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Why Bitcoin Will Fail As A Currency

66 points by tav 15y ago

kiba 15y ago
How many time are people going to scream...bubble? http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-rise-of-bitcoin-s-value http://bitcoinweekly.com/articles/comic-reaction-after-drama... Anyway, hoarding is not a problem. http://bitcoinweekly.com/articles/one-apple-today-two-apples-tomorrow-or-how-i-stopped-being-afraid-and-learned-to-love-deflation http://bitcoinweekly.com/articles/one-apple-today-two-apples... Even if we need to use the satoshi(the lowest unit of bitcoin), we can extend decimal space. Does anybody actually have anything new or novel criticism for bitcoin? Or are we going to repeat trending the same ground everytime a new bitcoin story come up?
- baselogic 15y ago
  Speaking for only myself, this is the first article that I have read which goes beyond the usual arguments made against Bitcoin. I would strongly recommend reading the OP again properly as the links you have posted do not seem to address the issues it brings up.
- caf 15y ago
  That article on why deflation is allegedly not a problem does not address the concerns raised. In particular: Deflation, on the other hand, can damage the economy by placing an incentive to save, rather than spend. Over-saving can be just as damaging as over-spending. But unlike saving, you have to spend some eventually, so there's a built-in incentive to spend: continued survival. A deflationary economy can also stifle entrepreneurship because it increases the risk of loss without significantly increasing the return on the investment over that of simply letting the money sit and gain value. The first answer doesn't apply to a new entrant currency like Bitcoin - you don't have to spend bitcoins to survive, you can continue to spend local legal tender on the essentials of life. The second objection is noted but not even rebutted - it's just ignored. This seems to be the real potential problem for bitcoin - the incentive is to sit on it, not to circulate it. I think the original article is spot on.
  - hippich 15y ago
    Regarding entrepreneurship part.. For me bitcoins is just another sale channel for my http://store.gifti.us http://store.gifti.us . Once I receive coins I immediately exchange them to fiat dollars to pay suppliers. It works perfectly so far. And this is how I suppose it should work, at least until bitcoins will not become world currency =)
  - vrotaru 15y ago
    Marginal utility, marginal utility, marginal utility. It's true for USD, BTC, EUR, PLN... you name it. The more money you have the less valuable the last unit (coin) is. Or seems. Value is subjective, anyway. So what we have here is just another feedback mechanism which will regulate the level of saving/hoarding according to individual preferences of savers/hoarders. This way, hoarding, it self-regulates.
furyg3 15y ago
Not defending BitCoin (I won't be buying any soon), but I think the author doesn't realized that BitCoins are divisible down to eight decimal places. It's difficult for me to imagine a currency which is so divisible being "hoarded to death".
- michael_dorfman 15y ago
  The divisibility has no bearing on the hoarding. The hoarding comes from the expectation of increased value over time, not the number of decimal places. If you have something that you think is going to steadily appreciate in value over time, why sell it now?
  - tibbe 15y ago
    There are natural limitations to how much people will save: * When you're dead all your savings are worthless (to you), so your likely to spend most of them before then. * Some consumption cannot be postponed: you need food, a roof over your head, transportation, etc. * Time has value. For example, if you wait another 6 months the same amount of money (bitcoin or not) will buy you a better computer. This is likely to hold true in the foreseeable future. Still people do but computers (and phones, etc). * There's opportunity cost: even if your savings increase in value over time, investing them in something could increase them even more.
    - po 15y ago
      When you're dead all your savings are worthless (to you), so your likely to spend most of them before then. If that were true, why would there be so much debate around the estate tax? Warren Buffet is a rarity. Most people want to pass money down through generations rather than spend it as they near the end of their lives. Taxes on inheritance encourages spending and charitable giving. Some consumption cannot be postponed: you need food, a roof over your head, transportation, etc. Given. Probably not enough to avoid depression though. Time has value. For example, if you wait another 6 months the same amount of money (bitcoin or not) will buy you a better computer. This is likely to hold true in the foreseeable future. Still people do but computers (and phones, etc) You seem to be arguing for deflation. Given that I can wait and get a better computer there's even less incentive to spend it today. I remember a study that showed for a computationally intense problem (many years) you could finish sooner by waiting part of the time and buying a faster computer. That's even less incentive to move money around. There's opportunity cost: even if your savings increase in value over time, investing them in something could increase them even more. Not if the economy is depressed. In sum, the natural limitations you site - even if they worked - are not enough to avoid depression. A small bit of inflation is a good thing. Think of a dollar/bitcoin/whatever as a unit of work and inflation as 'urgency'. :-)
splat 15y ago
I'm curious, does anyone know what fraction of dollars are "hoarded"?
- rauljara 15y ago
  edit- I see now that I completely misread dollars as bitcoins. My response actually makes sense in that context, and not so much to the question you actually asked. My understanding is that it would be impossible to know. How could you tell the difference between a dollar that was being hoarded, a dollar that had simply not been spend yet, or a dollar that it's owner had lost access to? The way the system is set up, it is supposed to be impossible to tell even how much money a single individual possesses. One person could own half of all the bit coins in a massive market manipulation attempt right now, and I don't know how anyone could figure it out.
- jbellis 15y ago
  Approximately none, because dollars are inflationary by design (of the Fed), not deflationary like bitcoin (again, by design of its creators).
  - tatsuke95 15y ago
    Exactly. Inflation prevents (in fact promotes the opposite of) hoarding. Hoarding dollars would be just as irrational as spending Bitcoins. An example of something being hoarded today? Anything that is having its price run up. Gold, for instance.
  - batterseapower 15y ago
    For another perspective: USD are "hoarded" by investing them in US treasuries. This preserves their value against inflation, because (to a first approximation) when the Fed prints money it does so by buying those treasuries, thus raising their price in USD. So in the dollar economy, hoarding takes the form of purchasing USD so you can participate in seigniorage. In the bitcoin economy, hoarding takes the form of holding on to your balance. But they are both forms of hoarding, designed to protect value without actually making "useful" investments that affect the real world.
thailandstartup 15y ago
The key mistake the author makes is to assert no-one will ever spend or sell bitcoin trying to secure greater future wealth. As a bubble grows, large holders find that that a larger and larger proportion of their wealth is tied up in a single asset and start to diversify that wealth into other assets. I assume this is already the cause for most of the bitcoins being sold on the market.
Havoc 15y ago
I still don't see a problem. Surely as long as someone (hoarders) really wants it, it has perceived value making it a viable currency. Everything else is just details & implementation. Most of which will sort itself out via supply & demand equilibrium or if its a technical detail via a clever programmer or two.
acangiano 15y ago
The article makes a series of well known criticisms, but there are a few issues with it. 1. If a BTC were to be worth $2M, you'd simply trade microcoins which would be worth $2. Or even nanocoins for micropayments. 2. Bitcoin's quasi-anonymous nature will be highly desirable to many people, including very large criminal organizations who'll definitely be moving those coins. 3. A large number of early adopters joined the movement because they believe in the ideal behind a p2p cryptocurrency. These people are not in it for the investment alone and will be willing to use it as a currency. 4. On paper, even the free software movement sounds idiotic. What kind of idiot would spend their time and resources to produce something for free? In practice, it works extremely well because not everyone is solely motivated by their best economical interest. 5. Few people will put all of their eggs in one basket. When the value of BTC stabilizes, investors who are happy with the valuation are likely to sell and cash in on the investment or diversify their investment through other currencies/speculations.
- benihana 15y ago
  Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency. They list Bitcoin's features as the reasons it will fail. They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource.
  - tatsuke95 15y ago
    The average human was far, far poorer 200+ years ago, in relative terms. The fact is, modern banking and capitalism have created massive amounts of wealth for a vast proportion of the population. Evolution of our economic system has led to where we are now for a reason. It's not perfect, but we aren't going back to the days of measuring your net worth on a stick. Every time we have a crash or downturn, people begin to under estimate how much we actually know about economics. It's a lot.
    - teodesian 15y ago
tatsuke95 15y ago
I'm not sure if Bitcoin will "fail", but they'll certainly be forced to adjust, as all currencies have, to the fact that a finite money supply (that doesn't grow with demand) has inherent problems.
scythe 15y ago
bitcoin will probably never represent a significant proportion of human wealth. However, it will probably remain useful for the next five to ten years as a cryptographically strong way to pay for things outside of government influences. Silk Road is a pretty cool case in point. It will probably be replaced organically by a more useful form of cryptographic currency -- perhaps something that uses bcrypt or a similar Moore's Law-resistant hashing algorithm -- before serious deflation or broken hashes really start to come into play.
knieveltech 15y ago
The number 1 reason why bitcoin will fail: Silk Road (et al) have handed legislators all the ammunition they need to go after it with a vengeance. All of what's coming next has happened before. Think e-gold, act II. Simply put there are no incentives (and massive disincentives, both perceived and real) for any government to tolerate financial transactions in anything other than fiat currency. The more popular the service becomes the more frenetic legislative and enforcement activity will become to stamp it out. http://en.wikipedia.org/wiki/E-gold http://en.wikipedia.org/wiki/E-gold
- puredemo 15y ago
  It'll still thrive in all the countries that don't legislate against it, and in the black markets of those which do.
  - knieveltech 15y ago
    That's one possible outcome. Another being bitcoin traffic provokes government-mandated deep packet inspection/filtering or other further intrusions into online privacy.
    - puredemo 15y ago
      It sounds like that might spark the first real "cyber wars." I'm not sure most governments would survive it. http://www.youtube.com/watch?v=7g0pi4J8auQ http://www.youtube.com/watch?v=7g0pi4J8auQ
- deleted 15y ago
  [deleted]
- pnathan 15y ago
  I support bitcoin and think it is a Good Way Forward, but I agree categorically with your critique. It is sufficiently disruptive that I expect the major players in governments will legislate it out of existence.
  - 15y ago
seles 15y ago
This whole hoarding argument is bogus: it assumes bitcoin will fail because bitcoin will be so successful that people will hoard.
- rwmj 15y ago
  Read the article again. It assumes everyone will hoard because they think there's a chance bitcoin might become successful (and in the meantime there's not a lot to spend bitcoins on anyhow). But this hoarding is exactly what creates a bubble, and the lack of anyone spending means that there will never be mainstream shops using it, so it will never have worth.
  - p1980 15y ago
    so..when hoarders realize by not allowing bitcoins to circulate, they will have no worth, some will start to sell their holdings since it becomes obvious they are not going to continue appreciating. This causes circulation to increase again, which will make the currency more valuable again. The point is, people are just assuming that both extremes happen--hoarders hoard forever, despite the currency going to zero. In reality, there is a feedback loop and an equilibrium will be reached.
- rmc 15y ago
  Prisoners Dilemma. BitCoin as a whole would get more popular if people spent it. However if lots of people spend/use it (and the price goes up), then it's better for you to hoard it. However everyone/lots of people will think this way and hoard it. This means it can't take off and get popular.
  - weavejester 15y ago
    But as the amount of people hoarding it goes up, the value of bitcoin will eventually drop. You can't have a market that climbs indefinitely on the basis of speculation alone.
piuk 15y ago
At the current price miners are producing $140,000 worth of bitcoins per day, I expect most of these miners will be looking to cash out and the ones that don't need to at least cover electricity costs etc. $100,000+ new investment per day probably won't be sustainable for long and hence the price will have to correct itself.
p1980 15y ago
The ideas here are important criticisms, but there is one thing to keep in mind with hoarding, and the author can't have it both ways. The author makes an important point that Bitcoin has value precisely because people are willing to accept it--the characteristic of any good currency. The appreciation of the currency encourages hoarding, which will negate the circulation of money. But there is a feedback loop to this of course. If hoarding does occur, then circulation will go down, which will cause people to lose interest, which will cause the value to stagnate. In that case, hoarding is no longer appealing, and people who have been will become impatient with the low return of investment and start selling them to liquidate. This in turn creates more circulation. So there is certainly an equilibrium that the system attempts to reach. If hoarders do the logical conclusion as to what happens if everyone hoards--it means the currency is worthless. So NOBODY would hoard anymore. In reality, there is some equilibrium point that is reached...it is in the best interests of the system participants that they circulate their currency, because it makes their own holdings valuable. The author can't have it both ways--you can't both say hoarding will cause the currency to be worthless, and assume that hoarders will just hold onto it forever expecting massive appreciation vs the USD. Nobody hoards it if the value stops going up (or becomes worthless, which is what is being claimed)
- jff 15y ago
  Are you familiar with the Tragedy of the Commons? "Oh, well of course it's important to keep bitcoins circulating... but it won't hurt anything if I hoard my coins, I'm just one person! Besides, I know there are other people hoarding theirs, so I might as well do the same!"
  - p1980 15y ago
    you miss a point--there will be certain players whose opportunity cost will be higher than waiting for others to liquidate theirs. Those people will liquidate theirs for USD to do productive investment that will earn returns far beyond just playing chicken with the rest of the people to see who will circulate theirs first. So it's not a tragedy of the commons situation--it will make perfect economic sense for certain people, if the hoarding gets too extreme, to change their currency for USD or other assets.
pdx 15y ago
Since it's legal for me to pay legal tender for software, for jpegs, for mp3's, and other digital constructs, how could a legitimate argument be made to make it illegal for me to pay legal tender for a bitcoin? Since it's legal for me to take legal tender for software, for jpegs, for mp3's, etc., how could a law be passed to make it illegal for me to take legal tender in return for a bitcoin? If I advertise that I want to buy bitcoins, how can they stop me from spending my dollars/euros on them? If I advertise that I have bitcoins to sell, how can they stop me from doing so? Now, if I advertise that I both buy AND sell them, at some bid/ask spread, than perhaps I have blundered in to an area where they can, indeed, regulate me.
- anateus 15y ago
  Software, jpegs, and mp3s are digital versions of things the law has seen before (well, software not quite, which is why there are still some controversies regarding it). What you wrote reminds me of the anti-spam service that attaches an X-Header to emails with a little copyrighted Haiku, and thus considers spammers to be in violation of copyright. If each bitcoin contained a little tiny piece of poetry you could make it robust against a legal challenge. It would just be a micro-poetry market.
- tokenadult 15y ago
  In principle, a government can make any kind of property contraband.
  - pdx 15y ago
    Nonsense. Either bitcoins are illegal now, based on already existing law, or they are not. If they are not already illegal, than the paranoid among us can say they will be made so later. However, such an action does not happen in a vacuum. That law must be written in some way so as to continue to allow other forms of digital commerce. The discussion I would like to have is whether such a law could be written, which would disallow commerce in a particular digital commodity which harms nobody (not stolen cc numbers, not child porn, etc) while allowing other forms of digital goods to continue unhindered. The thing that jumps immediately to mind, of course, is child porn, which is a digital commodity that is illegal to buy/sell/own/ or even possess. I question whether they would have as much success in the court of public opinion with bitcoins.
paisible 15y ago
Let's separate "bitcoin-as-a pure speculatory play" and "bitcoin-as-a cryptocurrency". At any time T, a bitcoin is worth W on the bitcoin exchange. Volatility means that at T+1 the bitcoin's worth might increase or decrease, but supply and demand still provide a pretty decent arbiratry price at this time T. When seller A and buyer B (who are involved in a dubious transaction) are looking for a safe way to transfer money, they can simply agree (at time T) that their 1000$ transaction can be translated to 1000/W bitcoins. It doesn't matter if 1 bitcoin = 1000$ or 1 bitcoin = 10$, what matters is that both parties agree on what bitcoin price they are doing their transaction in, and therefore how many bitcoins A is expecting from B. The transaction is then 1) Buyer buys agreed number of bitcoins so that at market price it represents the dollar amount of the transaction 2) sends over the bitcoins 3) Seller cashes out the bitcoins IMMEDIATELY, thus getting the real-market value for his "good or service" The argument as to "why would seller A want to cash out his bitcoins if deflation means they will increase in value" is besides the point here. Seller A is a drug dealer, not a bitcoin speculator. All he cares about is that receiving that money was as simple and anonymous as downloading a software client and logging in from some internet cafe somewhere. In this scenario, bitcoins are extremely valuable, and not going anywhere. I suspect that market will adjust, and at some point supply and demand (from people who actually use it for these kinds of activities) will lead to less volatile price variations - and therefore increased use on the black-market. Whether you want to profit from these activities is another question.
mikey_p 15y ago
All these bitcoin articles are getting more than old. Here are some major issues I've been seeing with all of them: 1) Assigning some fixed dollar amount to coins for the purpose of demonstrations in the article. This will never happen, it's in flux, and it's a scarce resource. Does gold or any other precious metal stay at a fixed resource, does anyone hoarding gold make it any less valuable? 2) As mentioned above, bitcoins can be traded in almost any fraction thereof, simply having each coin be worth 2 million dollars, is irrelevant. 3) If too many people start hoarding and there is no exchange of coin, it is possible that the value of coins will decrease instead of increasing. Please remember that the only value assigned to the coins will be the value that individuals are willing to assign to it, or pay to acquire it, or amount of coins willing to exchange for goods or services. 4) We've had commodity backed currencies for much, much more of recorded history than we've had fiat currencies and yet we've brought civilization to where it is today. Can we please stop assuming that any commodity backed currency is destined to be a failure because we currently favor a currencies that are by definition even more worthless than Bitcoin?
- nhaehnle 15y ago
  Commodity backed currencies are actually the exception, not the rule. I've written about this here: http://news.ycombinator.com/item?id=2632658 http://news.ycombinator.com/item?id=2632658
teilo 15y ago
This is all just one argument, the same argument others have been making: Bitcoin will inevitably deflate. That is true. Whether the conclusions are true remain to be seen. It's the old Keynsian vs. Austrian argument. What makes this an especially interesting experiment, is that Bitcoin is far more divisible than any other currency in history. This alleviates many of the typical objections to a fixed currency, and introduces a dynamic that, frankly, I don't think anyone understands yet. There still remain the question of whether the process of deflation itself makes a currency unviable. Herein lies the actual debate. I for one am going to enjoy watching it, and see how it all works out. There is a lot that we can learn. Let's hope governments don't get in the way and stop the experiment in-vitro.
lsparrish 15y ago
I think people will be even more anxious to buy and hold when they find out a way loan out bitcoins. For example, convert them temporarily to tokens representing another currency.
phamilton 15y ago
The assumption of the article is a paradox. The author first assumes that the total bitcoin market will be worth 1 trillion. Then he claims people will hoard coins due to their promising future value. In reality, there is a chance the bitcoin market will reach 1 trillion. There is also a chance it will crash. Most likely it will fluctuate. If I were told there was a 100% chance my 1.5 coins I have mined today would be worth hundreds of thousands of dollars, then of course I would hoard. But since I have no such guarantee, I am more likely to cash out when I think the market has peaked and/or the fad has faded. There are die hards who will hoard and have hoarded from day one. It's the same with all investments. I have a friend who bought his new car with 11 ounces of gold - He walked in, set it down on the table, sign some paperwork and walked away with a new car. But I think the average bitcoin user won't be able to pass up the idea of "I didn't really have to do anything for this, so why not buy a pizza with a few (micro)bitcoins."

66 points by tav 15y ago

kiba 15y ago

How many time are people going to scream...bubble? http://bitcoinweekly.com/articles/comic-reaction-after-dramatic-rise-of-bitcoin-s-value http://bitcoinweekly.com/articles/comic-reaction-after-drama... Anyway, hoarding is not a problem. http://bitcoinweekly.com/articles/one-apple-today-two-apples-tomorrow-or-how-i-stopped-being-afraid-and-learned-to-love-deflation http://bitcoinweekly.com/articles/one-apple-today-two-apples... Even if we need to use the satoshi(the lowest unit of bitcoin), we can extend decimal space. Does anybody actually have anything new or novel criticism for bitcoin? Or are we going to repeat trending the same ground everytime a new bitcoin story come up?

baselogic 15y ago
Speaking for only myself, this is the first article that I have read which goes beyond the usual arguments made against Bitcoin. I would strongly recommend reading the OP again properly as the links you have posted do not seem to address the issues it brings up.
caf 15y ago
That article on why deflation is allegedly not a problem does not address the concerns raised. In particular: Deflation, on the other hand, can damage the economy by placing an incentive to save, rather than spend. Over-saving can be just as damaging as over-spending. But unlike saving, you have to spend some eventually, so there's a built-in incentive to spend: continued survival. A deflationary economy can also stifle entrepreneurship because it increases the risk of loss without significantly increasing the return on the investment over that of simply letting the money sit and gain value. The first answer doesn't apply to a new entrant currency like Bitcoin - you don't have to spend bitcoins to survive, you can continue to spend local legal tender on the essentials of life. The second objection is noted but not even rebutted - it's just ignored. This seems to be the real potential problem for bitcoin - the incentive is to sit on it, not to circulate it. I think the original article is spot on.
- hippich 15y ago
  Regarding entrepreneurship part.. For me bitcoins is just another sale channel for my http://store.gifti.us http://store.gifti.us . Once I receive coins I immediately exchange them to fiat dollars to pay suppliers. It works perfectly so far. And this is how I suppose it should work, at least until bitcoins will not become world currency =)
- vrotaru 15y ago
  Marginal utility, marginal utility, marginal utility. It's true for USD, BTC, EUR, PLN... you name it. The more money you have the less valuable the last unit (coin) is. Or seems. Value is subjective, anyway. So what we have here is just another feedback mechanism which will regulate the level of saving/hoarding according to individual preferences of savers/hoarders. This way, hoarding, it self-regulates.

furyg3 15y ago

Not defending BitCoin (I won't be buying any soon), but I think the author doesn't realized that BitCoins are divisible down to eight decimal places. It's difficult for me to imagine a currency which is so divisible being "hoarded to death".

michael_dorfman 15y ago
The divisibility has no bearing on the hoarding. The hoarding comes from the expectation of increased value over time, not the number of decimal places. If you have something that you think is going to steadily appreciate in value over time, why sell it now?
- tibbe 15y ago
  There are natural limitations to how much people will save: * When you're dead all your savings are worthless (to you), so your likely to spend most of them before then. * Some consumption cannot be postponed: you need food, a roof over your head, transportation, etc. * Time has value. For example, if you wait another 6 months the same amount of money (bitcoin or not) will buy you a better computer. This is likely to hold true in the foreseeable future. Still people do but computers (and phones, etc). * There's opportunity cost: even if your savings increase in value over time, investing them in something could increase them even more.
  - po 15y ago
    When you're dead all your savings are worthless (to you), so your likely to spend most of them before then. If that were true, why would there be so much debate around the estate tax? Warren Buffet is a rarity. Most people want to pass money down through generations rather than spend it as they near the end of their lives. Taxes on inheritance encourages spending and charitable giving. Some consumption cannot be postponed: you need food, a roof over your head, transportation, etc. Given. Probably not enough to avoid depression though. Time has value. For example, if you wait another 6 months the same amount of money (bitcoin or not) will buy you a better computer. This is likely to hold true in the foreseeable future. Still people do but computers (and phones, etc) You seem to be arguing for deflation. Given that I can wait and get a better computer there's even less incentive to spend it today. I remember a study that showed for a computationally intense problem (many years) you could finish sooner by waiting part of the time and buying a faster computer. That's even less incentive to move money around. There's opportunity cost: even if your savings increase in value over time, investing them in something could increase them even more. Not if the economy is depressed. In sum, the natural limitations you site - even if they worked - are not enough to avoid depression. A small bit of inflation is a good thing. Think of a dollar/bitcoin/whatever as a unit of work and inflation as 'urgency'. :-)

splat 15y ago

I'm curious, does anyone know what fraction of dollars are "hoarded"?

rauljara 15y ago
edit- I see now that I completely misread dollars as bitcoins. My response actually makes sense in that context, and not so much to the question you actually asked. My understanding is that it would be impossible to know. How could you tell the difference between a dollar that was being hoarded, a dollar that had simply not been spend yet, or a dollar that it's owner had lost access to? The way the system is set up, it is supposed to be impossible to tell even how much money a single individual possesses. One person could own half of all the bit coins in a massive market manipulation attempt right now, and I don't know how anyone could figure it out.
jbellis 15y ago
Approximately none, because dollars are inflationary by design (of the Fed), not deflationary like bitcoin (again, by design of its creators).
- tatsuke95 15y ago
  Exactly. Inflation prevents (in fact promotes the opposite of) hoarding. Hoarding dollars would be just as irrational as spending Bitcoins. An example of something being hoarded today? Anything that is having its price run up. Gold, for instance.
- batterseapower 15y ago
  For another perspective: USD are "hoarded" by investing them in US treasuries. This preserves their value against inflation, because (to a first approximation) when the Fed prints money it does so by buying those treasuries, thus raising their price in USD. So in the dollar economy, hoarding takes the form of purchasing USD so you can participate in seigniorage. In the bitcoin economy, hoarding takes the form of holding on to your balance. But they are both forms of hoarding, designed to protect value without actually making "useful" investments that affect the real world.

thailandstartup 15y ago

The key mistake the author makes is to assert no-one will ever spend or sell bitcoin trying to secure greater future wealth. As a bubble grows, large holders find that that a larger and larger proportion of their wealth is tied up in a single asset and start to diversify that wealth into other assets. I assume this is already the cause for most of the bitcoins being sold on the market.

Havoc 15y ago

I still don't see a problem. Surely as long as someone (hoarders) really wants it, it has perceived value making it a viable currency. Everything else is just details & implementation. Most of which will sort itself out via supply & demand equilibrium or if its a technical detail via a clever programmer or two.

acangiano 15y ago

The article makes a series of well known criticisms, but there are a few issues with it. 1. If a BTC were to be worth $2M, you'd simply trade microcoins which would be worth $2. Or even nanocoins for micropayments. 2. Bitcoin's quasi-anonymous nature will be highly desirable to many people, including very large criminal organizations who'll definitely be moving those coins. 3. A large number of early adopters joined the movement because they believe in the ideal behind a p2p cryptocurrency. These people are not in it for the investment alone and will be willing to use it as a currency. 4. On paper, even the free software movement sounds idiotic. What kind of idiot would spend their time and resources to produce something for free? In practice, it works extremely well because not everyone is solely motivated by their best economical interest. 5. Few people will put all of their eggs in one basket. When the value of BTC stabilizes, investors who are happy with the valuation are likely to sell and cash in on the investment or diversify their investment through other currencies/speculations.

benihana 15y ago
Every single criticism of Bitcoin I've seen is based on the assumption that it will fail because it's not a fiat-based currency. They list Bitcoin's features as the reasons it will fail. They talk about the past 200 years of central banking and seem to forget the thousands of years of human economy before governmental central banking, when money was actually backed by a scarce resource.
- tatsuke95 15y ago
  The average human was far, far poorer 200+ years ago, in relative terms. The fact is, modern banking and capitalism have created massive amounts of wealth for a vast proportion of the population. Evolution of our economic system has led to where we are now for a reason. It's not perfect, but we aren't going back to the days of measuring your net worth on a stick. Every time we have a crash or downturn, people begin to under estimate how much we actually know about economics. It's a lot.
  - teodesian 15y ago

tatsuke95 15y ago

I'm not sure if Bitcoin will "fail", but they'll certainly be forced to adjust, as all currencies have, to the fact that a finite money supply (that doesn't grow with demand) has inherent problems.

scythe 15y ago

bitcoin will probably never represent a significant proportion of human wealth. However, it will probably remain useful for the next five to ten years as a cryptographically strong way to pay for things outside of government influences. Silk Road is a pretty cool case in point. It will probably be replaced organically by a more useful form of cryptographic currency -- perhaps something that uses bcrypt or a similar Moore's Law-resistant hashing algorithm -- before serious deflation or broken hashes really start to come into play.

knieveltech 15y ago

The number 1 reason why bitcoin will fail: Silk Road (et al) have handed legislators all the ammunition they need to go after it with a vengeance. All of what's coming next has happened before. Think e-gold, act II. Simply put there are no incentives (and massive disincentives, both perceived and real) for any government to tolerate financial transactions in anything other than fiat currency. The more popular the service becomes the more frenetic legislative and enforcement activity will become to stamp it out. http://en.wikipedia.org/wiki/E-gold http://en.wikipedia.org/wiki/E-gold

puredemo 15y ago
It'll still thrive in all the countries that don't legislate against it, and in the black markets of those which do.
- knieveltech 15y ago
  That's one possible outcome. Another being bitcoin traffic provokes government-mandated deep packet inspection/filtering or other further intrusions into online privacy.
  - puredemo 15y ago
    It sounds like that might spark the first real "cyber wars." I'm not sure most governments would survive it. http://www.youtube.com/watch?v=7g0pi4J8auQ http://www.youtube.com/watch?v=7g0pi4J8auQ
deleted 15y ago
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pnathan 15y ago
I support bitcoin and think it is a Good Way Forward, but I agree categorically with your critique. It is sufficiently disruptive that I expect the major players in governments will legislate it out of existence.
- 15y ago

seles 15y ago

This whole hoarding argument is bogus: it assumes bitcoin will fail because bitcoin will be so successful that people will hoard.

rwmj 15y ago
Read the article again. It assumes everyone will hoard because they think there's a chance bitcoin might become successful (and in the meantime there's not a lot to spend bitcoins on anyhow). But this hoarding is exactly what creates a bubble, and the lack of anyone spending means that there will never be mainstream shops using it, so it will never have worth.
- p1980 15y ago
  so..when hoarders realize by not allowing bitcoins to circulate, they will have no worth, some will start to sell their holdings since it becomes obvious they are not going to continue appreciating. This causes circulation to increase again, which will make the currency more valuable again. The point is, people are just assuming that both extremes happen--hoarders hoard forever, despite the currency going to zero. In reality, there is a feedback loop and an equilibrium will be reached.
rmc 15y ago
Prisoners Dilemma. BitCoin as a whole would get more popular if people spent it. However if lots of people spend/use it (and the price goes up), then it's better for you to hoard it. However everyone/lots of people will think this way and hoard it. This means it can't take off and get popular.
- weavejester 15y ago
  But as the amount of people hoarding it goes up, the value of bitcoin will eventually drop. You can't have a market that climbs indefinitely on the basis of speculation alone.

piuk 15y ago

At the current price miners are producing $140,000 worth of bitcoins per day, I expect most of these miners will be looking to cash out and the ones that don't need to at least cover electricity costs etc. $100,000+ new investment per day probably won't be sustainable for long and hence the price will have to correct itself.

p1980 15y ago

The ideas here are important criticisms, but there is one thing to keep in mind with hoarding, and the author can't have it both ways. The author makes an important point that Bitcoin has value precisely because people are willing to accept it--the characteristic of any good currency. The appreciation of the currency encourages hoarding, which will negate the circulation of money. But there is a feedback loop to this of course. If hoarding does occur, then circulation will go down, which will cause people to lose interest, which will cause the value to stagnate. In that case, hoarding is no longer appealing, and people who have been will become impatient with the low return of investment and start selling them to liquidate. This in turn creates more circulation. So there is certainly an equilibrium that the system attempts to reach. If hoarders do the logical conclusion as to what happens if everyone hoards--it means the currency is worthless. So NOBODY would hoard anymore. In reality, there is some equilibrium point that is reached...it is in the best interests of the system participants that they circulate their currency, because it makes their own holdings valuable. The author can't have it both ways--you can't both say hoarding will cause the currency to be worthless, and assume that hoarders will just hold onto it forever expecting massive appreciation vs the USD. Nobody hoards it if the value stops going up (or becomes worthless, which is what is being claimed)

jff 15y ago
Are you familiar with the Tragedy of the Commons? "Oh, well of course it's important to keep bitcoins circulating... but it won't hurt anything if I hoard my coins, I'm just one person! Besides, I know there are other people hoarding theirs, so I might as well do the same!"
- p1980 15y ago
  you miss a point--there will be certain players whose opportunity cost will be higher than waiting for others to liquidate theirs. Those people will liquidate theirs for USD to do productive investment that will earn returns far beyond just playing chicken with the rest of the people to see who will circulate theirs first. So it's not a tragedy of the commons situation--it will make perfect economic sense for certain people, if the hoarding gets too extreme, to change their currency for USD or other assets.

pdx 15y ago

Since it's legal for me to pay legal tender for software, for jpegs, for mp3's, and other digital constructs, how could a legitimate argument be made to make it illegal for me to pay legal tender for a bitcoin? Since it's legal for me to take legal tender for software, for jpegs, for mp3's, etc., how could a law be passed to make it illegal for me to take legal tender in return for a bitcoin? If I advertise that I want to buy bitcoins, how can they stop me from spending my dollars/euros on them? If I advertise that I have bitcoins to sell, how can they stop me from doing so? Now, if I advertise that I both buy AND sell them, at some bid/ask spread, than perhaps I have blundered in to an area where they can, indeed, regulate me.

anateus 15y ago
Software, jpegs, and mp3s are digital versions of things the law has seen before (well, software not quite, which is why there are still some controversies regarding it). What you wrote reminds me of the anti-spam service that attaches an X-Header to emails with a little copyrighted Haiku, and thus considers spammers to be in violation of copyright. If each bitcoin contained a little tiny piece of poetry you could make it robust against a legal challenge. It would just be a micro-poetry market.
tokenadult 15y ago
In principle, a government can make any kind of property contraband.
- pdx 15y ago
  Nonsense. Either bitcoins are illegal now, based on already existing law, or they are not. If they are not already illegal, than the paranoid among us can say they will be made so later. However, such an action does not happen in a vacuum. That law must be written in some way so as to continue to allow other forms of digital commerce. The discussion I would like to have is whether such a law could be written, which would disallow commerce in a particular digital commodity which harms nobody (not stolen cc numbers, not child porn, etc) while allowing other forms of digital goods to continue unhindered. The thing that jumps immediately to mind, of course, is child porn, which is a digital commodity that is illegal to buy/sell/own/ or even possess. I question whether they would have as much success in the court of public opinion with bitcoins.

paisible 15y ago

Let's separate "bitcoin-as-a pure speculatory play" and "bitcoin-as-a cryptocurrency". At any time T, a bitcoin is worth W on the bitcoin exchange. Volatility means that at T+1 the bitcoin's worth might increase or decrease, but supply and demand still provide a pretty decent arbiratry price at this time T. When seller A and buyer B (who are involved in a dubious transaction) are looking for a safe way to transfer money, they can simply agree (at time T) that their 1000$ transaction can be translated to 1000/W bitcoins. It doesn't matter if 1 bitcoin = 1000$ or 1 bitcoin = 10$, what matters is that both parties agree on what bitcoin price they are doing their transaction in, and therefore how many bitcoins A is expecting from B. The transaction is then 1) Buyer buys agreed number of bitcoins so that at market price it represents the dollar amount of the transaction 2) sends over the bitcoins 3) Seller cashes out the bitcoins IMMEDIATELY, thus getting the real-market value for his "good or service" The argument as to "why would seller A want to cash out his bitcoins if deflation means they will increase in value" is besides the point here. Seller A is a drug dealer, not a bitcoin speculator. All he cares about is that receiving that money was as simple and anonymous as downloading a software client and logging in from some internet cafe somewhere. In this scenario, bitcoins are extremely valuable, and not going anywhere. I suspect that market will adjust, and at some point supply and demand (from people who actually use it for these kinds of activities) will lead to less volatile price variations - and therefore increased use on the black-market. Whether you want to profit from these activities is another question.

mikey_p 15y ago

All these bitcoin articles are getting more than old. Here are some major issues I've been seeing with all of them: 1) Assigning some fixed dollar amount to coins for the purpose of demonstrations in the article. This will never happen, it's in flux, and it's a scarce resource. Does gold or any other precious metal stay at a fixed resource, does anyone hoarding gold make it any less valuable? 2) As mentioned above, bitcoins can be traded in almost any fraction thereof, simply having each coin be worth 2 million dollars, is irrelevant. 3) If too many people start hoarding and there is no exchange of coin, it is possible that the value of coins will decrease instead of increasing. Please remember that the only value assigned to the coins will be the value that individuals are willing to assign to it, or pay to acquire it, or amount of coins willing to exchange for goods or services. 4) We've had commodity backed currencies for much, much more of recorded history than we've had fiat currencies and yet we've brought civilization to where it is today. Can we please stop assuming that any commodity backed currency is destined to be a failure because we currently favor a currencies that are by definition even more worthless than Bitcoin?

nhaehnle 15y ago
Commodity backed currencies are actually the exception, not the rule. I've written about this here: http://news.ycombinator.com/item?id=2632658 http://news.ycombinator.com/item?id=2632658

teilo 15y ago

This is all just one argument, the same argument others have been making: Bitcoin will inevitably deflate. That is true. Whether the conclusions are true remain to be seen. It's the old Keynsian vs. Austrian argument. What makes this an especially interesting experiment, is that Bitcoin is far more divisible than any other currency in history. This alleviates many of the typical objections to a fixed currency, and introduces a dynamic that, frankly, I don't think anyone understands yet. There still remain the question of whether the process of deflation itself makes a currency unviable. Herein lies the actual debate. I for one am going to enjoy watching it, and see how it all works out. There is a lot that we can learn. Let's hope governments don't get in the way and stop the experiment in-vitro.

lsparrish 15y ago

I think people will be even more anxious to buy and hold when they find out a way loan out bitcoins. For example, convert them temporarily to tokens representing another currency.

phamilton 15y ago

The assumption of the article is a paradox. The author first assumes that the total bitcoin market will be worth 1 trillion. Then he claims people will hoard coins due to their promising future value. In reality, there is a chance the bitcoin market will reach 1 trillion. There is also a chance it will crash. Most likely it will fluctuate. If I were told there was a 100% chance my 1.5 coins I have mined today would be worth hundreds of thousands of dollars, then of course I would hoard. But since I have no such guarantee, I am more likely to cash out when I think the market has peaked and/or the fad has faded. There are die hards who will hoard and have hoarded from day one. It's the same with all investments. I have a friend who bought his new car with 11 ounces of gold - He walked in, set it down on the table, sign some paperwork and walked away with a new car. But I think the average bitcoin user won't be able to pass up the idea of "I didn't really have to do anything for this, so why not buy a pizza with a few (micro)bitcoins."