I'd like to try a thought experiment on this. Totally contrived, but I think it illustrates what I'm getting at.

Suppose Bank has 100 BTC.

There is a landlord. He would like to build a home. He goes to the Bank and gets a loan for 2 BTC: 1 BTC for eating; 1 BTC to pay some entity to build the home.

The bank now has 98 BTC, but it's also charging interest of 100%, so in theory, Bank has 100 BTC + 2 BTC (profit).

Renter comes along and wants to take a loan to rent. He borrows 1 BTC from the bank to pay a year's rent. Bank once again charges 100% interest.

The Bank is now with 97 BTC, Now the bank, in theory, has 100 BTC + 3 BTC.

Well, if you can't create BTC from nothing, where is that 3 BTC going to come from? Let's say the bank continues to loan out all of it's money, so it has a theoretical 0 BTC + 200 BTC.

The problem is that the bank is now broke and there is 100 BTC in the economy that can't move. The incentive for the loaner is to not loan at all. Even if one is able to split the BTC, at some point, the upper bound makes it impractical to put out a loan, and that incentive, with no real math to back it up, is less than half of 0.00000001 x BTC.

This is a silly example, but it illustrates why that upper cap matters (and why the gold standard failed). It may not matter in the current scale, but the US alone has a GDP of $18.56 trillion. The fact is, the upper bound guarantees some inflection where hoarding is not only the best strategy, the the only viable strategy.

I'm interested in the solution to this issue. Let's say the BTC is split again, what is the value of one BTC at that point? It appears to me that all BTC would have to drop in buying power to compensate for the split.

***

IRT Target, MtG was acting more like a bank wasn't it? Wouldn't the better example be BofA being hacked?

Dave, I'm not sure how your loaning example is different than what happens now with currency.

Only Governments can create currency, but the "money supply" (and I've forgotten the exact terms to use here) can grow/contract around that.

Basically if every entity wanted to withdraw all of their money from banks, there wouldn't be enough real currency to do that (and things would get bad). I'm not really sure how that's different with BTC.

Dave,

Imagine please, a world where an economy operated on a gold standard. So let us imagine the United States early 20th century. There are different types of currency floating around: silver dollar, nickels, paper currency etc. At the end of the day all those instruments were priced in relation and backed by a gold amount.

Lets say $50k = 50 pounds of gold.

It becomes tedious and really heavy to move 50 pounds of gold around if a business or a bank or person wants to make payments around the city, even worse, to a different city/state. So we use a paper dollar, backed by the gold in the bank. So you could pay your debts, move money around much easier.

In this scenario, the coins/paper bills are used for transferring and daily use while the gold holds the actual store of value. The same can be said for a bitcoin(gold)/eth, etc, doge, zmoney, etc (dollar bill). Its actually being played out like that as transfer fees for bitcoin are becoming expensive and slower, where as ethereum is faster and cheaper for transfer. Or whatever other coin you could create/trade for priced at X/1unit of bitcoin.

Also as far as your bank scenario, no bank in the world has more physical gold/dollars in their bank vaults than the liabilities out there. The bank's method of making money is pooling people's deposits and lending it.

If today everyone decided to withdraw their cash from bank of america, the bank would collapse. same holds true for any bank in the world.

The commercial banks give a loan, and that number exceeds the money allocated by the central bank.

https://en.wikipedia.org/wiki/Money_...mmercial_banks

http://www.investopedia.com/ask/answ...eate-money.asp

Most newly created central bank money enters the economy through banks or the government. The Federal Reserve can create new assets to be carried on bank balance sheets, and then banks issue new commercial loans from those new assets. Most central bank money creation becomes, and is exponentially increased by, commercial bank money creation.

This article claims that 97% of money is created by commercial banks, but I'm not sure if I believe that number.

http://positivemoney.org/how-money-w...-create-money/

That's the difference here, and why BTC seems fundamentally incompatible with fiat currency, as I'm understanding it.

Dave, the banks are creating 'fake money', if you will. Just like in your example the banks could create 'fake BTC'. There would be reserve requirements just like there are now with currency so that it all works out ok.

It's not like the banks are actually printing out new physical dollars.

I'm not saying it couldn't work with BTC. I do question if it could work without a central authority. I also never seen this conversation come up in context of BTC. I'm only trying to lay some thoughts down because I'm not sure how BTC would ever grow to be viable. For now, I only hear that the limit is okay and that BTC can work itself out by splitting into parts. I think the splitting into parts is a flawed idea.

Economies grow, so currencies need to grow with them.

I'm just spitballing here, but lets make an extremely simplified thought experiment. Say that the world economy is valued at 100 eu right now (economic units). And lets say that all BTC has been mined and there is no other currency, so the BTC supply is valued at 100 eu.

Now lets say that the economy doubles over time. What happens then? Does the value of BTC double? So everything that used to cost 1btc now costs 0.5btc? Isn't that deflation, and generally thought to be bad for economies? Why invest in a business when you can just sit on your BTC and grow rich for free.

I'm out of my depth when it comes to evaluating if the bitcoin 'limit' is ok.

Dave, my point is just that whether its a problem or not is separate from your lending example. It should just work like it works now since banks aren't allowed to print new money.

Wolfram, I don't think that is obviously true. (Not claiming its false, but a claim like that would require a lot more proof and pretty deep economic knowledge).

Edit: Wolfram, I was addressing just your initial sentence, before your edit.

I don't believe deflation is inherently bad for the economy. And this would be a situation that is different than the "bad" deflation that we're typically talking about.

When the Silk Road guy got busted, i think he had like $20m or something? The market wasn't that big. and I don't even know if there is a replacement yet.

I'm out of my depth on the limit as well. I'm just trying to figure out the arguments for or against.

I think the problem with splitting is exactly as Wolfram said. Also, no matter how far you split, a car that is 5 BTC would still be 5 BTC. The economy of the US wouldn't change if we re-introduced the 1/2 penny. I doubt we'd declare every item is now 1/2 price to compensate that extra fraction.

No, the price would change. That's why it's deflationary.

Wolframs point is that this is generally bad (for lots of reasons). But inflation is also bad for lots of reasons. And figuring out the situations where either is ok or tolerable is beyond my knowledge.

Wikipedia on deflation explains it pretty well. Goods and services drop in price so currency has more purchasing power. This causes people to hold on to currency instead of purchasing for multiple reasons including waiting for values to fall more and then wanting to hoard the more valuable currency.

Demand goes down which increases supply and limits production. It also mentions the real value of debt increasing but did not go further into what that is or means.

As far as the bit coin limit my understanding was that the splitting fixed the fungibility problem. Say for example you wanted to buy a car that was worth $5k USD and had 2 BTC each worth $3.5K USD. If bit coins were not divisible, you could not easily substitute them for actual currency or in this case for the value of the car. But since you can arbitrarily split them down to a certain point you can more easily substitute and exchange them with other forms of value (USD, cars, etc).

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how did we just gloss over the bitcoin to ethereum model? Eth or whatever coin to transact backed by bitcoin. ETH has no limit on number of coins to be created. Even if there was only 100 btc total you could still continue with the economy because there are still the divisibility of bitcoin so its not really 100btc its more like 100 * 10 ^ 10 or however small you want to make the divisibility of it.

Furthermore, its hard for us to think about the U.S not having a central bank and not being on the gold standard but we were at some point. The idea of the federal reserve and being off of the gold standard came about in the 20s-30s. To imply that the economy of the U.S wasnt growing leaps and bounds on a gold standard post civil war up to the 1930s is insane. Massive technological advances mainly the steam engine drove massive gains for society as a whole.

To believe that the supply of gold properly matched the growth of the economy is a short sighted thought. To be fair there was the gold rush out west, but jeez its not like you can print gold to properly reflect the economy. Gold still requires men to go down deep underground and start mining it. Its slow, risky, and expensive to find it. Sounds kind of like bitcoin mining doesnt it?

Sorry goods drop in value not price per say.

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the guy running it had 20m? that doesnt mean much tho. he could have had a ton more in other accounts. and it doesnt account for the thousands of vendors that were pulling tons of cash out of there every week.

I could be wrong but it sure seemed to be thriving according to my research.

He had something like 200k bitcoins seized. I think he was doing pretty well.

This might be helpful
Quantity Theory of Money

M * V = P * T

M == money supply
B == velocity of money
P == price level which included inflation/deflation effects
T == GDP more or less

Pretty much illustrates Wolfram's point.

We did have an experiment with this fairly recently, didn't we? When Canada stopped making the penny, did the price of everything increase by 5? *

* (assuming the next denomination is a 5c piece)

No one said that at all. The US and a few other countries had all the gold (and the US still has the most gold of any country). It is a classic have / have not system. If you're country is on the gold system and you don't have any gold, you're screwed (see WW1 and Great Depression).

The same goes for BTC. The lion's share of it is apparently in the Silicon Valley and Kansas City, which leave the rest of the country / late adapters without. If there is no BTC to go around, then it's back to the gold situation. The rarity of the object is actually a liability.

Dave, it has nothing to do with the denominations of coins or paper available. It's about the total monetary supply which increases with most (all?) currencies but with bitcoin can only grow quite slowly.

Aside: Canada dropped the penny from cash transactions but not from electronic transactions.

okay, this is getting screwy and we're deviating from tech into the realm of economics. You are not screwed if you don't have any gold. By that logic, a rich country like Singapore would be ****ed royally while a country like South Africa (rich in gold deposits) would be VASTLY better. Yet that's clearly not the case. Or take a look at Japan, its essentially got no natural resources and yet somehow here they are a rich and developed nation ( lets not deviate this discussion about their messed up economics for now).

It doesn't matter what the actual material/object/digital good is used as a means of exchange/store of value. Some old native american tribes used sea shells, somebody across the globe uses the Yen, some trade in bitcoin, who gives a damn.

Same goes for pop stars and movie icons of the present. In 10 years, they will not be famous and someone else will come in and become the darlings of the fans. There isnt a 'central bank' for sea shells, for gold, for movie stars, etc. Its whatever people place value upon and so far, bitcoin keeps chuggin along slowly. Society isn't a fixed set of goods and if I do well on my career, someone out there got fired and is going to die of starvation. The pie grows as society grows and free exchange happens.

To have faith in a stupid piece of paper currency backed by 'good faith' of the government is just as a ridiculous idea as having faith in bitcoin as a currency.

You had me until that last sentence. One is the world's reserve currency. The other is very new and been pretty unstable so far.

They're different kinds of ridiculousness, it's silly to say they're equivalent.

I have to say I am not super stoked about 2+2's attempt in this thread to resolve the long standing debates in macro-economics.

Damnit! Lol, I tried. I remember reading Alan greenspan's book, and he talked about if there was a way to measure people's confidence he could predict how well the economy was performing better than any current tool. Not the numbers, not the GDP, not the debt, but people's emotions. You can't eat gold or dollar bills, you have them because they can be quickly traded for something else you might want quickly.

As for the world reserve currency, there's some benefits to Americans in having the dollar as a reserve currency but if you look at other rich countries that don't run on the dollar they are still rich. Also the overall trend of this "stability" for bitcoin has been going to the right and up historically. Same goes for gold, it's price goes up and down depending on investor's confidence, usually when they get scared they buy more of it.

I mean fiat US currency may turn out to be the greatest century-long scam of all time and bring down the world with it. Granted.

But when you look at timelines of the average human holding some money - your BTC has a much greater chance of going to nil on you than your $$$.

Gold is no longer the backing product for any currency, anywhere in the world. These economies became rich with "no resources" in part because money is fiat.

Eh, probably my fault. cheers.