The Bitcoin Standard

[philostam]

I guess any currency whatsoever is based on a fiction. What exactly is it at the end of the day, but tokens assigned an artificial value? Like any currency, as long as sufficient people believe in bitcoin, it will hold or increase in value compared with other currencies, and if they stop believing in it then it will drop in value. It seems to me it's a law of nature as strong as the law of gravitation, I guess. The technology is really secondary to this, though it does have a strong secondary influence, because like gold, there is a restriction on the amount of bitcoin that can be generated. I guess a big risk with a crypto currency is if someone finds a way to hack the underlying system - by destroying it perhaps, or ramping it externally. Essentially, all that is necessary is to destroy confidence in it and its value will collapse, at least temporarily if not permanently.

I can understand @David Nelson 's ethical concerns. I'm very uncomfortable with currency dealing as a way of making money, except as a part of the fees necessary for swapping currency as part of the financing of the manufacture and trading of goods and services internationally. I'm much more laid back about private individuals spreading savings around a number of different currencies as a way of reducing risk to their value through crises and inflation. I can't see any problem ethically in putting some into bitcoin - ethically it's no more significant than investing in inflation-proofed government loan stocks, or simply holding cash accounts in dollars and euros as well as sterling (say). I can't see that adding a bitcoin account is any different than someone from the UK having some money stored in a dollar account.

I think the biggest problem is having a clear understanding of what it is and how it works - there seem to be plenty of sources of information about that, but I haven't really looked hard at it yet. I wouldn't put cash into something I don't understand. I think what gives me a lot of unease about it is that it's value against conventional currencies has gone up vastly more than they have depreciated through inflation, which stinks of bubble. The fact that its growth (in terms of bitcoin in circulation) is restricted automatically gives some reassurance that such growth in value is not all bubble, but it still makes me uneasy. I do wonder if some shady organisation is ramping it - but here I'm just giving more structure to my ignorance of how it works maybe?

Some valid points and concerns here. I'll try to tackle some, as my time permits.

Safety: I won't pretend to be a technical/cryptographic/computer science expert, but Bitcoin is not a strictly "online" currency. Like gold, it has to be mined in the real world. The only way to corrupt the Bitcoin network is to create a so called 51% attack, i.e to sieze 51% of Bitcoin mining network around the world which is decentralized across many geographical regions and is capital intensive.

Ultimately, Bitcoin has been running without fault for 12 years and with each day it's not corrupted, it's case becomes stronger. Not only because of Lindy effect but also because the mining hash rate grows over time, so the system becomes more secure and difficult to solve. As far as I understand, Bitcoin uses SHA-256 hash function which is insanely difficult to solve. You have a 1:2^256 chance to create a new block on the blockchain. If you guess the correct number from 1 to 2^256, I will give you all my net worth.

Another element of safety is counter-party risk, and with Bitcoin you don't need to worry about that. You store it on your cold (meaning offline) wallet and you don't need to "trust" any other party. This makes it much more secure than a bank or an online broker or something like that. It's like having your money on an USB drive. But even if you lose the USB, you can still restore it with the 24 word seed key. So, all you need is to remember 24 random words.

The ESG crowd will say that Bitcoin mining consumes too much electricity and is destroying the planet, but in my opinion fiat currency does much more damage. If you wanna have a hard currency as opposed to fiat currency, it has to be capital intensive to create more of it. If you make it too easy to print more, people will ultimately give in and do it.

OK, that's it for now, maybe I will write some more later.

 

[philostam]

People just forget that we've been on a gold standard for much longer than we are on fiat standard.

Gold was chosen as money by free market forces due to it's technological features (hard to mine, durable, doesn't corrode etc.). But low stock to flow ratio of gold was too restrictive for governments, because they had to expand the money supply to finance wars and other "projects".

Now we have gold adapted to 21st century that is being monetized and chosen by people as their currency. If you believe in free market, Bitcoin has every right to compete with other currencies. Let people choose. If you live in Venezuela, Turkey, Argentina etc., you now have a choice to either hold the worthless government fiat currency that inflates 50% a year, or Bitcoin.

 

[David Nelson]

Anyone know what causes inflation? Why does money nearly always reduce in value over time?

 

[philostam]

Anyone know what causes inflation? Why does money nearly always reduce in value over time?

Ultimately, because we try to centrally plan the monetary supply. 80% of existing dollars were printed in the last 5 years or something crazy like that (I don't remember the exact number now). So you have more money going after the same amount of goods.

In the short term, supply shocks also play a factor of course. You have covid supply chain bottlenecks, oil embargos etc. So you have same demand for oil/gas, but there is less of it available, so each unit costs more.

On the gold/Bitcoin standard, prices should generally fall, not increase. Technology is deflationary, because it allows us to produce more with less. So prices should fall with time as we progress and become more efficient.

Even now, if you take Bitcoin as unit of account, stuff got much cheaper since 2010. Only if you take fiat currencies as denominator of things, they got more expensive.

 

[John K]

Ultimately, because we try to centrally plan the monetary supply. 80% of existing dollars were printed in the last 5 years or something crazy like that (I don't remember the exact number now). So you have more money going after the same amount of goods.

In the short term, supply shocks also play a factor of course. You have covid supply chain bottlenecks, oil embargos etc. So you have same demand for oil/gas, but there is less of it available, so each unit costs more.

On the gold/Bitcoin standard, prices should generally fall, not increase. Technology is deflationary, because it allows us to produce more with less. So prices should fall with time as we progress and become more efficient.

Even now, if you take Bitcoin as unit of account, stuff got much cheaper since 2010. Only if you take fiat currencies as denominator of things, they got more expensive.

Interestingly, it sounds like one of the problems with Bitcoin, as it is now, is that it suffers from very significant deflation. That means that people will be more inclined to hoard it than spend it, and it becomes a commodity in its own right rather than primarily a vehicle of exchange - it seems to me this would tend to inhibit rather than encourage economic activity. As long as it only represents a very small proportion of international wealth, that won't be an issue, and people will make a profit out of just investing and holding it. If it starts to replace ordinary currencies on a large scale, it sounds to me like this would have a major impact by reducing economic growth.

From what I've read about economics, deflation is feared even more than inflation and leads to major economic slumps and poverty. Maybe if bitcoin-like currencies became the norm, things would settle down to a more economically beneficial situation. To get there though, I understand that we need inflation to run at between 1%-3% which seems to be the best place for optimising a healthy economy. Maybe cryptocurrencies would evolve into this sort of pattern eventually, but if they didn't they would put a major break on our economic welfare.

 

[philostam]

Interestingly, it sounds like one of the problems with Bitcoin, as it is now, is that it suffers from very significant deflation. That means that people will be more inclined to hoard it than spend it, and it becomes a commodity in its own right rather than primarily a vehicle of exchange - it seems to me this would tend to inhibit rather than encourage economic activity. As long as it only represents a very small proportion of international wealth, that won't be an issue, and people will make a profit out of just investing and holding it. If it starts to replace ordinary currencies on a large scale, it sounds to me like this would have a major impact by reducing economic growth.

From what I've read about economics, deflation is feared even more than inflation and leads to major economic slumps and poverty. Maybe if bitcoin-like currencies became the norm, things would settle down to a more economically beneficial situation. To get there though, I understand that we need inflation to run at between 1%-3% which seems to be the best place for optimising a healthy economy. Maybe cryptocurrencies would evolve into this sort of pattern eventually, but if they didn't they would put a major break on our economic welfare.

Yes...Good thinking. I admit that I don't know how exactly it would look if we reach that stage where Bitcoin is actual currency instead of just store of value (as gold today).

I would need to read more about the gold standard era to get some insights. For sure if Bitcoin would appreciate 100% a year forever, it'd be destructive for economic growth. But I don't think that is possible. Bitcoin's returns in percentage terms have a logarithmic curve, so they were big in the beginning and then they flatten out over time. Imagine a world where Bitcoin only grows like 5-6% a year, in line with global economic GDP growth. I think that could work. Yes we would have a pristine monetary asset/store of value and high savings rate, but not enough of an incentive for people to just put everything into it. People would still need to invest and work and innovate. Again, something like it was under gold standard. Many of our greatest innovations came under gold standard (19th and early 20th century).

Just a note on inflation. If inflation was really just 1-3% year, there would be less of a need for Bitcoin. But it's not, this 1-3% is almost cherry picked to be as low as possible. I recently read that Japanese CPI basket still includes things like VHS tapes...No wonder it's so low.

To gauge a true monetary inflation you have to also look at scarce desirable goods such as housing and education. And there you see it's much higher than 1-3%.

 

[philostam]

Also, technically speaking Bitcoin will still be inflationary for a few decades, although inflation rate halves every 4 years. Currently cca 19/21 million coins have been mined.

 

[John K]

Yes...Good thinking. I admit that I don't know how exactly it would look if we reach that stage where Bitcoin is actual currency instead of just store of value (as gold today).

I would need to read more about the gold standard era to get some insights. For sure if Bitcoin would appreciate 100% a year forever, it'd be destructive for economic growth. But I don't think that is possible. Bitcoin's returns in percentage terms have a logarithmic curve, so they were big in the beginning and then they flatten out over time. Imagine a world where Bitcoin only grows like 5-6% a year, in line with global economic GDP growth. I think that could work. Yes we would have a pristine monetary asset/store of value and high savings rate, but not enough of an incentive for people to just put everything into it. People would still need to invest and work and innovate. Again, something like it was under gold standard. Many of our greatest innovations came under gold standard (19th and early 20th century).

Just a note on inflation. If inflation was really just 1-3% year, there would be less of a need for Bitcoin. But it's not, this 1-3% is almost cherry picked to be as low as possible. I recently read that Japanese CPI basket still includes things like VHS tapes...No wonder it's so low.

To gauge a true monetary inflation you have to also look at scarce desirable goods such as housing and education. And there you see it's much higher than 1-3%.

Exactly - inflation use to be measured against the RPI (retail prices index) in the UK and this included housing costs, but the government replaced it with the CPI a few years back and this excludes housing, which is silly.

The terminology gets ambiguous doesn't it lol? Bitcoin is inflating against other currencies, but it's in a deflation because you can by more goods and services with it as time passes and it increases in intrinsic value. I'm sure you are right and it will tail off eventually as it becomes more mainstream - competition between rival crypto-currencies may accelerate this too. I agree - inflation is much higher than 1-3% in most developed economies at the moment and it will be recessionary if it doesn't start to be fed by wage inflation rather than goods and services shortages. If it becomes driven by pay, then we are in for 20 years of global financial instability like from the late 1960s to the late 1980s, and that will drive big political changes and a lot of uncertainty. I think assets are better than cash for holding on to the value of our savings at the moment - I'd include bitcoin in that.

One thing that intrigues me is how we still have such low interest rates. I know what the up front reason for that is, but I suspect a deep reason is that people are bidding up the cost of investment income - as a pensioner I'm very aware of how important that is if you rely on it instead of a job for your living income. There are a lot more pensioners now than there used to be, and a large minority of them are cash rich and risk averse, so they (and their pension funds) have bid the safer investments up and up until they no longer provide a decent return - in fact anyone holding cash in the UK at the moment will lose at least 7-10% of its value in purchasing power this year. I can't help feeling there will be a sudden crisis though - government loan stock is losing value this way despite the huge borrowing that's been going on over the pandemic. I can't help feeling that the big institutional investors and the rich sovereignty funds that have trillions of dollars in these loans will suddenly want to preserve their intrinsic vale and demand much higher returns on them - and there will be a crisis.

 

[aeon]

80% of existing dollars were printed in the last 5 years or something crazy like that (I don't remember the exact number now)

I think it’s about 2½ years—they started running the presses in earnest when COVID arrived. But your 80% figure is also what I heard. “Crazy” is quite polite.

Cheers,
Ian

 

[David Nelson]

Do you think the dropping of the Gold standard was a big mistake?

 

[philostam]

Do you think the dropping of the Gold standard was a big mistake?

Possibly, yes.

There would be less moral hazard in the system. Less too-big-to-fail mentality. Less leverage. Less bullshit jobs. Less debt. Less zombie companies. Less inflation and currency debasement.

 

[David Nelson]

I suspect the dropping of the gold standard was another part of the move to a technocratic neoliberal hegemony.

 

[philostam]

I suspect the dropping of the gold standard was another part of the move to a technocratic neoliberal hegemony.

Roosevelt actually seized gold from the American public. Well, he forced them to sell under the market price. Check out executive order 6102.

So it was driven by governments and their desire to expand the money supply to fund all of their lavish spending (wars and the like).

 

[John K]

Didn't FDR come off the gold standard as part of his policies to free the USA from the Great Depression? Like I said before, systemic deflation is much worse economically than low to moderate inflation because people hoard their cash as it rises in purchasing power, and that causes the economy to shrink chronically. By coming off the gold standard, he was trying to get people to spend instead of hoard, and this was with the best of intentions, whatever the actual outcome.

It seems to me that there are no really good options, but only those with different pros and cons - but I'm not really well into the depths of economics and all the Keynes and Friedman stuff. I believe there is a good case to be made, though, that adopting Keynesian economics from the 1930s onwards lead to the post WW2 economic skyrockets that improved our standard of living immeasurably in The West and which we all take for granted these days. It comes with it's problems as do all complex things in politics - it can be exploited by the unscrupulous, but then so can any economic model that leads to real growth. The 20th Century alternatives, such as the Communist command economies, were dire, and left their people in grim poverty for several generations until they were abandoned.

 

[philostam]

Yeah, you're right. True "hardcore" Bitcoiners usually aren't fans of Keynesian economics.

If you think about it, it is a bit weird. He was very focused on the short term, and said "in the long run, we're all dead". His solution to everything seems to be more spending and injecting money into the economy. He also had no kids, maybe that's why. He was a bit of an upper class hedonist, by all accounts.

Also Bitcoiners would say, why is hoarding of money bad? Or even more extreme, why is GDP growth the most important metric in Keynesian economics? I mean, GDP is just the total value of transactions/purchases in the economy in a given time period. Can we even have a infinite GDP growth in a finite world? Everyone is projecting more spending, more "growth", while in fact most of the growth in the West in just a result of debt and higher prices.

For example, if a house cost 1 million as opposed to 100k, when you purchase it, you add 10x more to the GDP figure at the end of a year. Is this really the point, though?

But I agree, planned communist economy is way worse. Central planning never works, markets are just too complex. They are so complex we have to distribute it across all market participants in the form of price signals and consumer preferences.

 

[philostam]

But I don't wanna revise history, of course. It's absolutely true that Keynesian economic model produced amazing growth in the Western world. I wonder, though, are we paying the price for all that lavish spending now?

I honestly don't know the answer, economics is not physics. Although a lot of economists have "physics envy", and want to make their models as scientific as possible. But that usually doesn't work, not least because there are no constants in economics. All parts are variable and dependent on something else. In fact, Bitcoin might be the only constant in economics.

 

[dragulagu]

Keynesian economic

What is Keynesian Economics..*I Need an Answer*

 

[John K]

The fuck is Keynesian Economics..*I Need an Answer*

This is a quick overview that seems like a reasonable read;
https://www.investopedia.com/terms/k/keynesianeconomics.asp

 

[dragulagu]

Thanks John, will have a read.
At first glance it's a bit over my head but I'll try to understand it.

 

[John K]

Thanks John, will have a read.
At first glance it's a bit over my head but I'll try to understand it.

Basically it says Governments should lower taxes and borrow in a recession, and increase public spending in order to raise economic activity. The classic way was to raise taxes, reduce public spending and balance the government books in recession. But this was disastrous during the Great Depression.