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Some people believe that hoarding hurts the Bitcoin economy.

But are they really right?

As long as corresponding goods vendors and services will be here to stay and reinforce people's faith in Bitcoin, hoarded bitcoins simply do not take part in daily business and do not hurt anyone.

Quite the contrary, they will decrease the supply of bitcoins in active circulation, thus increase the demand for bitcoins, and thus raise their over-all value, right?

Update: This question also comes with a premise or insight that Bitcoin "power users" have savings and spendings wallets or similar setups, and that those two forms of wallets will not tend to "compete" with each other so much. The bitcoins in the spendings wallets will rather compete with the fiat money that respective users will use to buy for goods and services. The bitcoins in the savings wallets will rather compete with more traditional forms of assets and investments.

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I don't believe this can be answered reliably and therefore isn't suitable for this format. –  Amin Sep 2 '11 at 8:45
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this is inherently an argument-based question. Both sides could obvious be made. This is a clear-cut close. –  lemonginger Sep 2 '11 at 21:35
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@lemonginger I think someone with a deeper economic background should surely be able to shed a light on this issue. But then again some properties of Bitcoin might be quite too much of a novelty for classic economic theories. –  herzmeister Sep 2 '11 at 22:28
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sure but "shedding light" isn't the same as "answering definitively" There are reasonable arguments on both sides of the question. Most mainstream economists would in fact argue that hoarding will cause a deflationary spiral that is hard to break out of, especially as there is no mandatory reason to use bitcoins. –  lemonginger Sep 2 '11 at 22:33
    
The choice of whether or not to allow these questions is directly related to this meta discussion: meta.bitcoin.stackexchange.com/questions/85/… –  eMansipater Sep 7 '11 at 17:38

16 Answers 16

up vote 67 down vote accepted

TL;DR: No. The argument is basically that hoarding will make Bitcoins so valuable that nobody will be willing to offer people enough to part with them. Does that pass the giggle test? Another way of stating the argument is this, "If gold is $2,000/oz today but people think it will be $5,000/oz next year, nobody will trade any gold today." Again, think about it. Does that pass the giggle test either?

Hoarding increases the value of Bitcoins, increasing the profits from mining. This encourages more people to mine, increasing the total hashing power and thus the security of the system.

It also makes holding Bitcoins more profitable. This helps to encourage people to accept them in trade because they are less worried about them decreasing in value while they are holding them. Using Bitcoins as a currency inevitably means people sometimes have to hold them and having them drop in value while you hold them is a risk. Hoarding reduces this risk. But it also makes it harder to price things in Bitcoins because the value will tend to change more. Merchants don't like to change their prices twice a day.

Contrary to claims, it should not affect the trading volume or the willingness of people to use Bitcoins to pay for things.

The argument that increasing value means people would prefer to hold Bitcoins rather than spend them is specious. While it will make people want to have Bitcoins more, it will also make people want to convince others to give them Bitcoins more so they can have them.

Think about it, do people prefer to pay for goods in dollars or garbage? By the reasoning of this argument, they should prefer to pay for goods in garbage, since they'd rather hold their dollars and get rid of their garbage. But, of course, people don't like paying in garbage because nobody wants garbage. If you can pay with the currency others want, you can get a better deal. So you actually prefer to spend the currencies sellers most want.

If Bitcoins are valuable because inflation doesn't deprive them of value, then a merchant would rather get my Bitcoins than my dollars, so he'll accept fewer of them. This will cancel out the effect of me preferring to pay in dollars rather than Bitcoins. So it should be a wash.

Or, put another way, whatever the present and future prospects, there should always be some equivalence between dollars and Bitcoins that people roughly agree on. So whether I pay X dollars or Y bitcoins, where X and Y are in this ratio, will purely depend on whether I prefer the characteristics of dollars or Bitcoins for the transaction.

A consequence of this is that hoarding won't negatively affect the trading volume either because that's only dependent on people's use of Bitcoins to buy and sell things. If hoarding makes Bitcoins worth twice as much, only half as many will be used to buy and sell things and the volume (the total value traded) will be the same.

I don't believe it's lost opportunity either. It's not like people who want to trade Bitcoins can't get them because they're all being hoarded. (Nor will it ever be likely to be an issue, since that would just raise the price and thus fewer would be needed. Bitcoins have effectively unlimited divisibility.)

So why do so many people think currency hoarding is bad? Because it usually is, and empiric studies even show that it is. But the logic of why currency hoarding is bad doesn't apply to Bitcoins, especially when it's a minority currency.

Bitcoins are different enough from physical fiat currencies that empirical studies don't apply unless the suspected mechanisms for the observed effects are believed to apply to Bitcoins too. For example, if a penny were enough money to buy a car, how useful would dollars be?

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Please provide a TL;DR –  ripper234 Sep 2 '11 at 8:04
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Can I up vote twice? Very good (if verbose) answer. Though I would add that the primary danger of hording for bitcoins is market crashes; when some one with a lot of high value bitcoins cash out. This has happened frequently over the past few months. –  Evil Spork Sep 3 '11 at 20:04
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@Evil Spork: Thanks. Yes, that's true, but the same thing can happen (arguably, it's more likely) with someone who just uses Bitcoins as a medium of exchange. Once you get paid in Bitcoins, if you're a hoarder, you don't cash out. If you're a "pay me in Bitcoins" business, you cash out. (Since you likely can't pay any of your costs/expenses in Bitcoins yet.) –  David Schwartz Sep 3 '11 at 20:54
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I'm sorry the dollar and garbage analogy does not convince me. Appreciation is the game not good vs negative-good. nor do I giggle when someone hoards bitcoins. –  Roo Apr 7 '13 at 12:18

This is very similar to consumer spending here in the US. If people save their money, it's not going towards the growth of the economy.

I think a lot of people make this comparison when it doesn't necessarily hold true for Bitcoin at the moment.

My opinion is that if miners held onto their coins instead of dumping them on the exchange, it would reduce the volatility we're seeing.

So spending Bitcoins is best, holding them is OK, and trading for other currencies is selfish.

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The down-side of spending my BitCoins is that i no longer have BitCoins. And without anyone willing to give me BitCoins i have even more reason to hold onto the BitCoins i do have (which happens to be none). –  Ian Boyd Dec 18 '12 at 0:27
    
They maybe you need to provide a service or sell a product in exchange for Bitcoins ;) –  Alex Waters Dec 18 '12 at 16:18

Bitcoin is really a little strange because it doesn't know if it is a currency or a commodity. And this is why this question has many answers and is a popular item of discussion. If Bitcoin were just a commodity, the thing to do is to hoard it. There are lots of commodities that are almost totally hoarded. For example: emeralds or works of art.

Now if Bitcoin is just a currency, then hoarding is a problem. Economists, when they talk about money supply, also talk about the velocity of money, which is a measure of hoarding. The amount of money times how fast it is moving is a measure of total money being used. (Of course, with computers, money moves faster now than it ever has.)

So to answer your question, hoarding helps somewhat and hurts somewhat. Which one overpowers the other, nobody can say. The net effect will be shown to us all over time.

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A while back I wrote a short post about why hoarding (or more exactly "early adopters") isn't a problem. I'll copy-paste here:

  • Bitcoin was not designed to be a fair currency, just a more efficient currency than its alternatives. Dollars and Yens aren’t “fair” either.
  • It is not random luck that is rewarded – it is one’s ability to research and arrive at correct conclusions. In this scenario, the people that found out about bitcoin at “an early stage” and made the decsicion to either mine or buy them, are rewarded for a smart technological and economical decision – much like early investors in successful startup companies are rewarded.
  • It is not too late – in this “bitcoin wins” scenario”, the final value of bitcoin will be a few orders of magnitudes higher than its current value. If you’re reading this now and think that “it’s not fair only a few early adapters win”, you can still join us.
  • Perhaps the strongest argument IMO is the economical argument – If bitcoin “wins”, but its wealth remains concentrated in too few hands, it won’t be as useful to the rest of the world because of over-pricing and scarcity. As a result, this will be reflected in bitcoin prices, because the public will not be willing to pay the outrages amounts demanded by the early adopters – in fact, it will make bitcoin “lose a little bit”, or not reach its full potential. In turn, this will motivate said early adopters to sell some of their stash (nobody likes to be on a losing horse), thus moving bitcoin to other parts of the population. Once the market believes this is no longer a problem, the price of bitcoin may rise to its “real” and full value. In shorts, the market will auto-correct any such problem.
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Hoarding and saving is the same thing. So is having a savings account bad? Save as much as you can, spend what you need to. If you feel bitcoin is too risky, dont invest that much or diversify and sell if your btc becomes too much of your portfolio. Support merchants that use bitcoin whenever possible.

https://en.bitcoin.it/wiki/Deflationary_spiral

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You invest your money in a savings account. (The bank spends it) When you hoard, you don't invest. Less investment means less economic growth. –  siamii Sep 12 '11 at 8:38

Even if it is not actively hurting bitcoin it is not helping bitcoin while being hoarded, while bitcoin being exchanged for goods and services would be helping. Its an opportunity cost for the health of the system.

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It's true it might be better to spend bitcoins instead of hoarding, but as long as we can't spend bitcoins for our daily needs, we can only occasionally use it to buy stuff anyway. Many people have a dedicated spending wallet also. –  herzmeister Sep 4 '11 at 8:48

The value of bitcoin stems from scarcity and usefulness. Scarcity is set (21 million) and hoarding just increases the demand.
Now does hoarding hurt the usefulness of bitcoin ?
Bitcoins are useful to transfer value from A to B over the internet.
To transfer value requires a certain amount of bitcoins, corresponding to a price denominated in central money.Let's say a buyer wants to purchase a 10-dollar item using the bitcoin network.He/she buys 10 dollar worth of bitcoin, let's say 1 bitcoin for simplicity, from a bitcoin payment processor that will send it to the seller. The seller in turn may want to cash out the bitcoin for 10 dollars after x number of confirmations i.e x times 10 minutes. The processing of the transaction has created a demand for 1 bitcoin for x times ten minutes.
The more transactions are processed using bitcoins, the higher the demand for bitcoins. Hoarding has no effect on the ability of the bitcoin network to process transactions: volatility does. If the exchange rate varies widly in a 10-minute interval, then the payment processor cost of hedging the exchange rate risk goes up. The payment processor passes the cost of hedging in fees applied to the sellers: the cost of accepting payments through the bitcoin network goes up. In the end, if the hedging fees become higher than the bank card fees, then the seller may end up refusing payments through the bitcoin network. However the likelihood of the bitcoin volatility becoming so high is rather thin: even with the small volume and active speculation that we experience today, the volatility is perfectly manageable over a period of 1-hour (6 confirmations) with fees far more attractive than the bank card fees.

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+1 Nice answer! You explain the concept of volatility very well... and welcome to Bitcoin SE –  Highly Irregular Aug 2 '12 at 3:35

I don`t think hoarding Bitcoins is bad for them in itself, but rather spending the hoarded coins.

In the world of material things hoarding currency means there is less of it to circulate and make economy go around. For example, if people were still trading in gold (scarce resource), 99% of it was hoarded and not used, and you wanted to have the same volume of trade, the remaining 1% of gold would have 100 times the buying power (if you could buy a loaf of bread for 100 gold coins in the past, now you would pay only 1 gold coin). But with physical currency lies a problem - how do you divide it to have roughly the same amount of coinage to go around when it is worth orders of magnitude more? You can have goals bullions, coins, then go to thin gold film, and eventually you would reach a limit of how much you can divide your currency.

Similar example can be made with normal (fiat) currencies, like the dollar, but there is a difference between them. A dollar bill is not all that scarce. It is mostly cotton and linen, which can be made in big quantities and turned into dollars if the need for more money to circulate would arise.

Bitcoins are infinitely divisible, or at least can be made like that if the need would arise. You can pay in Bitcents, mili-bitcoins, etc. and it wouldn't matter much. So if someone would own all but one Bitcoin, the economy could still manage just fine. On the other hand Bitcoins are scarce by design - there is a finite amount of them that will be created. Nobody can control the economy and release new coins to make sure they are worth the same through the whole time in relation to other currencies.

This is where there is a problem with hoarding - say you own a 100000 coins now and store them for a long time. If Bitcoin turns out to be successful and all the internet is fuelled by the coins, a value of a single coin could be pretty high, lets say equivalent to 10 000$. Then you would have 1B$ worth of coins in your wallet, a significant amount. Now if you were to spend all those coins at once you could disrupt the economy and put a dent in the worth of Bitcoins. This sudden influx of coins into the economy is probably the only bad effect of coin hoarding - a rapid change of value of the coins. If the volume would be big, it could damage the economy quite badly. Compare this to the scenario of a couple wealthy countries abandoning USD and selling off all their supplies - the value of the dollar would fall, causing rapid inflation and possibly destroying the economy of at least some countries.

On the other hand, if you were to just kick back and spend your coins slowly the impact of your coin hoarding wouldn't be negative. It might even help the economy by making people sell more and thus earn more, but this would probably even itself out with the economy being worse off while you were hoarding coins instead of spending them. The situation is similar to the one right now - a lot of people mine coins for profit, but since they are not worth too much, they hoard them for later, instead of circulating and spending them.

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Inflation transfers capital from the middle class savers to those who capture the debasement. Typically the rich can position into investments and/or "political capture" which capture inflation, and the middle class may not individually have the economy-of-scale to do this as well.

Deflation transfers capital from the middle class to the rich, because they save a much higher % of their income. And discourages risk taking, technological innovation, and deploying human capital (e.g. Dark Ages because stored passive capital can't create knowledge, and even more so in this knowledge age of digital innovation with cheap CPUs).

Thus a store of value is only a sustainable representation of human capital (cost of child rearing, education, etc) if it encourages prosperity for the humans. Deflationary gold standards always fail politically over time (when the import of capital peaks) because they destroy prosperity.

The problem for Bitcoin is that if the model is primary driven by ponzi appreciation, and not by transaction growth, then eventually capital importation will peak, and there will not be enough transaction growth to counteract the hyperinflationary spiral due to a stampede to extract value before others do. This capital importation peak can be accelerated by a competitor which brings to the market a system that has a significantly higher transaction growth rate, because ponzi schemes rely on future expectations-- confidence.

The money supply growth of Bitcoin is decelerating while the nature of ponzi schemes is they accelerate in value as they drive towards a peak, because of the mass delusion of crowds and the stampede to not be the last to buy. This is a dangerous juxtaposition, but it seems we are not yet close to this day-of-reckoning although a competitor could accelerate it. This would probably beneficial because otherwise Bitcoin may setback crypto-currency adoption significantly after the hyperinflation spiral wipes out the majority who come in near the peak.

I think it is just common sense that rewarding early adopters with 1000-fold increases in wealth simply for buying a store-of-value, is antithetical to prosperity. Imagine the poverty and inequity of a society that spends its time searching for ponzi speculations instead of innovating and producing.

The counter-argument is that this initial speculation interest is necessary to drive adoption which will drive transaction growth. However, do we see this happening as the dangerous juxtaposition is accelerating?

I know speculators in silver who are now ready to jump into Bitcoin. That is what brought my immediate attention to study this developing juxtaposition.

I am also expecting this answer to fly over the heads of some voters. Apparently some of the participants either don't have a very good grasp of economics (or have a vested interest or I am wrong and they didn't comment to tell me why). I would appreciate if downvoters would at least try to defend their logic with a comment below my answer. That gives me an opportunity to debate them and show them why I think they are wrong (or to admit my mistake). The point is to make sure we collectively have the correct logic.

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See also my comments under the answer that mentions "freecoin". –  Shelby Moore III Mar 20 '13 at 13:08
    
If you are going to downvote, it would be helpful to provide some justification in a comment, otherwise it appears that this stackexchange is populated by Bitcoin vested interests who are THUS NOT OBJECTIVE. Especially considering I have extensive experience in this subject matter and have been studying and writing about gold and "what is money" for more than 6 years. Gold bugs are repulsed by the truth, even though I was also at first a gold bug until I was able to analyze deeply. –  Shelby Moore III Mar 20 '13 at 14:49
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Good answers are clear, correct, and non-obvious. Your answer fulfills non-obviousness; I can't tell whether it fulfills correctness; it's definitely not clear. I'd remove my downvote if it were about half as long. –  Nick ODell Mar 20 '13 at 18:20
    
@NickODell your criticism is that my answer should be more clear. Should I be responsible if macro economics are difficult for you to understand? Do you really think you should be voting if you don't understand the concepts? I don't think I can make it any simpler, it is very difficult for people to understand why both deflation and inflation transfer and concentrate wealth from the middle class to rich. Bitcoin is a highly technical product. Developers of it need to understand economics. In any case, thanks for expressing your opinion. And giving me a chance to respond in kind. –  Shelby Moore III Mar 20 '13 at 18:37
    
Please humor me with more anonymous downvotes. Bitcoin going forward will require transaction fees. How will it compete against a no transaction fee model with perpetual debasement? Since current investment in Bitcoin hinges on expectation of rising demand from future transaction volume, such a competitor pops the ponzi bubble. Also due to lack of Litecoin's scrypt, it is no longer feasible to earn some Bitcoin with the excess CPU power idling wastefully on your PC to drive demand for transactions. –  Shelby Moore III Mar 20 '13 at 21:57

Yes. Hoarding does hurt the currency, but not because somebody's getting rich off of it. The problem is that due to the fixed quantity of coins, it's obvious that the value is going to go up if bitcoin achieves widespread adoption.

And what's keeping bitcoin from widespread adoption?

"Currency risk" is one of the primary reasons, and it's easy to see why. If the price is at risk of wild swings in value, then how is a merchant going to feel confident in pricing his goods? Imagine an internet merchant who prices his goods at 8pm, goes to bed at 9pm, the price of bitcoins doubles at 10pm, and all night long nobody will buy from him because his goods are now way too expensive.

This is a serious disincentive to the adoption of bitcoin. And it exists whenever the possibility of bitcoin going way up in value exists. It's a catch-22. Bitcoin can't achieve widespread adoption (and therefore make hoarders rich) without having value stability, but value stability implies by definition that you can't get rich off of it.

The good news is, we can modify bitcoin, or create a competitor, which has value stability as a goal. The funny thing is that this currency, while being less "valuable" by design, would actually have more value to the community because of its stable value.

Whew, is your mind bent yet?

If not, here's the paper that explains it more thoroughly.

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I'd say high volatility in any direction would hurt merchants. Any decentralized currency will have that problem, even "freecoin", because you don't have a central instance that can decide to "peg" or "back" the currency to anything. Bitcoin is still in its infancy. Should it become more established, the value will still raise, but more slowly and thus at a more predictable rate. –  herzmeister Sep 20 '11 at 11:37
    
The idea is that "freecoin" would be limited on the upside by the cost of mining. So the only significant fluctuations in value would be between 0 and <cost-of-mining-per-coin>. Now it's possible that the value would still fluctuate a lot, percentage-wise, within that range. However, I think it would be much be much more stable because it is so obviously not going to make you rich by buying it (turning off all the speculators). –  Owen Sep 21 '11 at 18:19
    
I upvoted bcz the freecoin paper makes the point I made in my answer. However the FAQ fails to discern that deflation vs. inflation has no inherent advantage for humanity-- both transfer wealth to the unproductive rich. We need stable value that can't be manipulated for the benefit of any group. If we don't fix Bitcoin, we will setback this paradigm shift win for humanity. My other quibble with the paper, is the initial fixed difficulty could lead to excessive inflation or deflation while the system finds an equilibrium value. Also Litecoin's scyrpt will more equitably spread the debasement. –  Shelby Moore III Mar 20 '13 at 10:05
    
Also a fixed difficulty will result in persistent "inflation" of theoretically 50% "devaluation" every 18 months due to Moore's Law. Litecoin's scrypt hash can't equitably distribute enough to counteract devaluation, because more capital buys a larger proportion. But this is devaluation relative to a currency that could maintain a constant share of computer power. The problem is that valuation always is relative to something else. So what to choose as the stable metric of value? Should stored value maintain a constant share of increased productivity, i.e. deflation? –  Shelby Moore III Mar 20 '13 at 12:41
    
Continuing from my prior comment, if the goal is to remove the ponzi instability, then the stable value should be relative to the unit-of-account that most people are calculating their ROI with. For the moment that is probably the dollar, but the dollar will likely be destabilized but not until after 2016. During the instability phase, gold will skyrocket for probably 3 years, but pegging to gold would not render a long-term stable currency. So there needs to be means to decouple from the dollar as confidence in it plummets. –  Shelby Moore III Mar 20 '13 at 13:02

Yes, hoarding does hurt Bitcoin. For Bitcoin to have a successful future, people need to be able to use Bitcoins as a medium of exchange.

If Bitcoin succeeds, in the far future you won't need to exchange between Bitcoins and other currencies to do business. But that's in the far future. Long before we get there, business will need to transact in both Bitcoins and national currencies. You may be able to buy a T-shirt for bitcoins, but the company that sold it to you is going to have to pay their rent and their employees in dollars.

For that to work, the value of Bitcoins relative to national currencies needs to be fairly stable. If the price of Bitcoins halves overnight, then the T-shirt company can't pay their rent or their employees and will take a loss. If they have to charge me a premium because of the risk that Bitcoins will drop in value, I might as well just pay in dollars.

Note that the exact exchange rate is basically irrelevant. It doesn't matter if Bitcoins are $1 each or $1,000 each, we can trade them just the same. But speculation and hoarding increase volatility, and that's a problem. Speculators and hoarders hold Bitcoins with the hope that they'll increase in value. When they see Bitcoins moving up in value, they buy more. When they see Bitcoins moving down in value, they often sell out to avoid a possible crash or to buy back when the drop bottoms out.

As a result of these transactions, they cause minor fluctuations in value to be much larger than they would otherwise be. This discourages precisely the type of uses of Bitcoin that are essential for its next phase of growth.

Unfortunately, without any speculation, Bitcoin would likely die out completely. With no demand and no market, there'd be no value at all. So the puzzle is how to grow Bitcoins without causing volatility. As far as I know, nobody knows how to do that yet.

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I think the inclination to hoard actually decreases volatility. Think about it - every every person in the world horaded 0.1% of their net worth in Bitcoin, it would be rock solid. If someone "hoards" 1000 BTC for the next ten+ years (not short term speculation), then this pushes the entire economy's market cap upwards, and decreases fluctuations - because a larger market is harder to manipulate. –  ripper234 Dec 29 '11 at 7:28
    
ripper234: Sure, but this is the rare hoarder who is not speculator. Also, think of the volatility that would be created by the sudden drop in demand once everyone had acquired the .1% you want them to hold. You'd need a steady increase in hoarding to sustain your market. That would take something akin to magic. –  David Schwartz Dec 29 '11 at 7:32
    
Who says there will be a sudden drop? The ideal scenario is "everybody starts hoarding bitcoin slowly, and in 10-20-100 years convert all their money into BTC". Sure, there will be local bubbles like June 2011, but that doesn't mean the overall trend isn't upward ... into the sky. If everybody hoards 0.1%, believe me, Bitcoin will be so rock solid and popular people will want to increase their hoard, not drop it. They'll actually start using it too. –  ripper234 Dec 29 '11 at 7:38
    
If you want to believe there will be a perpetual exponential increase in adoption, then yes, prices will just continue to rise. But that's pretty much physically impossible. –  David Schwartz Dec 29 '11 at 8:16
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Did you post to different answer with different opinion in them? –  Gopoi Jan 27 '13 at 1:15

Why would anyone holding bitcoins want to put an end to hoarding? Let's say I own a mining rig. I invested x dollars of my money into securing the bitcoin network, and earned a reward of y bitcoins. Now, instead of spending my btc, I hoard them. What I've actually done is worked for the good of the bitcoin network, and demanded nothing in return! Its a pretty good deal for everyone else, since by hoarding instead of spending my btc, their bitcoin value is unaffected, due to my preventing y btc from increaseing the supply, with the resultant price inflation. Had I spent those btc, the value of everyone else's btc would have dropped by (y/MarketCap) * YourBitcoins.

Now if I buy up additional btc with dollars, the story gets even better. Lets say I take a portion of my weekly salary and buy up Z bitcoins. Now, in addition to the fact that I am working now and deferring my demand into future, I increased your btc purchasing power to (Z/MarketCap) * YourBitcoins!

If you're now thinking this deflation will suck the btc economy down a black hole, are you more likely to blow $10,000 at a strip club if you (a) have a billion dollars worth of btc in your wallet or (b) exactly $10,000 worth of btc in your wallet? Hopefully the answer is obvious, which makes one man's hoarding your night out. So next time you meet a hoarder, give them a pat on the back for making you richer by working for free!

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  • Bitcoin is currently inflationary (increasing in supply), however in the long run it has a maximum of 2.1 quadrillion transactable units (21 million bitcoins).
  • Any finite currency supply can be harmed by charging interest. Charging interest means musical chairs, when the music stops & you are asked to pay back what you owe someone will be left without a chair. I.e. there won't be enough bitcoins in circulation to pay back the interest.

For Example: Bob wants to buy Manhattan, & Manhattan costs 21-million bitcoins, but Bob does not have 21 million. Some how he convinces every bitcoin holder in the world to loan or give their coins to him. The bitcoin holders that loan Bob bitcoins ask for principle plus interest to be paid back. But that's the problem there are only 21 million bitcoins MAX and Bob can not pay back the interest he owes.

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Your answer seems to miss the topic. The question is about whether hoarding hurts bitcoin. However, your answer seems to mainly address lending. –  Murch Jan 21 at 17:51
    
The loan solves the how portion of hording. Is not possessing every bitcoin kind of hoarding? You can say that interest leads to hoarding, by creating a demand for increased velocity, and increased supply to a supply that has a maximum. People with economies of scale can leverage their bitcoins as loans causing btc amounts to consolidate ( hoard ) into the ownership of one person. –  Xzila Jan 22 at 18:13
    
Hoarding in this context refers to just holding the bitcoin without spending them. Some people are worried that the low circulation speed might keep Bitcoin from becoming a widely accepted currency. –  Murch Jan 23 at 0:36

I think hoarding is a major problem with the bitcoin. Allow me to copy an excerpt from a rant I published online about just this, available at https://bitcointalk.org/index.php?topic=53683.0.

We'll begin with a background where the economy is growing. Everything is fine, until the bitcoin mines run dry: all 21 million bitcoins have been harvested. In order to adjust to the growing economy, an individual bitcoin becomes more valuable (deflation). During a period of deflation, money becomes more valuable even when it is unused. People realize this: why should they risk loss in investment when their money will gain value risk-free by letting it sit? As such, people stop investing and let their money sit untouched. Companies are no longer able to take out loans. Companies wither and die, people lose jobs. New companies cannot start as they cannot get their initial loan money. Due to the lack of production, the bitcoin shrinks sharply. The people who just kept their money away suffer, too, as the bitcoin is no longer backed by an economy. Bitcoins suddenly lose value and face hyperinflation. Now we're back we've a shattered economy, the bitcoin's a 21st-century [counterpart to the] German Mark after WW1 (i.e., worth practically nothing), and literally everybody involved has suffered. How is this supposed to be avoided?

A growing bitcoin economy leads to deflation. Deflation means that hoarding is preferred to investing. Hoarding money decreases the money supply, causing more deflation so it becomes even better to hoard. Lack of investment means lack of capital. Lack of capital means that existing businesses cannot survive and new businesses cannot form. Production shrinks. The bitcoin suddenly loses much value and faces hyperinflation. Everyone, even the hoarders, suffers. I can't see how to get around this.

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Deflation is discussed here: bitcoin.stackexchange.com/questions/66/… –  herzmeister Dec 4 '11 at 15:45
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According to your analysis, a Michelangelo statue would be worthless today, because there aren't any more being produced and the economy has grown since 1475. –  shoeless joe Dec 6 '11 at 18:29

Bitcoin is a scam that will draw in millions of unsuspecting consumers who fear the hyperinflation.. those that already had 5 cent bit coins are the millionaires and anyone who converts their dollars or yen or euros at this point is going to get screwed if they think this is a wealth preservation tool...

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No matter what your opinion on its abilities for wealth preservation, it has several other properties that make it valuable. Do you actually understand those properties when you make such a comment? –  Highly Irregular Mar 10 '13 at 8:36
    
so is potentially any asset I guess. Gold/Silver are probably much overvalued as well shortly before a collapse. –  herzmeister Mar 11 '13 at 10:45

Bitcoin is not meant to be an investment, its goal is to be a currency. The basic sign of health for a currency is its volume of trade. If you horde large amounts of currency, then you are not trading it for good/services. If you are not trading the currency, then you are not increasing confidence in the currency. If there is no confidence in the currency then it will not be used and will not achieve its goal.

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I don't think this argument makes any sense. The volume of the currency isn't measured in units of that currency, it's measured in value. If hoarding doubles the value of bitcoins, then about half as many of them will trade to purchase goods and services, and the volume will be precisely the same. –  David Schwartz Sep 2 '11 at 2:01
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Artem, can you give any references to material that backs up this point of view? –  Alex Waters Sep 2 '11 at 4:01
    
@David value is determined by the goods you trade for. Just because a single bitcoin costs more USD doesn't mean the people who want to use bitcoins as a currency will suddenly have more money to spend (unless they happen to hold large chunks of bitcoin already). Thus they will still spend about the same amount of value of currency. Hoarders by definition hold the currency using USD or some other currencies for their purchases instead, thus not spending and contributing to the total volume (in terms of raw numbers or value). –  Artem Kaznatcheev Sep 2 '11 at 15:40
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So you're saying hoarding has no effect on volume, right? If so, your answer supports my "no" answer -- hoarding won't really hurt bitcoin. –  David Schwartz Sep 3 '11 at 1:38
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-1 because hoarding can be seen as a sign of total confidence in the currency ("I'm prepared to hold on to this because it's the best thing to do") –  Gary Rowe Sep 3 '11 at 20:30

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