How is hoarding to be prevented?

Question

If all humans used bitcoins now (Jan 2013) for most of their transactions, then a dollar would be worth about a billionth of a bitcoin (1/10 Satoshi).

If bitcoins take ten years to catch on that fully, and population rises only a little while worldwide productivity doubles, then you could buy 5 candy bars for a Satoshi (1/10^8 BTC).

A house today, starter home might be worth 10 000 bitcoins or so. Paying a 30 year loan payment in Bitcoins would require a payment of a billion dollars a month at some point.

So I don't see how you could have viable loans in bitcoins until the system has settled down at least 30 years from now.

And if you have 1 bitcoin today, it could become worth 100 million dollars purchasing power in 10 to 20 years. One inexpensive coin worth an hour's labor.

So the system has an enormous potential reward for hoarding--far beyond working for a living, or any remotely normal successful investment.

How is hoarding to be prevented?

And I think this system is even more unsound than fiat money, albeit in a very different direction. But it IS likely to lead to drastically improved money in the long run.

Answer 1

Build in a reliable entropy function to take account of natural decrement in value over time. All value degrades in nature, and this is the fundamental problem with money in that it can be hoarded without cost. Not sure how this would be implemented, it does dig at the root of the basic theory of money and value but that is what we are attempting to achieve so why not look at it.

Answer 2

I speak from the point of view as a middle-aged (Born 1968) investor; I think the answer to the question is quite simple. You cannot simply consider the start point and end point in asking the question. Along the way the price will gradually appreciate and most people have a price at which they will start to sell their Bitcoins. Currently I hold about 630 BTC. I acquired these over the past 18 months as I gradually poured about $6000 cash into the Bitcoin exchanges. At todays price I would get about $11000 if I sold them all.

August 2012, I took most of my BTC and invested in a BTC mining fund that pays around 5 BTC a month dividends. At todays exchange rates I could convert this to $85.00 a month. Currently I convert none of this back to fiat because my goal is to save for retirement, and I believe in BTC so I let it ride. At some point in the future as Bitcoin becomes more valuable, one BTC will be worth say $1000.00. My 5 BTC a month dividends would yield $5000 a month. At that point (actually probably before) I will be using some of that to fund retirement expenses. I will sell that portion on an exchange (or better yet directly trade with a merchant) to provide the real world products etc. that I need to live on.

Of coarse those BTC would be worth even more in the future, but we all need to live and we all have limited lifespans, so at some point we will sell to provide for our needs. Actually this is true of any investment that will appreciate at a level above inflation. For example stock investments on average pay around 8% a year in the long run and inflation averages around 3% in the long run. If you have a diversified portfolio, no matter what it will be worth more in the long term future. All the time though investors are selling in order to fund their basic needs. This will be true of Bitcoin as well.

If people simply hoarded BTC then there would be none available on the exchanges. 6 Blocks are created each hour X 24 hours X 25 BTC per block yields 3600 BTC created per day. 30 days X 3600 yields about 108,000 BTC mined per month. The current 30 day volume on Mt Gox is over a million BTC (http://www.bitcoincharts.com/markets/mtgoxUSD.html), this would not be possible if people simply were hoarding them.

When one thinks about it, the actual value of BTC (or any currency) actually comes from the fact that people are willing to trade it for real world goods/services. Some people may hold larger amounts of BTC just like some people hold larger amounts of investments or cash in accounts. Hoarding will not be a problem as long as some people are willing to trade other items for BTC.

Answer 3

Key points in bold.

Hoarding doesn't need to be prevented. At least, not yet. See this answer for a solid argument: How does hoarding hurt Bitcoin?

Bitcoin attracts hoarding by design. To change that would turn it into something else.

As Bitcoin matures, I expect that it will remain a problem that speculative trading brings instability to the market, similar to the gold market. If you put your retirement savings into gold, you'll likely do quite nicely, but there's also a significant chance you'll lose most of it in a price crash. It's not a reliable store of value. Even if you have several years you can wait for the value to come back up, you may still lose out.

Even though bitcoins are more efficient to trade than gold and cheaper to store, it's subject to the same volatility when traders manipulate it. The more popularity Bitcoin has, the bigger the traders will be that take an interest in it, like they do in gold. This could mean that when Bitcoin is mature we still see the same level of volatility that we see today with Bitcoin (and gold).

To me, this says that Bitcoin is great for efficient online transactions, but in the long run (once the market has reached its saturation point) won't a completely reliable store of value. For that, a diversified portfolio of productive investments is better.

If that becomes common knowledge, then people will eventually accept the volatility as a necessary risk in the use of Bitcoin. After all, on average it will still almost certainly cost less than credit card transactions and traditional international money transfers. Secondly, risk-reduction services (ie insurance) tend to fill gaps in the market like that for those who don't want to take the risk.

In the meantime, Bitcoin is doing a great job, but it doesn't mean something better won't come along.

Answer 4

So I don't see how you could have viable loans in bitcoins until the system has settled down at least 30 years from now.

Err.. For a home loan, that would be paid down after 25 years or so; I think you're underestimating. Let's look at the most popular non-governmental currency, gold. According to this, the price of gold (in US dollars) quintupled between 2001 and 2011. Keep in mind that gold has been used as a currency for thousands of years.

And if you have 1 bitcoin today, it could become worth 100 million dollars purchasing power in 10 to 20 years. One inexpensive coin worth an hour's labor.

It could also be worthless. Perhaps the various governments of the world will see Bitcoin as a threat to their ability to tax. The Bitcoin community can come up with a solution to any technical countermeasure, but that doesn't stop a crackdown against businesses that accept it.

It's not realistic to assume that everybody in the world will start using Bitcoin. It requires a computer/internet connection to even validate a transfer.

How is hoarding to be prevented?

People hoard their money because they believe it will be more valuable in the future. To stop that, you print money.