The reason Bitcoin will never be a replacement for a Central Bank based currency like the USD is the fact that it is in permanent deflation.
Orthodox macroeconomics holds that your currency needs to be slightly inflationary, but it doesn't consider what happens in the face of credible competition with a deflationary currency.
It might very well be the case that the economy runs better when everyone uses an inflationary currency. But if everyone wants to hold the deflationary currency instead of the inflationary one (which, all else being equal, they do, for obvious reasons) no amount of theorising will save it.
We haven't yet seen a credible competitor to the inflationary currencies of nation states, but bitcoin is rapidly heading in that direction.
And the cat is out of the bag now. If deflationary currencies do outcompete inflationary ones, then it's only a matter of time until it happens, even if it's not bitcoin.
Switching to a deflationary currency might be "bad for the economy", but if it's good for individuals, they'll do it.
The truth is we have not had any real deflationary currencies compete against state issued currencies. Even commodity monies like gold and silver aren't deflationary since the existing in-ground resource base is still very large and can continue to be mined for millions of years.
Crypto, on the other hand, will eventually stop creating new coins based on programming. It is essentially the ultimate deflationary currency.
From the end-user stand point, the currency of choice is always going to be deflationary. The end-user has absolutely nothing to gain by using an inflationary currency. The benefits of the inflationary currency is that is encourages people to get rid of their currency as fast as possible because it is losing value. That doesn't benefit the end-user. It benefits businesses and the people those businesses employ. The inflationary currency ideals are mostly based on the socialist ideas that we need to spend our money as fast as possible to "move the economy forward" but that does not benefit the user of the money. It benefits other people.
I believe that most people are self-interested and will do actions that maximize their benefit in most situations. Thus, it is easy to see that users will prefer to keep their money in deflationary currency rather than inflationary. Will it seize up the entire economy? My theory is no it won't and it will have the side effect of encouraging people to wisely spend their money. People will only buy stuff they really want or need rather than this idea of "I better buy it right now before the price goes up (due to inflation)".
Yep.
> and since USD is used to buy stuff they will want to have USD on hand to buy stuff when they want to
Nope! Starting from a position of only having BTC (because you've already got rid of the USD you had, and you immediately convert any USD you receive into BTC), what is the advantage of buying USD to spend instead of spending your BTC directly?
Based on a false premise. Under no scenario will people only have BTC. With regards to what people will be paid in, insofar as people are planning to spend money, they'll want it paid in USD.
Frankly your argument is incoherent. If something is bad for the economy its bad for individuals. If the economy goes down most people starve.
You also seem to argue that people hold onto more of a currency than another that currency "wins" but the currency that "wins" is the one in circulation. If by "win" we mean the currency that survives, then the one that survives is the one in circulation. Again this is all eco 101.
In the past, it was difficult to use 100% crypto to live on but now it is a real possibility.
Perhaps real deflationary effects of bitcoin will probably kick in after 3 halvings (about 10 years?), when the number of bitcoin that is being lost naturally becomes greater than the inflation. However, at that stage, bitcoin fees would need to dramatically increase from what they are now.
This is probably a paradox of deflationary crypto-currencies: They need to raise revenue from fees to pay for validation/security, however if there's more incentive to hold rather than spend them, their revenue raising ability becomes constricted. Whenever this is true, I'm excited that we'll find this out in the future.
Already there is an awful lot of money being paid in bitcoin tx fees, and it's rising over time, and I can't see any reason for it to start going down, so I don't think it'll be a problem.
There are different definitions of inflation/deflation, but the price is always a function of supply-and-demand, therefore it all boils down to the supply, where the issuance rate & eventual supply cap is what gives a crypto-currency its inflationary/deflationary properties.
We don't need to debate it because it is obvious what individuals will decide to do.
The whole point is we DON'T want people to just hold onto a currency. If everyone stops spending their USD and just saves them, the economy will collapse. Think about all the businesses that will go under because no one is buying anything. I could go on but really this is economics 101.
Also I don't buy into the economy will collapse argument. The economy will restructure itself to produce items that people want and need. That will never change. You can't eat currency or digital bits. Your arguments are primarily based on FUD.
If you have a currency that is increasing in value, and one decreasing, which do you choose to spend? You would not "use" deflationary currency, only hold onto it.
Yes the economy will restructure. People will spend USD and keep Bitcoin in their pocket. People will want to be paid in USD because they can use it to buy stuff. Bitcoin is and will stay relegated to an interesting experiment people invest in, and only use if they need its anonymity.
>If you have a currency that is increasing in value, and one decreasing, which do you choose to spend? You would not "use" deflationary currency, only hold onto it.
Like I said, you can't eat bits of currency. I would spend the deflationary currency but I would be more hesitant to spend it. I would buy stuff that I really want or need. People aren't going to starve to death or go homeless because they want to hold on to their deflationary currency. That's not reality.
>Yes the economy will restructure. People will spend USD and keep Bitcoin in their pocket. People will want to be paid in USD because they can use it to buy stuff. Bitcoin is and will stay relegated to an interesting experiment people invest in, and only use if they need its anonymity.
You are seeing the situation for what it is now, not for what it will be in the future. Crypto is gaining more acceptance world wide. Yes, currently people prefer to be paid with USD or similar but in the future it could be possible that people prefer crypto. Also there are lots of businesses and services that directly or indirectly accept crypto.
I disagree with your last sentence. Like all things, bitcoin started as an experiment but it will go on to change the world similar to how the internet changed the world. Entire industries will be disrupted as a result. I have been in crypto since 2011 and to even be having this discussion today already shows me that the experiment has been a monumental success. In 2011, I would have never even imagined that bitcoin would reach 10k per coin.
Yes but if you had the choice between spending a deflationary currency or inflationary, which would you spend? Unless you want to outlaw USD in general, because USD is decreasing in value you have an incentive to spend it.
"You are seeing the situation for what it is now, not for what it will be in the future. Crypto is gaining more acceptance world wide. Yes, currently people prefer to be paid with USD or similar but in the future it could be possible that people prefer crypto. Also there are lots of businesses and services that directly or indirectly accept crypto. I disagree with your last sentence. Like all things, bitcoin started as an experiment but it will go on to change the world similar to how the internet changed the world. Entire industries will be disrupted as a result. I have been in crypto since 2011 and to even be having this discussion today already shows me that the experiment has been a monumental success. In 2011, I would have never even imagined that bitcoin would reach 10k per coin."
I want to engage with you but I don't see an argument here. You are only asserting that "this is the way things are, but they will change!" without saying why.
So?
> Based on behavioral economics, people are mostly self-interested and will do actions that maximize their benefit.
I'm sure you know this, but this is exactly the opposite of what behavioral economics has shown.
> You can't eat currency or digital bits.
True, but if your currency is gaining value, you will be less inclined to spend that currency to start or invest in businesses, e.g.
That's a big problem because you need to force people to do something. How are you going to force someone to not use an asset that benefits them over an asset that does not benefit them. You have to convince them to use the inferior asset because it benefits society. That's hard to do in reality because most people are selfish by virtue of human nature.
>I'm sure you know this, but this is exactly the opposite of what behavioral economics has shown.
Really? That's news to me. I think you are confused by what the science is actually telling us. It is telling us that people make bad decisions because of biases. The person was still thinking that they are doing something the benefits them but due to these biases they make decisions which are not rational in hindsight. The science is not telling us that people make non-rational decisions on purpose. PBS NOVA did a good documentary on the topic called mind over money.
>rue, but if your currency is gaining value, you will be less inclined to spend that currency to start or invest in businesses, e.g.
I find nothing wrong with that. If businesses want the money then they will need to provide exceptional value to the customer as always.
I understand that that is the point you're making.
The point we're making is that it does not matter what you want. Given the opportunity to hold deflationary currency instead of inflationary, (all else being equal) rational actors will prefer to hold the deflationary currency.
This is economics 101 indeed.
Hence in a world of rational actors the only currency in circulation will be inflationary currencies.
If they have a floating exchange rate, the good money will drive the value of the bad money towards 0.
Edit: perhaps read the section of the Wikipedia article entitled "reverse of Gresham's law". It argues exactly the point I'm arguing.
You would do neither. You would spend what is losing value, and hold onto what is gaining value.
Also this is already being done with point of sale machines that accept bitcoin. The POS machine simply goes to an exchange to see how much one bitcoin is worth then tells the buyer to pay xyz amount in bitcoin that is equivalent to the value that USD represents.