> What motivation to save USD?

Seriously? How about buying a house? Buying a car? Going to college? Going on vacation? ... Most people cannot save up enough for these things overnight, and they aren't going to put their downpayment savings fund into stocks because it's not worth the risk of losing it for them.

[colanderman]

Um, you know there do exist lower-risk investment vehicles than stocks, right? Back when there was inflation, you'd be a fool not to put the $10,000 you're saving for a house into a 1- 2- or 5-year CD. And investing in I-bonds for their kids' education is still something parents do.

[dragonwriter]

> Seriously? How about buying a house? Buying a car? Going to college? Going on vacation? ...

In all those cases, saving USD as dollars is generally a suboptimal idea (unless its over a particularly short term, but that gets back to the short-term liquidity, not long-term investment, case.)

Using the dollars to buy investments that are expected to be worth more when converted back to cash is what you usually want to do.

[nilkn]

That's a fine idea, but few people will do that in practice because they don't want any risk at all in losing the money they're saving for those things. People generally invest for the very long-term, like retirement, not for things like house downpayments.

[JumpCrisscross]

Stocks aren't the only investment option. Safer options exist, e.g. corporate bonds, money market funds, and certificates of deposit. All of those are a more productive use of capital than socking it away under a mattress or in a Bitcoin wallet.

[lambda]

Because it loses value slowly enough. That's the whole "stability" part. Holding onto USD for a year or two doesn't lose a significant amount of value, so you can save up effectively and plan on what you will be able to buy with it at the end. And you can put it in an interest bearing bank account or invest it to further offset or counteract the effect of inflation for longer-term savings.

Unstable currencies you generally need to convert to a more stable currency immediately, if you don't want to be subject to the sudden swings in value.

[nilkn]

> Because it loses value slowly enough.

Yes, I agree and stated as such in my post.

My point is that I don't think you're pointing out a fundamental flaw in bitcoin. Deflation in a currency is not a deal breaker. Bitcoin is volatile right now because it is so young. People are predicting it will reach a huge market capitalization, which would necessarily entail a huge USD price per bitcoin because there are so incredibly few bitcoins in comparison to USD. Anytime something is increasing in value there will be considerable gambling and speculation to come along with it as random people jump on and off the train repeatedly.

What bitcoin really needs is a unique and innovative service which could not exist without it. This would encourage people to hold a small balance in bitcoin which they would be willing to spend in order to enable participation in this service not otherwise possible. As the currency stabilizes and more and more use cases emerge, people will slowly but steadily become more comfortable holding larger balances in bitcoin.

[dragonwriter]

> Deflation in a currency is not a deal breaker.

Its pretty much a deal breaker in the use of currency as a the general medium of exchange and pricing. Its not a deal breaker in its use as a store of value, obviously, but that's more about being an investment vehicle than a currency.

> As the currency stabilizes and more and more use cases emerge

What I'm missing here is any explanation of why we should expect bitcoin volatility to stabilize.

[JumpCrisscross]

> Because it loses value slowly enough

More than that it loses value predictably enough, with an active financial system around it to make and hedge out those predictions for you.

[walden42]

> It's pretty dumb to actually spend bitcoins if you could just hold onto them and sell a week or two later at twice the price

Similarly it's pretty dumb to hold on to dollars if you know you could double them in a week by buying bitcoin. The ideal solution is to spend bitcoin and immediately replenish them by exchanging USD to bitcoin. That way, you still have the same amount of bitcoin and simultaneously more bitcoins are going into the economy.

> The volatility is valuable for speculators, but could be ruinous if you were trying to run a business based on it.

Immediately converting to fiat removes the risk. The beauty is you get to decide what you want to do with them.

[grey-area]

Since the beginning of this year, the price of a US dollar has declined by more than 98%, from BTC 0.074 to just over BTC 0.001!

Consider the last month:

2013-11-01 212.87 USD = 1 BTC

2013-11-22 733.71 USD = 1 BTC

If you think Bitcoin is a great investment and can sell your BTC to get other assets in at a high point, this is a good thing, though slightly worrying because of the boom and bust pattern and extreme volatility.

If you think Bitcoin is a stable currency, this is a terrible thing. I'm not even sure what the implications would be if buying raw materials one day cost more than selling a finished product the next due to rapid deflation, but it surely wouldn't be much better than rapid inflation which we have seen in other currencies.

Like a loaf of bread which is 1.6 trillion Zimbabwe dollars, one which cost 0.0000000001 Bitcoins would not be desirable either if that figure keeps changing rapidly and the next day becomes 0.00000000001 etc. Any extreme fluctuations in price are really undesirable for a currency, and I do think this mechanism of ratcheting up the difficulty of mining and an ever-increasing value is really damaging for Bitcoin's credibility as a currency, though presumably it was designed to boost adoption by encouraging people to see it as investment first, currency second.

I like the idea of a currency which doesn't allow politicians to introduce inflation, but perhaps we should have one which has a finite set of tokens on setup, and doesn't attempt to also attract people as some sort of investment with mining etc. - is that side of Bitcoin even useful except to turn it into a sort of pyramid scheme where early adopters are rewarded disproportionately?

[EDIT I am aware of the proposed 21m Bitcoin limit, which they're about half way to reaching, that's why I said on setup, which Bitcoin doesn't have]

[nullc]

> I like the idea of a currency which doesn't allow politicians to introduce inflation, but perhaps we should have one which has a finite set of tokens on setup, and doesn't attempt to also attract people as some sort of investment with mining etc.

Bitcoin _does_ have a fixed set of tokens on setup: 21 million of them... but you need a way of giving out those tokens without handing a windfall to a centralized decider that gives them out.

Mining isn't an "investment" thing: It's the @#$@ fundamental consensus process that makes the whole thing possible: Node autonomously validate the rules, but transaction order is not decidable autonomously and so mining produces a hard to rig / cheap to verify 'vote' on the order of transactions.

Bitcoin smarty aligned these two processes by making participation in the consensus also accomplish giving out the original tokens.

[triptychs]

Just to comment on this part:

>I like the idea of a currency which doesn't allow politicians to introduce inflation, but perhaps we should have one which has a finite set of tokens on setup, and doesn't attempt to also attract people as some sort of investment with mining etc.

I'm sure someone will correct me, but as I understand it this is how Ripple[0] works. From my recollection (I haven't checked in on how Ripple has been progressing over the past 6-8 months or so), Ripple's currency (XRP) are established with a finite supply and all XRP is in reserve, not requiring any "mining" or similar. Also, it looks like Ripple is kind of an exchange as well? It seems to be able to cross-process payments between USD, EUR, BTC, LTC, XRP, and more (I believe most international currencies are supported currently)[1]. It's interesting but, like I said earlier, I'm not sure if I fully understand it.

[0] https://ripple.com/ [1] https://ripple.com/guide-to-currency-trading-on-the-ripple-n...

[grey-area]

Thanks for the link, that looks interesting (as a currency). From their FAQ they look like a Bitcoin inspired currency which tries to define all the parts necessary for independent digital payments:

Payment Network (with protocol)

Exchange

Currency

All in one place. The advantage to that if you trust them of course is that you can expect the exchange/payment processor isn't a buggy webapp sitting on an insecure VPS with multiple ways to be hacked (I hope!). If you don't trust them it's even more scary than bitcoin though.

I wish alternatives to Bitcoin got half the attention Bitcoin has been getting on HN over the last few months - a currency is not a success because it constantly shoots up in value, quite the reverse.

[deletes]

Commenting on the last paragraph;

Bitcoins are limited and when they run out miners will start getting bitcoins from fees.

https://en.bitcoin.it/wiki/FAQ

https://en.bitcoin.it/wiki/Controlled_supply

[TheCoelacanth]

The prices of most commodities have been relatively stable in USD over the last year, while the prices in bitcoins have almost universally changed greatly. Until that changes, it makes more sense to consider bitcoins volatile and USD not volatile, rather than the other way around.

[aw3c2]

I would be surprised. Right now bitcoin seems like a speculative bubble with people trying to push a "it will be the best thing ever" attitude to further rise the exchange rate. Reminds me of the https://en.wikipedia.org/wiki/Tulip_mania

[rfnslyr]

Question: Where can a Canadian passively invest $50 - 200 a month safely and watch their investment grow?

[jzwinck]

The TSX Composite Index: https://www.google.com/finance?cid=9291235

There are others if you have a more specific interest: http://web.tmxmoney.com/indices.php?locale=EN

[rfnslyr]

I meant into Bitcoin.

[personalcompute]

"Safely" -> TSX Composite Index

Drop that qualifier and we can talk Bitcoin.

[rfnslyr]

I meant safely as in I won't be keeping my funds with some shoddy company that won't ever pay out, not in terms of risk/volatility. I guess securely was what I meant.

Can we talk now?