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344 sats \ 3 replies \ @Undisciplined 16 Oct \ on: Bitcoin Economics And Finance Survey bitcoin
As noted by Yermack (2015) and Ali et al. (2014), a fixed supply will lead to deflation which will, in turn, lead to high welfare destroying volatility. It will be a difficult task indeed to match the variation in demand. Ali et al. (2014) propose that a more flexible system is required to respond to varying demands. One way is to have an adjustable growth rate of currency supply and another is a decentralized voting mechanism. While some researchers predict a possibility of deflation, Lo and Wang (2014) throw light on a possible scenario of hyperinflation if the central bank chooses to oversupply currency. These possible scenarios of deflation and inflation are ruled out by Iwamura et al. (2014b) as they argue that fixed supply will only negatively impact the profitability of mining activity but not lead to a deflation-like situation.
This passage really demonstrates how confused modern macro is. Full disclosure: I didn't even peak at a single one of these articles.
In a monetary sense, "deflation" means decreasing supply, so it's directly contradictory to say a fixed money supply is deflationary. Of course, these are the kind of people who start talking about deflation whenever price inflation falls below 2%.
Now, it is true that bitcoin is actually deflationary (or at least it will be), because of lost/stranded bitcoin. The history of prices on the gold standard would seem to directly refute the claim about "welfare destroying volatility", as prices were so stable over the course of centuries that people thought of them as almost innate properties of goods. Compare that to today, when we're constantly shocked at how much prices have changed for everything.
Then, the comment about adjustable growth rates seems to come from someone who doesn't understand one of the core Misesian insights about money: any amount of money is enough to facilitate economic transactions, since money is divisible.
The author of the main article seems to have confused himself talking about hyperinflation and central bankers as though it's a counterpoint to the deflation concerns. It wouldn't be bitcoin that's hyperinflating, or if that's what those authors did say then they're morons. Bitcoin deflating and fiat inflating are completely disconnected phenomena.
The final point about fixed supply ultimately hurting miners' profits might be right. I've read people making it before. It depends on the purchasing power of bitcoin, which would stabilize at full adoption, while competition between miners drives fees down. Until then, mining profits could increase, decrease, or go sideways. Where that author is slightly wrong is in not recognizing that bitcoin really doesn't have a fixed supply.
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21 sats \ 2 replies \ @SimpleStacker 17 Oct
prices were so stable over the course of centuries that people thought of them as almost innate properties of goods.
So do my kids, whose only exposure to economic transactions is video games :D
But to your broader point, yes, this paragraph was not very enlightening. The Iwamura paper looks interesting though, since it discusses the long run profitability of mining, one of the key debate topics within Bitcoin.
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32 sats \ 1 reply \ @SimpleStacker 17 Oct
Ok, I read the Iwamura (2014) paper as well. It's only 15 pages, unpublished, and not even really a paper per se as there's no model or empirical analysis. It's just the authors discussing bitcoin with words and logic. Not necessarily problematic, but I didn't find anything inside that helped me better understand the long-run viability of bitcoin mining or the debate over deflationary money supply.
When it comes to the issue of deflation and mining profitability, the survey paper seems to be referring to a single paragraph in Iwamura:
Why did Nakamoto (2008) set a limit of total Bitcoin issues? Because he seemed to believe that a decreasing supply of money will not lead to inflation. A geometrical reduction of the money supply rate does not necessarily create deflation. But it will create a sharp drop in the profitability of mining activity, even if we take into account of technological growth based on the Moore’s Law. We think it is this real factor that determines inflation and deflation in the Bitcoin ecosystem.
Honestly, I didn't quite understand that. And it didn't come from a model or data or anything, just stated without evidence. It wasn't really a focus of the paper, and I'm a bit surprised the survey paper included this when discussing deflationary supply.
Interestingly, the paper very much reflects 2014-era thinking: a more idealistic time before the explosion of scam coins. The paper thinks that competition amongst many crypto will be healthy and that ultimately a crypto with better properties will supplant Bitcoin. The authors would definitely get called shitcoiners here on SN :)
The paper even proposes what it thinks would be properties of an "ideal" cryptocurrency, but these are stated in very abstract rather than practical terms. For example:
"The marginal cost of [ideal crypto] production must be discounted by the technological growth via the Moore’s Law and operational specifications of [ideal crypto]."
Not particularly helpful, imo.
All in all, this paper seemed like just a simple discussion of the authors' high-level thoughts and opinions, not a real serious analysis of the issues, so I'm a bit surprised it was cited in the survey paper.
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0 sats \ 0 replies \ @Undisciplined 17 Oct
It seems like the expectations would be for bitcoin mining to approximate perfect competition, regardless of those factors. I'm not sure how someone would get much traction trying to model actual profits.
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