Vast Bulk of BitCoins Are Hoarded, Not Used

another random user writes with this news from Ars Technica:"More than three-quarters of the digital coins in the Bitcoin digital currency scheme aren't circulating because they remain dormant in user accounts that have never participated in outgoing transactions, a recently published study has found. The figure translates to more than 7.019 million BTCs, the term used to denote a single coin under the digital currency, which uses strong cryptography and peer-to-peer networking to enable anonymous payments among parties who don't necessarily know or trust each other. Based on exchange rates listed on Mt.Gox — the most widely used Bitcoin exchange — the coins have a value of more than $82.87 million. On May 13, the date the researchers analyzed their data, there were slightly more than 9 million BTCs in existence."

Comments

Gridlocked with No Way to Prime the Pump

[eldavojohn]

So what you're saying is that there is a limited resource which we cannot make more of that people are hording? And the more people horde it, the higher the deflation? And people watch their value rise in USD as this happens? And you're surprised?

What motive is there to spend your BTC? Isn't this how deflationary spirals occur? Wasn't this an effect of The Great Depression and lead to FDR implementing a pump-priming strategy?

Could someone explain how they would escape that spiral? I'm not an economist so I don't know if there are other routes of which I'm unaware.

Re:Gridlocked with No Way to Prime the Pump

[Spad]

Ultimately, once the maximum bitcoins have been generated, you're pretty much guaranteed a deflationary spiral with no real way to restart the economy as you can't introduce any more money into the system.

Sure, you might think that once you reach that point people will start selling their hoarded BTC to cash in, but that doesn't really help because most people involved aren't going to be dumb enough to buy something that can only really go down in value.

Re:Gridlocked with No Way to Prime the Pump

[Voogru]

So why do you have a computer when you can always wait another six months, and buy a better and cheaper one?

The computer industry is a deflationary spiral.

Re:Gridlocked with No Way to Prime the Pump

[Anonymous Coward]

So why do you have a computer when you can always wait another six months, and buy a better and cheaper one?

The computer industry is a deflationary spiral.

Because today, right now, right this very moment, a computer has a functional, practical use. You can do things with it. You can make things with it. Hell, I'm communicating to you right now with one! And this particular one is well past six months old; it's around four years old! This is far, far more than you can do with BitCoins right now, and, as the deflationary spiral continues, in six months.

There's this difference between a functional tool and a rapidly-deflating unit of pseudocurrency. I admire your trolling efforts to confuse the two to throw the weak-minded of us off of the point, but, well, you're just wrong.

Re:Gridlocked with No Way to Prime the Pump

[arth1]

It is no different to a normal currency.

I think you just fell into his trap. That's obviously what the post was fishing for.

And no, it isn't. Nothing backs the bitcoin, nor regulates circulation, nor is it legal tender.
It's as much a normal currency as old baseball cards are. That they hold a perceived value, are a finite stock, and that some people are willing to trade them (even for real currencies) does not make them a currency. At least with the old baseball cards you get a picture to look at.

Re:Gridlocked with No Way to Prime the Pump

[betterunixthanunix]

I think an equally good question would be, is it the goal of a currency (or the currency controllers) to avoid deflationary spirals?

That is certainly a goal of currency, but I think it is indirect in the sense that avoiding deflationary spirals is necessary to satisfy other, more immediate goals of currency. The purpose of currency is to facilitate trade of some kind -- it is not useful if it cannot be spent, and the most useful currency would be one that can only be used for this purpose (there are other views, of course). Thus hoarding (and deflationary spirals) make money less useful, or in the worst case, totally worthless.

I have argued in the past that Bitcoin is actually not useful as currency, and that it will ultimately fail for economic reasons before it fails for technical reasons.

Re:Gridlocked with No Way to Prime the Pump

[jythie]

Actually, this effect is one of the reasons we got off the gold standard.

Re:Gridlocked with No Way to Prime the Pump

[Laxori666]

This is poor economic reasoning at best.

The amount of money in circulation has nothing to do with how much wealth there is in the economy. Printing a trillion dollars right now won't magically generate a trillion dollars in wealth (e.g. physical goods) - rather it will make everybody who currently holds USD collectively one trillion dollars poorer, as you'll have the same amount of goods being chased by a larger amount of 'money'.

The trick is that the wealth of an economy is not best measured by spending, but rather, by what is actually produced. Spending is epiphenomenal. You can notice that rich families tend to spend more dollars per year, so there is certainly a correlation between how much a family spends and how wealthy they are, but if a poor family starts borrowing money and sending as much as a rich family, they don't magically become a rich family. However, if you only look at spending, then that poor family will seem just as rich as the family that is actually wealthy.

When the government prints money, spending certainly increases. This is because it's impossible for prices to adjust instantaneously. For example, if there were $1 million in the economy and the government printed another $1 million, with all else being equal, all the prices should double. It takes a while for that to happen, though, so the first people to receive the printed money get a huge discount, as they're essentially paying half of what things are now worth. The people who are way down the line in terms of receiving that inflated money (e.g. after many many transactions have been made) receive less of a benefit as the prices have already begun to adjust. And the people who are attempting to do the rational thing - save money - are completely boned, because now all the money they have accumulated is suddenly worth half of what it is.

Printing money is immensely beneficial to the government, as they can essentially tax people without them knowing it. Far easier to increase the money supply by 10% - where prices might take months or years to adjust - instead of levying a 10% tax on everybody. It also benefits the people who are closest to the government the most, as they receive those printed funds first and get everything at a discount. Yet they have brainwashed people into thinking inflation is good, deflation is horrible, so yes, please continue to steal our money at an acceptable rate.

Why is it such a bad thing for prices to go down? Prices go down every year in computer goods - hard drives, video cards, RAM, processors, etc., are all cheaper and higher quality. What would be the problem if this were to happen across the board? It would reward saving tremendously - you could literally leave your money in the mattress and you would be gaining more value with it each year. Compare this to today's economy where if you were to do that it would slowly be taken away from you by the massive amount of money printing going on.

The argument, of course, is that if you would accumulate wealth by leaving your money in a mattress, everyone will do that, no one will spend, and the economy will tank. This is specious at best and intentionally deceptive at worst.

First of all, there's the moral argument - why is it okay for the government to steal your money without your knowledge or consent to promote the economy elsewhere? At least a tax is up front and explicit.

Secondly, people like to have shiny things. There will always be demand - how could there not be? What's preventing you from buying a jetski and an apartment with a swimming pool in it and expensive clothing and whatnot? Just a lack of the economic resources to do so. You can argue, given limited resources, everyone will decide to just wait a little more so they have more wealth before finally spending it. And, indeed, some people will do so. But not everybody is a miser who will hoard their wealth without spending a penny of it. That is an extreme, but the reasoning stands: that activity defeats the purpose of money, which is to allow you

Re:Gridlocked with No Way to Prime the Pump

[Anonymous Coward]

Can't do much with the digital bits of which most modern state currencies are made, either.

So, let's sum up:

With a six-month-old computer, you have a tool that you can use to get work done.

With six-month-old BitCoins, you have a smug, smarmy sense of superiority and a generic the-world-hates-me attitude that you can only use to further extend your smug, smarmy sense of superiority and generic the-world-hates-me attitude. And get drugs. Sometimes. If the market's right. Maybe.

Best part is, you need the computer to do what little you can do with BitCoins anyway. Perhaps a different analogy is in order?

Re:Gridlocked with No Way to Prime the Pump

[MikeBabcock]

In case you missed it, regular US currency has most of the same issues. It is not backed by anything, its value fluctuates dynamically with perception and it is traded and gains and loses value at others' whims.

If you have $100 you put in the bank ten years ago, its worth a lot less now in exchange for goods, services or other currencies than it was then.

Re:Gridlocked with No Way to Prime the Pump

[DarkOx]

We got off the gold standard because we were fighting a war we could not pay for and were going to default on redemptions otherwise. We were creating more money supply than there was gold to back it up and the rest of the world knew it. That is why we got off the gold standard and no other reason.

Deflation is a symptom not a cause. Its velocity not quantity of money supply that matters, where stimulating an economy is concerned. Deflation driven by delivering and hording are symptomatic of population that does not expect the prospects of wealth production to be bright in the future.

This idea that people don't spend because they will get more for it next week is a farcical, in my opinion. People don't *need* dollars or gold, they need bread to eat, cars to drive, tar for their roofs, boots for their feet, gas for their stoves etc. People stop spending not when they think money is going to gain in value, they stop spending when they question their future prospects for obtaining enough replacement money to accommodate their future needs.

I don't think people would stop spending even in the face appreciable and obvious deflation. Not even on luxuries. Look you don't want a new TV 6 months from now, you want to start enjoying today. If you were sure your job was secure and any pay cuts you might face would be no greater than the general deflationary trend you'd have no special incentive to save.

The mainstream economists are wrong about deflation being a threat. Treating is at best like using a nasal decongestant to fight a cold. It does nothing to attack the underling issues, although it might make some groups more comfortable.

Inflation does not prime the pump either. It forces people into bad decisions. They don't want to buy because they feel their security is threatened. They probably should save, but inflation will destroy their savings if they don't swap cash for assets. So you make them guess at which assets they will need rather than acquire them when they have actual needs. We have been at this experiment for about 50 years now. Do you really think our nation is on a more solid fiscal footing?

Also consider this angle, before the gold standard was dropped we had boom and bust cycles. They were more frequent but shorter dips were shallower, peaks were lower. Before the central bank we had even more rapid cycles. What happens to you now with these longer cycles if the most productive years of your own life span happen to coincide with one of the dips? You are screwed that's what. Shorter cycles are better. Trying to keep the boom times going past ripeness with monetary games means a bigger dip later, and that is really unfair to folks a little younger than you.

Re:Gridlocked with No Way to Prime the Pump

[Stirling Newberry]

I like to think of it as a small economic experiment in why the perversion of gold buggery is doomed. It fails to take into account the relationship between store of value and medium of exchange. People who have currency want it to be a perfect store of value, but if it is, that is if past discounting is negative, the economy freezes over and there is nothing to exchange for, at which point the currency loses all value. The essential problem with bitcoin is it is made by people who wanted in on sieniorage but are not offering access to a market.

Re:Gridlocked with No Way to Prime the Pump

[Anonymous Coward]

What would be the problem if this were to happen across the board? It would reward saving tremendously - you could literally leave your money in the mattress and you would be gaining more value with it each year.

You've answered your own question. If inflation amounts to a tax, then deflation is a subsidy for people who stuff their money in mattresses where it does no one any good. You're paying people with fat mattresses sit and watch their money instead of using it to produce more and create new wealth.

Re:Gridlocked with No Way to Prime the Pump

[Cyberax]

You might check your history. Gold standard in the US was repealed in 1933 and the war started quite a bit later and by that time economy has almost recovered from the Great Depression.

Consequently, Hitler came to power after two grueling years of _deflation_ in Germany. And no, this is a historical fact relevant to the issue at hand, I'm not Godwining the thread.

Re:Gridlocked with No Way to Prime the Pump

[Vintermann]

We got off the gold standard because we were fighting a war we could not pay for and were going to default on redemptions otherwise.

Another way to formulate this would be to say that you got off the gold standard because you could no longer could afford to support hoarders' (of gold and gold-standard cash) expectations of rent just for sitting on their claims to wealth.

Speculators

[Dan East]

I wonder how many of these were generated early on and are being hoarded by the early adopters. The rate at which bitcoins can be created out of thin air is artificially controlled to keep production at a steady pace. What I'm curious about is how many bitcoins were created initially before they gained widespread publicity, and are those being hoarded?

Re:Speculators

[Animats]

I wonder how many of these were generated early on and are being hoarded by the early adopters.

Probably most of them. In the early days of Bitcoin, the amount of computation needed to generate a Bitcoin was orders of magnitude less than it is now, and the number of Bitcoins that could be generated per unit time was higher. More than half of the Bitcoins in existence were generated prior to the end of 2009. The system has a huge early-adopter bias built into it.

Bitcoin generation is competitive; the compute load required to generate a Bitcoin is automatically adjusted about once a month based on the number of Bitcoins generated in the last time period. The originator of Bitcoin is still anonymous, and being the first adopter, generating coins with no competition, probably holds many of those cheap-to-generate Bitcoins.

But they can't cash out without crashing the market. The total daily transaction volume in Bitcoins is roughly that of a big supermarket or two. Most of that volume is between traders; actual goods and services sales are tiny.

That's the real problem with Bitcoin. As a currency, it went nowhere. It was supposed to compete with PayPal. Instead, it's mostly a speculative vehicle. By now, one would think that there would be games, music stores, and app stores using Bitcoins, just as a convenience for small transactions. Didn't happen.

(Anyone remember CyberCoin? DigiCash? Beenz? Didn't think so.)

Money Laundering?

[eldavojohn]

"We discovered that almost all these large transactions were the descendants of a single large transaction involving 90,000 Bitcoins which took place on November 8th 2010, and that the subgraph of these transactions contains many strange looking chains and fork-merge structures, in which a large balance is either transferred within a few hours through hundreds of temporary intermediate accounts, or split into many small amounts which are sent to different accounts only in order to be recombined shortly afterwards into essentially the same amount in a new account."

Not to imply that anything wrong was happening but isn't that the definition of money laundering?

Perhaps an individual experimenting with how effectively he can automatically clean BTC with temporary internet accounts being made for transactions leading back to a brand new account? But wouldn't the whole chain of ownership be shown on that final balance? What else could be the purpose of the mentioned exercise?

The researchers started by mining the history for data that identified when two or more addresses belonged to the same owner.

How is this done? I thought that BTC just needed an address and that was it. You could use throwaway accounts if you wanted to, right? From the wikipedia page on it:

Because transactions are broadcast to the entire network, they are inherently public. Unlike regular banking, which preserves customer privacy by keeping transaction records private, loose transactional privacy is accomplished in Bitcoin by using many unique addresses for every wallet, while at the same time publishing all transactions. As an example, if Alice sends 123.45 BTC to Bob, the network creates a public record that allows anyone to see that 123.45 has been sent from one address to another. However, unless Alice or Bob make their ownership of these addresses known, it is difficult for anyone else to connect the transaction with them. However, if someone connects an address to a user at any point they could follow back a series of transactions as each participant likely knows who paid them and may disclose that information on request or under duress.

Movement from a known to unknown account in an attempt to "launder" it maybe?

Implied valuation

[sjbe]

Shocking that people wouldn't be doing transactions with a currency that few people know about or understand and that even fewer people are willing to accept as payment.

Based on exchange rates listed on Mt.Gox — the most widely used Bitcoin exchange — the coins have a value of more than $82.87 million.

That is referred to as an inferred value. Same thing happens with companies. Say you buy 5% of a company for $1 million. By doing so you think the entire company is worth $20 million (5% of $20 million is $1 million). That doesn't mean it is actually worth that much, it just means someone paid an amount that implies the value of the company. On a thinly traded commodity inferred values can be wildly misleading because the person doing the transaction might have overpaid compared with the going market rate. If most of the bitcoins are sitting on the sidelines, that $80 million valuation is almost certainly far higher than is realistic.

Re:Hoarding, or...

[Anonymous Coward]

I suspect coin collectors snapped up all the bitcoins with the low serial numbers, and are holding them hoping they become collectible. If the bitcoin folks were smart, they'd release a series of bitcoins for each State.

Some are also destroyed/lost

[rcs1000]

Worth remembering that some Bitcoins (perhaps many) will have been 'lost'. I had the Bitcoin wallet software on my mobile phone, with perhaps 20BTC in it (this was when the exchange rate was c. $4); my four year old daughter fell into the swimming pool, and I didn't think to remove the phone from my pocket. If anyone knows a way to remove the wallet.dat file from a broken Galaxy Note, I would be interested to hear.

Also, there will be some people who have lost the passwords for their wallets.dat, and are therefore unable to access their funds. Of course, in 20 years time they'll be able to decrypt them, but for now they're out of luck.

my preciouuuusssssss

[Thud457]

The dwarves delved too greedily and too deep.
You know what they awoke in the darkness of Khazad-dum.

Re:Bitcoin exchange?

[Wesley Felter]

Yes, trading is going on. http://bitcoincharts.com/markets/mtgoxUSD.html

Collect them all!

[interval1066]

I think people love the commerative bc's, the special editions, etc...

Re:More like gold by the day

[sarysa]

Gold, not so much. Bitcoins had a distribution method that was vastly different to the discovery of gold. The distribution favoing early adopters and being limited to a select few IN AN EDUCATED WORLD (coupled with natural human greed tendencies) is why the masses will never accept it. (But we'll have bubble cycles while people try to figure out whether or not bitcoins have value)

If you're interested in a long dry read, I wrote an article about Bitcoins while studying a different virtual economy. The perspectives in this thread couldn't have come at a better time. I'll probably integrate them into my article. ;)

monopoly money

[wbr1]

I have a warehouse full of Monopoly money,valued at $500 USD. I don't spend it either. No one will take it.

It is very different from a normal currency

[sirwired]

With a "normal" currency (i.e. a much-maligned "fiat" currency, like the dollar), in the face of such massive deflationary pressure, the central bank injects additional currency into the market by lowering overnight lending rates, buying govt. bonds, and lowering bank reserve requirements. The ensuing inflation provides incentive for people to spend their money instead of banking it.

BitCoins, by design, have no such mechanism. This, combined with a stupidly-designed expansion curve, means that deflationary currency hoarding was 100% predictable.

Re:I never understood bitcoin

[TheSpoom]

This is why I never bought into BitCoin: It's a vastly overwrought solution to a small problem in a largely functional currency system. It's saying, because nobody has set up easy internet money transfers, let's dump the entire currency system and start a new one.

It's reinventing the wheel because a spoke is broken.

Mod Down, Copy-Pasted from another post

[Anonymous Coward]

Your sig complains of people modding you down due to global warming bias... or maybe it should be because you copy-paste other people's posts up to higher threads hoping to gain karma back through some trickery?

This post is clearly copied from one five minutes earlier here. And this isn't the first one in this thread that you've done that with, there are others further down.

This.

[sirwired]

This has been the biggest flaw in BitCoins since day 1, and one which it's backers stubbornly refuse to acknowledge. (Either that, or they believe that a deflationary spiral is a good thing.)

Not true.

[sirwired]

The vast bulk of dollars are NOT hoarded. They are mostly stored in banks, which in turn lend them to others. They should have covered this concept (Fractional Reserve Banking) back in middle school... you need a refresher.

These BitCoins aren't being stored in a lending bank, they are being stored under the metaphorical mattress.

Re:I never understood bitcoin

[jest3r]

Not really that easy.

As a consumer In order for me to actually acquire a Bitcoin and then spend it I have to do the following:

1. Go to my Bank and transfer CAD to my local BitCoin Exchange - $3.00 fee
2. Covert the CAD balance transferred to the BitCoin Exchange into BTC (3% fee)
3. Send the BTC to my Wallet
4. Transfer money from by Wallet to the seller (there is a small fee applied to that .001 BTC or something like that)
5. The Seller then also incurs a fee if they are using BitPay or some other third-party to handle the transaction which is typical of a legitimate purchase
6. Furthermore if I don't want to lose my wallet I need to use a Hosted Wallet which costs me even more!!
7. Then when I want to cash out my remaining balance (which is always a strange amount) I have to pay even more fees through the Exchange (this is why there seems to be a lot of hoarding).

This whole process takes days and is not really worth the time and effort for small items.

Finally using the Default Bitcoin client (which they still recommend on the Bitcoin website) takes almost a DAY or more to download the Block Chain. You can't even begin to do any of that until you have the Block Chain download. There are other clients that don't need to do this but for the average newbie the Bitcoin website recommends Bitcoin-QT which requires a full download.

At this point it is a currency for people who can't use Credit Card or Interac or PayPal really. But the fees are just about the same when you look at the big picture and time-to-spend is really high.

Because there is nothing to spend them on.

[Conchobair]

Because there is nothing to spend them on.

Re:Question for economics wonks

[alexander_686]

If you want charts, graphs, etc. see

A Monetary History of the United States by Milton Friedman and Anna J. Schwartz
This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff

Either one will cover your first 3 points.

But in short:
Moderate Inflation has been associated with economic growth: See past 50 years. Abundant historical examples.
Deflation increases the value of money – thus it transfers wealth from those who have money or are creditors – thus encouraging wealth people to invest in government bonds instead of real economic activity. See Great Depression or Japan over the past 15 years.
High inflation destroys savings and discourages poor people from investing (including education, homes, etc). See America during the 70s. See great britain having to break with the European monetary board.
These effects are all quantifiable. i.e. there are formulas out there. However, those formulas are highly tinged by psychological factors (people’s perceived need for money and stability), growth in productivity, availability of alternative currencies (bit coin, HELOCs on overinflated homes, tulips, etc.)

Re:Speaking of computers and bitcoins...

[compro01]

1. No. The complexity is dynamic. It adjusts based on the total power of the network so that on average, 1 block is found every 10 minutes. If fewer people are mining, the difficulty will drop to maintain that rate.

2. The mechanism for that is that every 210k blocks, the reward for finding the block (currently 50BTC) is cut in half. This will happen for the first time (dropping from 50 to 25) sometime around the end of November.

3. That depends on what you're using for the calculations. Using a CPU stopped being profitable long ago, unless your power is free, but even then unless you have a company worth of computers, you're not going to get much out of it. A good GPU, like something recent from ATI, is slightly profitable, depending on your electrical rates. FPGA based mining equipment is far more power efficient and should remain profitable for quite some time, but isn't cheap.

4. Mining will always be needed, as that's what makes the whole system run. Without mining, transactions aren't recorded into the blockchain. The difference is that the method of paying the miners for their work shifts from creating coins from whole cloth to being paid by the people sending transactions around.

Re:Speaking of computers and bitcoins...

[h4rr4r]

Mining is yet another flaw of this currency. It turns real value, electricity and your time into something currently worthless. You could do a lottery to assign bitcoins, have the same outcome and save everyone a ton of real money and time.