Bitcoin is a deflationary currency since it's supply is limited.
Doesn't that mean that it's expected to rise in price? This also ends up being the currency's downfall, since there's an incentive to hoard it rather than spend it.
Doesn't that mean that it's expected to rise in price? This also ends up being the currency's downfall, since there's an incentive to hoard it rather than spend it.
By that logic, everyone would put their dollars into investments that beat inflation (this is a form of saving). Yet they do not. You can hold (hoard?) securities (VBLTX, HTS, JNJ) that beat inflation, yet people spend dollars on depreciating assets (cars, computers). There are other less-risky financial instruments [1] that beat nominal CPI, yet people spend dollars.
> Doesn't that mean that it's expected to rise in price?
Sure, relative to an inflationary currency. But bitcoin fluctuates quite a bit.
By they way, currency is just a good, like anything else. One trades currency for some other good that one values more than the currency [2].
[1] http://www.mint.com/blog/investing/beat-inflation-with-i-bon...
(So I mean, the point of the securities you mention is exactly to hold/hoard them, whereas the point of a currency is not to hold it, but to pass it around, or?)
No-one buys a dozen computers and puts them in their basement as savings for retirement. People buy cars and computers to use, not as investments. People with nontrivial quantities of "spare" dollars generally do put them into inflation-beating investments.
Doesn't that mean that it's expected to rise in price?
True, this amount is set to decrease to 0 eventually. However, with some planning conceivably this could be changed, as long as the majority of bitcoin users agree it should be changed.
The mechanism that would happen through is just as you predict. People would buy & hold bitcoin. Buying & holding is an increase of demand (buying) & a decrease in supply (holding). These both increase prices until the point where buying and holding isn't any more attractive than buying and holding some other asset with a known future value (like government bonds).
In reality that certainty doesn't exist. Current prices of bitcoin a reflection of all sorts of wild guesses about possible future effects that are dependent on all sorts of things.
Whether that means a 'downfall' is far less clear. If Bitcoin just keeps becoming more valuable, serving a role but not circulating as much as other currencies (be they traditional or digital-of-a-post-Bitcoin-design), is that a 'downfall', or just a peculiar kind of success?
Bitcoin is like a new form of monetary/economic matter... some lessons from traditional domains may apply, but others not at all. Casual, confident pronouncements either way are silly.
"The argument that increasing value means people would prefer to hold Bitcoins rather than spend them is specious. While it will make people want to have Bitcoins more, it will also make people want to convince others to give them Bitcoins more so they can have them."
I don't see how these are compatible. Reminds me of "No one in New York drove. There was too much traffic."