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#13872489
http://nakedkeynesianism.blogspot.com/2 ... nland.html
Hyperinflation in Bitcoinland

There are Gold Bugs and there are Bitcoin Bugs. They all oppose fiat money (hate the Fed and other monetary authorities) and follow some sort of free banking view loosely based on Austrian views. The supply of bitcoins is strictly exogenous controlled by a complex system that cannot be trampled by greedy central bankers and politicians. Wired said in an article last year that:

"Bitcoin required no faith in the politicians or financiers who had wrecked the economy—just in Nakamoto’s elegant algorithms. Not only did bitcoin’s public ledger seem to protect against fraud, but the predetermined release of the digital currency kept the bitcoin money supply growing at a predictable rate, immune to printing-press-happy central bankers and Weimar Republic-style hyperinflation."

A very monetarist view of inflation, as you can see. The problem is that central banks print too much money, and by the way, in the US hyperinflation is around the corner.

The funny thing is that they had hyperinflation in Bitcoinland (a land of people that use this stuff) last year and they didn't understand it. The graph below shows the exchange rate between bitcoins and dollars from inception to the end of last year more or less. As it can be seen (not very well I'm afraid), prices fell from almost US$30 per bitcoin to around US$3 in two months.

Image

Now think about it. If you bought a "I'm Satoshi Nakamoto" T-shirt (the guy that invented bitcoins, and yes they do sell them) say for US$ 30 in mid-June last year it would cost you approximately B$ 1 (B$ is not a bad symbol for them!). By late October, when the exchange rate depreciated brutally, you would have to pay for the same US$ 30 T-shirt around B$ 10. 10 times more. 1000% inflation in two months looks like hyper to me, even though the supply of bitcoins did not increase nearly as much, since it is controlled by a complex computational algorithm.

This should teach these people that hyperinflation is more complicated than just central banks printing money (see this paper). Still Ron Paul may have some support in Iowa, because of popular misperception about the role of money supply and the causes of inflation. Happy New Year!

PS: In my view Nakamoto is the intelligent version of Madoff. He got away with the dollars and dumped the bitcoins.


Thought this might be an interesting corrective to some of the flawed ideas people have about hyperinflation.
Last edited by Paradigm on 14 Jan 2012 23:55, edited 2 times in total.
#13872529
Paradigm wrote:Thought this might be an interesting corrective to some of the flawed ideas people have about hyperinflation.


Nice strawman that this guy sets up and knocks down, austrians recognize that when it comes to prices the demand for holding money is a factor also when it comes to determining prices. If you critics of austrian economics actually bothered to read the books written by people like Rothbard you would find out that they have already written about how people gaining or losing the desire to hold money in their accounts affect prices.

In the case of Bitcoin I would guess the reason why they have ''hyperinflation'' even though the supply stays stable is because people have lost faith in the system staying honest, if the holders of these bitcoins suspect they are gonna get ripped off in the future by the guy controlling the code they will try and get rid of their bitcoins.
#13872567
The code was basically sound and the method of mining was hard to commit fraud with, so it wasn't that angle that did it in, I think. Additionally, Satoshi Nakamoto didn't run off with the bitcoins that he mined at the beginning, since the records show that the coins that were mined in the beginning are still present in the system now, so Nakamoto seems to have disappeared at some point this year without ever withdrawing them. He just vanished.

So what was really the cause of the incredible volatility in the ratio of BTC to USD? Well, like any libertarian-themed project, BTC was faithfully designed by Nakamoto to not require any central authority - in fact it was architecturally impossible to centralise the management of it. This means that users were responsible for securing their own bitcoins! (Haha!)

Naturally, after a few very expensive mishaps, people began to demand that the market cater to their desire to store their coins somewhere securely. This is where the scamming began, as virtual banks appeared. Various virtual bank crashes and virtual bank runs drove the value of bitcoins down as people began dumping suddenly-unreliable bitcoin currency for USD, and that's where you see the steep decline going down the other side of that graph.

The market 'corrected' itself after the fraud, by wiping out most of the bitcoin value (hyperinflation time!) of those people who hadn't already had their coins literally stolen by the fraudulent banks which collapsed, but none of the systemic causes of the fraud have actually been addressed, so there is the knowledge hanging over everyone that the same thing could happen again.

If there were a trustable centralised authority, it's perhaps possible that the volatility seen on that graph would not have been so wild. People saw thousands of USD in value evaporating in front of their faces on that roller-coaster. The greed of the managers of a few unaccountable virtual bankers damned the project. In a scenario where maintaining the trustworthiness of the currency in the face of human avariciousness and unpredictability required the pre-emptive exercise of coercion (also known as regulation), there was no such coercion to be found. And that's the result.
#13872592
In the case of Bitcoin I would guess the reason why they have ''hyperinflation'' even though the supply stays stable is because people have lost faith in the system staying honest, if the holders of these bitcoins suspect they are gonna get ripped off in the future by the guy controlling the code they will try and get rid of their bitcoins.


How would this be prevented, then, in your society? Isn't this a major issue with your argument for free market currencies?

Or will Libertaria have to periodically deal with hyperinflation, like any other business cycle?
#13872663
Fasces wrote:How would this be prevented, then, in your society? Isn't this a major issue with your argument for free market currencies?

Or will Libertaria have to periodically deal with hyperinflation, like any other business cycle?


Bitcoin is a computer program, computer programs can be modified and this enables the controller of said system to create inflation of the money supply, you cannot increase the supply of gold without spending large amounts of money and this is what makes it virtually impossible for people to lose faith in a gold coin as a medium of exchange.
#13872678
Fasces wrote:No new coins were created. Are you going to deny the facts of the case in an attempt to prove a solution?


That doesnt mean shit if it is still possible for the people running the system to create ''money'' at will.
#13872690
Please read up on bitcoin, Kman. You are making terribly ignorant statements about the nature of the currency. It has been used as an argument in favor of private currencies in the past by your own Mises Institute.
#13872708
Fasces wrote:Please read up on bitcoin, Kman. You are making terribly ignorant statements about the nature of the currency. It has been used as an argument in favor of private currencies in the past by your own Mises Institute.


The Mises Institute has no daily articles on Bitcoin so yeah please tell me where they endorsed the use of this currency.

Anyway I just did read up on it, apparently it stops being produced at 21.000.000 coins and then I assume a new network has to be created in order to provide currency for other people, would you then have more than 1 bitcoin currency? Anyway it seems like a shitty currency compared to gold, I suspect this is why it has crashed in value, the bitcoin fanboys realized that it is an inferior currency compared to gold and ditched the experiment thereby causing the value of the coins to plummet.

Doug Casey talks about Bitcoin here:

Frankly, I can’t see why anyone would, when there’s already an electronic digital currency like Bitcoin but backed with gold: GoldMoney. I should disclose that I’m a small investor in the company. But I have to say that I really do like GoldMoney. It does everything Bitcoin does – or did – but is backed by something of real value: gold. That means it’s not just an abstraction, but an actual store of wealth. The ultimate proof of that is that you can take delivery of your gold if you want to. With Bitcoin, there’s nothing to take delivery of. I don’t understand why anyone would use Bitcoin when they can use GoldMoney, which does all the same things but has real backing.


http://lewrockwell.com/casey/casey89.1.html
#13872718
I don't give two shits about bitcoin. It is a fiat currency operating in a system of free money, which in an Austrian view, would predict failure. The Austrians were correct if any judgement were to be made. There is much more to pricing a currency than just how many of them exist. The Austrian view is that money backed by real assets like commodities and gold will be most capable to survive in a free money system. Bitcoins are not redeemable in real assets at fixed rates.

There is nothing in a free market that ensures that everyone will win. Typically, the absence of failure means the absence of a free market.


The funny thing is that they had hyperinflation in Bitcoinland (a land of people that use this stuff) last year and they didn't understand it. The graph below shows the exchange rate between bitcoins and dollars from inception to the end of last year more or less. As it can be seen (not very well I'm afraid), prices fell from almost US$30 per bitcoin to around US$3 in two months.

Similarly, the USDollar had hyperinflation when measured in bitcoins between January and June 2011. I'm not sure what any of this proves besides prices fluctuate.

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