[nicholas73]

I don't think Bitcoin will ever be a viable currency, at least not on the scale of national currencies. Despite all the flaws fiat currency has, it is actually backed by something - the power of the country's government to tax. Thus, any buyer of sovereign debt has a calculable probability of return. Despite America's printing of dollars, inflation has actually been mild so far.

Bitcoin has nothing backing it but an artificial supply limitation. That in itself is not a solution because its monetary base cannot possibly grow at the rate overall goods do, and thus have a stable price point.

[andrewla]

I don't understand the argument that "the power of the country's government to tax" is a point in favor of a currency. I would say that it is pretty clear that the opposite is true for almost every significant tax; that a country collecting taxes in a currency would be a disadvantage of a currency. The fact that countries need to pass laws allowing taxation of non-local currencies seems to support that.

For a limited class of taxes, namely, taxes directly denominated in a currency (like property taxes), the taxability of a currency adds to the demand for that currency. But for the most part, since non-local currency transactions and barter transactions are taxed at the effective exchange rate / fair value, the fact that taxes are collected in dollars would seem to neither hurt nor help the currency.

That said, in summary, the "artificial supply limitation" applies to both Bitcoin and dollars, with dollars relying purely on trust that America will not increase the money supply unnecessarily. That inflation has actually been mild is a "bug" in the system -- the Fed is deliberately trying to spur inflation, and has not been having success, for reasons that nobody (including themselves) completely understands. The calculable probability of return that you refer to has been pretty reliable (just like MBS's in 2006, couldn't resist), so that is true, but I don't see that being related to the taxability of the currency so much as to the lack of apparent inflation compared to the nominal returns on sovereign debt.

The monetary base argument also seems specious; M0, the "monetary base", is not generally considered (except by non-mainstream economists) to be all that significant compared to the higher-order money supply factors caused by dollar-denominated assets of varying liquidity. Once (or if) Bitcoin develops a credit market, then the medium-term effective money supply will grow and shrink as the market demands.

[nicholas73]

The excess dollars in circulation tend to be absorbed by treasury bonds, which is backed by the US taxpayer. If there were doubt about this tax base, then the dollars would stay in circulation and devalue the currency. Of course inflation still happens, but it is controlled to a low level which economists claim is helpful to spurring the economy.

[adventured]

I don't agree that inflation has been mild.

http://www.shadowstats.com/alternate_data/inflation-charts

It's only mild if you use their fraudulent CPI accounting, and only if you use the latest version of it, designed solely to hide inflation. If you use the 1980 CPI we're running at 9% inflation, which is not mild at all. In fact, Volcker would have raised rates long ago to fight that level of inflation.

It's exactly the same way they commit fraud in obscuring the real unemployment rate - the U6 - while referring only to the U3 anytime they want to talk about the economy. 14% vs. 6.8% is a dramatic difference, and it only works because they hide the people that have fallen out of the labor force.

[nicholas73]

I don't disagree with you. You bring up very good clarifications. When I say "mild" I mean relative to what it could be without faith in the US and the status of the dollar as the reserve currency.

[grovulent]

Folks make this statement: "but a currency must have backing, or intrinsic value" and feel that they have just proved bitcoin can't work. But not many contributors seem capable of stating WHY they believe this. Care to elaborate?

In any case, I think it's entirely possible that you're wrong, and I've written a long argument against your claim if you're interested:

http://reviewsindepth.com/2013/12/bitcoin-krugman-and-the-me...

The TLDR is that yes, historically currencies have required intrinsic value or government backing of some kind - but it is not an economic law of nature that a currency has to be backed as such. If you can get the economic costs of securing agreement over a currency, then a currency of "mere agreement" is possible. Given that the internet and the design of Bitcoin itself have dramatically reduced those costs - it may actually have a shot at gaining wide acceptance.

[nicholas73]

Another point is to look at the position of sovereign wealth, large banks, and investment funds. If you held a trillion dollars, would you park it in a currency that is backed by a state, or trust that kind of money with mere agreement? Would you put most of your net worth in bitcoin?

Now let's allow that bitcoin has become universally accepted and is indexed to some basket of goods. Then it should be reliable as a currency, right? Well, yes, it'll be an international currency ... just like the Euro! And what we saw in the last few years is that the Euro system is inherently unstable because of unbalanced trade and uncontrolled government debt. You have the PIIGS countries facing the choice of massive debt service or withdrawing from the currency altogether. You have the wealthier countries being forced to support the deadbeats from their own tax base.

In the end, currency is what people make it out to be, and people will game the system. Whatever system bitcoin settled upon will have its own problems. At least with a state backed system you have players who have self interest in mind.

[nicholas73]

There are two things a currency needs - wide acceptance and store of value. Your point about agreement can solve acceptance, maybe, if there is enough impetus to switch (like a failing dollar).

However as it store of value it fails because people holding currency do not want volatility. Dollars are created in response to increase in goods; bitcoins are created by algorithmic mining. There is a disconnect in creation vs. supply of real goods, therefore the value of bitcoin will fluctuate more. You might say that bitcoin's positive value increase bias makes people desire it over dollars, but that would cause people to hoard bitcoins only to dump and crash the market.

Now, you can adjust bitcoin by CPI, but then you'd just transform bitcoin into a system just like other currencies, along with entrusting a central banker and other problems.

The transactional advantage seems nice, but there is no reason a system can't be set up for dollars either.

I'm not going to say it's never going to happen, but it seems unneeded at this point.

[pault]

The inherent value of Bitcoin is that it allows one to conduct (some types of) business globally without a bank account (kind of). There are caveats, of course, but in my opinion this is its primary innovation and everything else is mostly noise.