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Why Bitcoin Will Fail As A Currency (espians.com)
66 points by tav on June 7, 2011 | hide | past | favorite | 87 comments

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.

He is not saying what you think he's saying for #1. He's saying that if in 10 years or whatever, 1 bitcoin is worth $2M, why would you ever spend your 1 bitcoin now when it's going to be worth so much money in the future. This means people are going to horde, or it's not going to become so big.

"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."

Acceptance of a currency is a tricky thing. For less-than-legal uses, you need someone willing to launder the money at some point. Your arms dealer isn't going to take bitcoin unless they can exchange it for a widely accepted currency or pay their supplier in bitcoin, and the supplier won't take bitcoin unless they can buy raw materials with bitcoin, and the mine isn't going to take bitcoin unless they can exchange it for something useful to them.

Breaking out of the cycle is much easier with a currency that is accepted by everyone for everything. With dollars, just set up a restaurant, people pay in dollars in those, and there are more legitimate restaurants than money-laundering restaurants (in most places). You'd need enough legitimate use of bitcoins to hide laundering, and it's not clear to me that will ever happen.

I personally think that BitCoin as a concept is too big to succeed. It will scare governments and they'll ban trading in it.

More likely, they could run a bunch of PR campaigns and plant news stories about how risky and unstable Bitcoins are -- either in an attempt to scare consumers away from the currency, or to actively destabilize the speculative market for the currency.

"Banning" the currency seems beyond the reach of a government unless it's prepared to place restrictions on internet usage in general (a la the PRC). This is because, even if the U.S. government (for example) were to declare that dollars are no longer convertible with Bitcoins, people could still trade dollars for BCs, and vice versa, under the table.

> declare that dollars are no longer convertible with Bitcoins

Yes, what I was trying to get at (not banning the transfer of BTC). While trading could move underground, making it illegal would probably deter enough people.

Should most governments adopt a similar stance, then it would be nothing more than a collectors item.

You just described part of the plot of "A Lodging of Wayfaring Men". Highly recommended book!

>In practice, it works extremely well because not everyone is solely motivated by their best economical interest.

Actually free software can be in your best economical interest. I wonder if Linus would have gotten the kinds of jobs he has without Linux. I seriously doubt it, at least not the first ones.

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.

"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."

Then you're being willfully blind. Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to. That has nothing to do with its fiat-ness, it is simply a characteristic of deflating currencies of any kind.

You may not agree, or you may think BitCoin has some clever solution to the problem, but there are numerous criticisms that are much more sophisticated than "it's not a fiat currency".

(Another one being the "it has no backing", which is not a claim that only a government can back a currency, it is observing that it has no backing at all. I'd be perfectly fine with a credible non-governmental third party that provided a credible backing (and both "credibles" are important there, I did not just repeat myself), but there isn't one, and again, that has nothing to do with it "not being fiat".)

In fact I think most criticisms of BitCoin are not that it simply isn't a fiat currency.

(On a general note, if you are planning on being a BitCoin activist, it is important to learn and understand the arguments your opponents are making. You can not counter an argument you do not deeply understand. Sticking fingers in ears and chanting "la la la!" is psychologically appealing, but you're sacrificing all ability to persuade when you do it. There are good arguments against BitCoin. For that matter you can't engineer solutions to problems you don't deeply understand.)

Even in the very article at hand, it points out that there is a standard economic criticism applicable to deflating currencies that BitCoin may be vulnerable to.

Yes, the armchair deflationary spiral theory. With the exception of labor theory of value, I do not know of any other economic theory whose premises are a) so thoroughly laughable b) lacking any kind empirical evidence.

In an attempt to reduce the noise/signal ratio (usually high) in such debates... Yes, I know the usual arguments in favor of Deflation Scare and I devoted a fair amount of time thinking and debating these matters. Done my homework, so to speak.

But feel free to surprise me, with an argument I missed.

That's your persuasive counterargument? "That theory sucks"? I don't deny the standard case is controversial (which is also, BTW, not the same as "lacking in any evidence"; there's plenty of evidence, it's just that what it means is still debated), when discussing deflation spirals of a relatively small size, but when you're talking about a currency that will deflate by orders of magnitude, and that necessarily must do so if it going to be any sort of successful, I think you need more than "Ha ha ha! I laugh in the face of your argument!" I do not know of a real world parallel of such a thing, and when it comes to systems this complicated the presumption by any sane systems engineer is that your new proposal won't work. I for one am not going to take it as axiomatic that BitCoin is inevitably going to work and the burden of proof is on those who think it won't work (another psychologically tempting position). Quite the opposite.

You claim to have done your homework... have you considered actually sharing it with us? Or are derisive italics all you really have?

That's your persuasive counterargument? "That theory sucks"?

Thank you, you've put it more succinctly than I did. As for "plenty of debated evidence" it just means no evidence. Evidence should be evident, I'd say.

when you're talking about a currency that will deflate by orders of magnitude

How about you (or TAOTFA) have a look at a) Bitcoin Monitor b) The "Buying" section on bitcoin forums c) this:

*You may be right, but I have some anecdotal evidence to the contrary. Since the $10+ spike in bitcoin prices we've sold considerably more shirts in our store.


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.

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.

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.

> 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.

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...

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.

The question is are they good reasons. It's probably a mistake to assume that our current knowledge and understanding of economics represents progress from where we were before.

Having just finished a detailed account of the history of economic thought I can assure you that there were times when economists far better understood the nature of prices that came well before Adam Smith and Ricardo-both of whom didn't really understand prices at all.

Schools of thought tend to continue until they reach a dead-end that's impossible to ignore. A new school picks up the pieces and continues on again. We have seen that with the fall and rise of Keynesian economics.

Maybe we've been seeing different criticisms, but the ones I've seen don't just complain that it's not backed by fiat -- they complain that it's not backed by anything.

I think it's getting backed by all the people that are putting money into it.

That's the same kind of backing tulips had.

"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."

Please check your facts. For the majority of human history, money was not backed by a scarce resource, but by government power.

For example, there was no guarantee in the Roman empire of exchanging coins to a certain amount of gold or silver, and the value of the coins in the Roman empire was largely unrelated to their material value.

To make that more precise, the reason that precious metals were used in coins was to prevent forgeries. If C is the cost to produce a coin or piece of paper money, then its value will (with very few degeneracies) always be in the range between C and f*C, where f > 1 is a factor that depends on the level of anti-forgery technology, and on the efficiency of law enforcement for tracking down forgers.

After all, no government in their right mind would produce coins whose value is lower than or equal to the cost to produce them - that would just be a nonsensical work. Therefore, the value is larger than C.

However, the higher the ratio between value and cost of production, the more attractive the coin or paper money becomes as a target for forgers. So raising the cost C of production makes it less attractive to forgers.

Interesting side note: If you actually look at the (unfortunately scarce) data concerning inflation in the Roman empire, you will see that as inflation pushes the real value of coins down, and the nominal cost of production of the coins up, the government eventually reacted by minting new coins with adjusted production costs (by reducing the amount of precious metals in the coins, or by creating new coins with the same amount of precious metals, but higher nominal value).

It is quite unfortunate that folklore has the causality between minting coins and inflation exactly the wrong way around.

You mean when 19 out of every 20 people had to work to grow food, and there wasn't enough money for social welfare?

How much of the last 200 years (industrial revolution, mass transport (trains/roads/cars/planes), etc.) have been due to having a fiat currency and modern banking system?

Um, the U.S. dollar was fully convertible to gold until 1971. Since gold has risen from $35 to $1500 per ounce.

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.


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.

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.

I support bitcoin and think it is a Good Way Forward, but I agree categorically with your critique. It is sufficiently disruptive that I expect the major players in governments will legislate it out of existence.

They might legislate against it, but will they be able to enforce the legislation?

Throw a non-negotiable 1-year imprisonment into whatever penalty they enact for using bitcoin. Then imprison the thousand most prolific users (business that accept it, people who publicly exchange it, etc.), and continue doing sweeps of anyone who admits to using bitcoin for the next few years. Suddenly, the only people who are willing to use bitcoin are those who are already using it for illegal things.

Keep in mind that they don't need to kill the entire system, they just need to make it too risky for the average person to even consider using. That is sufficient to make it fail.

Exactly. Add to that a propaganda stream, "Only Evil du jour will use Bitcoin. Are you Evil? No! Then you won't use Bitcoin either!"

I heard Hitler uses Bitcoins.

I'm sorry but this is silly. What you are suggesting has been already tried in prohibition of alcohol, in war on drugs and now in a more civilized way in a "war on car downloaders".

The main outcome was that black markets flourished. If people want what Bitcoin provides, they will get it in one way or another.

> If people want what Bitcoin provides.

That's the key point. There is a huge demand for alcohol, for drugs, and for cheap/free content. In the first two cases, this means that there is real profit to be had in selling it, and the illegality means that prices can be hugely inflated due to risk. For free content - "car downloaders" is a really nice way to describe it - I haven't yet figured out the economic motives, but it seems to be a mixture of selling ads (for the people running the sites), sharing/giving back to the community (especially on private, invitation-only trackers), and just because of how easy it is.

Is it possible to make money or karma off of bitcoins in a similar way? Well, you can sell them. If you have bitcoins, you can make a profit of them that way - you can sell them for above value, or charge for the service as well as the coins. You can also buy them, hoping that the price increases, which ends up as selling them.

So, answer this: if bitcoins were made illegal, what monetary incentive would there be to use them? Their price certainly wouldn't go up - it would plummet as all the legitimate traders tried to get out.

Hate to burst your bubble but comparing demand for alcohol during prohibition and demand for quasi-anonymous online value transfers is what most folks would call an obvious strawman. What percentage of the population of the US do you think has even heard of bitcoin, much less understand the underlying concepts?

Everyone I know that's even aware of (much less involved with) bitcoin atm falls under the following demographic: young technophiles. A small minority of these are buying up more GPU's and giggling about the "free money" they're making.

It's a mistake to confuse speculation on the part of some early adopters with actual broad public demand. Expect popular demand for bitcoin about the time that credit cards stop working on Amazon.com.

In the mean time the IRS has every reason to stomp on this before it gets any bigger and all the excuses legislators need have been laid out on a silver platter.

It'll still thrive in all the countries that don't legislate against it, and in the black markets of those which do.

That's one possible outcome. Another being bitcoin traffic provokes government-mandated deep packet inspection/filtering or other further intrusions into online privacy.

It sounds like that might spark the first real "cyber wars." I'm not sure most governments would survive it.


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)

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!"

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.

I guess the real question then is whether the bitcoin equilibrium value is stable enough to be a price unit for real economic transactions, or whether it will fluctuate wildly as people jump on and off the bandwagon.

yep this a good open question. The bitcoin guys will say, in parts of the world economies where bitcoins are taken for both input costs and for selling prices, then exchange rates are irrelevant because bitcoins are used in all transactions, so there are is no forex volatility. Of course we are far away from that sort of adoption.

The more persuasive argument is that people are worried that sovereign currencies will themselves become too volatile for real economic transactions if debt problems grow too much, debasement by central banks cause inflation, etc.

In this sense, bitcoin is a great hedge against world uncertainty, and will do very well if problems with the euro mount, USD debt skyrockets, etc. For the same reasons people care about gold when people lose faith in fait currencies, there is a good chance people will care about bitcoin if things go crazy.

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".

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?

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.

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'. :-)

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.

True, I do believe that money flowing from one person to the next (i.e. spending) encourages progress and opportunity. I think those are (on balance) good things. I think it's good to have some convection in the pool.

I don't want a central bank to 'allocate resources' but I don't mind when Wall St. closes due to panic selling or the market closes when someone blows up a skyscraper while everyone figures out wtf that means. I think sports are better with referees. Kill-the-man-with-the-ball is only fun for the biggest guy. Football is a better game.

What we have right now is great but I also don't think Bitcoin is going in the right direction. If you think bitcoin will be less volatile than the overall economy now think about how much easier it would be to corner a market in BTC than USD. Think about how easy it will be to buy off a politician. I don't think democracy can survive under bitcoin.

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

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

your likely to spend most of them before then.

This does not happen that much in human behaviour. Just look at all the people who inherit wealth. If what you said was the most common approach, they would be rare.

even if your savings increase in value over time, investing them in something could increase them even more.

Depends. Over the last year bitcoin has seen a ~20,000% return rate. If bitcoin gets uberpopular (i.e. each coin is worth ~ US$2m) within 20 years, then BitCoin would have a return rate of ~ 85% per year consistantly for the next 20 years. There is practically nothing else with that close an return rate, so the only financially sound course is to hoard your BitCoins, not invest them

The article overlooks that fractional reserve banking is totally feasible with bitcoin. Bitcoins will not inevitably sit on people's hard drives doing nothing, hoarded. Saved bitcoins will likely wind up as reserves in some bank, just as with dollars, from whence they are loaned out.

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.

How many time are people going to scream...bubble? http://bitcoinweekly.com/articles/comic-reaction-after-drama...

Anyway, hoarding is not a problem. http://bitcoinweekly.com/articles/one-apple-today-two-apples...

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?

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.

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.

Regarding entrepreneurship part..

For me bitcoins is just another sale channel for my http://store.gifti.us . Once I receive coins I immediately exchange them to fiat dollars to pay suppliers. It works perfectly so far. And this is how I suppose it should work, at least until bitcoins will not become world currency =)

Speaking for only myself, this is the first article that I have read which goes beyond the usual arguments made against Bitcoin. I would strongly recommend reading the OP again properly as the links you have posted do not seem to address the issues it brings up.

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.

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.

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.

Software, jpegs, and mp3s are digital versions of things the law has seen before (well, software not quite, which is why there are still some controversies regarding it).

What you wrote reminds me of the anti-spam service that attaches an X-Header to emails with a little copyrighted Haiku, and thus considers spammers to be in violation of copyright.

If each bitcoin contained a little tiny piece of poetry you could make it robust against a legal challenge. It would just be a micro-poetry market.

Since it's legal for me to pay legal tender for software, for jpegs, for mp3s, and other digital constructs, how could a legitimate argument be made to make it illegal for me to pay legal tender for copyright-infringing files?

Since it's legal for me to take legal tender for software, for jpegs, for mp3s, etc., how could a law be passed to make it illegal for me to take legal tender in return for copyright-infringing files?

If I advertise that I want to buy copyright-infringing software, how can they stop me from spending my dollars/euros on them? If I advertise that I have copyright-infringing files to sell, how can the stop me from doing so?

I won't pretend it's not silly, but only so long as you stop pretending that governments have never made illegal the exchange of certain bit patterns.

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

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.

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

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.

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.

Prisoners Dilemma. BitCoin as a whole would get more popular if people spent it. However if lots of people spend/use it (and the price goes up), then it's better for you to hoard it. However everyone/lots of people will think this way and hoard it. This means it can't take off and get popular.

But as the amount of people hoarding it goes up, the value of bitcoin will eventually drop. You can't have a market that climbs indefinitely on the basis of speculation alone.

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?

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

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."

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

Hoarding is relative. Whatever commodity has the highest velocity (most trades per day) is generally not considered hoarded.

Relative to dollars, nearly all commodities are hoarded, but that's because the entire money supply changes hands nearly 3 times a day on the currency markets (or at least used to). As bitcoin is backed by as much thin air as the other currencies, there is nothing to stop it's velocity from attaining the levels of the dollar.

Being as bitcoin is relatively new, its velocity is low; furthermore, as many vendors have not started accepting it, its velocity is further hampered.

The author suggests that it is mainly being used as a store of value, which is true. Any money that is not controlled by a government is generally a good store of value; and stores of value have their uses. Velocity is not everything.

It is worth noting, however, that throughout history "good money" (good stores of value) have always beaten "bad money" (bad stores of value) in the competition for velocity, all other factors being equal. The only place bitcoin has to catch up is in redeemability, otherwise it's suitability as a money is equal to the other fiat currencies. When it catches up there (and it will, since it obsoletes many taxes), expect it to really take off, unless governments start to get jealous and shove guns in everybody who tries to use it's faces.

Otherwise, most of his arguments are beaten by the infinite subdividability of digital currency.

I think what most of the critics of bitcoin don't realize is that soundness of a money is not dependent on it's backing or even how much is in circulation at any particular time. Who/what controls the issuance of the money is the most important factor; and the numerous hands on bitcoin assure things do not get out of hand.

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

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.

For another perspective: USD are "hoarded" by investing them in US treasuries. This preserves their value against inflation, because (to a first approximation) when the Fed prints money it does so by buying those treasuries, thus raising their price in USD.

So in the dollar economy, hoarding takes the form of purchasing USD so you can participate in seigniorage. In the bitcoin economy, hoarding takes the form of holding on to your balance. But they are both forms of hoarding, designed to protect value without actually making "useful" investments that affect the real world.

edit- I see now that I completely misread dollars as bitcoins. My response actually makes sense in that context, and not so much to the question you actually asked.

My understanding is that it would be impossible to know. How could you tell the difference between a dollar that was being hoarded, a dollar that had simply not been spend yet, or a dollar that it's owner had lost access to? The way the system is set up, it is supposed to be impossible to tell even how much money a single individual possesses. One person could own half of all the bit coins in a massive market manipulation attempt right now, and I don't know how anyone could figure it out.

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.

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.

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.

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.

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.

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