January 4th, 2014

Hopefully the Only Thing I Will Ever Post about Bitcoin

Bitcoin is inherently deflationary. Surely people realize that will result in one (or more) of three outcomes:

(1) Bitcoin will top out at a small and decreasing fraction of the world's transactions.
(2) The world will generally experience deflation.
(3) The world will generally experience unending recession before either of the first two come to pass.

Basically, for BitCoin to Take Over the World / Outcompete National Currencies / WTF ETC BBQ, the world would have to become a pretty awful place.




As near as I can tell, the participants in Bitcoin are aware, but somehow think this is more in the nature of a feature than a bug.

"Therefore, Bitcoin seems to be faced with a unique problem. Whereas most currencies inflate over time, Bitcoin will mostly likely do just the opposite. Time will see the irretrievable loss of an ever-increasing number of Bitcoins. An already small number will be permanently whittled down further and further. And as there become fewer and fewer Bitcoins, the laws of supply and demand suggest that their value will probably continually rise."

Sounds suspiciously like the writer thinks this is a pretty good problem to have!

Apparently people in BitcoinWorld think that loans should never, ever, ever happen. Wonder how they think things will work for young people just starting out, or people who got into a hole somehow? It's hard to imagine BitcoinWorld being enthusiastic about a comprehensive, cradle to grave coercive taxation based system of guarantees to prevent the obvious sadness that could result.

In any event, all other things being equal (which they basically never are), if you have a currency in which loans can be made competing with a currency in which loans cannot be made, the former is probably going to Win. It doesn't even usually take a very long haul for this to happen, either.

ETA: People go through some amazing contortions to argue that deflation doesn't really matter with Bitcoin.


It's tricky to summarize, but here are some high points:

"Deflation is harmful for conventional currencies because, in economist jargon, Bitcoins are a unit of account as well as a medium of exchange."

"Similarly, no one has Bitcoin-denominated salaries, borrows money in Bitcoins, or pays Bitcoin-denominated rent every month. So the rapidly rising value of Bitcoin isn’t going to cause the kind of economic dislocations that dollar deflation would cause.

Also, “hyperdeflation” is another word for “investment opportunity.” If Joe really thinks the price of Bitcoins is going to continue rising rapidly, he should put his money where his mouth is and buy some."

It's not a bug; it's a feature!