[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.

[bunderbunder]

Virtually everyone already does that in practice.

Consider the humble savings account. Those accounts may be dollar-denominated, but under the hood they're really a type of security. You're making a loan to the bank at interest - a special kind of loan that you can call at any time, in part or in full, but a loan all the same. The bank then takes that money and loans it out at interest to people who want to borrow money to buy houses cars, whatever.

There is risk involved - the people at the end of the chain might default on their loans, in which case the bank loses their money. Historically, if the bank lost enough money then they wouldn't be able to pay back the money they borrowed from you, in which case you also lose it. Nowadays banks are required to carry deposit insurance, so instead when the bank defaults the FDIC loses their money, but you still get paid. But if enough banks default then the FDIC also won't be able to make good on their guarantee to you, and you're still out your money. Meaning that when you stick your cash in a savings account, it's not really money anymore. It's an IOU - a promise to give you money when you ask for it. Probably.

[dragonwriter]

> 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.

Many people do it in practice. Stuffing dollars in your mattress is "saving dollars". Loaning money at interest who will aggregate it with other money and invest in productive assets is an indirect investment in productive assets other than dollars.

[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.