As the trend followersi are waning away from Bitcoin the remaining new people are starting to ask and to consider meaningful, worthwhile questions. The situation is not much unlike that of a tide beach : periodically the high water comes in. Then it retreats. Stuff is left behind on the sand.
In this particular case it is the first time in the history of Bitcoin that people with other skillsets than simple computer dickery have been carried in by the tide. This is a fundamental and essential development, because on the strength of code monkeys alone Bitcoin never will and never could become anything other than Paypal's Ubuntu Hal.
So : welcome new people! Have fun. Mind your step.
And now this introduction aside, let's move to the meat and potatoes.
I. Bitcoin inflation. Bitcoin is regularly described as "deflationary", "designed to deflate", "non inflationary" etc. This is not at all true in the present tense and dubious in the future tense. Specifically, here's the evolution of Bitcoin MBii :
So now, what deflation are we talking about ? With the MB going from just under 9mn to just over 11mn over the course of one year it'd stand to reason that Bitcoin inflation is a very healthy 25% a year. Of course it speaks volumes to the desperate situation of fiat currencies that the Bitcoin exchange rate has appreciated from two to three digits over the same interval its inflation was "only" 25%, but nevertheless : you can't talk of deflation in an environment which inflates from under 9 to over 11 in a year. It just makes no sense.
As for the future, Bitcoin is designed to never deflate on a MB basis. The design specifically calls for new Bitcoins being added in at the steady rate of 25 each new block for a while, then 12.5 each new block for another while then 6.25 each block for yet another while and so on indefinitely. Those whiles are about four years each, give or take. By the time the new block reward actually drops to zeroiii centuries will have elapsediv.
This would, I hope, set to rest any discussion of "deflation" on an MB basis : it's inflation all the way, and currently at rates which the IMF, WB et al consider "unhealthy" for an economy (or at least considered, back when the Argentines were doing it and the US was notv).
That aside, consider the problem of the M3vi : If you credit the monetization of S.MPOE theory, for instance, that's a solid 0.7mn that has been added to the M3 on top of the ~2.3 mn added through sheer Bitcoin printing. We are talking over 30% M3 inflation for the 2012 Bitcoin fiscal year, folks. This trend will only continue, and as the pressure for the M3 meeting actual economic activity increases the compensatory mechanism of financial instrument monetization will go into full bore, easily deleting by orders of magnitude any and all deflationary effects (such as the small and rapidly diminishing loss of coins through actual physical destruction of wallets / passwords / etc).
In short : Bitcoin is not deflationary. It inflates, and can inflate abundantly, but only through market-directed processes. The fiat process of inflation is unavailable. That is all. To say Bitcoin is deflationary is akin to saying a married woman is sterile. No, she's not, the balance of new life is created by married women. They just don't happen to be available to the general public through its "elected" representatives, that is all.
II. Bitcoin economic activity. I've recently had the pleasure to publish a report detailing the 2012 fiscal yearvii in Bitcoin : MPEx - one year of dividends. The part of interest to us here is : Total MPEx dividends to date - 89`171 BTC ; All time average MPEx market cap - 896`121.18 BTC.
This means that the... wait for it... that the return through dividends rate for pretty much the entirety of Bitcoin economy was 10%viii. What can we say of an economy with ~30% inflation rate, ~10% dividend rate and a healthy 80% to 200%ix risk-adjusted deposit rate ?
That of course is the question you all have to answer. Note that answers in fact are in general better and in most cases more productive than answers in word.
Have fun now.———
- Euphemistically speaking. [↩]
- Notes and coins in circulation + Notes and coins in vaults. [↩]
- And provided the code isn't buggy and ends up keeping the reward forever at 1, which on the balance of evidence so far would not be in the least bit surprising. [↩]
- 50 Bitcoins are just a shorthand representation, the truth of the matter is that we are talking of 5000000000 satoshi. There's eight zeroes, or one hundred million satoshi in a Bitcoin and contrary to common representation Bitcoin is actually integer based. The satoshi are the integer, and with respect to them the exact value of a Bitcoin is purely an arbitrary convention. The satoshi are actually the unit of this game.
For 5000000000 to become 0 it'll have to be divided in half no less than
34 times, which if the 4 year per division rule holds would mean ~136 years. [↩]
- Isn't this amusing, dear reader ? Twenty years ago when Argentinian economists were practicing exactly, but exactly what the US sponsored clowns a la Krugman et al are practicing today the "entire world" derided them for being incompetent, the "entire world" knew better and so on. Today somehow magically that "entire world" changed its tune, and somehow the "scientific" consensus has taken a 180 degree turn.
How did this miracle happen, ye "scientists" and "experts" and what-are-you ? How can "everything we know" and "historically established facts through centuries of accumulated economic experience and study" and all that change into its exact opposite within a decade or two ? What if astronomy (which, unlike "social sciences", is an actual science) operated on these lines, and every twenty or so years the Moon would take the place of the Sun as the center of the Solar System ? (Depending on, of course, whether a woman or a man was Tyrant Universal & Grand Emperor of the World).
Shameless creatures. Eagerly awaiting the "reverse golf cross pattern" and all that jazz. [↩]
- Which includes, on top of the MB, demand deposits, savings deposits, time deposits, large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets and a slew of other items. [↩]
- I'm afraid the happenstance that MPEx open beta closed in in late March and the first corporate results were published for April will make forevermore Bitcoin's fiscal year to run 1st of May to 1st of May. C'est la vie. [↩]
- 10.049468773% if you're the precise sort [↩]
- The MPBOR, Bitcoin's equivalent of the fiat world LIBOR minus, of course, all the corruption and lies, consistently averages between 5% and 10% a month. [↩]