Reply to post: Scam alert

Scam alert

BitConnect promised patrons the ability to earn interest on Bitcoins by lending them.

This is a scam. They might be a perfectly legitimate exchange, but anyone offering to borrow or lend in Bitcoin is a scammer.

The thing that the Bitcoin fans used to go on about in the good old days, before it turned into this mad bubble recently, was inflation. It was where the gold-bugs all went, after the gold price collapsed. There couldn't be inflation in bitcoin due to limited numbers allowed, corrupt governments, evil banks, etc. etc. etc...

So Bitcoin has deflation built in. At the moment it's in hyper-deflation. Inflation is where the value of money falls, hyper-inflation I think is defined as when that's by more than 50% a year. Deflation is when the value of money rises.

Why's this a bad thing? Well I'm going to use one example, lending. It's awful for other reasons too, but without lending you can't have investment. Without investment, you don't get productivity growth. Without productivity growth, you don't get richer - you just move the same resources round amongst your population. Growth then only comes from having more people.

If there's 100% inflation, that's bad for the economy. But I can still invest. If I borrow £1m for a year to upgrade a factory - then I've obviously got to cover the interest - but in a year's time I'm only going to owe the equivalent of half that. It would now cost £2m to buy that same machinery, but I only owe £1m to the bank. Obviously this means they'll be charging me high interest, but then the price of the goods I'm selling is also doubling every year. This is still bad for the economy, but the point scales down to 5% inflation - I just did it to make the numbers easier. And it explains why developing countries can cope with inflation of 10-20% and still grow.

With 100% deflation - it all goes horrible. I buy a machine for £1m. After a year I can now buy that same machine for £500k! But I still owe the bank £1m! Disaster! Obviously they can't charge me much interest, or I'd be going bust. Worse lets say I was planning to sell 1m gewgaws a year, made with this machine, at £1 each. By year 2, I'm deflation means I can only sell them for 50p each. That money still buys me the same stuff, so it would be fine. Except I had to borrow the year before when money was half as valuable - so I'm screwed and will never be able to pay back my debt. I don't believe there's every been hyper-deflation before, becasue it causes economic collapse at even low levels. So congratulations to Bitcoin for that...

Anyway my point here is that the gold-bugs are wrong. Deflation is awful. Inflation at low levels is fine, at high levels it's bad, but not as catastrophic as deflation. And deflation destroys banking. So anyone claiming to do Bitcoin banking (rather than just doing money transfers) is an idiot or a fraudster.