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1) Bitcoin has a bootstrap advantage, not disadvantage; like all Ponzi schemes, it has the potential to return real profit to early adopters.

2) Deflation for a primary store of value in an economy is definitely a bad thing; not least, because it does weird things like causing the value of debts to increase over time, potentially to the point of requiring negative interest; and think about what that would mean - the bank pays you to borrow money from it. Bitcoin probably isn't going to become that, though, so I think it is less of a cause for concern.

3) Convertibility is a systemic problem because it's a confidence game. If the value of bitcoin is on a downward spiral rather than an upward spiral, then you would expect fewer buyers, and those buyers would pay less for declining assets. Paying less in turn sets the market value lower; it becomes cyclical.

And that's where (4) comes in. The reason "when something goes wrong, it will die" is a valid point is because of contagion and panic selling, and the reduction in the number of buyers in the market. It makes perfect sense to me, because it's the exact reverse analogue of why bitcoin has a built-in bootstrap advantage.

I'm getting the impression that people who like Bitcoins are the same kind of people who think gold has an intrinsic worth as a currency, rather than a commodity; in other words, they don't understand that the value of money is a product of supply and demand, no matter whether fiat or specie. Don't forget that 80% of gold production is used in jewellery and industry, rather than bullion etc. What fiat money has going for it is a degree of control to get out of systemic problems.

1) Bitcoin has a bootstrap advantage, not disadvantage; like all Ponzi schemes, it has the potential to return real profit to early adopters.

Can't the same be said for people who bought Apple or Google stocks early on?

Ownership of a stock is a claim on the net value and future profit of the company. In a theoretically efficient market with perfect information, stock price would be fixed; its value would be the same as the net present value of all income streams associated with that stock. But we don't have perfect information, especially about the future; so a certain amount of the stock price is formed from expectations about future profit.

It is of course possible that there can be a bubble of expectations in a kind of echo chamber that cause a stock to act like a Ponzi scheme, but ultimately over time there must be returns. The return can be as a stock price rise (but that can't go on forever) or dividends; if the cost[1] of the money invested in the stock doesn't match the return over time, then people will sell the stock and it will fall in price. If too much of the stock price is formed from aspirational expectations of the future (i.e. a bubble), then the price fall may be drastic.

[1] Money has a cost; for example, compared with the interest rate on a risk-free government bond. If an investment isn't making at least that much, it's losing money.

>> Can't the same be said for people who bought Apple or Google stocks early on?

> Ownership of a stock is a claim on the net value and future profit of the company.

Ownership of currency is a claim on the net value and future profit of the currency. How does this address OP?

In principle, you're right, currency is just traded like anything else; but the fundamentals are different. A company is (presumably) engaged in profitable production (the future profit, i.e. it does something) and is composed of various capital assets (the net value, i.e. it has something). A currency has neither attributes; its claim on future production and assets is only valid in so far as people have confidence in it and will take it in exchange for other things. A share, meanwhile, is a direct claim on things themselves.

Currency can have its own features that make it worthwhile. No matter what happens with btc's popularity, as long as I have one other party to trade with, some features will be available to me through btc that are not available through normally denominated national currencies. Can't I buy btc because I think these are valuable features and their desirability will drive interest and users, just like I would buy Google because the desirability of its features drives interest and users?

I understand currency and shares are not the same thing, I don't understand this addresses OP.

> A share, meanwhile, is a direct claim on things themselves. What if you buy a share of an ETF?

A share of an ETF is a claim on a financial asset that is backed by claims in other financial assets, usually stocks. So while it is one level higher than directly owning securities, it is still a claim on productive economic assets.

For the sake of preventing a tautological melt-down could you define "securities"?

I've found your economic explanations a breath of fresh air in this thread. Thanks.

Set A may be a strict subset of set B, but that doesn't mean the elements in B are in A as well.

Alternatively: the profits generated by Apple and Google would argue otherwise.

> Deflation for a primary store of value in an economy is definitely a bad thing

How can having your assets increase in value be harmful? Traders already account for many stock variables, why would deflation be any different?

> and think about what that would mean - the bank pays you to borrow money from it.

Oh no, not that :P

> "when something goes wrong, it will die"

Sort of like hyper inflation?

> they don't understand that the value of money is a product of supply and demand

They also understand when supply is in control by a few bankers, so is the demand. Who do you trust to ensure supply isn't ramped up: your friendly banker, or math? This isn't hypothetical either http://en.wikipedia.org/wiki/Hyperinflation

Suppose you need capital to commence on some enterprise. You'd like to borrow against and/or sell a share of future income. How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?

In an inflationary scenario, money is declining in value. People with a lot of it are actively looking for ways to put it to work, otherwise they'll end up poorer. But if the money is not losing value over time, and is in fact appreciating, what incentive do they have to put their capital to work? They need much larger returns on investment to make up for the loss of their existing risk-free return.

[1] For bank, read anyone who could lend to or finance you.

> How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?

Why do people invest in stocks when they can play it safe in a bond market? They have a different appetite for risk.

I do see your point, a constantly inflating money supply encourages people to invest. The flip side to that is, are the investments worth it? Inflation is an artificial incentive to invest, which some believe is the cause of bubbles. Remember all those stupid investments in the dot-com bubble? Some believe it's because money was too cheap.

I think this is obvious -- a bank will lend you money if you can offer returns in excess of the risk-free rate of return, balanced by the perceived risk and collateral for the loan.

Similarly, an individual will deposit money in a bank rather than keep it under their mattress only if the bank offers returns in excess of what it gets sitting in the mattress.

Since at the moment there is no FBDIC, as an individual you must also balance the risk of depositing in the bank against the return they offer.

But in a hyper-deflationary environment, which seems bound to happen with a currency with a fixed supply in a growing economy, almost no investment could provide returns in excess of the risk-free rate.

"How can having your assets increase in value be harmful?"

Ponder the implications of bread jumping to an effective price of $25 a loaf. That can and has happened in deflationary collapses, as the reserve fraction jumps toward 100% (due to credit panic).

By assets increasing in value I was referring to currency, not the cost of commodities.

In your story, I would attribute the $25 a loaf bread to the credit panic, not the resultant of a consumers increase in purchasing power -- such as the expected deflation in BitCoins.

1) Early adopters. I couldn't find a point here.

The point is that it's a scam. It's designed with enriching the people who made it up in mind. The only difference between this and my "Hey let's all use these pieces of paper that I printed as money" scheme is that these guys actually got it off the ground by allowing the first few adopters to also print their own money in significant quantities.

2) Deflation. There's a creed in mainstream economics that deflation is bad, repeated here. "if your money is getting predictably more valuable, why would you want to spend it?" It's just false. Would you buy a computer today if you can buy a more powerful one by waiting until tomorrow?

Computers, yes. Food, yes. Other stuff I actually need right now, yes. But I sure as hell am not gonna invest in your startup... or in any other business for that matter, so that's just wiped out half the economy. I'm also not gonna buy a house, I'm gonna rent... but who'd be dumb enough to be my landlord?

Really, the faith which some folks seem to have in this particular bubble-in-value-of-intrinsically-valueless-asset is scary.

I have no idea if it is solid or not but statements like:

"Bitcoin will be tested but from what we know about it at the moment, it looks solid."

worry me. Its easy to make things for ideal conditions. If bitcoin becaomes mainstream the stresses will be incredible. Where there is money to be made there are smart people looking for an angle and leverage. Even governments suffer:

http://en.wikipedia.org/wiki/Black_Wednesday

This is an experimental mechanism. It is not based on main stream economics and it has no government or bank protecting it with regulation or defending it. The originators may have hit upon something new that is solid and can stand on its own two feet or they may have initiated the construction of a tower of cards.

Even if you are a full on supporter of bitcoin you would be mad to assume that it doesn't have a fatal flaw at this stage.

Re: Deflation

You're thinking too small. Think of holders of vast wealth, who in an inflationary system, are forced to invest their money and earn a significant return in order simply to maintain the value of their wealth. In a deflationary system, they are no longer at risk of losing wealth by letting their money sit in a bank, and so the least risky course of action for them is to simply hold on to their money. This means that the markets for things like angel investing and venture capital, among others, dry up as holders of significant wealth are no longer incentivized to invest their money.

An inflationary currency is what gives us our social mobility. Without it, holders of wealth don't make risky investments, meaning socially mobile entrepreneurs don't get funding to allow them to join higher social classes, wealthy investors no longer lose their shirts and move down the social ladder, and the society at large becomes entrenched in its current economic makeup.

I would not like to live in a society with deflationary monetary policy; money is meant to be spent and made to work for you, not hoarded.

>Deflation. There's a creed in mainstream economics that deflation is bad, repeated here. "if your money is getting predictably more valuable, why would you want to spend it?" It's just false. Would you buy a computer today if you can buy a more powerful one by waiting until tomorrow? People do.

s/spend/invest/. I mean, why would anyone spend money on food? There's no storable value! I can dream up silly situations too, y'know.

Meanwhile, there's a bit more to modern economic theory than a single pithy quote. Like, when deflation actually happens, you get this:

http://en.wikipedia.org/wiki/Deflation#Historical_examples

And this is deflation over a short scale. Bitcoin will experience constant, effectively unstoppable deflation every day after 2020.

>Mainstreamers like the leaves-on-the-fire effect of inflation and also like to overlook the fact that stimlus impairs cyclic corrections

Got some numbers on that? I seem to recall basically no problems occurring during periods when inflation rates are 0-10%.

>and detracts from the role of money as a store of value.

Money isn't supposed to be a store of value; the object of money is to facilitate exchange, not to inhibit it. Investments are a store of value. If you want to store value, invest in the S&P 500.

>"When Something Goes Wrong, It Will Die." I found the logic here non-sequiter. Bitcoin will be tested but from what we know about it at the moment, it looks solid.

SHA256 will -never- be broken, that's for sure!

>If we had a period of high inflation, it's reasonable to expect people would trust finite-supply bitcoins over an unending supply of newly-minted, inflating notes.

The medium that is more easily exchanged will be exchanged. Ever wonder why e-gold never took off, even before governments tried to stop it?

Mind you, I really, really want Bitcoin to succeed. I don't like the Federal Reserve and it bothers me that the federal government has control over the money system. However, I'm not going to disregard science to make myself feel better.

This is deflation caused by central bank (due to contraction of credit).

There was a deflation during all 19th century, when gold were money, without any ill consequence. And it was a century of growth due to industrial revolution.

One fair non-structural criticism, a weak, temporary criticism and two things billed as criticisms that aren't.

Actually, all of Adam's criticisms deal with the supply and demand of currencies, and they are pretty strong and damning as a result. In sum, the supply of Bitcoins is finite (despite a growing population) and the demand for Bitcoins depends on (a) confidence in Bitcoins as a currency and (b) consumers' ability to convert between Bitcoins and fiat money with little friction.

(1) Adam's point is not the unfairness of early adoption, but that early adopters control all the rents. Today's miners will control currency as it appreciates, but after a point (say, the supply of mine-able Bitcoins is exhausted) there is zero reason to demand Bitcoins unless they supplant paper money (very, very unlikely).

(2) I'm weak on my deflation theory, but I don't think the computer-purchasing analogy is 100% right. Instead of buying the computer with paper money, consider buying the computer with gold bullions during the commodity boom. Why buy that Macbook Pro with x bullions today if you can buy it with x-y bullions tomorrow? Adam isn't arguing that "deflation is bad," but rather that the supply of Bitcoins as currency will dry up as their value appreciates.

(4) You can't hand-wave this away. Consumers have confidence in US dollars because the Federal Reserve and U.S. government can step in during a crisis and back people's assets. There is no similar guarantee for Bitcoins once something goes wrong.

(3) Why is convertibility not a systemic problem? Lack of convertibility falls out of all the previous points! Why accept bitcoins for cash if (a) they're not backed by a central authority, (b) almost no one else accepts them as money, or (c) they will be obscenely expensive once the supply dries up?

I can't believe Bitcoins have gotten this far. They're a currency accepted by almost no one as payment, guaranteed by no governing body, and artificially supplied as precious commodities without the benefits of said commodities (Bitcoin engagement ring? 24K Bitcoin watch?). They're a great theoretical exercise, but their real-world value will trend to $0 in the long run.

EDIT: barrkel gets to the point when he/she says "the value of money is a product of supply and demand, no matter whether fiat or specie." The fundamentals of Bitcoins are such that (a) supply will artificially dry up and (b) unlike precious metals/commodities, there will be little demand for Bitcoins aside from use as a currency (or a Ponzi scheme).

Instead of buying the computer with paper money, consider buying the computer with gold bullions during the commodity boom. Why buy that Macbook Pro with x bullions today if you can buy it with x-y bullions tomorrow?

People have different time preferences. Some value Macbook today high enough to pay y more bullions than they would if they waited till tomorrow. There're many currencies that depreciate faster than the dollar, but it does not stop people stuck with those currencies from buying Macbooks -- even though they could theoretically change their money to dollars (or invest in gold) and wait.

Adam isn't arguing that "deflation is bad," but rather that the supply of Bitcoins as currency will dry up as their value appreciates.

There actually is a possible problem with Bitcoins "drying up" connected with its deflationary nature, but it is not the one mentioned by Adam. AFAIK there's a limitation on the minimal amount of Bitcoin transaction. That means that as Bitcoins appreciate in value at some point it may be impossible to set and pay small enough prices -- and such transactions will require alternative payment methods.

This is a pretty much technical problem with the current Bitcoin implementation. It might be perfectly possible to design a deflationary crypto money system without this flaw.

They're a currency accepted by almost no one as payment

Just a point of interest -- the list of sites that accept Bitcoin (http://en.bitcoin.it/wiki/Trade) is actually pretty long. I read it as a pretty good coverage of everyday commodities, actually. You can't pay for food, rent, or doctor bills with it, but you can buy a lot of other stuff.

I guess you could characterize that as almost no one, but you'd have to mean an insignificant fraction of the larger economy. If you mean useless for buying actual stuff with--and you seem to--you're demonstrably wrong.

No, I definitely meant "an insignificant fraction." Thanks for the link.

in the current system, it's unfair that government (through tax law and control of force) mandates that you use a form of money that doesn't function well as a store of value

The governors of the Federal Reserve are appointed by the President and confirmed by Congress, and politicians, for all their numerous faults, understand that if the economy goes in the crapper it hurts their chances of getting re-elected. So there is democratic accountability, albeit democracy on a long fuse, that discourages the Fed from doing something stupid with the dollar.

Bitcoin’s early adopters, by contrast, are only special because they got on the bandwagon first. They don’t have any special talents that they are being rewarded for, and they aren’t accountable to anyone.

The Fed does not have accountability to anyone as seen in their resistance to being audited. After they are confirmed they can do what they want, as a board, without any direct accountability.

Dude, your #4 is exactly what Goldman-Sachs said about real estate derivatives. That wasn't that long ago.

The problem of deflation is worse. There is a finite supply of btc. Read that again. Finite. in fifty years, our whenever the mills run dry, are we just going to stop increasing population? Are we going to stop creating more things of value? Of course not. So what happens then? We have to start dealing in ever-decreasing payments. They will decrease as fast as the sum of things which can be paid for in btc grows, which is damn fast. Nobody will be able to afford to spend money.

I think your reasoning about 4 is wrong. It does not look solid: in the long run, the security of all crypto goes to zero. There's a very real possibility that the current system will in time be replaced by something which is intended to be better, or to fix a to-be-found flaw, but which is itself flawed in a much worse fashion. In fact, that's quite likely: under the circumstances which such a change would need to be made, there'd be a panic and quite a pressure to get it done quickly.

That being said, I don't agree with the article's conclusion, either. If/when something goes wrong, it's a completely open question whether or not the reaction will be catastrophic.

> in the long run, the security of all crypto goes to zero.

Perhaps that's true, but then the only thing to do is prepare a viable upgrade path that could be executed as soon as it's evident that the crypto won't hold up. Bitcoin has that with its genesis block forking ability. As long as the network doesn't become too fragmented with forks, it'll be fine.

> It's just false.

No, you just misunderstand the actual statements.

Deflationary currency doesn't mean that people don't buy anything. It means that the supply and demand curves shift, reducing (but not completely eliminating) investment and consumption. The magnitudes of the shifts vary depending on the product being discussed, but the direction of the shifts is the same in every case.

Your other points I can't comment on, but the deflation argument is absolute bunk in terms of small, non-durable goods (groceries, electronics, etc), but when it comes to houses and other big purchases (cars, etc.), it absolutely will affect purchasing. You can already see evidence of this now. Houses are at the lowest point in prices that they have been in decades, but people still aren't buying, and they won't until there's some indication that they won't ever be this cheap.

There's lots of factors why people might not be buying houses that have nothing to do with inflation: (1) it's not rational to buy a house when your abillity to meet payments looks undercertain; (2) it's harder to get loans; (3) there's been lots of media about people getting burnt; (4) we've exited the house-buying-mania bubble; (5) related t ofirst point butdifferent, you have much better labour flexibility by renting which is important in hard times.

    You can already see evidence of this now. Houses are at
    the lowest point in prices that they have been in
    decades, but people still aren't buying, and they won't
    until there's some indication that they won't ever be
    this cheap.

"been in decades" - this would be true of Buffalo and Detroit, but certainly not of San francisco, New York, London, Perth, Sydney, Toronto, Calgary or other places I have an idea about.

I think first world property prices are still ridiculous.

It's madness to push people to leverage up in order to get into property just so they can store value. I'm not a hedge fund. I don't want to be compelled to behave like one to look after my savings. Now that the music has stopped, people are wising up that housing is not even reliable as a store of value irrespective of their sacrifices.