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Why Bitcoin Will Never Be a Currency

40 points by emkemp 13y ago

bryanh 13y ago
I'm always a bit shocked that people can be so dismissive, is there really a precedent of a value construct like bitcoin that we can extrapolate confidently from?
en4bz 13y ago
> What Bitcoin really needs is a central bank to stabilize its value. The whole point of Bitcoin is that there is no central governing authority. I'm not sure if this statement is meant to be funny, but if it isn't the author clearly has no understanding of how Bitcoin works or what it aims to achieve. I think given this statement its fair to ignore this piece all together.
- Nursie 13y ago
  What does bitcoin aim to achieve? I've heard so many different things, and as soon as one gets challenged someone will pop up and say "well it was never meant for that, it does these other five things". Frankly if it was to be a currency, yes, a central bank would be a feature. But it's not a currency, its economic presets would make it a really bad one and its lack of central control makes it very prone to instability. It's not really a very good payment method either, because it takes time to confirm and there's no chargeback facility, something that has given consumers the confidence to shop online and really helped along the boom in internet retail.
- gahahaha 13y ago
  The author obviously understands that Bitcoin has no central bank - his point is that if it ever were to be used as a currency it would need one. Would you like your salary paid in bitcoins? You wouldn't know from one month to the next what you could afford to buy since prices would be so volatile. Bitcoin might have other uses like easy electronic payments - but the author points out that if you want to buy something legally it is quite convenient already today with the currencies we have.
  - jpttsn 13y ago
    > it is quite convenient already today with the currencies we have. That's ridiculous. The friction or transferring money is a huge problem across the world. Developing nations are left out, governments shut down payments on a whim, etc.
  - coinbase-craig 13y ago
    I get my salary paid in bitcoin and I think it's pretty awesome.
    - maxerickson 13y ago
      How flexible is that arrangement? If Bitcoin undergoes a sudden downturn, can you ask for dollars next month?
      - coinbase-craig 13y ago
        I get paid a USD equivalent. So if bitcoin went down next month, I'd just get a greater amount of bitcoin. I could change to being paid in USD instead, but I choose to be paid in bitcoin.
        gnaritas 13y ago
        If your salary is priced in USD, you're really just being paid in USD, not Bitcoin. When you're ready to accept a fixed amount of Bitcoin every pay period, then you're paid in Bitcoin.
        coinbase-craig 13y ago
        At the end of the day I end up with bitcoin in my account, not dollars. So what you're saying does not seem correct to me. The conversion is just a way of determining how much bitcoin I should be paid.
        13y ago
darkbot 13y ago
Obvious to any one who have read a bit of Marx.
- gahahaha 13y ago
  I don't see the connection.
cup 13y ago
"Why Bitcoin will Never Be a Currency". And yet it only takes an arbitary 5 minutes to realise that it is being used as a currency. People are buying goods and services in exchange for bitcoins. Sure some people horde in the hope that the value will double but the same is done with US Dollars. I mean isnt that what FOREX trading is?
- enjo 13y ago
  Ok. So it's a very poor currency.
  - alexeisadeski3 13y ago
    According to the poorly thought out theory that deflationary currencies are by necessity bad currencies?
    - chad_oliver 13y ago
      The idea that a small amount of inflation is better than deflation is pretty much the least controversial idea in economics. Seriously, no professional economists argue about that. (There are plenty of special cases where deflation is good, sure, but I'm talking about the general case). I'm sure you're a very smart person, and you probably know a lot more than me in many areas. However, anyone trying to say that deflation is great for a general-purpose currency just sounds like someone trying to claim that evolution didn't (doesn't) happen.
      - alexeisadeski3 13y ago
        I agree that inflation is better than deflation. I also agree that this is not controversial - that virtually all economists agree that inflation is better than deflation. However. This does not mean that all deflationary currencies are bad. For example: It is entirely plausible that a currency which is almost 100% predictably deflationary would be preferable to our current currencies, the values of which vary depending upon many factors (central banking strategies, economic outlook, etc). Whilst inflation may help spur consumer spending, and almost certainly does help the economy by permitting 'invisible' wage cuts to poorly performing workers/sectors (perhaps the biggest advantage of inflationary currencies, not even mentioned in the article), the upside of a nearly 100% predictable currency may be even greater. Of course, it is also possible (likely, even) that our current central bank managed system is superior: The downside of unpredictability may be (likely is, in my opinion) outweighed by the flexibility granted to central banks. But we'll never know unless we run the experiment.
maratd 13y ago
Finally, somebody with a basic understanding of economics decides to chime in. It is not possible for bitcoin to be a currency due to its deflationary nature. Bitcoin might be an interesting investment vehicle, a storage of value, but something that will at some point replace the dollar? No.
- fthssht 13y ago
  There's a fixed quantity of it like gold and gold worked as a currency for a very long time. If Bitcoin fails its certainly not because of its "deflationary nature." What you think it a basic understanding of economics is obvious nonsense. How could people have it so twisted?
  - chad_oliver 13y ago
    It also failed as a currency in a very bad way. Part of the reason why the Great Depression was so bad is because most countries still used (or used the mindset associated with) the gold standard. Monetary policy is a very good way of stabilising the economy, and any currency which removes monetary policy as a tool is not likely to be stable in the long term.
    - fthssht 13y ago
      You're dead wrong but even if you werent the fact that it worked for thousands of years completely invalidates the author's point.
  - gnaritas 13y ago
    > There's a fixed quantity of it like gold and gold worked as a currency for a very long time. And that time has passed, the world moved on.
    - fthssht 13y ago
      "There are three eras of currency: Commodity-based, politically-based, and now, math-based." - Chris Dixon,
lettergram 13y ago
> What Bitcoin really needs is a central bank to stabilize its value. Neither did the U.S. before WWI... Once they added the Federal Reserve they really didn't know what they were doing and when the stock market collapsed they raised overnight lending rates and essentially caused the great depression (or made it significantly worse). Point being, although the Federal Reserve may have a better handle on what is going on now, it does not mean that it is necessary for a currency to have a central bank. The author pretty much has no idea what he is talking about.
kordless 13y ago
> Now, it doesn't make much sense, but there's actually a currency designed to create these kind of economic calamities. I wanted to stop reading right there.
27182818284 13y ago
"Why the Internet Will Never be Newspaper" It doesn't have to fit the role of traditional currency because it isn't.
- winterswift 13y ago
  You're criticizing The Atlantic (which happens to be a print publication as well, not just online) for an article stating that Bitcoin won't become an everyday currency, but saying "it doesn't have to fit [that] role." The article never said it did have to fit that role. The journalism is perfectly fine here, quit being defensive and make an actual argument.
knodi 13y ago
Bitcoin is already used a currency right now but I believe what the author is trying to say is it has not lasting power. Which i believe it to be true. In its current form, its too complex for non-tech savvy people and what makes bitcoin bitcoin will not last more then 10 years as processing power increases over time.
- fragsworth 13y ago
  Heh. It's not that complicated. How many concepts have common people learned since computers and the Internet took everything over? Computer network. Router. Website address. Domain name. IP address. Email address. File. Torrent. What if knowledge of hashing and public and private keys become as commonplace? Because of bitcoin?
mixmastamyk 13y ago
Does a lack of inflation equal deflation? I've not heard that one before.
- philwelch 13y ago
  Deflation is when prices drop due to currency scarcity, and inflation is when prices rise due to currency abundance. The only perfect zero is when the amount of currency in circulation perfectly matches the amount of economic activity. A cryptocurrency might be able to make that happen, but central banks usually err on the side of 1-2% inflation since deflation is so much worse than inflation.
alexeisadeski3 13y ago
And the actual evidence behind the author's claim that deflationary currencies aren't successful? crickets Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while.
- Nursie 13y ago
  >> Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while. Gold has been a terrible choice of currency in the past. Read about it. There are a variety of very good reasons (and probably one or two bad ones, sure) why most modern countries have decoupled currency from precious metals.
- gahahaha 13y ago
  Gold didn't work very well as a currency. There is plenty of proof, but just look at the first graph in this article. http://fabiusmaximus.com/2010/09/13/21514/ http://fabiusmaximus.com/2010/09/13/21514/ Industrial production and when a country left the gold standard. Obviously clinging to the gold standard for so long was a huge mistake. (my point is purely related to that one graph, not the rest of the article (that I have not read))
  - deleted 13y ago
    [deleted]
lucb1e 13y ago
People saying Bitcoin won't work because of the instable price are just dumb. Can anyone bring up some charts from when the first 'normal' (non-crypto) currencies were invented? Let's see if those were so stable from the first year onward. Earlier today I just happened to look up inflation rates from european countries before the Euro: one was nearly 30% in 1980. "Omg 30% price change in just a year," yeah and even that seems to have worked out fine. They were even allowed to join the Eurozone.
- Nursie 13y ago
  Look up the Euro. That was relatively recent. And no, it didn't have fluctuations anything like BTC.
- winterswift 13y ago
  That 30% price change in a year was an anomaly, and it was in 1980, during a severe global recession. Bitcoin, meanwhile, just gained value approximately eightfold over several weeks ago, and it's relatively unusual that it isn't highly volatile, especially lately.
kazagistar 13y ago
> When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing. To some degree, this already works. If the price of bitcoin gets high enough relative to the price of electricity and ASICs, then more bitcoins are mined, right?
- Zetaeta 13y ago
  Then the difficulty goes up. The network is designed to create an average of 6 blocks per hour, with a constant reward per block that halves every 4 years. https://en.bitcoin.it/wiki/Controlled_Currency_Supply https://en.bitcoin.it/wiki/Controlled_Currency_Supply
  - maxerickson 13y ago
    It is slowly racing ahead of the forecast though. The current block was projected for 2014: http://blockexplorer.com/q/getblockcount http://blockexplorer.com/q/getblockcount I guess that will slow down as ASIC hardware matures (or if there is a sustained price drop).
KVFinn 13y ago
There are many bitcoin competitors now and I find it interesting that many of them are the creations of a specific political and economic line of thought. While bitcoin supporters tend to hate the idea of inflation, there are others coins that have inflation built in to encourage spending -- a kind of progressive version of bitcoin. Here's a random example of a coin designed around a specific economic philosophy: >Unlike Bitcoin, Freicoin has a demurrage fee that ensures its circulation and bearers of the currency pay this fee automatically. This demurrage fee was proposed by Silvio Gesell to eliminate the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle and the entrenchment of the financial elite, and has been tested several times with positive results. http://freico.in/ http://freico.in/ (no idea if that has merit but it was the one that stuck in my head because it was so clearly articulated on their homepage) Whether bitcoin itself last who knows, but probably some descendant will be around at the very least at the protocol level.
jMyles 13y ago
This almost reads like a parody. It's as if the author completely disregards the fact that the Austrian school exists at all. I particularly like the reference to the 'deflationary' nature of the Great Depression while glossing over the fact that the prescribed solution (the establishment of a central bank) occurred less than two decades before it.
- fragsworth 13y ago
  And by most historic interpretations, that centralization actually caused it.
  - gnaritas 13y ago
    Citation.
- gahahaha 13y ago
  All serious economists disregard the Austrian school. And with good reason - they're kooks. There was a central bank during the great depression but the US was still on the gold standard until 1933. When it went off the gold standard the great depression stopped getting worse and started getting better: http://delong.typepad.com/sdj/2011/09/yes-recovery-in-the-great-depression-started-with-roosevelt-stephen-williamson-takes-to-his-fainting-couch-department.html http://delong.typepad.com/sdj/2011/09/yes-recovery-in-the-gr...
- gnaritas 13y ago
  > It's as if the author completely disregards the fact that the Austrian school exists at all. Because they don't really, they're cranks, not a serious field of study. The Austrian school is equivalent to the flat earth society. Their answer to every possible economic issue is the same, the magic market will heal itself. When you have one answer for everything, you don't get to call yourself a serious field of study.
  - philwelch 13y ago
    I think it's important to distinguish between historic Austrians, like Hayek, and the nutjob libertarian variety that tried to turn economics into an apologia for anarchocapitalism, like Rothbard.
antonios 13y ago
"...what Bitcoin really needs is a central bank to stabilize its value." Seriously?
- gahahaha 13y ago
  IF it ever were to be used as a currency. Obviously the author knows that a central bank is not a part of bitcoin today or ever could be. So his whole point is that it can never be used as a currency.
fthssht 13y ago
Bitcoin aside just reading the first few sentences really shows what a sad state our economics education is in. People literally, dogmatically believe something that is so blatantly false you'd think you would have to be mentally handicapped to believe it. Yet they do.
- DalekBaldwin 13y ago
  Is it sad that they would believe those sentences, or sad that those sentences are even necessary? I can't tell whether you agree with it or not.
  - fthssht 13y ago
    I had a dream last night that I went into Walmart. Everything was a penny so I went home to wait this terrible situation out. And because the economy is dependent on SPENDING not producing the economy collapsed as a result! What a nightmare.
valtron 13y ago
Let T be the total amount of money in circulation in a given currency C. When you see a value X in units of C, convert it to C' by X in C' = X / T. There you have it, every currency is already trivially equivalent to Bitcoin in that the supply of C' is fixed at 1. How they're _not_ equivalent is that the creation of money in existing currencies is centrally controlled. You can get a clearer view of what happens when money is printed by looking at C' rather than C. For simplicity, pretend there's only the Mint (can create money) and the Public (can't). Initially, Mint has X C and Public has Y C. In C', this is X/(X+Y) C' and Y/(X+Y) C'. Then Mint decides to create Z C. Mint now has (X+Z) / (X+Y+Z) C' and Public has X / (X+Y+Z). The Mint has effectively transferred money away from Public. All arguments against deflation are, basically, Mint will now redistribute the money in such a way as to stimulate the economy.
- nhaehnle 13y ago
  the creation of money in existing currencies is centrally controlled This is a common misunderstanding. For typical fiat currencies, money creation is highly decentralized in the banking system. Most money creation happens when banks give out loans. Conversely, most money destruction happens when loans are paid back. This is actually why our system works so well: the supply of money is not controlled by a central (and therefore fallible) institution, and neither is it fixed (which would be even worse). Instead, it adapts automatically to the demand of money (perhaps one should better say "liquidity" here) via market mechanisms.
  - valtron 13y ago
    Interesting point, and you're right: I was only considering printed money!
    - nhaehnle 13y ago
      Exactly. And even with printed money, one could reasonably argue that the fact that money is printed centrally is irrelevant for the behavior of the economy. After all, central banks typically just react to the demand for physical money that they observe via the requests that come from banks.
oinksoft 13y ago
The author makes really good points about Bitcoin's viability right now as a day-to-day currency. The conclusion at the end, that "What Bitcoin really needs is a central bank to stabilize its value" comes out of left field. No matter the difficulty, the goal most consistent with those of Bitcoin would seem to be to create a cryptocurrency that has a reliable built-in inflation/deflation mechanism. I suppose such a creation would amount to the perfection of money, for whatever that's worth.
twobits 13y ago
"When prices fall, people put off buying things" So I'll never go on vacation, cause next year it will be cheaper. So I won't do the surgery now, cause next year it will be cheaper. etc, etc. This "common knowledge" means no one will ever buy anything if prices fall. That's patently wrong. It may be true for fads, but not for things people really want. "This self-perpetuating cycle of doom [..] is what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely." I live in a crisis stricken country in europe. Prices are NOT falling. That's a generalization and a lie. Prices fall for your property, what you have, and what you don't need, and prices are the same or spiking for things you need. Taxes also are spiking 2x 3x+. So, for example, you pay more and more taxes for your home, which is falling in price. (Owning it, not on debt.) But oil, food, electricity, etc, are rapidly increasing. Deflation and prices are falling, is a lie. They just destroy people, in order to pick up cheap on properties. "What Bitcoin really needs is a central bank to stabilize its value." lol. I remember seeing a graph of how much the dollar has lost it's value since the fed was created. Something like 90+%. I remember how much a coffee costed before entering the euro, and how much it costs now. Something like 15x more. It's bubbles, money printing, lies, and pure stealing. Central banks steal from all of us through inflation, and also give a competitive advantage to whoever they give the newly minted money first. (Their pals, big banks, etc.) " See, the technology of Bitcoin really is revolutionary, but the currency of Bitcoin is holding it back. [..] So who's the perfect person to run Bitcoin? [..] Someone like ... Ben Bernanke." This seems like a propaganda preparation piece. It seems that big players will introduce electronic money soon.
- fragsworth 13y ago
  If prices have been barely protected from falling like the author is claiming, I'd like to know why the price of owning a piece of just about any sector of the stock market has just about tripled in 4-5 years.
- pilooch 13y ago
  you would not buy surgery using this currency if you can avoid it since it would gain value in a possibly near future. So while people would still buy when prices fall, but with a preference given to other currencies. Note: I am no expert.
baddox 13y ago
> When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. Even worse, people are stuck trying to pay back debts that don't fall with wages that do. So bankruptcies pile up, and so do bank losses. That makes people too scared to borrow, and banks too scared to lend, which only makes prices fall even more. > This self-perpetuating cycle of doom is what sunk the global economy in the 1930s, and what, to a lesser extent, has sunk Japan since the 1990s. And it's what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely. Oh good, I'm glad that the causes of the business cycle, the great depression, and the recent global recession have all been discovered with absolutely no question or debate.
DennisP 13y ago
This argument would only be valid if bitcoin were the only currency, or weren't easily convertible to and from dollars. People invested in bitcoins still have to buy things. What many of them do is leave their investment in place, convert a few dollars to bitcoins and spend those. Of course they have an incentive to save rather than spend bitcoins, but this incentive applies equally well to their dollars. If they expect bitcoin deflation to continue, they should convert their dollars to bitcoins rather than spending their dollars. If bitcoin's deflation isn't preventing people from spending dollars, it's not preventing them from spending bitcoins either. Bitcoin isn't having a strong effect on dollars, because its total value is only about $10 billion. Maybe someday it will have a strong deflationary effect on the dollar economy, but it'll have to get much bigger before that happens. But once it is that big, its rate of deflation will slow. It's high now because its usage is growing[1] so quickly. In the past seven days, the number of bitcoin-accepting merchants on coinmap grew 13%. That radical growth will eventually slow, and then we won't see such drastic price changes. Arguably it will still be somewhat deflationary, but even that isn't a sure thing since bitcoin won't necessarily be the only successful cryptocurrency. Hayek argued that private competing currencies would result in price stability without central control, and we might find out whether he was right. [1] http://www.bitcoinpulse.com http://www.bitcoinpulse.com
- maxerickson 13y ago
  It's telling that none of those indicators relate to the value of the goods that are being purchased with Bitcoin. That's probably the most interesting metric.
  - DennisP 13y ago
    It would definitely be interesting. I'm having trouble thinking of a way that metric could be gathered with any reliability, given that merchants typically generate new bitcoin addresses for each purchase.
gnaritas 13y ago
> What Bitcoin really needs is a central bank to stabilize its value. No, a distributed system who's goal is getting rid of central control doesn't need a central point of control. > When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing. And again no; rather, minting more currency can be built into the network algorithmically so that hoarding causes enough inflation to offset it. Bitcoin's deflationary nature will make it a bad currency, but it's not the only crypt-currency out there, and inflation and deflation can be tied into actual transactions on the block chain to build a self regulating currency that can actually be trusted and more importantly adjusted by the economy itself, unlike central planning. Peercoin has these attributes, though I'm not convinced in the correct proportions as it's still long term deflationary. Saving causes inflation by minting new coins and spending causes deflation by destroying transaction fees. This is a better strategy for a currency, but it's not quite balanced right yet.
brownbat 13y ago
Isn't it contradictory to argue that everyone should go short on Bitcoin because it's deflationary? It's either deflationary, so everyone should go long on it / use it as a store for all excess value, or it's not, so it doesn't actually have this problem.
MrQuincle 13y ago
It would be great to have some guys here run a large simulation. I might be wrong, but I bet that there is a trade-off between "centrally organized" currencies versus "decentralized" ones. There might market potential for both. A centralized monetary system could have some disadvantages, isn't it?

40 points by emkemp 13y ago

I'm always a bit shocked that people can be so dismissive, is there really a precedent of a value construct like bitcoin that we can extrapolate confidently from?

en4bz 13y ago

> What Bitcoin really needs is a central bank to stabilize its value. The whole point of Bitcoin is that there is no central governing authority. I'm not sure if this statement is meant to be funny, but if it isn't the author clearly has no understanding of how Bitcoin works or what it aims to achieve. I think given this statement its fair to ignore this piece all together.

Nursie 13y ago
What does bitcoin aim to achieve? I've heard so many different things, and as soon as one gets challenged someone will pop up and say "well it was never meant for that, it does these other five things". Frankly if it was to be a currency, yes, a central bank would be a feature. But it's not a currency, its economic presets would make it a really bad one and its lack of central control makes it very prone to instability. It's not really a very good payment method either, because it takes time to confirm and there's no chargeback facility, something that has given consumers the confidence to shop online and really helped along the boom in internet retail.
gahahaha 13y ago
The author obviously understands that Bitcoin has no central bank - his point is that if it ever were to be used as a currency it would need one. Would you like your salary paid in bitcoins? You wouldn't know from one month to the next what you could afford to buy since prices would be so volatile. Bitcoin might have other uses like easy electronic payments - but the author points out that if you want to buy something legally it is quite convenient already today with the currencies we have.
- jpttsn 13y ago
  > it is quite convenient already today with the currencies we have. That's ridiculous. The friction or transferring money is a huge problem across the world. Developing nations are left out, governments shut down payments on a whim, etc.
- coinbase-craig 13y ago
  I get my salary paid in bitcoin and I think it's pretty awesome.
  - maxerickson 13y ago
    How flexible is that arrangement? If Bitcoin undergoes a sudden downturn, can you ask for dollars next month?
    - coinbase-craig 13y ago
      I get paid a USD equivalent. So if bitcoin went down next month, I'd just get a greater amount of bitcoin. I could change to being paid in USD instead, but I choose to be paid in bitcoin.
      - gnaritas 13y ago
        If your salary is priced in USD, you're really just being paid in USD, not Bitcoin. When you're ready to accept a fixed amount of Bitcoin every pay period, then you're paid in Bitcoin.
        coinbase-craig 13y ago
        At the end of the day I end up with bitcoin in my account, not dollars. So what you're saying does not seem correct to me. The conversion is just a way of determining how much bitcoin I should be paid.
        13y ago

darkbot 13y ago

Obvious to any one who have read a bit of Marx.

gahahaha 13y ago
I don't see the connection.

cup 13y ago

"Why Bitcoin will Never Be a Currency". And yet it only takes an arbitary 5 minutes to realise that it is being used as a currency. People are buying goods and services in exchange for bitcoins. Sure some people horde in the hope that the value will double but the same is done with US Dollars. I mean isnt that what FOREX trading is?

enjo 13y ago
Ok. So it's a very poor currency.
- alexeisadeski3 13y ago
  According to the poorly thought out theory that deflationary currencies are by necessity bad currencies?
  - chad_oliver 13y ago
    The idea that a small amount of inflation is better than deflation is pretty much the least controversial idea in economics. Seriously, no professional economists argue about that. (There are plenty of special cases where deflation is good, sure, but I'm talking about the general case). I'm sure you're a very smart person, and you probably know a lot more than me in many areas. However, anyone trying to say that deflation is great for a general-purpose currency just sounds like someone trying to claim that evolution didn't (doesn't) happen.
    - alexeisadeski3 13y ago
      I agree that inflation is better than deflation. I also agree that this is not controversial - that virtually all economists agree that inflation is better than deflation. However. This does not mean that all deflationary currencies are bad. For example: It is entirely plausible that a currency which is almost 100% predictably deflationary would be preferable to our current currencies, the values of which vary depending upon many factors (central banking strategies, economic outlook, etc). Whilst inflation may help spur consumer spending, and almost certainly does help the economy by permitting 'invisible' wage cuts to poorly performing workers/sectors (perhaps the biggest advantage of inflationary currencies, not even mentioned in the article), the upside of a nearly 100% predictable currency may be even greater. Of course, it is also possible (likely, even) that our current central bank managed system is superior: The downside of unpredictability may be (likely is, in my opinion) outweighed by the flexibility granted to central banks. But we'll never know unless we run the experiment.

maratd 13y ago

Finally, somebody with a basic understanding of economics decides to chime in. It is not possible for bitcoin to be a currency due to its deflationary nature. Bitcoin might be an interesting investment vehicle, a storage of value, but something that will at some point replace the dollar? No.

fthssht 13y ago
There's a fixed quantity of it like gold and gold worked as a currency for a very long time. If Bitcoin fails its certainly not because of its "deflationary nature." What you think it a basic understanding of economics is obvious nonsense. How could people have it so twisted?
- chad_oliver 13y ago
  It also failed as a currency in a very bad way. Part of the reason why the Great Depression was so bad is because most countries still used (or used the mindset associated with) the gold standard. Monetary policy is a very good way of stabilising the economy, and any currency which removes monetary policy as a tool is not likely to be stable in the long term.
  - fthssht 13y ago
    You're dead wrong but even if you werent the fact that it worked for thousands of years completely invalidates the author's point.
- gnaritas 13y ago
  > There's a fixed quantity of it like gold and gold worked as a currency for a very long time. And that time has passed, the world moved on.
  - fthssht 13y ago
    "There are three eras of currency: Commodity-based, politically-based, and now, math-based." - Chris Dixon,

lettergram 13y ago

> What Bitcoin really needs is a central bank to stabilize its value. Neither did the U.S. before WWI... Once they added the Federal Reserve they really didn't know what they were doing and when the stock market collapsed they raised overnight lending rates and essentially caused the great depression (or made it significantly worse). Point being, although the Federal Reserve may have a better handle on what is going on now, it does not mean that it is necessary for a currency to have a central bank. The author pretty much has no idea what he is talking about.

kordless 13y ago

> Now, it doesn't make much sense, but there's actually a currency designed to create these kind of economic calamities. I wanted to stop reading right there.

27182818284 13y ago

"Why the Internet Will Never be Newspaper" It doesn't have to fit the role of traditional currency because it isn't.

winterswift 13y ago
You're criticizing The Atlantic (which happens to be a print publication as well, not just online) for an article stating that Bitcoin won't become an everyday currency, but saying "it doesn't have to fit [that] role." The article never said it did have to fit that role. The journalism is perfectly fine here, quit being defensive and make an actual argument.

knodi 13y ago

Bitcoin is already used a currency right now but I believe what the author is trying to say is it has not lasting power. Which i believe it to be true. In its current form, its too complex for non-tech savvy people and what makes bitcoin bitcoin will not last more then 10 years as processing power increases over time.

fragsworth 13y ago
Heh. It's not that complicated. How many concepts have common people learned since computers and the Internet took everything over? Computer network. Router. Website address. Domain name. IP address. Email address. File. Torrent. What if knowledge of hashing and public and private keys become as commonplace? Because of bitcoin?

mixmastamyk 13y ago

Does a lack of inflation equal deflation? I've not heard that one before.

philwelch 13y ago
Deflation is when prices drop due to currency scarcity, and inflation is when prices rise due to currency abundance. The only perfect zero is when the amount of currency in circulation perfectly matches the amount of economic activity. A cryptocurrency might be able to make that happen, but central banks usually err on the side of 1-2% inflation since deflation is so much worse than inflation.

alexeisadeski3 13y ago

And the actual evidence behind the author's claim that deflationary currencies aren't successful? crickets Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while.

Nursie 13y ago
>> Gold has been deflationary for all of recorded history, insofar as I'm aware (ie: rate of gold discovery was slower than economic expansion), yet it seemed to work pretty well for a little while. Gold has been a terrible choice of currency in the past. Read about it. There are a variety of very good reasons (and probably one or two bad ones, sure) why most modern countries have decoupled currency from precious metals.
gahahaha 13y ago
Gold didn't work very well as a currency. There is plenty of proof, but just look at the first graph in this article. http://fabiusmaximus.com/2010/09/13/21514/ http://fabiusmaximus.com/2010/09/13/21514/ Industrial production and when a country left the gold standard. Obviously clinging to the gold standard for so long was a huge mistake. (my point is purely related to that one graph, not the rest of the article (that I have not read))
- deleted 13y ago
  [deleted]

lucb1e 13y ago

People saying Bitcoin won't work because of the instable price are just dumb. Can anyone bring up some charts from when the first 'normal' (non-crypto) currencies were invented? Let's see if those were so stable from the first year onward. Earlier today I just happened to look up inflation rates from european countries before the Euro: one was nearly 30% in 1980. "Omg 30% price change in just a year," yeah and even that seems to have worked out fine. They were even allowed to join the Eurozone.

Nursie 13y ago
Look up the Euro. That was relatively recent. And no, it didn't have fluctuations anything like BTC.
winterswift 13y ago
That 30% price change in a year was an anomaly, and it was in 1980, during a severe global recession. Bitcoin, meanwhile, just gained value approximately eightfold over several weeks ago, and it's relatively unusual that it isn't highly volatile, especially lately.

kazagistar 13y ago

> When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing. To some degree, this already works. If the price of bitcoin gets high enough relative to the price of electricity and ASICs, then more bitcoins are mined, right?

Zetaeta 13y ago
Then the difficulty goes up. The network is designed to create an average of 6 blocks per hour, with a constant reward per block that halves every 4 years. https://en.bitcoin.it/wiki/Controlled_Currency_Supply https://en.bitcoin.it/wiki/Controlled_Currency_Supply
- maxerickson 13y ago
  It is slowly racing ahead of the forecast though. The current block was projected for 2014: http://blockexplorer.com/q/getblockcount http://blockexplorer.com/q/getblockcount I guess that will slow down as ASIC hardware matures (or if there is a sustained price drop).

KVFinn 13y ago

There are many bitcoin competitors now and I find it interesting that many of them are the creations of a specific political and economic line of thought. While bitcoin supporters tend to hate the idea of inflation, there are others coins that have inflation built in to encourage spending -- a kind of progressive version of bitcoin. Here's a random example of a coin designed around a specific economic philosophy: >Unlike Bitcoin, Freicoin has a demurrage fee that ensures its circulation and bearers of the currency pay this fee automatically. This demurrage fee was proposed by Silvio Gesell to eliminate the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle and the entrenchment of the financial elite, and has been tested several times with positive results. http://freico.in/ http://freico.in/ (no idea if that has merit but it was the one that stuck in my head because it was so clearly articulated on their homepage) Whether bitcoin itself last who knows, but probably some descendant will be around at the very least at the protocol level.

jMyles 13y ago

This almost reads like a parody. It's as if the author completely disregards the fact that the Austrian school exists at all. I particularly like the reference to the 'deflationary' nature of the Great Depression while glossing over the fact that the prescribed solution (the establishment of a central bank) occurred less than two decades before it.

fragsworth 13y ago
And by most historic interpretations, that centralization actually caused it.
- gnaritas 13y ago
  Citation.
gahahaha 13y ago
All serious economists disregard the Austrian school. And with good reason - they're kooks. There was a central bank during the great depression but the US was still on the gold standard until 1933. When it went off the gold standard the great depression stopped getting worse and started getting better: http://delong.typepad.com/sdj/2011/09/yes-recovery-in-the-great-depression-started-with-roosevelt-stephen-williamson-takes-to-his-fainting-couch-department.html http://delong.typepad.com/sdj/2011/09/yes-recovery-in-the-gr...
gnaritas 13y ago
> It's as if the author completely disregards the fact that the Austrian school exists at all. Because they don't really, they're cranks, not a serious field of study. The Austrian school is equivalent to the flat earth society. Their answer to every possible economic issue is the same, the magic market will heal itself. When you have one answer for everything, you don't get to call yourself a serious field of study.
- philwelch 13y ago
  I think it's important to distinguish between historic Austrians, like Hayek, and the nutjob libertarian variety that tried to turn economics into an apologia for anarchocapitalism, like Rothbard.

antonios 13y ago

"...what Bitcoin really needs is a central bank to stabilize its value." Seriously?

gahahaha 13y ago
IF it ever were to be used as a currency. Obviously the author knows that a central bank is not a part of bitcoin today or ever could be. So his whole point is that it can never be used as a currency.

fthssht 13y ago

Bitcoin aside just reading the first few sentences really shows what a sad state our economics education is in. People literally, dogmatically believe something that is so blatantly false you'd think you would have to be mentally handicapped to believe it. Yet they do.

DalekBaldwin 13y ago
Is it sad that they would believe those sentences, or sad that those sentences are even necessary? I can't tell whether you agree with it or not.
- fthssht 13y ago
  I had a dream last night that I went into Walmart. Everything was a penny so I went home to wait this terrible situation out. And because the economy is dependent on SPENDING not producing the economy collapsed as a result! What a nightmare.

valtron 13y ago

Let T be the total amount of money in circulation in a given currency C. When you see a value X in units of C, convert it to C' by X in C' = X / T. There you have it, every currency is already trivially equivalent to Bitcoin in that the supply of C' is fixed at 1. How they're _not_ equivalent is that the creation of money in existing currencies is centrally controlled. You can get a clearer view of what happens when money is printed by looking at C' rather than C. For simplicity, pretend there's only the Mint (can create money) and the Public (can't). Initially, Mint has X C and Public has Y C. In C', this is X/(X+Y) C' and Y/(X+Y) C'. Then Mint decides to create Z C. Mint now has (X+Z) / (X+Y+Z) C' and Public has X / (X+Y+Z). The Mint has effectively transferred money away from Public. All arguments against deflation are, basically, Mint will now redistribute the money in such a way as to stimulate the economy.

nhaehnle 13y ago
the creation of money in existing currencies is centrally controlled This is a common misunderstanding. For typical fiat currencies, money creation is highly decentralized in the banking system. Most money creation happens when banks give out loans. Conversely, most money destruction happens when loans are paid back. This is actually why our system works so well: the supply of money is not controlled by a central (and therefore fallible) institution, and neither is it fixed (which would be even worse). Instead, it adapts automatically to the demand of money (perhaps one should better say "liquidity" here) via market mechanisms.
- valtron 13y ago
  Interesting point, and you're right: I was only considering printed money!
  - nhaehnle 13y ago
    Exactly. And even with printed money, one could reasonably argue that the fact that money is printed centrally is irrelevant for the behavior of the economy. After all, central banks typically just react to the demand for physical money that they observe via the requests that come from banks.

oinksoft 13y ago

The author makes really good points about Bitcoin's viability right now as a day-to-day currency. The conclusion at the end, that "What Bitcoin really needs is a central bank to stabilize its value" comes out of left field. No matter the difficulty, the goal most consistent with those of Bitcoin would seem to be to create a cryptocurrency that has a reliable built-in inflation/deflation mechanism. I suppose such a creation would amount to the perfection of money, for whatever that's worth.

twobits 13y ago

"When prices fall, people put off buying things" So I'll never go on vacation, cause next year it will be cheaper. So I won't do the surgery now, cause next year it will be cheaper. etc, etc. This "common knowledge" means no one will ever buy anything if prices fall. That's patently wrong. It may be true for fads, but not for things people really want. "This self-perpetuating cycle of doom [..] is what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely." I live in a crisis stricken country in europe. Prices are NOT falling. That's a generalization and a lie. Prices fall for your property, what you have, and what you don't need, and prices are the same or spiking for things you need. Taxes also are spiking 2x 3x+. So, for example, you pay more and more taxes for your home, which is falling in price. (Owning it, not on debt.) But oil, food, electricity, etc, are rapidly increasing. Deflation and prices are falling, is a lie. They just destroy people, in order to pick up cheap on properties. "What Bitcoin really needs is a central bank to stabilize its value." lol. I remember seeing a graph of how much the dollar has lost it's value since the fed was created. Something like 90+%. I remember how much a coffee costed before entering the euro, and how much it costs now. Something like 15x more. It's bubbles, money printing, lies, and pure stealing. Central banks steal from all of us through inflation, and also give a competitive advantage to whoever they give the newly minted money first. (Their pals, big banks, etc.) " See, the technology of Bitcoin really is revolutionary, but the currency of Bitcoin is holding it back. [..] So who's the perfect person to run Bitcoin? [..] Someone like ... Ben Bernanke." This seems like a propaganda preparation piece. It seems that big players will introduce electronic money soon.

fragsworth 13y ago
If prices have been barely protected from falling like the author is claiming, I'd like to know why the price of owning a piece of just about any sector of the stock market has just about tripled in 4-5 years.
pilooch 13y ago
you would not buy surgery using this currency if you can avoid it since it would gain value in a possibly near future. So while people would still buy when prices fall, but with a preference given to other currencies. Note: I am no expert.

baddox 13y ago

> When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. Even worse, people are stuck trying to pay back debts that don't fall with wages that do. So bankruptcies pile up, and so do bank losses. That makes people too scared to borrow, and banks too scared to lend, which only makes prices fall even more. > This self-perpetuating cycle of doom is what sunk the global economy in the 1930s, and what, to a lesser extent, has sunk Japan since the 1990s. And it's what has been sinking us since 2008, though this time central banks have at least kept prices from falling, just barely. Oh good, I'm glad that the causes of the business cycle, the great depression, and the recent global recession have all been discovered with absolutely no question or debate.

DennisP 13y ago

This argument would only be valid if bitcoin were the only currency, or weren't easily convertible to and from dollars. People invested in bitcoins still have to buy things. What many of them do is leave their investment in place, convert a few dollars to bitcoins and spend those. Of course they have an incentive to save rather than spend bitcoins, but this incentive applies equally well to their dollars. If they expect bitcoin deflation to continue, they should convert their dollars to bitcoins rather than spending their dollars. If bitcoin's deflation isn't preventing people from spending dollars, it's not preventing them from spending bitcoins either. Bitcoin isn't having a strong effect on dollars, because its total value is only about $10 billion. Maybe someday it will have a strong deflationary effect on the dollar economy, but it'll have to get much bigger before that happens. But once it is that big, its rate of deflation will slow. It's high now because its usage is growing[1] so quickly. In the past seven days, the number of bitcoin-accepting merchants on coinmap grew 13%. That radical growth will eventually slow, and then we won't see such drastic price changes. Arguably it will still be somewhat deflationary, but even that isn't a sure thing since bitcoin won't necessarily be the only successful cryptocurrency. Hayek argued that private competing currencies would result in price stability without central control, and we might find out whether he was right. [1] http://www.bitcoinpulse.com http://www.bitcoinpulse.com

maxerickson 13y ago
It's telling that none of those indicators relate to the value of the goods that are being purchased with Bitcoin. That's probably the most interesting metric.
- DennisP 13y ago
  It would definitely be interesting. I'm having trouble thinking of a way that metric could be gathered with any reliability, given that merchants typically generate new bitcoin addresses for each purchase.

gnaritas 13y ago

> What Bitcoin really needs is a central bank to stabilize its value. No, a distributed system who's goal is getting rid of central control doesn't need a central point of control. > When the demand for Bitcoin goes up, they need to print more to keep it from skyrocketing. And again no; rather, minting more currency can be built into the network algorithmically so that hoarding causes enough inflation to offset it. Bitcoin's deflationary nature will make it a bad currency, but it's not the only crypt-currency out there, and inflation and deflation can be tied into actual transactions on the block chain to build a self regulating currency that can actually be trusted and more importantly adjusted by the economy itself, unlike central planning. Peercoin has these attributes, though I'm not convinced in the correct proportions as it's still long term deflationary. Saving causes inflation by minting new coins and spending causes deflation by destroying transaction fees. This is a better strategy for a currency, but it's not quite balanced right yet.

brownbat 13y ago

Isn't it contradictory to argue that everyone should go short on Bitcoin because it's deflationary? It's either deflationary, so everyone should go long on it / use it as a store for all excess value, or it's not, so it doesn't actually have this problem.

MrQuincle 13y ago

It would be great to have some guys here run a large simulation. I might be wrong, but I bet that there is a trade-off between "centrally organized" currencies versus "decentralized" ones. There might market potential for both. A centralized monetary system could have some disadvantages, isn't it?