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The obvious speculation aside, Bitcoin's behaviour is revolving more and more about good vs bad money, aka Gresham's law. "Good money" (bitcoin) is being hoarde

The obvious speculation aside, Bitcoin's behaviour is revolving more and more about good vs bad money, aka Gresham's law. "Good money" (bitcoin) is being hoarded because people are starting to trust it as a long term store of value, while elastic moneys like USD/EUR/JPY are being used for paying and playing. Most modern economists just instinctively hate good money because they believe saving is evil. "It doesn’t serve any socially useful function." They use the exact same phrasing when discussing gold. (My only beef with bitcoin and blockchain is that it can become bad money in a matter of milliseconds, without any heads up. E.g. when a major bug is found. Bitcoin may ultimately just be too complex to be good savings money. Its "badness" can be hidden in a massive, single occurence tail risk.)

fhood 9y ago
How do you define good money and bad money? I feel like Bitcoin used to be a currency, but it has evolved into an investment game.
- dnautics 9y ago
  Good money and bad money are well defined concepts in the context of greshams law
- unknown_apostle 9y ago
  Whenever a person owns two kinds of things which are money-like (fungible, liquid, universal) they will prefer to pay using the bad money. Bad means things like "diluted gold content", reckless behaviour of the emitting central bank, etc. In the case of a widely adopted blockchain like bitcoin, "bad" could mean something like "technically inferior". Or in terms of tail risk: "hacked" or "major bug discovered" or "encryption broken". These tail risks caused by blockchain's complexity would be a sudden event. Unlike e.g. USD or EUR becoming bad money, which is something that unfolds slowly and publicly over many years.
paulgb 9y ago
That's not what Gresham's law says. As Hayek put it in denationalisation of money (section VI The confusion about Gresham's Law): > Gresham's Law will apply only to different kinds of money between which a fixed rate of exchange is enforced by law (Emphasis in the original)
- conanbatt 9y ago
  Nice! Argentina had currency controls and this effect happened immediately. Gresham's law could happen if the governments...banned bitcoin!
- unknown_apostle 9y ago
  Why would the same principle not apply to any situation where a person owns two kinds of money (both fungible, liquid, universally accepted), regardless of exchange rate rules? People will always prefer to hoard ("save") the better of the two and pay ("get rid of") using the worse of the two.
  - paulgb 9y ago
    Because in an efficient market, if one of the currencies is preferable that will already be reflected in the price. If, based on public information, you would rather hold currency X than currency Y, then so would your counterparty in the exchange, so the buying power of currency X would rise accordingly. Gresham's law applies when a legally fixed exchange rate means that the price can't reflect the difference between the two currencies.
    - unknown_apostle 9y ago
      I'm not going to get dragged into a discussion on "efficient markets". You win by forfeit.
      - paulgb 9y ago
        Efficient markets was just a simplifying assumption to make my point brief, but the second sentence of my explanation does not rely on any more assumptions than Gresham's law does. In any case, I recommend that chapter of Hayek, it's a quick read and you might find it clarifying.
md2be 9y ago
Look at the early investors of Bitcoin, they all invested because they saw it as a currency. When this didn't materialize, the hyped it as an investment.
- wuliwong 9y ago
  I've heard this idea mentioned recently. Is there suddenly a consensus that bitcoin (or crytpo in general) will never be used as currency? To me it seems pretty arbitrary to say it now. Outside of slow transaction times, I'm not sure what has changed. Volatility is just a fact of life until the market cap is significantly larger. Bitcoin may never get enough investment to stabilize but I don't see how that is now accepted as definite.
- luka-birsa 9y ago
  Nobody needs hyping anything. Bitcoin was a viable currency until its price started appreciating stratospherically. There is no sense in spending BTC right now, since you can get x10 gains just by holding it. You don't spend stocks right? I really don't get these snarky comments on how this is a bubble and BTC will die and what not. Just don't buy it and leave it to others that like to have x10-x100 gains in a year. For me it's quite straight forward that BTC value will appreciate over time. There is finite amount of BTC in this world and Y people. Unless some systemic factor (eg. criminalization of use) or technological factor (eg. crypto is broken) rears it's head it's fair to say that an asset designed to be deflatory in price will increase its price over time. It's not going to be a straight line, and I really hate these massive growth spikes (not sustainable, plus they play with your emotions), but we're well ahead of the times when BTC and/or crypto could be called just a fad. Not with wall street actively pursuing legal means to invest in BTC.
tlrobinson 9y ago
Well, from a technical standpoint, implementation bugs are unlikely to affect savings if you’re not transacting often, and consensus bugs can be fixed with a fork. The exception would be simultaneous catastrophic breaks in ECDSA signatures and (assuming you’re not reusing adddresses) RIPEMD-160 and SHA256, which seems unlikely. From a price perspective, yeah, the market could overreact.
- unknown_apostle 9y ago
  I agree, unlikely but not quite zero. As is the general rule with complex things. But again, until a show stopper is found, I would say that bitcoin will never be popular as a means of payment. People would increasingly use it as a vehicle of savings. Once it has reached some point of "maximum adoption", it would start behaving exactly like post-1973 gold. It would still go through periods of speculative enthusiasm in which allocation to bitcoin increases, followed by periods of aimless grinding in which it drops again. It wouldn't follow CPI tick-for-tick, but over very long term periods, it would be nicely mean reverting vs cycles of general price levels and financial market prices. And as such, in terms of bad forms of money like government currencies, it would ultimately just keep rising forever. Or at least never go to zero. So people who say "bitcoin is a bubble because it's not used much for payments" would be wrong. It's going places exactly because it's not being used much as transaction money. And so, as Nobel prize winners would move up from the step of calling it a dangerous bubble to the step of decrying it as a deflationary threat, I predict no end to their criticisms.

fhood 9y ago

How do you define good money and bad money? I feel like Bitcoin used to be a currency, but it has evolved into an investment game.

dnautics 9y ago
Good money and bad money are well defined concepts in the context of greshams law
unknown_apostle 9y ago
Whenever a person owns two kinds of things which are money-like (fungible, liquid, universal) they will prefer to pay using the bad money. Bad means things like "diluted gold content", reckless behaviour of the emitting central bank, etc. In the case of a widely adopted blockchain like bitcoin, "bad" could mean something like "technically inferior". Or in terms of tail risk: "hacked" or "major bug discovered" or "encryption broken". These tail risks caused by blockchain's complexity would be a sudden event. Unlike e.g. USD or EUR becoming bad money, which is something that unfolds slowly and publicly over many years.

paulgb 9y ago

That's not what Gresham's law says. As Hayek put it in denationalisation of money (section VI The confusion about Gresham's Law): > Gresham's Law will apply only to different kinds of money between which a fixed rate of exchange is enforced by law (Emphasis in the original)

conanbatt 9y ago
Nice! Argentina had currency controls and this effect happened immediately. Gresham's law could happen if the governments...banned bitcoin!
unknown_apostle 9y ago
Why would the same principle not apply to any situation where a person owns two kinds of money (both fungible, liquid, universally accepted), regardless of exchange rate rules? People will always prefer to hoard ("save") the better of the two and pay ("get rid of") using the worse of the two.
- paulgb 9y ago
  Because in an efficient market, if one of the currencies is preferable that will already be reflected in the price. If, based on public information, you would rather hold currency X than currency Y, then so would your counterparty in the exchange, so the buying power of currency X would rise accordingly. Gresham's law applies when a legally fixed exchange rate means that the price can't reflect the difference between the two currencies.
  - unknown_apostle 9y ago
    I'm not going to get dragged into a discussion on "efficient markets". You win by forfeit.
    - paulgb 9y ago
      Efficient markets was just a simplifying assumption to make my point brief, but the second sentence of my explanation does not rely on any more assumptions than Gresham's law does. In any case, I recommend that chapter of Hayek, it's a quick read and you might find it clarifying.

md2be 9y ago

Look at the early investors of Bitcoin, they all invested because they saw it as a currency. When this didn't materialize, the hyped it as an investment.

wuliwong 9y ago
I've heard this idea mentioned recently. Is there suddenly a consensus that bitcoin (or crytpo in general) will never be used as currency? To me it seems pretty arbitrary to say it now. Outside of slow transaction times, I'm not sure what has changed. Volatility is just a fact of life until the market cap is significantly larger. Bitcoin may never get enough investment to stabilize but I don't see how that is now accepted as definite.
luka-birsa 9y ago
Nobody needs hyping anything. Bitcoin was a viable currency until its price started appreciating stratospherically. There is no sense in spending BTC right now, since you can get x10 gains just by holding it. You don't spend stocks right? I really don't get these snarky comments on how this is a bubble and BTC will die and what not. Just don't buy it and leave it to others that like to have x10-x100 gains in a year. For me it's quite straight forward that BTC value will appreciate over time. There is finite amount of BTC in this world and Y people. Unless some systemic factor (eg. criminalization of use) or technological factor (eg. crypto is broken) rears it's head it's fair to say that an asset designed to be deflatory in price will increase its price over time. It's not going to be a straight line, and I really hate these massive growth spikes (not sustainable, plus they play with your emotions), but we're well ahead of the times when BTC and/or crypto could be called just a fad. Not with wall street actively pursuing legal means to invest in BTC.

tlrobinson 9y ago

Well, from a technical standpoint, implementation bugs are unlikely to affect savings if you’re not transacting often, and consensus bugs can be fixed with a fork. The exception would be simultaneous catastrophic breaks in ECDSA signatures and (assuming you’re not reusing adddresses) RIPEMD-160 and SHA256, which seems unlikely. From a price perspective, yeah, the market could overreact.

unknown_apostle 9y ago
I agree, unlikely but not quite zero. As is the general rule with complex things. But again, until a show stopper is found, I would say that bitcoin will never be popular as a means of payment. People would increasingly use it as a vehicle of savings. Once it has reached some point of "maximum adoption", it would start behaving exactly like post-1973 gold. It would still go through periods of speculative enthusiasm in which allocation to bitcoin increases, followed by periods of aimless grinding in which it drops again. It wouldn't follow CPI tick-for-tick, but over very long term periods, it would be nicely mean reverting vs cycles of general price levels and financial market prices. And as such, in terms of bad forms of money like government currencies, it would ultimately just keep rising forever. Or at least never go to zero. So people who say "bitcoin is a bubble because it's not used much for payments" would be wrong. It's going places exactly because it's not being used much as transaction money. And so, as Nobel prize winners would move up from the step of calling it a dangerous bubble to the step of decrying it as a deflationary threat, I predict no end to their criticisms.