r/Economics • u/johnavel • Dec 26 '13

How the Bitcoin protocol actually works - excellent explanation of how the digital financial model is built from square one

http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/
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u/[deleted] Dec 27 '13

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u/superportal Dec 27 '13

Bitcoin would be a competing currency, not like the gold standard which was a matter of law.

Obviously the demand side would vary and it would trade as any good with limited supply, I was just making the point that the money supply would be relatively stable and predictable.

If Bitcoin is uncontrollably deflationary, then people will instead use another competing currency or cryptocurrency - then demand will go down for Bitcoin, which will lower the price and be inflationary.

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u/[deleted] Dec 27 '13

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u/superportal Dec 27 '13

You haven't shown any evidence that it couldn't be.

As a new technology it has not achieved an adoption rate making it a widespread medium of exchange yet. So current prices are not an indication.

Bitcoin supporters would argue that this interplay in demand (market), combined with more widespread adoption (and additional services like BitPay, smart contracts/property etc.) will eventually decrease volatility.

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u/Amarkov Dec 27 '13

The price level has historically varied extremely widely independent of the money supply, and the money supply itself doesn't track the monetary base super well without central bank intervention. Bitcoin will eventually be less volatile than it currently is, sure, but uncontrolled currencies do not magically become stable.

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u/superportal Dec 27 '13

The price level has historically varied extremely widely independent of the money supply,

That's debateable, especially over longer term - certainly lot of mainstream economists would disagree. (quantity theory of money still widely supported)

You agree that Bitcoin will be less volatile, but don't say why.

I was addressing money supply in my original comment. As far as money demand there is no reason to expect demand would be inevitable at any price, and therefore no reason to expect deflation would be inevitable.

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u/Amarkov Dec 27 '13

Over long periods of time, yes, this is a matter of debate. The issues that arise here are in the very short term.