For starters, he clearly misunderstands what it means for the Fed to print money. When you increase the money supply, somebody is getting "free money", even if it's indirectly. The more dollars there are, the less each individual dollar is worth. If everybody got their share of the newly minted money there would be no difference, but in practice just a few institutions will be the direct recipients of the new money. For instance, when the Fed prints money then uses it to buy California-issued bonds, the California government is indirectly getting free money.
> Or at least have constant in rate of growth? Yes, of course you would, because that's the only way to actually accommodate more people using it.
This is an elementary mistake. Bitcoins can be subdivided almost indefinitely. If they go up 1000 times in value, we'd just start using milibitcoins.
> As a quick thought experiment, let's say demand for Bitcoin grew as more people found out about them. Well, you'd expect the price of Bitcoin in dollars to grow rapidly. Now assume I own one Bitcoin. I also have a dollar bill. I would like to purchase a Pepsi. Which one of those will I spend? Obviously the devaluing dollar gets spent before the skyrocketing Bitcoin.
This is nonsense. A transaction takes 2 willing participants. If bitcoin's value is expected to go up, then naturally the merchant will prefer getting paid in bitcoins rather than the dollars.
The main problem of Bitcoin is that currencies are like social networks: they're only useful if other people are using it, and often they never achieve the critical mass necessary to be successful. This, and the large risk of being outlawed by governments.
I suggest that you read "A Free Nation Deep in Debt: The Financial Roots of Democracy". You don't understand how this stuff works, particularly the relevance of "fiat" currency versus an asset-based currency.
You also forgot to address the key issue with Bitcoin -- the scam aspect of it. The first half dozen people who started mucking around with Bitcoin control millions of bitcoin.
Why is it bad for the Fed to give California "free money", but OK for some Japanese programmer to give himself and his friends "free money"?
This is an elementary mistake. Bitcoins can be subdivided almost indefinitely.
OK, it is fine for a random person to make a serious argument that a professional economist is making a mistake - if you do that, I suggest you back it up. But before someone accuses a professional of an "elementary mistake", that someone ought to do some substantial research into the field (I'm not a professional but I did do my undergraduate work in it).
The problem with deflation is NOT that bitcoins can't be subdivided. NOT what you're saying. Got it?
The problem with a deflating currency is that when a currency holder has a strong belief that their currency will be worth more tomorrow than today, they have a strong incentive to hold that currency rather than spend it. This only sounds good. In reality, it, deflation, is severe drag on demand in the economy - we saw this in 1930's America. Money has two uses - medium of exchange and store-of-value. If bitcoins err too much on the store of value side, this interferes with their medium of exchange function. A functioning economy requires its currency to circulate constantly as Goods and labor circulate constant. Interrupt the circulation of currency and real production processes get interrupted - a bad thing.
Of course, bitcoins are terrible as long term store of value also for the #5 reason in the link - when people are buying and holding bitcoin 'cause they expect them to increase in value (store of value "component") and at some point bitcoins go down, their value will be hit hard and permanently because nothing backs them other than people's optimism (even fiat currency is back by a state). IE, if confidence is lost in Bitcoins, someone could issuing Bitcoin2.0's and then how to you decide what is real?
(Certainly following the rules defines current bitcoins but people follow these rules because they have confidence in the entire setup. If an event which caused people to lose their bitcoin confidence, like bitcoins suddenly losing value, then people willingness to accept the particular bitcoins will decline concomitantly).
That's what makes me the most nervous about Bitcoins -- for me to turn my paycheck into Bitcoins, or turn Bitcoins into something I can give to my mortgage holder, I've got to find a person to trade with. And you're right -- if the value of a Bitcoin is expected to keep trending up, that shouldn't be a problem. But what happens if (or, as I'm guessing, when) the market adjusts, or the bubble pops? That decentralized nature makes me worry that any investment in Bitcoins could turn very illiquid very fast, and given that the market right now seems to be driven almost completely by speculation, I worry about this happening sooner than later.
If, however, more people start accepting Bitcoins in exchange for goods & services, I think the currency might stabilize a bit more. But that's going to require much more widespread adoption. And how many merchants will shy away from a currency whose value can swing 10%-15% in the time it takes a customer to place an order?
The one and only thing I feel certain about re. Bitcoin: Somebody way smarter than me is going to make a ton of money with this.
I didn't say that issuing bonds is getting free money. The point is when the Central Bank prints money and then spends it on X, the institution selling X is indirectly getting free money or, equivalently, everyone else holding dollars becomes a bit poorer.
When a Central Bank engages in something like quantitative easing, no one is getting "free money." Other governments or banking institutions are borrowing and re-lending it to others who do the same until it finally gets to real people who exchange their physical time, labor, and output for it.
That is how capital is diffused in the current system. Yes, it is absolutely inflationary, imperfect, and this is big oversimplification, but the bottom line is that money has no inherent value. The issuing bodies -or more closely- the groups of people they represent, do. I hold that true for Bitcoin too - a hash string has no inherent value, nor does the "proof of work" that was required to generate it - it's all about artificial scarcity seeded randomly to an entirely non-random segment of the population.
You get high marks for boastful overconfidence, but frankly, I think anyone who claims to know with certainty what will happen with bitcoin, including you, is grossly overestimating their predictive talents.
The truth is, we have not seen a currency with exactly these properties ever before. The discussion on Quora highlights for me just how little consensus there is about what will happen. Bitcoin is interesting precisely because we have no idea how important it will turn out to be.
The top poster in that discussion doesn't make a very good argument. He starts out with casual slander, makes it clear he has little understanding of how Bitcoin works, and then goes on to claim that it will fail because it will indefinitely appreciate in value at such a rate that no-one will ever want to spend it.
I found a part of Sean Lynch's comment to be very insightful.
Bitcoin's deflationary nature, ironically, will almost
certainly cause it to suffer from Gresham's law, in fact
it probably is right now: when the novelty of using
Bitcoin to pay for things wears off, we'll all come to
our senses and start using our inflationary fiat
currencies to pay for things, and spend the rest to buy
deflationary Bitcoin, and nearly all Bitcoin transactions
will be for a fiat currency or for something illegal or
that otherwise has very high transaction costs with fiat
currencies.
For starters, he clearly misunderstands what it means for the Fed to print money. When you increase the money supply, somebody is getting "free money", even if it's indirectly. The more dollars there are, the less each individual dollar is worth. If everybody got their share of the newly minted money there would be no difference, but in practice just a few institutions will be the direct recipients of the new money. For instance, when the Fed prints money then uses it to buy California-issued bonds, the California government is indirectly getting free money.
> Or at least have constant in rate of growth? Yes, of course you would, because that's the only way to actually accommodate more people using it.
This is an elementary mistake. Bitcoins can be subdivided almost indefinitely. If they go up 1000 times in value, we'd just start using milibitcoins.
> As a quick thought experiment, let's say demand for Bitcoin grew as more people found out about them. Well, you'd expect the price of Bitcoin in dollars to grow rapidly. Now assume I own one Bitcoin. I also have a dollar bill. I would like to purchase a Pepsi. Which one of those will I spend? Obviously the devaluing dollar gets spent before the skyrocketing Bitcoin.
This is nonsense. A transaction takes 2 willing participants. If bitcoin's value is expected to go up, then naturally the merchant will prefer getting paid in bitcoins rather than the dollars.
The main problem of Bitcoin is that currencies are like social networks: they're only useful if other people are using it, and often they never achieve the critical mass necessary to be successful. This, and the large risk of being outlawed by governments.