A friend of mine basically put it this way: bitcoin can't become medium of exchange before it becomes medium of value.
You can read this as: if you are holding btc, it's in your best interest to hold more without selling.
Bitcoin’s deflationary nature discourages spending and selling, by definition. The high transaction costs discourage it even further.
It's not in your best interest to buy and never sell. Current investors are just incredibly short sighted. If bitcoin isn't usable by (and useful to) the majority of the world, it will never get enough investment to serve as a buffer against the drastic price swings caused by speculators.
Smart investors know that simply holding coins isn't enough in the long run. Finding new use cases and encouraging adoption and use is the only way crypto stands a chance.
When you start to account for other things like lost and unrecoverable coins, it becomes severely deflationary and much sooner. Things like grandpa taking his encrypted wallet to the grave or in the case of bitcoin BTC, small coins that can't be moved because the fee is higher than the coin's value.
At the time of writing this, coins worth less than ~ $6.15 (USD) aren't able to be spent*. That means if you bought a $4 coffee with BTC and paid with a tenner (a coin [input] worth $10) , you'd lose the change. It would remain unspendable until the network starts unclogging.
* By "arent able to be spent" I mean, reasonable fee estimations for getting the transaction into a block within an amount of time that you can be sure the transaction won't get dropped from the mempool. I used https://bitcoiner.live to estimate the fee which was the most generous of the three I looked at.
Any currency with a limited supply will tend to be deflationary over time, though not necessarily experiencing a deflationary spiral depending on the overall economy around it. An active economy will see enough movement of the currency that deflation will, hopefully, be small. But an inactive economy (like bitcoin's) with people hoarding rather than spending will see higher-than-healthy (from an economic perspective, it's great for the hoarders if they can use it later) deflation rates.
Now, you can make the argument that that’s not really inflation - that BTC won’t predictably ~double in value every year going forward, and therefore one shouldn’t be afraid to spend it - but the idea that the tiny rate of increase in supply should be a major factor in that decision is pretty silly. Also, it’s not obvious that it’s being mined faster than it’s being eliminated due to lost keys.
But bitcoin is more of an asset than a currency, so speaking of it in terms of inflation / deflation leads to oddities, like this.
Assets inflate and deflate. It’s not an oddity.
Bitcoin adoption is a deflationary process because an increasing number of people are competing over a fixed (ultimately) supply of Bitcoin.
If more people want Bitcoin, the price goes up. Why do more people want Bitcoin? Because the price goes up. The cycle reverses when the price starts going down.
Define best interest here. I mean saving money and investing it to make more money is also in everyone's best interest, but that is certainly not the case. So why is that?
Holding BTC is the same as the last one. The holdings are not invested in anything remotely productive, it's just speculation on the future value.
Investment centralization is bad because it makes it much more susceptible to regulatory capture by the industries crypto stands to disrupt. We're already seeing this now. The same big banks that called crypto a scam have suddenly become bullish after a few years of quietly buying coins. We need regular people on the streets advocating for crypto.
The reduced use cases is a problem because it minimizes adoption and the network effect, both of which are vital for the long term survival of the network.
Of course it applies. Holding lots of dollars (e.g. as hard cash or in a checking account) is stupid. That is the purpose and benefit of (mild) inflation: to incentivise consuming or investing them.
Bitcoin, as a deflationary asset, encourages lower time preference, which encourages saving and real investing (generating real world value rather than paper gains), resulting in less consumerism and better stewarding of resources.
BTC does not encourage real investing, only hoarding. The hoarded BTC is not used in any productive investment or way because no one will loan it when it gains much more value than most businesses can produce merely by existing. When it can increase in apparent value by 100% in just a few weeks, there is no reason to invest your BTC because no business (or very few, and none sustainably) will have similar returns.
A common misconception. The health of an economy lies in the goods that are exchanged; money is merely a placeholder. They are improved by producing more goods than are consumed, which creates room for investment in capital goods (tools for enhancing the productivity of goods and labor) and the research and development of improved technology (learning to make better tools).
"Stagnant" money just means that more goods were produced than were consumed, and the surplus was not actively invested. The surplus still exists, and continues to fuel investment (by others) so long as the money remains unspent. The "stagnant" money is off the market, not competing for goods and services, and as such contributes to a reduction in prices similar to what would occur if that money were simply destroyed (albeit temporarily), shrinking the money supply. In effect this leaves the decision about how the surplus of goods should be invested up to other market participants.
If the owner of the "stagnant" money knows of ways to invest which would provide an ROI better than the average rate of return on the market (i.e. the rate of deflation) then they should do so, earning themselves a profit and raising the average rate of return. However, below-average investments—malinvestments—would lower the average rate of return and reduce overall economic growth, and ought to be discouraged. It's better for everyone for the owner to simply sit back, "hoard" the money, and receive a passive reward for producing more than they consumed than it would be for them to actively invest in ventures with below-average realized returns and thus divert resources from better-performing ventures, but that is exactly what an actively inflationary monetary policy encourages by driving people who lack the competency to choose good investments to invest in the market anyway merely to avoid losses due to money supply inflation.
"Stagnant" was my way of referring to hoarded money that's not actually invested in anything. Yes, it's equivalent to removing it from the economy and it reduces the nominal price of goods and services, which also means it reduces the nominal wages (over time). Which means old money is given a much stronger benefit in the economy when they finally spend it, and new money (including new entrants like an 18 year old getting their first full time job) are severely penalized not due to any actual lack of skill or ability, but due to their entering the economy 100 years too late.
Then it is rational to hold, not spend, them. Deflationary currencies don’t function. (They can be stores of value.)
Yes.
Legal tender for debts only means that you have to accept the notes if you have issued credit to the payer. For example, if they ate at your restaurant and came to settle the bill, they would owe you the amounts printed on the menu for the items that they ordered, but if they came into your cheese shop and wanted to buy some Swiss cheese, you could choose to only carry out the transaction if they paid in Swiss Francs.
It is the speculators buying and holding that create the expectation that its value will hold over time, thus making it viable as a medium of exchange.