As long as its crypto primitives remain secure (SHA-256, Elliptic Curve crypto, RIPEMD), if the Bitcoin economy continues to grow 5x, 10x, 20x, etc, then its value should increase 5x, 10x, 20x, etc, because there is a fixed number of coins available.
Both of these assumptions are likely. So I would say, yes, this exchange rate should last (of course there will be some bumps on the road, bubbles, crashes, etc).
That's exactly how it should grow - in relation to the growth of the economy. But I worry all these posts about the latest Bitcoin price will push it again on the speculation train.
There is slow growth in coins. But if it takes off then we know all of the primitives to make a second bitcoin. Establish one with a price peg to existing bitcoin. If you maintain it long and well enough, it will become accepted as equivalent. Once that happens you've done a big one-time increase in the supply.
In fact I would recommend doing this at some point. Because otherwise bitcoin has built-in deflation. That is bad economically because it discourages investment in anything else, like building businesses.
It's asymptotic growth of coins. There will never be more than x number of bitcoins. (I forget the value x is exactly, but it is a finite, pre-definded number).
So what you would need to do is have an account in both currencies with large amounts of currency in it, and publicly advertise that you will trade across currencies in some predetermined ratio. If your account has enough currency to succeed in handling people who might deliberately try to trade against you, then you will successfully peg currencies.
Admittedly an attempt to provide a peg like this might fail. But what is in it for the entity trying to do it? Quite simply, that entity presumably starts with a much larger amount of the new currency than they used for establishing the peg. If you can successfully create the peg, your net worth decreased by the amount of bitcoin you had to accumulate to create the peg, and increased by the amount of other currency that you had. So you make a handsome profit. (Conversely you have the risk that people will set about mining your new currency and converting it all to bitcoin through your peg, then when you have to abandon the peg you've lost the bitcoin you had to purchase to try to establish said peg.)
There are a number of tricks that can improve your odds of establishing a successful peg. But that's the principle.
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uh, no, it's not yet. Masses of new bitcoins are being created every day. That is inflationary (and much more so than USD).
@greg_bt: it matters little how you frame it, but the supply of bitcoins is increasing. It will gradually reduce and stop, all of which is predetermined, yes. Today it is inflationary (IIRC its about 15%/y currently, but don't hold me to that), eventually it will be deflationary.
I don't know if 'bitcoins are being created every day' is the right way of looking at it? Bitcoins are more discovered as opposed to created. It would be like if every USD ever was buried and people were gradually digging them out of the ground and everyone knew exactly how many were buried? The amount of bitcoins in circulation is increasing but the total amount of bitcoins that will ever exist isn't increasing at all.
It's also increasing at a controlled rate. To make your analogy more complete, it'd be like all the diggers are aware of each other and whether they've found a USD or not. If too many are being found at once, everyone switches to using their hands. If still too many are found, everyone uses their tongues. If too few are being found, shovels are allowed. If still too few are being found, backhoes are allowed.
Can you give this analogous type summary of how this works from a technical perspective? I assume it doesn't rely on everyone coming to some sort of an agreement?
To be correct, the question of whether a currency is inflationary or deflationary, is a function of both the increase in the supply of the currency, as well as growth in the economy. If the economy is growing faster than the currency, than the currency is deflationary.
There is also the velocity of money, which people tend to forget. MV = PQ is a tautology that tends to be fairly useless in understanding inflation because there's no variable there that is reasonably constant. So other approaches fare better, such as looking at the sources of inflation, e.g. imports, relative labor bargaining power, and aggregate demand vs. supply.
> Who are you to make a claim as to if it will last or if it won't or how valuable bitcoins are.
A speculator, same as you. This is implied. Besides, what has who I am got to do with what I say?
> We have no evidence to the contrary, and in fact, bitcoin being a deflationary currency by definition means it will likely increase in value and, what's more, if you look at the trend it has been increasing in value. If you were to use a single shred of logic then your conclusion would be "it might or might not last", but that's hardly a useful post.
Bitcoin's a great idea, but people have been using it to make a quick buck. That's why (I think) it won't last.
> Well, since people are RIGHT NOW paying over 10 dollars for a bitcoin that indicates that yes, yes it is.
Would you buy houses because "they're a great investment" was "good advice" pre-2008? Speculators aren't using bitcoins to buy $10 worth of stuff, they're using buying bitcoins because they think they can earn more than $10 worth of dollars. So, bitcoin's success is based off of it's ability to earn dollars, not buy stuff: this is what makes it unstable.
>" bitcoin being a deflationary currency by definition means it will likely increase in value"
Why would yo want a deflationary currency? This promotes people "holding" onto the money with the hopes of getting a better deal in the future.
ie. Why buy that $50 USD item for 5 BTC, when at the current rate it might be worth 4.5 BTC by next month? This is a burden on a currency and commerce.
This is a burden only if you do not use it. but the same applies to any investment - why invest at all? Bitcoins are capped by protocol - Quoting DeathAndTaxes @ https://bitcointalk.org/index.php?topic=80185.0:
(quote)
The method used for determining the reward is to do a right shift on 50,000,000 satoshis every 210K blocks. That truncates any fractional satoshis.
There are some truncation along the way. For example starting in block 6,090,000 the reward is 9 satoshis. In block 6,300,000 it becomes 4 satoshis so the block reward declines by more than 50%. Block 6,930,000 will drop the reward to 0 satoshis however only 2,099,999,997,690,000 so it looks like we will be eternally 2,310,000 satoshis (0.0231 BTC) short of the magical 21M. If Satoshi had wanted it to be an even number the starting block reward should have been a multiple of 2. For example is the first block reward had been 2^32 satoshis (~42.94 BTC) then we would have had 32 perfect halvings of the reward. 2^32 down to 2^0. A bit of trivia, the "21M" appears nowhere in the code. The entire subsidy calculation is just a handful of lines.
(endquote)
Following this principle, eventually you will want to use them, particularly when others Fiat currencies go away - this is but a transition period for the next 30-50 years. The fact that there is an economy (mostly underground) that makes use of the currency as what it is meant to be (anonymous / uncontrollable / as a way to establish a trading baseline) just makes it stronger as tool for the people. As to this being another bitcoin bubble, definitely. But look at the 4 yr graph and you can see that bitcoins are seeing constant positive growth if you ignore the speculative bubbles.
(Disc: I own & am long Bitcoin)
>"but the same applies to any investment - why invest at all"
But "money" isn't an investment. It's a medium of exchange.
If you're buying BTCs to hold them as an appreciating asset, that's one thing. If the intention is for them to be used as a currency, then deflation inhibits the exchange.
>But "money" isn't an investment. It's a medium of exchange.
I disagree, many traders deal solely with currencies.
> deflation inhibits the exchange.
Valid if you deal with fiat currencies - but with a finite volume that point doesn't hold its own too well. if there is any transaction going on (currently mostly underground) then the market levels itself on those. In other words, you can't hold it forever, particularly when it transitions toward mainstream use.
The beauty of BTCs is that it has no worth but it's own encryption. And that worth appears poised to grow as people worry more and more about secure digital transactions that no one entity can regulate. It is a tool to an ideology, that no government can secretly abuse, which is why it isn't seeing much love from that crowd.
