Why Bitcoin Will Never Be a Currency

http://www.theatlantic.com/business/archive/2013/12/why-bitcoin-will-never-be-a-currency-in-2-charts/282364/

by emkemp • 13 years ago

40 135 13 years ago

bryanh• 13 years ago

I'm always a bit shocked that people can be so dismissive, is there really a precedent of a value construct like bitcoin that we can extrapolate confidently from?

en4bz• 13 years ago

What Bitcoin really needs is a central bank to stabilize its value.

The whole point of Bitcoin is that there is no central governing authority. I'm not sure if this statement is meant to be funny, but if it isn't the author clearly has no understanding of how Bitcoin works or what it aims to achieve. I think given this statement its fair to ignore this piece all together.

Nursie3• 13 years ago

What does bitcoin aim to achieve?

I've heard so many different things, and as soon as one gets challenged someone will pop up and say "well it was never meant for that, it does these other five things".

Frankly if it was to be a currency, yes, a central bank would be a feature. But it's not a currency, its economic presets would make it a really bad one and its lack of central control makes it very prone to instability.

It's not really a very good payment method either, because it takes time to confirm and there's no chargeback facility, something that has given consumers the confidence to shop online and really helped along the boom in internet retail.

gahahaha9• 13 years ago

The author obviously understands that Bitcoin has no central bank - his point is that if it ever were to be used as a currency it would need one. Would you like your salary paid in bitcoins? You wouldn't know from one month to the next what you could afford to buy since prices would be so volatile. Bitcoin might have other uses like easy electronic payments - but the author points out that if you want to buy something legally it is quite convenient already today with the currencies we have.

jpttsn3• 13 years ago

it is quite convenient already today with the currencies we have.

That's ridiculous. The friction or transferring money is a huge problem across the world. Developing nations are left out, governments shut down payments on a whim, etc.

coinbase-craig6• 13 years ago

I get my salary paid in bitcoin and I think it's pretty awesome.

darkbot• 13 years ago

Obvious to any one who have read a bit of Marx.

gahahaha9• 13 years ago

I don't see the connection.

cup• 13 years ago

"Why Bitcoin will Never Be a Currency".

And yet it only takes an arbitary 5 minutes to realise that it is being used as a currency. People are buying goods and services in exchange for bitcoins. Sure some people horde in the hope that the value will double but the same is done with US Dollars. I mean isnt that what FOREX trading is?

enjo• 13 years ago

Ok. So it's a very poor currency.

alexeisadeski36• 13 years ago

According to the poorly thought out theory that deflationary currencies are by necessity bad currencies?

matwood2• 13 years ago

If you RTFM, it states that 64% of Bitcoins have never been used. For a currency that is a problem. A deflationary currency drives people to not spend. When people do not spend and aggregate demand goes down you end up in a recession. Read the article linked at the bottom of the Atlantic article on why deflation is bad:

http://www.federalreserve.gov/boarddocs/speeches/2002/200211...

If Bitcoin stabilizes in the future it could maybe be used as a currency. But right now when every purchase decision is prefaced with a 'how much is BTC worth right now' decision it adds too much friction to a transaction.

msandford6• 13 years ago

A compute cycle has fallen in price faster than anything else in the world except perhaps shares of the East India Company or Dutch tulips. People still buy computers. And TVs and cell phones and flash drives and etc, etc, etc.

Surely if the falling price of a good with respect to the currency it's purchased in would prompt people not to buy then nobody would purchase computers. And yet it's a thriving industry.

Please help me reconcile this fact with the author's statement that would indicate that precisely the opposite should be happening.

SolarNet• 13 years ago

Why don't you do some accurate reading, it's "64% of bitcoins are in accounts that have never been used". NOT "64% of bitcoins have never been used".

And if you knew the basics of bitcoin that 64% would make sense. Actually, if all bitcoin software was programmed correctly that number would be 100%. Every transaction can create a new "account" for every output, it's actually a flaw in systems using bitcoin that that number is so low.

prawn• 13 years ago

Have not been used yet...

Bitcoin interest will increase speculators and vendor adoption and then, presumably with time, it should steady and people will likely spend some of their hordes.

clin_3• 13 years ago

Congratulations, you found a semantic exception but missed the entire point. The point is that it's not just some people hordeing money. The fact that ratio of spending has not grown proportionately with BTC value suggests that recent demand for BTC is almost entirely speculative.

Sorry if this is kind of a nasty reply, but I'm really tired of people with no comprehension of how money functions being in denial about their pet technology.

waterlesscloud• 13 years ago

Ironically, anyone who doesn't understand how economies can function with multiple currencies which have different characteristics has little to no comprehension of how money works.

Or much of economic history, for that matter.

maratd3• 13 years ago

Finally, somebody with a basic understanding of economics decides to chime in. It is not possible for bitcoin to be a currency due to its deflationary nature.

Bitcoin might be an interesting investment vehicle, a storage of value, but something that will at some point replace the dollar? No.

knodi2• 13 years ago

This! Bitcoin is an investment and good one at that for short term gains. Its the tulip craze with bytes.

maratd3• 13 years ago

Its the tulip craze with bytes.

Oh, you! Tulips were better. You at least got the pretty flower after all was said and done.

jpttsn3• 13 years ago

That proves itself: A deflationary currency can't replace the dollar, because the dollar isn't deflationary.

However, the present system is perhaps not the only possible system. Some alternative schools of thought in economics see possibilities beyond systematic inflation.

philwelch10• 13 years ago

That's like saying "some alternative schools of thought in biology see possibilities beyond evolution" or "some alternative schools of thought in climatology see possibilities beyond anthropogenic climate change".

fthssht7• 13 years ago

There's a fixed quantity of it like gold and gold worked as a currency for a very long time. If Bitcoin fails its certainly not because of its "deflationary nature." What you think it a basic understanding of economics is obvious nonsense. How could people have it so twisted?

chad_oliver2• 13 years ago

It also failed as a currency in a very bad way. Part of the reason why the Great Depression was so bad is because most countries still used (or used the mindset associated with) the gold standard. Monetary policy is a very good way of stabilising the economy, and any currency which removes monetary policy as a tool is not likely to be stable in the long term.

gnaritas14• 13 years ago

There's a fixed quantity of it like gold and gold worked as a currency for a very long time.

And that time has passed, the world moved on.

kordless2• 13 years ago

Understanding economics does not necessarily provide insight into understanding cryptocurrencies. That's been evident by the wildly varying posts about the topic over the last few months.

Regardless of the nice graphs, Bitcoin is currently NOT deflationary. Every 10 minutes 25 new coins are minted and placed into circulation. The rate of new Bitcoin creation will be halved every four years until there are 21 million BTC in circulation. Additionally, there are a slew of other cryptocurrencies with varying degrees of mining rates - some have a constant rate of inflation built into them. Time will tell which ones are adopted.

The miners who are minting these new coins are helping secure the currency (adding value) are putting work into the system by way of capital expenditure on equipment and costs associated with power. They expect a return on their investments and are probably the determining factor to the current price.

philwelch10• 13 years ago

That's not what inflation means. Inflation is when prices rise because the growth in currency outstrips the growth in economic activity. If the growth in currency is less than the growth in economic activity, even if it's still >0, prices will drop, which is the definition of deflation.

gnaritas14• 13 years ago

Bitcoin is currently NOT deflationary.

Incorrect, demand alone has made it hugely deflationary; if everything were priced in Bitcoin right now, prices would have to be adjusted downward constantly, that's deflation. Money supply inflation is not inflation which generally refers to the overall prices of goods and services rising and money supply deflation is not deflation which is the fall of overall prices of goods and services. Bitcoin is currently hugely deflationary.

lettergram2• 13 years ago

Actually, I studied economics in the past and technically you can have a currency which is deflationary in nature, it just does not make it ideal. The Dollar has a similar disadvantage in many respects due to inflation.

It would actually be better to have some sort of currency which expands based on the number of transactions... There's a pretty large theory behind it and I out line some of it on my blog, where I also explain how a crypto currency can "potentially" work[1] or you could read one of Friedman[2] or Knights[3] books.

[1] http://austingwalters.com/the-currencies-of-tomorrow/ [2] http://en.wikipedia.org/wiki/Milton_Friedman [3] http://en.wikipedia.org/wiki/Frank_Knight

Further, economic system and in turn the manipulation of the Dollar in the U.S. is based largely off Kaynes work, which for the most part (we now know) is an inaccurate portrial of economics.

philwelch10• 13 years ago

I think some variety of Friedman coin would be ideal. You even have the information necessary to implement it because Bitcoin mining is already based on blockchain data, right?

zanny2• 13 years ago

This. Bitcoin is digital gold. Once it proves itself, we will probably transition into something like peercoin, or more appropriately an unimplemented proof-of-work payment scheme that calculates the payments not only on difficulty but also on the transaction rate across the last several blocks. You would want a median 1% inflation, but if exchange slows significantly (indicating money hoarding) you want the inflation rate to increase. If too many transactions are happening, you would turn down the inflation rate to compensate.

The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.

ryanjshaw2• 13 years ago

Are we even able to analyse Bitcoin as we would fiat currencies or precious metals? Why is this assumption left unstated and unanalysed?

Cryptocurrencies have several interesting properties that these traditional mediums of exchange do not, for example:

- the supply is fixed and precisely known at any point in time, with very little chance of that ever changing by unilateral decision (e.g. politics, war); surely this will factor into future decisions to price goods and services, in the same way businesses already factor inflation into their business models

- low transaction costs for high value cross-border payments could see a niche use that no fiat currency can compete with (unless you somehow believe there will be a unified global real-time gross settlement system or the like any time soon)

- settlement times could also see a niche use that no fiat currency can compete with (if it works, and your transaction is confirmed in seconds/minutes/hours rather than days as with ETFs, then I foresee people using it for certain value transactions)

- accessibility (just look at M-PESA in Kenya -- everybody has cellphones, but moving physical cash around is expensive and dangerous)

- up until all the coins are mined, and probably for some time thereafter, the value will be quite volatile; after that, however, value will pretty much reflect real economic activity and volatility will be less predictable -- why is there this obsession over the present volatility? All the coins will be mined within a fixed time frame provided 1 person continues mining, which is almost a certainty, and eventually the price will have to stabilise.

I fear the article is comparing apples and oranges. Maybe the author just wants to sow FUD while he buys some cheap BTC :)

Don't get me wrong - I have my doubts that Bitcoin has what it takes (among other things, I think the initial unequal distribution of wealth is a serious problem), but cryptocurrencies in general are likely to be a successful and inevitable medium of exchange at some point in the future.

clin_3• 13 years ago

Why are people replying to this post like OP is some kind of authority? It doesn't sound like he "studied economics" so much as he took a course.

Of course you can have a deflationary currency. The problem is that people won't spend it. The dollar is not naturally inflationary. Instead, the fed allows for a controlled amount of inflation every year to encourage spending. Automatically managed currencies like you discuss still suffer from inflexibility—as our understanding of monetary economics adjusts, or qualities of the economy change (as with the change in velocity of money during the 80's-90's), it would be difficult to adjust the algorithm to better stabilize the money supply.

More importantly, cryptocurrencies are region agnostic. I take it you learned about optimal currency area in your studies? Any arbitrary threshold would risk having inconsistent effects in different places. Expansion may be just the thing to encourage additional transactions in a recessionary region, but may encourage rapid inflation elsewhere. The result is always high volatility, making it unfit as a store of value.

fragsworth6• 13 years ago

The author is wrong on several points. The great depression was caused by an overestimation of how much the currency would inflate as a result of the Federal Reserve's lending practices, along with an expectation that the gold standard would be returned. It was an overprinting and contraction of fiat, deflation of which was totally unexpected, that caused it.

rglullis• 13 years ago

Why does it need to replace the dollar, though? Why can't it be just some form of hedge? Why can't I negotiatiate my salary to be 70% paid in USD, and the rest paid in some X BTC, with X being the remaining 30% at the day's rate of BTC/USD?

People keep saying that just because it's deflationary, they are never going to spend the coins. But as someone who grew up with hyperinflation (1980's Brazil) I can tell you that people still saved, they just used other currencies. I clearly remember my father buying dollars after getting his paycheck. Investment-wise it was a bad idea, but all people wanted was some sense of safety. When hyperinflation finally came to an end and I knew that my lunch at school would cost the same thing every week (instead of costing 20% more every Monday!), people started spending/selling their dollars.

The problem of BTC now is a problem of trust. And this lack of trust is due to the crazy volatility, not its deflationary nature. So, it is a chicken-and-egg problem. The more merchants you have accepting BTC, the more people will be able to spend their coins. Sure, the merchants buy be turning the 100% of their BTC into fiat right as they get them, but BTC could still be defined as the transaction currency.

lettergram2• 13 years ago

What Bitcoin really needs is a central bank to stabilize its value.

Neither did the U.S. before WWI... Once they added the Federal Reserve they really didn't know what they were doing and when the stock market collapsed they raised overnight lending rates and essentially caused the great depression (or made it significantly worse).

Point being, although the Federal Reserve may have a better handle on what is going on now, it does not mean that it is necessary for a currency to have a central bank.

The author pretty much has no idea what he is talking about.

kordless2• 13 years ago

Now, it doesn't make much sense, but there's actually a currency designed to create these kind of economic calamities.

I wanted to stop reading right there.

27182818284• 13 years ago

"Why the Internet Will Never be Newspaper"

It doesn't have to fit the role of traditional currency because it isn't.

winterswift2• 13 years ago

You're criticizing The Atlantic (which happens to be a print publication as well, not just online) for an article stating that Bitcoin won't become an everyday currency, but saying "it doesn't have to fit [that] role." The article never said it did have to fit that role. The journalism is perfectly fine here, quit being defensive and make an actual argument.

knodi2• 13 years ago

Bitcoin is already used a currency right now but I believe what the author is trying to say is it has not lasting power. Which i believe it to be true.

In its current form, its too complex for non-tech savvy people and what makes bitcoin bitcoin will not last more then 10 years as processing power increases over time.

fragsworth6• 13 years ago

Heh. It's not that complicated. How many concepts have common people learned since computers and the Internet took everything over? Computer network. Router. Website address. Domain name. IP address. Email address. File. Torrent.

What if knowledge of hashing and public and private keys become as commonplace? Because of bitcoin?

mixmastamyk• 13 years ago

Does a lack of inflation equal deflation? I've not heard that one before.

philwelch10• 13 years ago

Deflation is when prices drop due to currency scarcity, and inflation is when prices rise due to currency abundance. The only perfect zero is when the amount of currency in circulation perfectly matches the amount of economic activity. A cryptocurrency might be able to make that happen, but central banks usually err on the side of 1-2% inflation since deflation is so much worse than inflation.

alexeisadeski36• 13 years ago

And the actual evidence behind the author's claim that deflationary currencies aren't successful?

crickets

Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while.

Nursie3• 13 years ago

> Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while.

Gold has been a terrible choice of currency in the past. Read about it. There are a variety of very good reasons (and probably one or two bad ones, sure) why most modern countries have decoupled currency from precious metals.

gahahaha9• 13 years ago

Gold didn't work very well as a currency. There is plenty of proof, but just look at the first graph in this article. http://fabiusmaximus.com/2010/09/13/21514/ Industrial production and when a country left the gold standard. Obviously clinging to the gold standard for so long was a huge mistake.

(my point is purely related to that one graph, not the rest of the article (that I have not read))

lucb1e• 13 years ago

People saying Bitcoin won't work because of the instable price are just dumb.

Can anyone bring up some charts from when the first 'normal' (non-crypto) currencies were invented? Let's see if those were so stable from the first year onward.

Earlier today I just happened to look up inflation rates from european countries before the Euro: one was nearly 30% in 1980. "Omg 30% price change in just a year," yeah and even that seems to have worked out fine. They were even allowed to join the Eurozone.

Nursie3• 13 years ago

Look up the Euro. That was relatively recent.

And no, it didn't have fluctuations anything like BTC.

winterswift2• 13 years ago

That 30% price change in a year was an anomaly, and it was in 1980, during a severe global recession. Bitcoin, meanwhile, just gained value approximately eightfold over several weeks ago, and it's relatively unusual that it isn't highly volatile, especially lately.

kazagistar• 13 years ago

When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing.

To some degree, this already works. If the price of bitcoin gets high enough relative to the price of electricity and ASICs, then more bitcoins are mined, right?

Zetaeta• 13 years ago

Then the difficulty goes up. The network is designed to create an average of 6 blocks per hour, with a constant reward per block that halves every 4 years. https://en.bitcoin.it/wiki/Controlled_Currency_Supply

maxerickson8• 13 years ago

It is slowly racing ahead of the forecast though. The current block was projected for 2014:

http://blockexplorer.com/q/getblockcount

I guess that will slow down as ASIC hardware matures (or if there is a sustained price drop).

KVFinn• 13 years ago

There are many bitcoin competitors now and I find it interesting that many of them are the creations of a specific political and economic line of thought.

While bitcoin supporters tend to hate the idea of inflation, there are others coins that have inflation built in to encourage spending -- a kind of progressive version of bitcoin.

Here's a random example of a coin designed around a specific economic philosophy:

Unlike Bitcoin, Freicoin has a demurrage fee that ensures its circulation and bearers of the currency pay this fee automatically. This demurrage fee was proposed by Silvio Gesell to eliminate the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle and the entrenchment of the financial elite, and has been tested several times with positive results.

http://freico.in/

(no idea if that has merit but it was the one that stuck in my head because it was so clearly articulated on their homepage)

Whether bitcoin itself last who knows, but probably some descendant will be around at the very least at the protocol level.

jMyles• 13 years ago

This almost reads like a parody. It's as if the author completely disregards the fact that the Austrian school exists at all.

I particularly like the reference to the 'deflationary' nature of the Great Depression while glossing over the fact that the prescribed solution (the establishment of a central bank) occurred less than two decades before it.

fragsworth6• 13 years ago

And by most historic interpretations, that centralization actually caused it.

gnaritas14• 13 years ago

Citation.

gahahaha9• 13 years ago

All serious economists disregard the Austrian school. And with good reason - they're kooks.

There was a central bank during the great depression but the US was still on the gold standard until 1933. When it went off the gold standard the great depression stopped getting worse and started getting better: http://delong.typepad.com/sdj/2011/09/yes-recovery-in-the-gr...

gnaritas14• 13 years ago

It's as if the author completely disregards the fact that the Austrian school exists at all.

Because they don't really, they're cranks, not a serious field of study. The Austrian school is equivalent to the flat earth society. Their answer to every possible economic issue is the same, the magic market will heal itself. When you have one answer for everything, you don't get to call yourself a serious field of study.

philwelch10• 13 years ago

I think it's important to distinguish between historic Austrians, like Hayek, and the nutjob libertarian variety that tried to turn economics into an apologia for anarchocapitalism, like Rothbard.

antonios• 13 years ago

"...what Bitcoin really needs is a central bank to stabilize its value."

Seriously?

gahahaha9• 13 years ago

IF it ever were to be used as a currency. Obviously the author knows that a central bank is not a part of bitcoin today or ever could be. So his whole point is that it can never be used as a currency.

fthssht7• 13 years ago

Bitcoin aside just reading the first few sentences really shows what a sad state our economics education is in. People literally, dogmatically believe something that is so blatantly false you'd think you would have to be mentally handicapped to believe it. Yet they do.

DalekBaldwin• 13 years ago

Is it sad that they would believe those sentences, or sad that those sentences are even necessary? I can't tell whether you agree with it or not.

fthssht7• 13 years ago

I had a dream last night that I went into Walmart. Everything was a penny so I went home to wait this terrible situation out. And because the economy is dependent on SPENDING not producing the economy collapsed as a result! What a nightmare.

valtron2• 13 years ago

Let T be the total amount of money in circulation in a given currency C. When you see a value X in units of C, convert it to C' by X in C' = X / T. There you have it, every currency is already trivially equivalent to Bitcoin in that the supply of C' is fixed at 1.

How they're _not_ equivalent is that the creation of money in existing currencies is centrally controlled. You can get a clearer view of what happens when money is printed by looking at C' rather than C.

For simplicity, pretend there's only the Mint (can create money) and the Public (can't). Initially, Mint has X C and Public has Y C. In C', this is X/(X+Y) C' and Y/(X+Y) C'. Then Mint decides to create Z C. Mint now has (X+Z) / (X+Y+Z) C' and Public has X / (X+Y+Z). The Mint has effectively transferred money away from Public. All arguments against deflation are, basically, Mint will now redistribute the money in such a way as to stimulate the economy.

nhaehnle5• 13 years ago

the creation of money in existing currencies is centrally controlled

This is a common misunderstanding. For typical fiat currencies, money creation is highly decentralized in the banking system. Most money creation happens when banks give out loans. Conversely, most money destruction happens when loans are paid back.

This is actually why our system works so well: the supply of money is not controlled by a central (and therefore fallible) institution, and neither is it fixed (which would be even worse). Instead, it adapts automatically to the demand of money (perhaps one should better say "liquidity" here) via market mechanisms.

valtron2• 13 years ago

Interesting point, and you're right: I was only considering printed money!

oinksoft• 13 years ago

The author makes really good points about Bitcoin's viability right now as a day-to-day currency. The conclusion at the end, that "What Bitcoin really needs is a central bank to stabilize its value" comes out of left field. No matter the difficulty, the goal most consistent with those of Bitcoin would seem to be to create a cryptocurrency that has a reliable built-in inflation/deflation mechanism. I suppose such a creation would amount to the perfection of money, for whatever that's worth.

twobits• 13 years ago

"When prices fall, people put off buying things"

So I'll never go on vacation, cause next year it will be cheaper. So I won't do the surgery now, cause next year it will be cheaper. etc, etc. This "common knowledge" means no one will ever buy anything if prices fall. That's patently wrong. It may be true for fads, but not for things people really want.

"This self-perpetuating cycle of doom [..] is what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely."

I live in a crisis stricken country in europe. Prices are NOT falling. That's a generalization and a lie. Prices fall for your property, what you have, and what you don't need, and prices are the same or spiking for things you need. Taxes also are spiking 2x 3x+. So, for example, you pay more and more taxes for your home, which is falling in price. (Owning it, not on debt.) But oil, food, electricity, etc, are rapidly increasing. Deflation and prices are falling, is a lie. They just destroy people, in order to pick up cheap on properties.

"What Bitcoin really needs is a central bank to stabilize its value."

lol. I remember seeing a graph of how much the dollar has lost it's value since the fed was created. Something like 90+%. I remember how much a coffee costed before entering the euro, and how much it costs now. Something like 15x more. It's bubbles, money printing, lies, and pure stealing. Central banks steal from all of us through inflation, and also give a competitive advantage to whoever they give the newly minted money first. (Their pals, big banks, etc.)

" See, the technology of Bitcoin really is revolutionary, but the currency of Bitcoin is holding it back. [..] So who's the perfect person to run Bitcoin? [..] Someone like ... Ben Bernanke."

This seems like a propaganda preparation piece. It seems that big players will introduce electronic money soon.

fragsworth6• 13 years ago

If prices have been barely protected from falling like the author is claiming, I'd like to know why the price of owning a piece of just about any sector of the stock market has just about tripled in 4-5 years.

pilooch• 13 years ago

you would not buy surgery using this currency if you can avoid it since it would gain value in a possibly near future. So while people would still buy when prices fall, but with a preference given to other currencies.

Note: I am no expert.

baddox• 13 years ago

When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. Even worse, people are stuck trying to pay back debts that don't fall with wages that do. So bankruptcies pile up, and so do bank losses. That makes people too scared to borrow, and banks too scared to lend, which only makes prices fall even more.
This self-perpetuating cycle of doom is what sunk the global economy in the 1930s, and what, to a lesser extent, has sunk Japan since the 1990s. And it's what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely.

Oh good, I'm glad that the causes of the business cycle, the great depression, and the recent global recession have all been discovered with absolutely no question or debate.

DennisP2• 13 years ago

This argument would only be valid if bitcoin were the only currency, or weren't easily convertible to and from dollars.

People invested in bitcoins still have to buy things. What many of them do is leave their investment in place, convert a few dollars to bitcoins and spend those.

Of course they have an incentive to save rather than spend bitcoins, but this incentive applies equally well to their dollars. If they expect bitcoin deflation to continue, they should convert their dollars to bitcoins rather than spending their dollars. If bitcoin's deflation isn't preventing people from spending dollars, it's not preventing them from spending bitcoins either.

Bitcoin isn't having a strong effect on dollars, because its total value is only about $10 billion. Maybe someday it will have a strong deflationary effect on the dollar economy, but it'll have to get much bigger before that happens.

But once it is that big, its rate of deflation will slow. It's high now because its usage is growing[1] so quickly. In the past seven days, the number of bitcoin-accepting merchants on coinmap grew 13%. That radical growth will eventually slow, and then we won't see such drastic price changes.

Arguably it will still be somewhat deflationary, but even that isn't a sure thing since bitcoin won't necessarily be the only successful cryptocurrency. Hayek argued that private competing currencies would result in price stability without central control, and we might find out whether he was right.

[1] http://www.bitcoinpulse.com

maxerickson8• 13 years ago

It's telling that none of those indicators relate to the value of the goods that are being purchased with Bitcoin. That's probably the most interesting metric.

DennisP2• 13 years ago

It would definitely be interesting. I'm having trouble thinking of a way that metric could be gathered with any reliability, given that merchants typically generate new bitcoin addresses for each purchase.

gnaritas14• 13 years ago

What Bitcoin really needs is a central bank to stabilize its value.

No, a distributed system who's goal is getting rid of central control doesn't need a central point of control.

When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing.

And again no; rather, minting more currency can be built into the network algorithmically so that hoarding causes enough inflation to offset it.

Bitcoin's deflationary nature will make it a bad currency, but it's not the only crypt-currency out there, and inflation and deflation can be tied into actual transactions on the block chain to build a self regulating currency that can actually be trusted and more importantly adjusted by the economy itself, unlike central planning.

Peercoin has these attributes, though I'm not convinced in the correct proportions as it's still long term deflationary. Saving causes inflation by minting new coins and spending causes deflation by destroying transaction fees. This is a better strategy for a currency, but it's not quite balanced right yet.

brownbat• 13 years ago

Isn't it contradictory to argue that everyone should go short on Bitcoin because it's deflationary?

It's either deflationary, so everyone should go long on it / use it as a store for all excess value, or it's not, so it doesn't actually have this problem.

MrQuincle• 13 years ago

It would be great to have some guys here run a large simulation. I might be wrong, but I bet that there is a trade-off between "centrally organized" currencies versus "decentralized" ones. There might market potential for both. A centralized monetary system could have some disadvantages, isn't it?

Why Bitcoin Will Never Be a Currency

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