
Why Bitcoin Will Fail As A Currency - tav
http://tav.espians.com/why-bitcoin-will-fail-as-a-currency.html
======
acangiano
The article makes a series of well known criticisms, but there are a few
issues with it.

1\. If a BTC were to be worth $2M, you'd simply trade microcoins which would
be worth $2. Or even nanocoins for micropayments.

2\. Bitcoin's quasi-anonymous nature will be highly desirable to many people,
including very large criminal organizations who'll definitely be moving those
coins.

3\. A large number of early adopters joined the movement because they believe
in the ideal behind a p2p cryptocurrency. These people are not in it for the
investment alone and will be willing to use it as a currency.

4\. On paper, even the free software movement sounds idiotic. What kind of
idiot would spend their time and resources to produce something for free? In
practice, it works extremely well because not everyone is solely motivated by
their best economical interest.

5\. Few people will put all of their eggs in one basket. When the value of BTC
stabilizes, investors who are happy with the valuation are likely to sell and
cash in on the investment or diversify their investment through other
currencies/speculations.

~~~
benihana
Every single criticism of Bitcoin I've seen is based on the assumption that it
will fail because it's not a fiat-based currency. They list Bitcoin's features
as the reasons it will fail. They talk about the past 200 years of central
banking and seem to forget the thousands of years of human economy before
governmental central banking, when money was actually backed by a scarce
resource.

~~~
tatsuke95
The average human was far, far poorer 200+ years ago, in relative terms.

The fact is, modern banking and capitalism have created massive amounts of
wealth for a vast proportion of the population. Evolution of our economic
system has led to where we are now for a reason. It's not perfect, but we
aren't going back to the days of measuring your net worth on a stick.

Every time we have a crash or downturn, people begin to under estimate how
much we actually know about economics. It's a lot.

~~~
teodesian
You must remember, however that money != wealth.

The money supply of a nation in no way represents the wealth generation going
on in an economy. Printing an extra dollar does not mean the users of dollars
became wealthier, it simply redistributes the existing wealth. Barter is also
another factor that creates wealth, yet does not have anything to do with the
monetary system.

Our growing wealth in many ways is in spite of our money and governments. It
is worth noting that ever since the USD lost it's scarcity (with the closing
of the gold window in the 70's) real wages and quality of life has gone down,
not up.

~~~
btilly
Here is a basic economic fact for you. In periods of mild inflation, people
have an incentive to invest money, which leads to growth. In periods of
deflation (like the Great Depression) people have an incentive to put money
under the bed and wait for it to appreciate. Therefore deflation is horrible
for economic growth.

Thus money supply does not represent wealth generation, but controlling it
does affect wealth generation in a pretty significant way.

As for your comment about the 70s, the wealth of this country has gone up
dramatically. However there has also been a sharp increase in inequality. Thus
causing a small number of people to see wealth rise a whole lot. Whether or
not the middle class has wound up better or worse is a subject of debate among
economists. (The subject is not nearly as simple as you might think. We think
of "inflation" as an absolute number but it is not. The inflation that you
experience is relative to the goods that you purchase, and middle class or
poor people purchase a different bundle of goods than rich people do.) In any
case the result is that it is clear that wealth generation has been humming
along very nicely.

My personal belief is that the underlying cause of the increase in wealth
disparity is the continual drop in the top income tax rate, the reduction of
the number of tax brackets, and the increase in the tax rate on the average
person. (The effective tax rate on the richest people is now below the median
tax rate!) This has limited how much tax policy redistributes money between
socio-economic groups.

Whether this is a good or bad thing is a political debate for another time.
But it is a _real_ thing.

~~~
rubashov
> In periods of mild inflation, people have an incentive to invest money ...
> In periods of deflation ... people have an incentive to put money under the
> bed

This sounds very plausible but simply does not line up with historical
reality. Most of the 19th century saw persistent mild deflation alongside
massive investment and growth. Inflationary periods have usually seen
unproductive speculation and weak capital investment.

The deflation of the great depression was simply the inevitable consequence of
a fiat money credit bubble and preceding massive malinvestment. The great
depression deflation cannot be characterized as a deflationary tendency of the
monetary policy at the time. It inevitably followed the inflationary boom of
the 20s.

~~~
william42
Are you really linking the Great Depression to fiat money when the Great
Depression occured while the dollar was still on the gold standard?

And there was no «persistent mild deflation» in the 19th century; there were
massive swings in value:
[http://upload.wikimedia.org/wikipedia/commons/2/20/US_Histor...](http://upload.wikimedia.org/wikipedia/commons/2/20/US_Historical_Inflation_Ancient.svg)

~~~
rubashov
I'm linking it to the federal reserve act and massive credit growth.

Your chart shows persistent deflation in the 19th century with inflationary
spikes for wars, notably the civil war.

------
knieveltech
The number 1 reason why bitcoin will fail: Silk Road (et al) have handed
legislators all the ammunition they need to go after it with a vengeance. All
of what's coming next has happened before. Think e-gold, act II.

Simply put there are no incentives (and massive disincentives, both perceived
and real) for any government to tolerate financial transactions in anything
other than fiat currency. The more popular the service becomes the more
frenetic legislative and enforcement activity will become to stamp it out.

<http://en.wikipedia.org/wiki/E-gold>

~~~
paisible
Isn't that what the distributed system aims to solve in the first place ? If
they can't shut bittorrent down, how can they shut bitcoins ? They can crack
down on the e-currency exchangers, but only those that operate within their
jurisdiction. Would like to know if anyone has concrete examples of how they
would go about doing this.

~~~
knieveltech
Sure, and distributed file sharing aimed to protect file sharers from the kind
of crap the RIAA has been dishing out since it's inception.

I would expect governments first to limit the viability of the currency,
possibly through legislation (fines, jail time) aimed at businesses operating
within their borders. Get caught dealing in bitcoins, go to jail.

If that doesn't dampen enthusiam I would expect the next phase to target
ISP's. Mandated traffic monitoring and/or blocking, etc. Distributed networks
don't mean shit when the connectivity medium isn't available.

------
p1980
The ideas here are important criticisms, but there is one thing to keep in
mind with hoarding, and the author can't have it both ways.

The author makes an important point that Bitcoin has value precisely because
people are willing to accept it--the characteristic of any good currency.

The appreciation of the currency encourages hoarding, which will negate the
circulation of money. But there is a feedback loop to this of course. If
hoarding does occur, then circulation will go down, which will cause people to
lose interest, which will cause the value to stagnate. In that case, hoarding
is no longer appealing, and people who have been will become impatient with
the low return of investment and start selling them to liquidate.

This in turn creates more circulation. So there is certainly an equilibrium
that the system attempts to reach.

If hoarders do the logical conclusion as to what happens if everyone hoards--
it means the currency is worthless. So NOBODY would hoard anymore. In reality,
there is some equilibrium point that is reached...it is in the best interests
of the system participants that they circulate their currency, because it
makes their own holdings valuable.

The author can't have it both ways--you can't both say hoarding will cause the
currency to be worthless, and assume that hoarders will just hold onto it
forever expecting massive appreciation vs the USD. Nobody hoards it if the
value stops going up (or becomes worthless, which is what is being claimed)

~~~
jff
Are you familiar with the Tragedy of the Commons? "Oh, well of course it's
important to keep bitcoins circulating... but it won't hurt anything if _I_
hoard my coins, I'm just one person! Besides, I know there are other people
hoarding theirs, so I might as well do the same!"

~~~
p1980
you miss a point--there will be certain players whose opportunity cost will be
higher than waiting for others to liquidate theirs. Those people will
liquidate theirs for USD to do productive investment that will earn returns
far beyond just playing chicken with the rest of the people to see who will
circulate theirs first.

So it's not a tragedy of the commons situation--it will make perfect economic
sense for certain people, if the hoarding gets too extreme, to change their
currency for USD or other assets.

------
furyg3
Not defending BitCoin (I won't be buying any soon), but I think the author
doesn't realized that BitCoins are divisible down to eight decimal places.

It's difficult for me to imagine a currency which is so divisible being
"hoarded to death".

~~~
michael_dorfman
The divisibility has no bearing on the hoarding.

The hoarding comes from the expectation of increased value over time, not the
number of decimal places. If you have something that you think is going to
steadily appreciate in value over time, why sell it now?

~~~
tibbe
There are natural limitations to how much people will save:

* When you're dead all your savings are worthless (to you), so your likely to spend most of them before then.

* Some consumption cannot be postponed: you need food, a roof over your head, transportation, etc.

* Time has value. For example, if you wait another 6 months the same amount of money (bitcoin or not) will buy you a better computer. This is likely to hold true in the foreseeable future. Still people do but computers (and phones, etc).

* There's opportunity cost: even if your savings increase in value over time, investing them in something could increase them even more.

~~~
po
_When you're dead all your savings are worthless (to you), so your likely to
spend most of them before then._

If that were true, why would there be so much debate around the estate tax?
Warren Buffet is a rarity. Most people want to pass money down through
generations rather than spend it as they near the end of their lives. Taxes on
inheritance encourages spending and charitable giving.

 _Some consumption cannot be postponed: you need food, a roof over your head,
transportation, etc._

Given. Probably not enough to avoid depression though.

 _Time has value. For example, if you wait another 6 months the same amount of
money (bitcoin or not) will buy you a better computer. This is likely to hold
true in the foreseeable future. Still people do but computers (and phones,
etc)_

You seem to be arguing for deflation. Given that I can wait and get a better
computer there's even less incentive to spend it today. I remember a study
that showed for a computationally intense problem (many years) you could
finish sooner by waiting part of the time and buying a faster computer. That's
even less incentive to move money around.

 _There's opportunity cost: even if your savings increase in value over time,
investing them in something could increase them even more._

Not if the economy is depressed.

In sum, the natural limitations you site - even if they worked - are not
enough to avoid depression. A small bit of inflation is a good thing. Think of
a dollar/bitcoin/whatever as a unit of work and inflation as 'urgency'. :-)

~~~
reedlaw
You seem to suggest in all these cases that spending is inherently good.
Estate tax = incentive to give away. Inflation = incentive to buy now. I
understand this is one of the core concepts of Keynesian economics. But there
exists an alternative school of thought that posits that inflation causes
volatile business cycles and central banks are inefficient at allocating
resources. Success of a bitcoin-based economy would seem to support the
correctness of this Austrian school of economics. We shall have to wait and
see.

~~~
3am
That doesn't have the slightest thing to do with Keynesian economics.

~~~
mikey_p
The concept of hoarding in the original article and in this thread is
fundamentally identical to a liquidity trap.

------
paisible
Let's separate "bitcoin-as-a pure speculatory play" and "bitcoin-as-a
cryptocurrency". At any time T, a bitcoin is worth W on the bitcoin exchange.
Volatility means that at T+1 the bitcoin's worth might increase or decrease,
but supply and demand still provide a pretty decent arbiratry price at this
time T.

When seller A and buyer B (who are involved in a dubious transaction) are
looking for a safe way to transfer money, they can simply agree (at time T)
that their 1000$ transaction can be translated to 1000/W bitcoins. It doesn't
matter if 1 bitcoin = 1000$ or 1 bitcoin = 10$, what matters is that both
parties agree on what bitcoin price they are doing their transaction in, and
therefore how many bitcoins A is expecting from B.

The transaction is then 1) Buyer buys agreed number of bitcoins so that at
market price it represents the dollar amount of the transaction 2) sends over
the bitcoins 3) Seller cashes out the bitcoins IMMEDIATELY, thus getting the
real-market value for his "good or service"

The argument as to "why would seller A want to cash out his bitcoins if
deflation means they will increase in value" is besides the point here. Seller
A is a drug dealer, not a bitcoin speculator. All he cares about is that
receiving that money was as simple and anonymous as downloading a software
client and logging in from some internet cafe somewhere.

In this scenario, bitcoins are extremely valuable, and not going anywhere. I
suspect that market will adjust, and at some point supply and demand (from
people who actually use it for these kinds of activities) will lead to less
volatile price variations - and therefore increased use on the black-market.
Whether you want to profit from these activities is another question.

------
kiba
How many time are people going to scream...bubble?
[http://bitcoinweekly.com/articles/comic-reaction-after-
drama...](http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-
rise-of-bitcoin-s-value)

Anyway, hoarding is not a problem. [http://bitcoinweekly.com/articles/one-
apple-today-two-apples...](http://bitcoinweekly.com/articles/one-apple-today-
two-apples-tomorrow-or-how-i-stopped-being-afraid-and-learned-to-love-
deflation)

Even if we need to use the satoshi(the lowest unit of bitcoin), we can extend
decimal space.

Does anybody actually have anything new or novel criticism for bitcoin? Or are
we going to repeat trending the same ground everytime a new bitcoin story come
up?

~~~
caf
That article on why deflation is allegedly not a problem does not address the
concerns raised. In particular:

 _Deflation, on the other hand, can damage the economy by placing an incentive
to save, rather than spend. Over-saving can be just as damaging as over-
spending. But unlike saving, you have to spend some eventually, so there's a
built-in incentive to spend: continued survival. A deflationary economy can
also stifle entrepreneurship because it increases the risk of loss without
significantly increasing the return on the investment over that of simply
letting the money sit and gain value._

The first answer doesn't apply to a new entrant currency like Bitcoin - you
don't have to spend _bitcoins_ to survive, you can continue to spend local
legal tender on the essentials of life. The second objection is noted but not
even rebutted - it's just ignored.

This seems to be the real potential problem for bitcoin - the incentive is to
sit on it, not to circulate it. I think the original article is spot on.

~~~
vrotaru
Marginal utility, marginal utility, marginal utility.

It's true for USD, BTC, EUR, PLN... you name it. The more money you have the
less valuable the last unit (coin) is. Or seems. Value is subjective, anyway.
So what we have here is just another feedback mechanism which will regulate
the level of saving/hoarding according to individual preferences of
savers/hoarders. This way, _hoarding, it self-regulates_.

------
thailandstartup
The key mistake the author makes is to assert no-one will ever spend or sell
bitcoin trying to secure greater future wealth. As a bubble grows, large
holders find that that a larger and larger proportion of their wealth is tied
up in a single asset and start to diversify that wealth into other assets. I
assume this is already the cause for most of the bitcoins being sold on the
market.

------
Havoc
I still don't see a problem. Surely as long as someone (hoarders) really wants
it, it has perceived value making it a viable currency. Everything else is
just details & implementation. Most of which will sort itself out via supply &
demand equilibrium or if its a technical detail via a clever programmer or
two.

------
pdx
Since it's legal for me to pay legal tender for software, for jpegs, for
mp3's, and other digital constructs, how could a legitimate argument be made
to make it illegal for me to pay legal tender for a bitcoin?

Since it's legal for me to take legal tender for software, for jpegs, for
mp3's, etc., how could a law be passed to make it illegal for me to take legal
tender in return for a bitcoin?

If I advertise that I want to buy bitcoins, how can they stop me from spending
my dollars/euros on them? If I advertise that I have bitcoins to sell, how can
they stop me from doing so?

Now, if I advertise that I both buy AND sell them, at some bid/ask spread,
than perhaps I have blundered in to an area where they can, indeed, regulate
me.

~~~
tokenadult
In principle, a government can make any kind of property contraband.

~~~
pdx
Nonsense. Either bitcoins are illegal now, based on already existing law, or
they are not.

If they are not already illegal, than the paranoid among us can say they will
be made so later. However, such an action does not happen in a vacuum. That
law must be written in some way so as to continue to allow other forms of
digital commerce.

The discussion I would like to have is whether such a law could be written,
which would disallow commerce in a particular digital commodity which harms
nobody (not stolen cc numbers, not child porn, etc) while allowing other forms
of digital goods to continue unhindered.

The thing that jumps immediately to mind, of course, is child porn, which is a
digital commodity that is illegal to buy/sell/own/ or even possess. I question
whether they would have as much success in the court of public opinion with
bitcoins.

------
seles
This whole hoarding argument is bogus: it assumes bitcoin will fail because
bitcoin will be so successful that people will hoard.

~~~
rwmj
Read the article again. It assumes everyone will hoard because they _think_
there's a chance bitcoin might become successful (and in the meantime there's
not a lot to spend bitcoins on anyhow).

But this hoarding is exactly what creates a bubble, and the lack of anyone
spending means that there will never be mainstream shops using it, so it will
never have worth.

~~~
p1980
so..when hoarders realize by not allowing bitcoins to circulate, they will
have no worth, some will start to sell their holdings since it becomes obvious
they are not going to continue appreciating. This causes circulation to
increase again, which will make the currency more valuable again. The point
is, people are just assuming that both extremes happen--hoarders hoard
forever, despite the currency going to zero. In reality, there is a feedback
loop and an equilibrium will be reached.

------
mikey_p
All these bitcoin articles are getting more than old. Here are some major
issues I've been seeing with all of them:

1) Assigning some fixed dollar amount to coins for the purpose of
demonstrations in the article. This will never happen, it's in flux, and it's
a scarce resource. Does gold or any other precious metal stay at a fixed
resource, does anyone hoarding gold make it any less valuable?

2) As mentioned above, bitcoins can be traded in almost any fraction thereof,
simply having each coin be worth 2 million dollars, is irrelevant.

3) If too many people start hoarding and there is no exchange of coin, it is
possible that the value of coins will decrease instead of increasing. Please
remember that the only value assigned to the coins will be the value that
individuals are willing to assign to it, or pay to acquire it, or amount of
coins willing to exchange for goods or services.

4) We've had commodity backed currencies for much, much more of recorded
history than we've had fiat currencies and yet we've brought civilization to
where it is today. Can we please stop assuming that any commodity backed
currency is destined to be a failure because we currently favor a currencies
that are by definition even more worthless than Bitcoin?

~~~
nhaehnle
Commodity backed currencies are actually the exception, not the rule. I've
written about this here: <http://news.ycombinator.com/item?id=2632658>

------
phamilton
The assumption of the article is a paradox. The author first assumes that the
total bitcoin market will be worth 1 trillion. Then he claims people will
hoard coins due to their promising future value.

In reality, there is a chance the bitcoin market will reach 1 trillion. There
is also a chance it will crash. Most likely it will fluctuate. If I were told
there was a 100% chance my 1.5 coins I have mined today would be worth
hundreds of thousands of dollars, then of course I would hoard. But since I
have no such guarantee, I am more likely to cash out when I think the market
has peaked and/or the fad has faded.

There are die hards who will hoard and have hoarded from day one. It's the
same with all investments. I have a friend who bought his new car with 11
ounces of gold - He walked in, set it down on the table, sign some paperwork
and walked away with a new car. But I think the average bitcoin user won't be
able to pass up the idea of "I didn't really have to do anything for this, so
why not buy a pizza with a few (micro)bitcoins."

------
splat
I'm curious, does anyone know what fraction of dollars are "hoarded"?

~~~
jbellis
Approximately none, because dollars are inflationary by design (of the Fed),
not deflationary like bitcoin (again, by design of its creators).

~~~
tatsuke95
Exactly. Inflation prevents (in fact promotes the opposite of) hoarding.
Hoarding dollars would be just as irrational as spending Bitcoins.

An example of something being hoarded today? Anything that is having its price
run up. Gold, for instance.

------
teilo
This is all just one argument, the same argument others have been making:
Bitcoin will inevitably deflate. That is true. Whether the conclusions are
true remain to be seen. It's the old Keynsian vs. Austrian argument.

What makes this an especially interesting experiment, is that Bitcoin is far
more divisible than any other currency in history. This alleviates many of the
typical objections to a fixed currency, and introduces a dynamic that,
frankly, I don't think anyone understands yet.

There still remain the question of whether the process of deflation itself
makes a currency unviable. Herein lies the actual debate. I for one am going
to enjoy watching it, and see how it all works out. There is a lot that we can
learn. Let's hope governments don't get in the way and stop the experiment in-
vitro.

------
scythe
bitcoin will probably never represent a significant proportion of human
wealth. However, it will probably remain useful for the next five to ten years
as a cryptographically strong way to pay for things outside of government
influences. Silk Road is a pretty cool case in point.

It will probably be replaced organically by a more useful form of
cryptographic currency -- perhaps something that uses bcrypt or a similar
Moore's Law-resistant hashing algorithm -- before serious deflation or broken
hashes really start to come into play.

------
piuk
At the current price miners are producing $140,000 worth of bitcoins per day,
I expect most of these miners will be looking to cash out and the ones that
don't need to at least cover electricity costs etc. $100,000+ new investment
per day probably won't be sustainable for long and hence the price will have
to correct itself.

------
tatsuke95
I'm not sure if Bitcoin will "fail", but they'll certainly be forced to
adjust, as all currencies have, to the fact that a finite money supply (that
doesn't grow with demand) has inherent problems.

------
lsparrish
I think people will be even more anxious to buy and hold when they find out a
way loan out bitcoins. For example, convert them temporarily to tokens
representing another currency.

