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Bitcoin Is a Terrible Currency, and Not for the Reason You May Think

29 points by f_o_m 9y ago

Empact 9y ago
I don't find this argument persuasive. If the currency is liquid, you can simply spend the new currency rather than the old, while using the old currency you would have otherwise spent to acquire the new currency. The spending will have negligible impact on your investment outcomes, and you'll be supporting the currency that you're investing in.
- notthemessiah 9y ago
  That's a pretty big if. Also, currency is liquid nearly by definition, and bitcoin in relation to other currencies has demonstrated many properties that make it practically very illiquid (e.g. the uncertainty of day-to-day price changes).
  - deleted 9y ago
    [deleted]
  - Empact 9y ago
    The argument is basically an example of Gresham's law, which is used to explain why value-backed currency often loses out to fiat currency. IMO this doesn't apply to cryptocurrency because Gresham's law was formulated in contexts with lower liquidity and no electronic transmission. https://en.wikipedia.org/wiki/Gresham%27s_law https://en.wikipedia.org/wiki/Gresham%27s_law
notthemessiah 9y ago
> Bitcoin is hyperdeflationary Am I the only one where this was the reason I was thinking? Interestingly, thinking honestly about bitcoin made me a Keynesian.
- nine_k 9y ago
  Bitcoin is only hyperdeflationary because it's being pumped, to my mind. It's mostly used as an investment and speculation tool, not as a currency, that is, not for paying for goods and services. It's not (yet) "digital gold", but rather "digital tulips" [1]. [1]: https://en.wikipedia.org/wiki/Tulip_mania https://en.wikipedia.org/wiki/Tulip_mania
  - anonymous5133 9y ago
    Agree. BTC is now a speculative tool similar to gold. If you want something that is more like a currency then bitcoin cash is better. The fees are like one penny. Also I don't think the deflationary is an issue because of how fast crypto can change hands. For example, I go to buy a t-shirt for $10 and I pay the merchant $10 equivalent in bitcoin cash. The transaction confirms in 10 minutes or less and the merchant can send the crypto to an exchange to immediately convert it to fiat or any other crypto of their choice. Also most likely in the future, merchants will use some sort of centralized payment processor so when the buyer pays and the transaction confirms the seller immediately gets fiat cash instead of crypto, assuming they want fiat of course. So the whole idea that crypto doesn't work as a currency is mostly a moot point IMO. Most people are thinking about that issue from a macroeconomic perspective as in if one crypto was used as the official currency. The days of that is coming to an end IMO. The future is going to be multiple cryptocurrencies competing with traditional fiats. The payment processors of the future will be able to process hundreds of different medium of exchanges through their point of sale system. A merchant has nothing to lose by accepting 100 different medium of exchanges if the other medium of exchanges are simply be converted to whatever the merchant's ideal store of value is. Then it simply comes down to individual merchants and consumers deciding what medium of exchange to use and that is good for everyone. More freedoms is better. I think we can all agree on that.
    - chriswarbo 9y ago
      > For example, I go to buy a t-shirt for $10 and I pay the merchant $10 equivalent in bitcoin cash. This is why I don't think of bitcoin as a currency: I've never seen it used to denominate prices. As far as I can tell, not even Silk Road had prices set in bitcoin. Paying "$10 equivalent in bitcoin cash" (or bitcoin, or litecoin, or whatever) is using those cryptocurrencies as a payment gateway; the currency in those transactions is $.
vorotato 9y ago
Bitcoin doesn't inflate enough, so there's no incentive to spend it.
- alexmat 9y ago
  I can't take it with me when I die, so I'll spend it at some point. Also, see marginal utility of value: https://www.investopedia.com/terms/m/marginalutility.asp https://www.investopedia.com/terms/m/marginalutility.asp
  - vorotato 9y ago
    By the time you want to spend it it's possible there won't be enough liquidity to actually facilitate your transaction.
azinman2 9y ago
This volatility is exactly the reason it isn’t useful _for now_. In the past countries have created currencies, and it’s never been the case that they capitalize from 0 to _a lot_ in such a short time period. That’s why the USD chart is meaningless as a comparison against the same timeline. Wait 20-50 years and then we’ll see.
- f_o_m 9y ago
  Yes I agree - perhaps in 20-50 years (and maybe earlier) but not anytime soon.
sova 9y ago
Solid Platinum is also not a very good currency. What is your point?
- f_o_m 9y ago
  As far as I know no one is arguing that platinum is a future global currency, or letting customers buy products with it. Both are increasingly true for Bitcoin.
  - sova 9y ago
    You're an idiot if you don't accept platinum as a form of payment
Glyptodon 9y ago
The main reason I never got into Bitcoin is that I considered its deflationary nature a disaster and crippling flaw (for a currency). That said, it's become much less a currency and more a fiat commodity one stashes like beanie babies so my original reasoning isn't particularly applicable at this point.
- zyxzkz 9y ago
  Bitcoin has always been the game of finding the greater sucker... now more than ever.
badloginagain 9y ago
I may not buy a pizza with my bits, but I'd sure as hell buy a house, pay off my student debt, or whatever my proverbial lambo is. I only have enough BTC for really one big ticket purchase in my life, even if it increases in value forever. Actually, a deflationary currency is an interesting concept for Basic Income- if everyone is given an amount of BTC at birth, so that it appreciates in value by the time they're old enough to spend it, they have a nice nest egg to build off of. Of course, it only works if the currency circulates. I wonder if there's real world examples of deflationary currencies. Has it ever been tried?
- f_o_m 9y ago
  Yes I think of it as an investment vs. a currency. For example I may also sell TSLA stock to buy a house but not to buy groceries if I think it still has lots of room to run.
srge 9y ago
Flagged. This article brings nothing new or even interesting.
- prophesi 9y ago
  Not to mention the clickbaity title.
- f_o_m 9y ago
  :'(
Phenomenit 9y ago
I don't think the deflationary nature of btc and other crypto that are a finite in design is necessarily a bad thing. The most common objection is that it leads to intertemporal decisions. Is that really bad? If you knew that your money increases in value over time you might only spend it when it's really necessary instead of driving an ever expanding economy that consumes a finite world. Maybe a finite world needs a finite economy? If my money reflect the wear and tear on our common ecology I might be more restricted in its use.
- f_o_m 9y ago
  A currency that discourages consumerism - interesting idea!

29 points by f_o_m 9y ago

I don't find this argument persuasive. If the currency is liquid, you can simply spend the new currency rather than the old, while using the old currency you would have otherwise spent to acquire the new currency. The spending will have negligible impact on your investment outcomes, and you'll be supporting the currency that you're investing in.

notthemessiah 9y ago
That's a pretty big if. Also, currency is liquid nearly by definition, and bitcoin in relation to other currencies has demonstrated many properties that make it practically very illiquid (e.g. the uncertainty of day-to-day price changes).
- deleted 9y ago
  [deleted]
- Empact 9y ago
  The argument is basically an example of Gresham's law, which is used to explain why value-backed currency often loses out to fiat currency. IMO this doesn't apply to cryptocurrency because Gresham's law was formulated in contexts with lower liquidity and no electronic transmission. https://en.wikipedia.org/wiki/Gresham%27s_law https://en.wikipedia.org/wiki/Gresham%27s_law

notthemessiah 9y ago

> Bitcoin is hyperdeflationary Am I the only one where this was the reason I was thinking? Interestingly, thinking honestly about bitcoin made me a Keynesian.

nine_k 9y ago
Bitcoin is only hyperdeflationary because it's being pumped, to my mind. It's mostly used as an investment and speculation tool, not as a currency, that is, not for paying for goods and services. It's not (yet) "digital gold", but rather "digital tulips" [1]. [1]: https://en.wikipedia.org/wiki/Tulip_mania https://en.wikipedia.org/wiki/Tulip_mania
- anonymous5133 9y ago
  Agree. BTC is now a speculative tool similar to gold. If you want something that is more like a currency then bitcoin cash is better. The fees are like one penny. Also I don't think the deflationary is an issue because of how fast crypto can change hands. For example, I go to buy a t-shirt for $10 and I pay the merchant $10 equivalent in bitcoin cash. The transaction confirms in 10 minutes or less and the merchant can send the crypto to an exchange to immediately convert it to fiat or any other crypto of their choice. Also most likely in the future, merchants will use some sort of centralized payment processor so when the buyer pays and the transaction confirms the seller immediately gets fiat cash instead of crypto, assuming they want fiat of course. So the whole idea that crypto doesn't work as a currency is mostly a moot point IMO. Most people are thinking about that issue from a macroeconomic perspective as in if one crypto was used as the official currency. The days of that is coming to an end IMO. The future is going to be multiple cryptocurrencies competing with traditional fiats. The payment processors of the future will be able to process hundreds of different medium of exchanges through their point of sale system. A merchant has nothing to lose by accepting 100 different medium of exchanges if the other medium of exchanges are simply be converted to whatever the merchant's ideal store of value is. Then it simply comes down to individual merchants and consumers deciding what medium of exchange to use and that is good for everyone. More freedoms is better. I think we can all agree on that.
  - chriswarbo 9y ago
    > For example, I go to buy a t-shirt for $10 and I pay the merchant $10 equivalent in bitcoin cash. This is why I don't think of bitcoin as a currency: I've never seen it used to denominate prices. As far as I can tell, not even Silk Road had prices set in bitcoin. Paying "$10 equivalent in bitcoin cash" (or bitcoin, or litecoin, or whatever) is using those cryptocurrencies as a payment gateway; the currency in those transactions is $.

vorotato 9y ago

Bitcoin doesn't inflate enough, so there's no incentive to spend it.

alexmat 9y ago
I can't take it with me when I die, so I'll spend it at some point. Also, see marginal utility of value: https://www.investopedia.com/terms/m/marginalutility.asp https://www.investopedia.com/terms/m/marginalutility.asp
- vorotato 9y ago
  By the time you want to spend it it's possible there won't be enough liquidity to actually facilitate your transaction.

azinman2 9y ago

This volatility is exactly the reason it isn’t useful _for now_. In the past countries have created currencies, and it’s never been the case that they capitalize from 0 to _a lot_ in such a short time period. That’s why the USD chart is meaningless as a comparison against the same timeline. Wait 20-50 years and then we’ll see.

f_o_m 9y ago
Yes I agree - perhaps in 20-50 years (and maybe earlier) but not anytime soon.

sova 9y ago

Solid Platinum is also not a very good currency. What is your point?

f_o_m 9y ago
As far as I know no one is arguing that platinum is a future global currency, or letting customers buy products with it. Both are increasingly true for Bitcoin.
- sova 9y ago
  You're an idiot if you don't accept platinum as a form of payment

Glyptodon 9y ago

The main reason I never got into Bitcoin is that I considered its deflationary nature a disaster and crippling flaw (for a currency). That said, it's become much less a currency and more a fiat commodity one stashes like beanie babies so my original reasoning isn't particularly applicable at this point.

zyxzkz 9y ago
Bitcoin has always been the game of finding the greater sucker... now more than ever.

badloginagain 9y ago

I may not buy a pizza with my bits, but I'd sure as hell buy a house, pay off my student debt, or whatever my proverbial lambo is. I only have enough BTC for really one big ticket purchase in my life, even if it increases in value forever. Actually, a deflationary currency is an interesting concept for Basic Income- if everyone is given an amount of BTC at birth, so that it appreciates in value by the time they're old enough to spend it, they have a nice nest egg to build off of. Of course, it only works if the currency circulates. I wonder if there's real world examples of deflationary currencies. Has it ever been tried?

f_o_m 9y ago
Yes I think of it as an investment vs. a currency. For example I may also sell TSLA stock to buy a house but not to buy groceries if I think it still has lots of room to run.

srge 9y ago

Flagged. This article brings nothing new or even interesting.

prophesi 9y ago
Not to mention the clickbaity title.
f_o_m 9y ago
:'(

Phenomenit 9y ago

I don't think the deflationary nature of btc and other crypto that are a finite in design is necessarily a bad thing. The most common objection is that it leads to intertemporal decisions. Is that really bad? If you knew that your money increases in value over time you might only spend it when it's really necessary instead of driving an ever expanding economy that consumes a finite world. Maybe a finite world needs a finite economy? If my money reflect the wear and tear on our common ecology I might be more restricted in its use.

f_o_m 9y ago
A currency that discourages consumerism - interesting idea!