[Petrushka]

Exactly. "No explanation why the price would have soared so high" is the exact reason why Bitcoin will have issues trying to tie into the larger financial structure without series difficulties.

Ever seen Trading Places? The stock market scene at the end where they make a killing is based (fundamentally, forgetting about the fraud) on the fact that the value of the Frozen OJ drops to 25% of its former value in a single moment. The normal financial system has things in place, both internally and externally, so that (fraud not withstanding) such a rapid (de)valuation increase doesn't happen regularly (when it does, you get 1873, 1929, 2008, etc). Bitcoin doesn't have the internal measures, as it isn't issued by a central authority, which can alter the amount of currency in the market at will. As such, it would need some many external controls, such as say a 24-hour transaction period, to be useable on the open market, which would in turn make it unreasonable for the open market.

And if you're wondering why Bitcoin is being seriously studied by economists, that's why. No one has seen anything like this ever, and what happens, and how that can influence general economic models, is fascinating.

[yebyen]

I understand your point, but I think you've successfully argued against it when you told me that there is "no such authority on Bitcoin who can alter the amount of currency on the market at will"...

What would a 24-hour transaction period do exactly? Bitcoin is supposed to be used like cash. If you spend it then it's gone, most immediately, and if you value it highly then you keep it in a safe.

Price goes up, price goes down, safe is still safe. Until it gets cracked, then if you're a real player, the market is flooded with (illegally obtained, but generally not really tainted and otherwise fairly easy to clean) pile of coins.

I'm no economist, but I understand "redistribution of large collections of wealth can lead to rapid deflation without countermeasures." That's equally harmful to big-time owners as well as little guys.

We should be thinking about the countermeasures.

[Petrushka]

The points I'm making don't have anything to do with transactions in a primarily Bitcoin marketplace. The issue is that there is nothing in place to maintain price rates, even including that, as you note, its primarily digital existence and small size make it highly susceptible to fraud. This is a major issue for converting Bitcoin to other currencies.

That Bitcoins are supposed to function as cash doesn't mean they are automatically stable. Consider that Bitcoins are becoming more accepted by online retailers, and lets say that, for instance, Amazon decided one day to not only accept them, but, because of the simplicity of Bitcoin transactions (e.g., you don't have to pay eBay to implement PayPal), any and all Amazon products would be 5% off using Bitcoins. Such a situation is unlikely, but if you imagine instead of Amazon, a number of small players, like how Wordpress is doing it, it's feasible. Then, suddenly, the government steps in and forces Amazon to pay sales tax, and, because Bitcoin isn't accepted by the US Government as a full currency, they decide to set some arbitrarily low Bitcoin to USD rate, and Amazon stops taking Bitcoin. Such a series of events would lead initially to a massive increase in demand for Bitcoin, then a massive decrease. Again, fiat currencies have systems built in place to protect against such an occurrence, including scale. Bitcoin does not, and so its interaction with the general market will scare people off unless there is some sort of holding policy in place (like a 24-hour transaction period) to secure the Bitcoin's value.

Not a great example, but it will do.

[yebyen]

Thanks for that! It sounds more plausible than a regular house of cards. I never even think of sales tax. It makes things a lot more complicated than just having income tax.

For instance, should you collect sales tax when selling bitcoins? If you are in a jurisdiction that collects sales tax, then I don't see why not. Also pay income tax on your mining rewards. Now, good luck making a profit! *(without adding a secondary business, unrelated to mining. hey, at least you can be paid in bitcoins!)