1) Gresham's law: bad money drives out good
2) Bitcoin is good money (deflationary, holds its value)
3) National currencies are bad money (inflationary)
4) People prefer to "hoard" good bitcoin and spend bad national currencies
(So far, so good)
5) Therefore, since people prefer to own bitcoin, it has zero value
(Not every new argument has to make sense, I guess.)
It's a stupid idea to run a country with a fixed amount of currency - as the economy expands, more currency is needed - either that - or all prices of everything need to adjust because the 'stupid currency' is fixed.
A 'well managed' currency is better than a fixed supply.
Of course - the 'existential risk' is that some political cowboy will 'print money' for political reasons - this is the great problem that fiat always faces.
But this can be avoided.
Most major currencies are very well managed.
Also - remember that they are backed by actual assets - so money is not coming out of nowhere.
Almost all Euros are backed by some kind of quality asset. It's very rational to allow entities to 'trade' some kind of asset for currency at the central bank. This is actually more 'free market' than any kind of fixed currency.
National currencies - irrespective of the quality of their governance, fixed or not - are extremely useful to everyone. They 'spend' that currency because it's what's used to buy stuff.
Household expenditures: mortgage/rent, electricity, groceries, insurance, gas, car payments, cable/internet. Can you use BTC for any of that. Pragmatically - No. BTC is 'pragmatically worthless' to anyone - it has no reason to exist.
BTC is very useful to money launderers, tax evaders, and other people doing illicit things, it's a great currency for the black market. But beyond that, it serves no purpose. It's not a currency and it's a terrible store of value as compared to any of real-estate, gold, most commodities, a 'basked of bonds of equities' or a 'basket of currencies'.
It's a great intellectual exercise, and I think the 'paper value' of BTC will remain quite high for some time, but unless it sinks in as an actual currency of some economy (say, African nations where the currency is garbage), in the long-long-long run there's no reason for it to maintain it's value.
Additionally I work abroad, once I realized how much is was going to cost me to send my salary back home using the traditional banking system, I quickly became a bitcoin enthusiast
No. You can earn the same as inflation in a risk-free investment.
You can earn more by taking a small amount of risk.
Savers are not punished for anything.
A pure deflationary currency should exist to counterbalance inflationary fiat.
In fact I wish a portion of my actual salary was in Bitcoin, so I didn't have to pay exchange fees every month lol
If you're considering a long horizon, then volatility shouldn't bother you too much.
It's not perfect but it's by far the best currency for illicit online transactions.
1. User A holds a publicly visible wallet with 1000 bitcoins in it.
2. User B publicly gives User A 10 bitcoins.
3. User A now holds a publicly visible wallet with 1,010 bitcoins in it.
4. Over the course of a month, User A distributes all 1,010 bitcoins across a thousand new publicly visible wallets, in seemingly random amounts. These wallets are publicly visible, and the transactions are publicly visible.
5. Nobody knows who holds the keys to any of those wallets. Presumably, at least 10 bitcoins worth of money belonging to User B is held in some combination of those wallets, but figuring out which ones belong to User A vs User B suddenly becomes very complicated.
6. This becomes even more complicated if there are more than two users in the scenario. What if there are actually a thousand users that the money is being mixed between?
This is the premise of bitcoin mixer services. It is at least somewhat possible to "anonymize" and "launder" public bitcoin transactions on the public ledger via this method. This is especially true if someone uses multiple mixer services to launder the same money split across a bunch of wallets.
Or at least that's my understanding? I've never actually done it.
Euros are backed by specific classes of assets, and USD is backed by US government debt, and since 2008 a lot of real estate (which was under water for a long time, but coming above water over time).
The US does not just 'print money' and inject it into the economy.
The Fed takes US Gov debt out of the market at market prices, and replaces them with USD of the same value - or the reverse of that.
At least at the 'central bank' level.
Now - when it comes to the notion of 'fractional reserve banking' - that's another issue entirely.
Yes they just “print money” actually they create it electronically, that’s how the government got the money for quantitative easing.
The reserve bank has control over the money supply. They can create more or less, and thereby regulate the inflation rate of a country.
The government is trading money they create, for some type of asset - in the case of QE, it could be government bonds, or other things. i.e. taking bonds 'off the market' and putting currency 'on the market'. Some day it will will reverse.
Ergo - that currency is 'backed by' an asset, i.e. government bonds, or other securities.
Obviously they have to 'create it' somehow in order for it to exist, but it's only created in exchange for assets, which are held by the central bank.
'Money printing' or 'arbitrary money creation' is when governments/central banks create money out of thin air for whatever purpose.
When a government 'prints money' to pay of debt to some other country - that's just 'printing money out of thin air' - the newly minted currency is not 'backed' by anything. This will cause hyperinflation as the value of each 'dollar' is backed by less and less, worth less and less, i.e. failure.
At some point, the Fed will release those QE assets back into the market, and take dollars out of circulation - i.e. it's monetary policy, not just printing willy nilly.
The money is both created from thin air and at the same time connected to the underlying assets in the bond.
I'm leaning towards the opinion that it's more "air" than "matter" in that case, but you could argue that it's somehow reflecting the underlying economy somehow.
A BOND IS A LOAN, A LEGAL OBLIGATION TO REPAY
With 100's of years of financial regulation and legal apparatus and precedence, long-standing laws, process and practices it.
It's a fundamental part of the credit system.
The price of the bond on the the markets will be a function of the coupon rate, and the 'risk' associated with the issuer actually paying back.
That's why bonds can be resold because they are worth something.
PRINTING MONEY AND SPENDING IT ON MANSIONS (or whatever) IS DILUTION
It's just making 'z dollars in circulation' no 'z*n dollars in circulation' backed by the same amount of assets, ergo, each dollar worth less.
I recommend "Investopedia.com" where you can go and look up what a 'bond' is, what a 'stock' is, what 'currency' is, and what 'central banks' do, it's a great resource.
It's definitely increasing the money supply in that case. If the assets are valuated at the correct price is another issue...
Want to own real estate? Then you also need to acquire some currency to pay your property tax bill.
Want to buy food to eat? Even if you pay for the food with some other form of payment, you still need some of the local currency to pay the sales tax on that food.
Want to get compensated for your labor? Even if you want your compensation to be in some other form, you still need some of the local currency so that you can pay your income tax bill.
Want to hire someone to do something? Even if they accept some other form of payment, you still need some of the local currency to pay their payroll tax.
That creates a guaranteed base level of demand for the currency that will never go away, so the currency will always be worth something unless the government collapses or prints too much money.
Thats a price system like at the gas station, right? Sounds good to me.
But 'monetary policy' is a very valuable instrument, in fact, necessary in many occasions, such as deep recession, economic shock, or war.
All prices are already being adjusted all the time - what is the problem?
Greece and Spain right now do not have their own currency. Their monetary policy is dictated by greater powers - like Germany. The Euro is a 'strong currency' - it's the only way a currency union can work. There are very strict rules for how money is created.
When an economy crashes or sinks, sometimes governments want to print some easy money to 'stimulate' the economy, and a weaker currency will help exports.
Also - one 'price' that will not change easily is wages. Powerful, government sector unions will never accept a pay cut. Neither will private citizens really.
But in reality - 'the nations workers' simply are not as productive - and 'everyone needs to take a pay cut'. Not gonna happen.
Instead of 'pay cuts' companies and govs just 'hire less' hurting the economy even more.
Welcome 'monetary policy'. It's a tricky game, but they can inflate away debt, and push wages down a little bit, vis-a-vis other nations - to reflect the new condition of the economy.
Also - war, and existential shock. Monetary policy tools are important then for nations to survive sometimes.
It's a risky thing, and prone to mismanagement and certainly when politicians get their grubby hands on the Central Bank - it usually runs amok. This is the 'historical' reason a lot of people like 'Gold standards' and 'hard money' - because some tin-pot dictator can't dilute their cash.
But intelligently managed currency has elasticity - which helps smooth over bumps.
Is the short answer.
However I think what you need to understand with Bitcoin is that it isn't a finished product or in its final state. That is one of its strengths.
People are constantly working to improve it. It is literally always under development by the community that uses it. Eventually improvements will be made to improve transaction times, transaction anonymity, efficiency etc...
But even without those improvements Bitcoin is being adopted quite seriously by some significant institutions as a means of facilitating transactions. One of the largest retailers in South Africa (where I happen to live), is experimenting with accepting Bitcoin at the till.
So I suppose I am not here to preach the gospel that Bitcoin is the future and is perfect, but I would be careful of declaring absolutes like 'unless it sinks in as an actual currency of some economy ... there's no reason for it to maintain it's value.'
Mainly because most people that make those predictions (re. Bitcoin) have had to eat their own words.
Yes, before the internet and computers, changing the price of a product is a huge overhead. Today, it doesn't necessarily have to be.
(People casually refer to "bad money driving out good" whenever smart investors abandon bad markets, but that's a different dynamic from Gresham's Law proper.)
Sure, the price has been going up like crazy, and you might hold on to them to go "to the moon". But if it crashes, the value can go to zero - bitcoin has no "intrinsic value" unlike gold, its value is only defined by what you can get for it. In that sense, yes, it definitely has a non-zero value now. But it might crash, be outlawed, etc. tomorrow and you can loose everything.
(Another point is that "value" is notoriously ill-defined. Price? Trade value? Use value? Something else?)
It's also worth noting that the volatility of gold production has historically played against its function as a store of value, as fluctuations in its price have had impacts on the larger economy.
All of this is to say that the only reason gold has extrinsic value as money - why so many societies have seen it as money - is because it has natural properties that map reasonably well into the needed functions of a currency. It's not unique among natural currencies, rather just a first among equals.
Interesting fact about gold, for a while private gold possession was banned in the US. So even in that regard it is not a to Bitcoin...