Bitcoin And The Virtue of Hoarding and Deflation

By Anthony Freeman

I wanted to take a moment and dispel some of the myths circulating about hoarding and deflation:

What most people don’t understand is that “deflation” (defined in this instance as the lowering of prices compared to bitcoin’s appreciation in exchange value) is a GOOD thing. It means the purchasing power of your bitcoin money increases over time. You are rewarded for saving.

“Hoarding” is simply another word for “saving”. It means that the holder values the item more than the market does. He will only trade it when the market values it more than he does.

Savers of bitcoin are good. Their act of withdrawing their money from the marketplace drives up the value of everybody else’s money. This is another way of limiting supply and increasing value. I elaborate on this in my articles What is Money? And Further Observations on Bitcoin, Digital Currencies, Privacy and Liberty.

Whether or not bitcoin survives the tests of the market remains to be seen but at the present time the dollar (and gold) has crashed against bitcoin. Competition is good and that is why I am cheering for bitcoin.

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21 Responses to Bitcoin And The Virtue of Hoarding and Deflation

  1. Jason R. says:

    While I agree there is a misunderstanding of inflation / deflation, I do think hoarding can be an issue if it is in response to some economic shock – in which case the price of currency may jump erratically. Since the prices of goods, wages, etc. don’t adjust as fast, this can lead to instability.

    Under a free banking, fractional reserve system based on gold, there is a stable supply of base or “high powered” money (gold) but changes in demand for currency can by and large be handled by private bank note issue with redemption clauses. If demand rises, banks print more notes, and when demand falls, banks destroy notes. If there is a run on gold deposits, the redemption clause allows banks to withhold redemption for some defined time, say 60 days, usually enough time for bank panic to calm down. However, if they do utilize this clause, they are forced to pay a penalty fee to note holders.

    An interesting concept to explore would be the idea of replacing gold with bitcoins and then having fractional reserve banks issue private “bitnotes.”

  2. zirunk says:

    The argument fails in that no-one is living in a pure bitcoin economy and the bitcoin exchange rate will always matter.

    People hoard, they “Save”, you say this is a good thing. Fine, let’s run with it.

    This means prices goes up, so everybody who has bitcoins become richer! yay!

    The higher value the bitcoin gets relative to any “real” currency (that you can buy food with), due to the lack of supply, the higher the possibility of a run, that someone decides “people are willing to pay SO much for bitcoins, now is the time to sell!” and will start selling out, the prices will fall. The people who have been hoarding bitcoins see their fortunes dwindle! better sell now!

    The bitcoin bubble has burst. A lot of people have become richer. newcomers to the market have become poorer, any business that does transactions in bitcoins are fucked. Holdings in bitcoins mined at high cost or bought at high prices (say you actually sold your goods to someone – in bitcoins), are worthless.

    The likelihood of this happening is much greater with bitcoins than with any conventional fiat currency.

    Bitcoins are interesting, but ultimately they will never be accepted but major corporations, and the markets will always be prone to high volatility due to the fact that there is _nothing_ but speculation ultimately supporting the use of it.

  3. charley hardman says:

    the ol’ lew-rockwell-overcompensation “let’s shock ’em” shtick. yeah, that’s never been done before.

    per capita deflation isn’t the bogeyman invented by state supremacists. however, per capita deflation as with bitcoin (exponential) is giving it a rocky start. not an unconditional virtue.

    similarly, hoarding because of massive per capita deflation isn’t ideal for a currency. rational behavior for the hoarders, but it leads to rampant uncertainty and a material financial/psychological barrier to entry. not an unconditionally great thing. as zirunk noted, the hoarding itself may lead to inattentive hoarders losing wealth, opposite your topically smug pronouncement. speculative hoarding is a negative, however necessary in this case.

    i’m a big supporter of the bitcoin concept, and predict — even with interference from the goon squad — that bitcoin will prevail. contrary to time-machine blather from some “misesians” wallowing in argument by authority fallacy, it has theoretically everything required for a viable currency, with attributes that were impossible before widespread computer/internet use.

    “the dollar has crashed against bitcoin”? c’mon. is that a joke?

    • @charley:

      You wrote:

      speculative hoarding is a negative

      and

      similarly, hoarding because of massive per capita deflation isn’t ideal for a currency

      to which I respond: Deflation is not an issue when the currency is highly divisible. With bitcoin divisible to 8 decimal points the increasing value of the currency can be compensated for with price adjustments. Hoarding is simply the act of holding assets when you value them more than the marketplace does. What you do with your assets is none of my business. You are not required to sell them for my benefit just because I think they should be worth less and because I think you should sell them to me for less.

      you also wrote:

      “the dollar has crashed against bitcoin”? c’mon. is that a joke?

      to which I respond: No joke. I state this to bring attention to the fact that the dollar has lost something like 200,000% against bitcoin over the last year or so. I’d call that a crash. Whether the dollar can regain back some of that value against bitcoin remains to be seen.

  4. charley hardman says:

    “Deflation is not an issue when the currency is highly divisible.”

    false. bitcoin’s divisibility, theoretically beyond 8 decimal places, is essential and wonderful. great stuff. however, that it can accommodate deflation technically doesn’t ameliorate the market disruption of volatile deflation. even if steady, deflation for practical mass adoption should be much less than the current per capita deflation of bitcoin. it’s not the total nirvana you portray. that’s the point.

    did you really run to the ever-present out of invoking “none of my business”? please. the cheapest tactic in liberty circles. there is more to economics discussion, including most of bitcoin, than whether something is aggression. you refute nothing by describing hoarding in “simply the act of” “nothing to see here” language. the hoarding of bitcoins represents a natural reaction to a massive per capita deflation. that it’s necessary to bitcoin’s beginning, and voluntary, doesn’t make it not injurious to the near future of bitcoin. of all the bogeymen raised against bitcoin, hoarding is the only one i deem worth noting. it’s a huge disincentive to adopting the currency.

    re the dollar “crashing” with respect to bitcoin, that’s abject nonsense. the dollar hasn’t begun to have the slightest assignable reaction to bitcoin. you may as well make a quilt that’s bid up from $0.01 to $500, then announce that the dollar has crashed in relation to your quilt. for the dollar to crash in relation to a thing requires a significant level of participation in both markets. despite explosive growth, bitcoin hasn’t even nudged that yet. bitcoin could be destroyed wholesale tomorrow without even a noticeable burble in the dollar.

    • @charley,

      You wrote:

      even if steady, deflation for practical mass adoption should be much less than the current per capita deflation of bitcoin. it’s not the total nirvana you portray. that’s the point.

      I respond:

      Please enlighten me as to the optimal rate of per capita deflation. What we are witnessing here is a period of price discovery combined with inefficient (and immature) exchanges. Bitcoin is a new and unique asset class. It will take time for the market to sort out its value in exchange.

      You wrote:

      did you really run to the ever-present out of invoking “none of my business”? please. the cheapest tactic in liberty circles. there is more to economics discussion, including most of bitcoin, than whether something is aggression. you refute nothing by describing hoarding in “simply the act of” “nothing to see here” language. the hoarding of bitcoins represents a natural reaction to a massive per capita deflation. that it’s necessary to bitcoin’s beginning, and voluntary, doesn’t make it not injurious to the near future of bitcoin. of all the bogeymen raised against bitcoin, hoarding is the only one i deem worth noting. it’s a huge disincentive to adopting the currency.

      I respond:

      I beg to differ. I see hoarding and deflation as a huge INCENTIVE to adopt the currency. It proclaims to the masses that bitcoin is valued at a price much higher than what is being offered for it.

      You wrote:

      re the dollar “crashing” with respect to bitcoin, that’s abject nonsense. the dollar hasn’t begun to have the slightest assignable reaction to bitcoin. you may as well make a quilt that’s bid up from $0.01 to $500, then announce that the dollar has crashed in relation to your quilt. for the dollar to crash in relation to a thing requires a significant level of participation in both markets. despite explosive growth, bitcoin hasn’t even nudged that yet. bitcoin could be destroyed wholesale tomorrow without even a noticeable burble in the dollar.

      I respond:

      In my post I was not referring to any other markets than the dollar vs. bitcoin. My original point stands: to date, the dollar has crashed against bitcoin.

      • charley hardman says:

        Please enlighten me as to the optimal rate of per capita deflation.

        yes, i know how this works. you get to pretend that i’ve asserted i know one, while we pretend you aren’t effectively concluding that the optimal rate is whatever the rate is. back to aggression. yet what’s really being discussed is bitcoin design. i assert that bitcoin design is not optimal.

        Bitcoin is a new and unique asset class. It will take time for the market to sort out its value in exchange.

        in context, you just said nothing. i already asserted that what’s happening is necessary to bitcoin’s beginning. doesn’t make it a positive. doesn’t make it something that couldn’t have been smoothed in design.

        if you’re confused (apparently) by what i write here, simply return to my first statement. the pasting of false sheen is a standard LRC overcompensation tactic, and it appears you’re mimicking it.

        I see hoarding and deflation as a huge INCENTIVE to adopt the currency. It proclaims to the masses that bitcoin is valued at a price much higher than what is being offered for it.

        therefore, be the last sucker before the flip. if you don’t see the rational concern behind that “incentive”, wow. “fanboy” may have been invented for ya.

        In my post I was not referring to any other markets than the dollar vs. bitcoin. My original point stands: to date, the dollar has crashed against bitcoin.

        the dollar doesn’t even know bitcoin exists. yet.

      • You wrote:

        the dollar doesn’t even know bitcoin exists. yet.

        I respond:

        I can only imagine what happens when the holders of dollars DO discover the existence of bitcoin. I would not be surprised in the slightest if many of these people decide it has more to offer as a medium of exchange.

  5. Ed says:

    Why is it a good thing to be rewarded for saving? Shouldn’t an economy reward you for spending; particularly if the money you spend goes to people with less money than yourself? Otherwise, the economy turns into something like a pyramid scheme, does it not? What is the altruistic advantage of saving and hoarding? Who gains in an economy of mostly saving, hoarding, and continually deflation?

    These aren’t rhetorical questions. I’m just trying to figure out why you think hoarding and saving is a good thing.

    • The myth of “spending creates wealth” is a Keynesian fallacy. What creates wealth is production. Savings is a form of deferred consumption. Savings provides capital that can be invested into long term production projects that can improve our quality of life and standard of living by providing the goods and services we consume (think industrial and manufacturing plants).

      Money is a claim on goods and services. Money is a way to trade what you have for what you want. We only produce in order to consume – either now or in the future. I trade you the sandals I produce for the goods and services you have produced and we both use a “medium of exchange” that we call “money”.

      At this point of the exchange I can choose to save the money or spend it. The act of spending is the exercising of my claim on the goods and services of others. If I choose to save the money (or “hoard” it) I am simply choosing to defer my claim on the goods and services of others. In other words I have supplied goods and services to the marketplace without demanding immediate repayment. This is like a temporary “gift” or “loan” to the marketplace. This “loan” is reflected in lower prices.

      Generally speaking, prices are calculated by the following formula:

      Prices = Total Money Supply divided by Total Available Goods and Services

      In my example above I have temporarily reduced the Total Money Supply causing a reduction in prices. The other holders of money are rewarded with greater purchasing power. Everyone’s purchasing power increases.

      Probably the best little book ever written that explains money is 99% of Everything You Need to Know About Money and its Effect Upon the Economy by Harry Browne http://tinyurl.com/3phsofe

      • Ed says:

        Hmm. I agree with everything you’ve said so far, except maybe your claim about Keynesians (I don’t think Keynesians think that). I think everyone agrees that production is what creates wealth (maybe with the exception of raw resources that take little labor to extract).

        But, the expectation that people will spend their money is what causes production. When people aren’t spending money, things don’t get produced. In regards to Bitcoin, if people aren’t spending them, people won’t see any reason to sell goods and services in that currency, and they’ll choose other (most likely more traditional) currencies. Then it just becomes kind of like a collector’s item. However, if people spent them like crazy, then a robust economy could form around them. I think the word economists use for this is “liquidity?” It’s all relative of course. A small percentage of hoarders won’t hurt anything, but if a large percentage hoard, I think it could. Maybe I’m wrong though. There is a little bit of a reason to save Bitcoins right now, because there’s not too many places that accepts them🙂 After more and more things become available, maybe less hoarding will occur. Seems like a “chicken and egg” scenario though.

        And no, I’m not going to buy that book. I’d rather “hoard” my USD🙂

      • charley hardman says:

        Savings provides capital that can be invested into long term production projects that can improve our quality of life and standard of living by providing the goods and services we consume (think industrial and manufacturing plants).

        there’s a more accurate name for savings that provide capital: spending. if they are savings, they are not being exchanged for industrial and manufacturing plants. capital employed is savings spent. this is the LRC/LvMI brand of overcompensation i’m referring to. that most people incorrectly turn “spending” into a god doesn’t make the overreaction to that position correct. the core is time preference, and the correct time preference isn’t necessarily eternity.

        BTW, consumer spending also provides capital. it seems so much of modern “misesian” dogma is a dare to confront ludicrous contrarian positions, often held with infantile smugness.

  6. Donald Duck says:

    If hoarding will make it possible for me to buy 10x the goods and services in one year, then to spend the money I’d have to find something to spend it on that would give me a return on my investment by more than 10x.

    This disregards spending money on stuff needed for survival.

    So the deflation can be seen as the risk-free interest we get on goods and services by hoarding. If I run a business and there are no products that I can buy that will increase my production by 10x in a year, I’d be better off selling my business and start hoarding money.

    • Ed says:

      So, everybody should immediately stop buying everything, sell all their possessions, hoard gold/bitcoins/alpacas/beany-babies, and move to the Appalachian mountains and live off the land. Wait… who’s going to buy their possessions?

      • Admin says:

        @Ed

        You forget that people must consume in order to exist. At some point they will have to spend some of their savings in order to support themselves. They can’t eat bitcoin.

  7. Hi Anthony,
    Well, it depends on what you want your currency to be: a store of wealth or a means of exchange.
    It can’t be effective at both: either you hoard it, or you pay with it.
    If you want bitcoin to be a good store of value, it will have to rise in price.But if you want ‘economic growth’, i.e. ever more transactions with bitcoin, you actually want it to DECLINE in value.
    Deflation is bad, because it kills economic growth. It hurts debtors in favor of creditors.
    Inflation has been demonized a little by the Austrian Economics, but is certainly a lesser scourge than deflation, as it at least furthers the circulation of money, and thus growth.

    For Bitcoin to be important, it needs finance transactions, it has to go round. It’s rising price hinders this.

    You’ll see that the units coming will be depreciating. But very cheap to obtain. As a result of that, people will enjoy paying with them, while hoarding bitcoin and gold.

    • Admin says:

      A couple of points:

      1. A currency has to be a store of value valued before it can be a means of exchange – otherwise no one would accept it. It cannot be one without the other. Either it has value is valued or it doesn’t isn’t.
      2. A person who “hoards” is actually doing a favor to all the other holders of the currency. Since he is withholding supply, the value of the remaining supply goes up (all things being equal). By hoarding, he is delaying his gratification to the benefit of the other holders who now have increased purchasing power. He has traded his goods and services without seeking immediate repayment.
      3. Inflation is a form of theft (if done without full disclosure or by intentional misdirection) by those who control the issuance. As for me, I prefer to hold assets that are likely to maintain their value. Yes, inflation increases the velocity (circulation) of money but it only creates the illusion of economic growth. Real economic growth comes from production.
      4. If inflation were good for the economy, why not run the presses 24/7? I think you can see the flaw of this argument when followed to its logical conclusion. One need only look to the hyperinflationary periods of Zimbabwe, Argentina, and Germany (to name a few) in order to see the disastrous effects of inflation. If this still doesn’t make sense, I have a 100,000,000,000 Zimbabwe currency unit that I would consider trading – what would you give me for it?

      • 1. This is common misunderstanding. Money is a means of exchange appointed as such by agreement. It is the agreement that gives it value. Just think of the Federal Reserve Notes. They prove this point. And if you don’t agree with that because of legal tender laws, then think of the thousands of barters and other commercial and/or private currencies that circulate worldwide.
        2. No, he is not. By hoarding he is destroying the means of exchange function. He is deflating the effective money supply. In doing so, he is making money worth more. That sounds nice, but it means all other values go down and that’s MUCH more important.
        Keep in mind that this is a wealth transfer to those holding money. That is not the large majority of the population.
        3. Yes, but so is deflation (see previous point).
        4. Well, it’s not for nothing that for instance Milton Friedman suggested replacing the FED with an algorithm providing eternal, predictable inflation. It is also the basic idea behind demurrage. In an interest free credit environment (where hoarding money would be discouraged) this would be a nice proposition. In a interest bearing credit system it would not: inflation means more debtservice.
        5. The key is to see that orthodoxy (and austrianism) are wrong about the function of money. It is NOT a store of value. It is a means of exchange.
        Buy gold to store value, print interest free credit to pay. That’s the deal.
        Also keep in mind Gresham’s law: in a free market for currency nobody will pay with gold. They’ll hoard it and use the paper circulating beside it. You can easily check for yourself: just ask yourself what you would pay with if you had a choice.

      • Admin says:

        Thank you for your comments. That is what is great about free expression and open debate – ideas can be proposed and tested by the market. The market is the ultimate decider. I do not wish to force my opinions and conclusions upon you and I’m sure you feel the same. I think we can agree to disagree. Where some people cross the line is when they seek to force their opinions on others – the biggest culprits being the central planners (Milton Friedman being one of them with the proposed enforcement of his magic formula). Grab some popcorn and let’s see how it unfolds. The drama of the market is always exciting!🙂

      • Absolutely! Thank you too!

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