
Why Bitcoin Will Never Be a Currency - emkemp
http://www.theatlantic.com/business/archive/2013/12/why-bitcoin-will-never-be-a-currency-in-2-charts/282364/
======
KVFinn
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/](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.

------
en4bz
> 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.

~~~
gahahaha
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.

~~~
coinbase-craig
I get my salary paid in bitcoin and I think it's pretty awesome.

~~~
gahahaha
From your other comments you seem to be paid in USD but your employer buys
bitcoin for you each month and gives you that. You could buy the bitcoin
yourself each salary day and nothing would change.

~~~
coinbase-craig
Yep, basically. But what's your point? I don't want to do the extra work. I
consider not having to a perk.

------
cup
"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?

~~~
matwood
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...](http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm)

 _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.

~~~
msandford
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.

~~~
maxerickson
What sort of everyday value can I get from the bitcoins in my wallet?

The material goods you mention are good for all sorts of things.

(My point being that they are not great comparisons, I'm staying out of the
argument about deflation)

~~~
msandford
You've missed the point.

From the article: "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. "

I will make a more specific claim: the author is arguing that when the price
of things in a given currency fall, people delay purchasing. This can be re-
stated that as the ratio of money to goods declines, so too will the purchase
of goods.

The ratio of money to a specific good declining can happen in one of two ways.
Either

1) the currency as a whole appreciates in value relative to everything in the
economy (usually called "deflation") or

2) the good becomes cheaper to extract, manufacture, grow or otherwise produce
which then allows business to price it less expensively

In either case 1 or 2 the ratio of money to a good has decreased. We normally
would say it has "gotten cheaper"

Computers are a good which has gotten cheaper in real terms and nominal terms
and especially in absolute terms. A desktop computer used to cost $2000 or
more for anything decent (adjusted for inflation perhaps $5000 or more), today
a quite respectable laptop can be purchased for $800 which has hundreds if not
thousands of times the capability of the $2000 machine from 20 years ago.

The world as it exists today does have a computer industry, in fact it's huge.
Compared to 1993 it's at least 10x larger, and surely quite a bit more:
[http://en.wikipedia.org/wiki/File:Personal_computers_(millio...](http://en.wikipedia.org/wiki/File:Personal_computers_\(million\)_ITU.png)

So according to the author's "when things get cheaper people stop buying"
argument the computer industry should have been shrinking over the last 20
years, not growing. But we can clearly see from the world that exists today
that the computer industry has grown over the last 20 years.

How should I reconcile the author's argument with the reality I see around me?
I feel I have no choice but to conclude that the notion that "falling prices
causes people to reduce their purchases" might not be a universal truth, or
perhaps it contains only a little truth inside it.

~~~
maxerickson
I'm just saying I don't think you can expect the same behavioral responses to
1 and 2.

In the case of 1, I minimize all of my purchases during periods where I
perceive higher levels of appreciation.

In the case of 2, I only buy what I need of that good (which is approximately
what I do anyway).

So it isn't a particularly interesting comparison to make.

~~~
msandford
Sure, but for most people even in case 1 you still have to have food,
clothing, shelter, etc. Those needs don't disappear just because you want to
speculate.

Now you might be able to speculate quite effectively buying when prices are
low and living off of your stores when prices are high. But everyone can't do
that by definition, so we're saved from case 1 totally throwing a monkey-
wrench into the works.

------
maratd
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.

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

~~~
zanny
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.

~~~
fragsworth
I strongly suspect that the Bitcoin developers and mining community will
eventually choose to inflate the currency. Not for any economic reasons, but
rather to provide the funding for a large and secure mining network, because
future transaction fees might prove to be insufficient.

That 21 million number is not set in stone, and will change if there is a need
for it.

~~~
zanny
That still doesn't account for the fact that having a mathematical model for
inflation is hugely advantageous for a currency. Current btc should be
inflating at upwards of 10% considering how little money movement there is in
the network due to the investment hoarding.

~~~
maratd
> That still doesn't account for the fact that having a mathematical model for
> inflation is hugely advantageous for a currency.

This is hugely important and _obvious_ to anybody who has taken Econ 101.

Everybody knows this.

So why would you invent a currency that was deflationary in nature due to an
artificial cap? Well, once you realize that the guy(s) who invented it are
holding 10% of it, you'll have your answer.

Bitcoin is in a huge bubble at the moment. My only hope is that this bubble
bursts before the inventors can cash out. Oh, sweet justice.

After the collapse, there is every reason to believe that Bitcoin will become
something genuinely useful or at the very least, inspire something that will
be useful.

~~~
fragsworth
Deflation is only a threat because of fractional-reserve lending. The world
ends up owing itself more than it actually has in currency, and it collapses
in on itself in a massive disaster if and when the currency deflates.

Fractional reserve lending of bitcoins seems highly unlikely to happen any
time soon, if ever. And if it does start happening, it is likely to be made
quickly illegal, because the system simply won't work.

------
jMyles
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.

~~~
gnaritas
> 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.

~~~
philwelch
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.

~~~
gnaritas
I'll make the distinction if you'll explain to me what Hayek proposes other
than let the market handle it. From what I've seen, they're all cranks, Hayek
included.

The Austrian school of thought is little more than don't touch the market,
you'll break it, it's magic and it'll always work. That's not a serious field
of study; that's a golden hammer theory.

~~~
philwelch
Hayek is tendentious, but he made substantive contributions to the science.
Rothbard didn't even do that: he was a libertarian political activist
masquerading as an economist.

~~~
gnaritas
You've already said that, but that's not what I asked, I asked what those
contributions were beyond "the magic market will fix it".

~~~
philwelch
For one, he seems to have developed the theory of price signals.

~~~
gnaritas
Falls under let the magic market handle it, I asked for something outside
that.

~~~
philwelch
Cap and trade basically hacks price signals by enforcing the notion that
there's a finite supply of the environment's ability to absorb pollutants.
Without the notion of price signals, cap and trade is not the type of thing
you'd think to use, and the distinction _I_ was making was that later
Austrians, like Rothbard, never contributed anything of the like.

You can make whatever distinctions you want--this digression has gotten
tiresome and I regret ever responding to you in the first place.

------
twobits
"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.

~~~
fragsworth
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.

------
bryanh
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?

------
lettergram
> 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.

------
alexeisadeski3
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.

~~~
gahahaha
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/](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))

------
valtron
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.

~~~
nhaehnle
_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.

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

~~~
nhaehnle
Exactly. And even with printed money, one could reasonably argue that the fact
that money is printed centrally is irrelevant for the behavior of the economy.

After all, central banks typically just react to the demand for physical money
that they observe via the requests that come from banks.

------
baddox
> 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.

------
fthssht
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
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.

~~~
fthssht
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.

------
DennisP
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](http://www.bitcoinpulse.com)

~~~
maxerickson
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.

~~~
DennisP
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.

------
gnaritas
> 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.

------
27182818284
"Why the Internet Will Never be Newspaper"

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

~~~
winterswift
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.

------
knodi
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.

~~~
fragsworth
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?

------
oinksoft
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.

------
lucb1e
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.

~~~
Nursie
Look up the Euro. That was relatively recent.

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

------
MrQuincle
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?

------
brownbat
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.

------
kazagistar
> 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
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](https://en.bitcoin.it/wiki/Controlled_Currency_Supply)

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

[http://blockexplorer.com/q/getblockcount](http://blockexplorer.com/q/getblockcount)

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

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

~~~
philwelch
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.

------
kordless
> 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.

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

Seriously?

~~~
gahahaha
_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.

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

~~~
gahahaha
I don't see the connection.

