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> Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3]

The USD and the Euro, in comparison to BTC, are magnificently stable.

Sure USD/Eur changed in relative value by 100% over the course of 6 years after the inception of the Euro. That's very stable for a new currency, especially in contrast to bitcoin. The BTC/USD rate has changed by 400% over the past 30 days.

I don't think even bitcoin enthusiasts are saying bitcoin will be stable in the near future. Only that once it's widely adopted and reaches its growth potential or near it, it will then be stable.

If it is to be adopted widely, at some point it has to go from being distributed among a few million, to being distributed among a few billion. The continual price rise will correlate with that adoption continuing to happen.

So yeah, I understand all these arguments about volatility, but the reason they don't bother me is because they don't seem to point out anything bad about bitcoin in principle, in the long-term, they only point out the negative aspects of using it as a currency while its undergoing its adoption phase. I don't think there's actually any argument that using bitcoin as a currency right now isn't going to work as well as dollars/euros.

In the short term, 90% of bitcoin's value is driven by speculation of future adoption, as you say. If it does become widely adopted, it should be far less volatile than it is today, but it will remain more volatile than well-managed fiat like the dollar, since the supply of bitcoin is inelastic and therefore cannot react to fluctuations in demand. So, it might end up looking more like gold, rather than a "demented Internet stock", but it'll never be as stable as the dollar is today.

>but it'll never be as stable as the dollar is today.

That's right, and it's a feature, not a bug.

That's really not a feature for anyone.

Then hold Dollars.

Well said. I've had enough of this inflation. The poorer you are, the less likely you have money in any investment that is yields better results that inflation. The richer you are, the more likely you have your money both diversified and invested with good ROI.

The poorer you are, the less likely you are to have wealth to protect from inflation. If wages would keep pace with inflation, there would be no problem at all. To my mind, there is a wage problem for the poor, not an inflation problem.

Those that do have wealth to protect should be encouraged to use it for productive investments. Mild inflation is one way to do that, and it is healthy. Massive inflation to fund overseas adventurism on the other hand, is not healthy.

As the author of this piece correctly points out, deflation leads to hording behavior. In a world where everyone used bitcoin, the wealth disparity would only grow faster.

Inflation helps for capital and labor. It forces capital to be involved, and it lets labor be devalued. Wages are extremely sticky, but only nominally.

Wage increases always lag inflation. In a market a with huge labor surplus, wages may lag longer than many can tolerate.

Elasticity of supply and inflation rate are two completely orthogonal concepts. A deflationary currency can still have elastic supply, and an inflationary currency can still have inelastic supply.

Elasticity simply refers to whether the supply can react to price. In bitcoin's case, it cannot, since the supply is determined by an algorithm.

All I'm saying is that right now, while it's being adopted, growth and volatility are the same thing.

Sentiments along the lines of: "For bitcoin to be adopted, it should be stable first" don't make sense, because adoption (demand) drives the instability. That statement is the equivalent of saying "For bitcoin to grow, it should not be growing."

You're presenting a strawman. The choice for Lybians and Syrians isn't between their local currency and Bitcoins, it's between the local currency, Bitcoin and one of the first-world currencies. And people in the third world have been choosing to hold USD for decades.

In fact your comparison exposes the biggest problem with Bitcoin: it's a solution in search of a problem. The USD has a long track record as the best managed currency in the world. The 70's stagflation debacle was a minor hiccup by world standards, and the current quantitative easing policy is nothing. Why would anyone in their right mind convert their dollars into Internet funny money? I mean, sure, back in 2009 when Bitcoin started, people were panicking having witnessed the Lehman collapse and TARP. But now we know the world isn't coming to an end, so why bother?

This is not true, or at the very least, only true of the higher echelons of society. I can't speak about Libya, but in Argentina there are currently currency controls against USD. As a (non-politically connected) Argentinian citizen it is incredibly difficult to hold USD right now. This btw is not new, it happens every time Argentina goes into its ~9 year bust cycle.

I think the issue is that you are speaking from a position of comfort from the US. Of course USD seems fine to you, the US suffers the least in all these recessions. But for people outside the US, they often see their entire life's savings vanish. In Argentina inflation is not something that is only academically talked about, it has a real effect on every day life, the government understands this (and exploits it), and thus works hard to prevent everyone from fleeing the currency. Bitcoin does offer a real new alternative in this regard. Whether it will prove to be any better is admittedly an open question, but the idea that USD is some saving grace for foreigners is naive.

You're incorrect about me. I live in a country that went through hyperinflation a few decades ago, and I was born in another country whose currency was wiped out in the late 90's. In both of these places society responded by converting de facto to US dollars. People would stuff their mattresses with dollars and prices for anything other than groceries would be named in dollars. Sure Bitcoin offers an alternative if you live under a regime that can tell you what kind of currency you can hold, but wouldn't that sort of a regime also crack down on holders of Bitcoin if that were to catch on?

P.S. Correct me if I'm wrong, but didn't Argentina go through a dollarization phase at some point?

The trick in Argentina's case is that they have fixed the exchange rate to USD at an unfair amount and have enacted capital controls restricting the movement of currency into and out of the country. This is basically for the purpose of preventing people from trading their money into USD.

Brief Economist coverage here: http://www.economist.com/blogs/americasview/2011/11/argentin...

There was a decade in which pesos were directly convertible to USD at 1:1 exchange. That system collapsed when the government became insolvent.

With regard to your experience with hyperinflation -- why do you thus think it is a solved problem? Surely there are some advantages to encrypted digital wallets over "stuffing dollars in a mattress" in the same way that emails are better than snail mail. At the very least it is nice to have multiple alternatives.

With regard to "dollarization" in Argentina - Yes, and it should serve as another counterexample to your point. During the 90s when everything was fine Argentina "backed ever peso with a dollar". At stores no one cared if you used dollars or pesos as they were 1-to-1. (Similar to how the US used to back every dollar with gold). Then when things went south they "undollarized" (once again robbing people of their money as devaluation soon followed).

And sure, a country could crack down on holders of Bitcoin too. But the point is that it is a lot harder to catch someone purchasing with bitcoin, or even holding bitcoin, than it is to catch someone with dollars in their mattress or trying to buy something in a physical black market with physical dollars. Its really hard to catch someone with bitcoin "on hand" in general.

In this case though the real problem you're dealing with is that the Argentine government has enacted capital controls (from an outsider perspective, it looks like this is to force people to use pesos while they monetize away their spending). I think if a lot of people were trying to move their money out of the country using bitcoins the government would crack down on that too.

Just out of curiousity, is it easier for Argentines to get Bitcoins than USD? I find BTC really hard to get even in the United States.

I think (or perhaps predict?) that Bitcoin will require I higher level of sophistication to control, if for no other reason than it is new. Not to mention that the countries we are talking about in these scenarios are probably less sophisticated in these matters to begin with, coupled with the fact that there are no central authorities to deal with when it comes to Bitcoin. Argentina can't just go to the "big Bitcoin banks" and tell them not to accept their citizens' business.

At the end of the day, when a currency becomes worthless people start trading in something else, whether that be USD or cigarettes (like in post-war Germany). The attraction of Bitcoin is that it is basically tailor made for this and additionally is accepted by people outside your country.

Only time will tell of course. My point is simply that it is not just trivially "just another currency" where all the same rules apply. That being said -- it may crash and fail for completely unrelated reasons.

What about AUD, EUR or other stable currencies? Is this policy unique to USD?

> Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.

If we needed to buy everything in the US but store all of our wealth in Euros, this would be the right comparison. But since we don't, "stability" means low and predictable inflation for the Euro and the dollar. The exchange rate matters for Bitcoin because wages, goods, and services are all denominated in non-Bitcoin currency. Look at inflation over the same period and you'll see that the dollar really is a "bastion of stability" (in that narrow sense, the Euro is too... but the Euro's got other problems beyond the scope of this discussion that make me reluctant to vigorously defend its stability).

I think there's too much wishful thinking in your analysis, first people that are really rich are only interested in two things, one is that their wealth do not lose value, they will go to bitcoin, private equity, platinum, dollars, North Korean wons, stocks, fixed income titles, futures, whatever only to have this as a guarantee. The second is to increase their wealth.

Now your post appears to talk about the first point, which I agree, I only do not see how you jump to the conclusion that bitcoin is more stable than Swiss francs for example, stability is the guarantee that you'll not lose money if you trade all your wealth from one state to another, I do not see how bitcoin guarantees that (no store of value does), the only real alternative to not lose value is diversification, put your money in as many different things as you possibly could, never let a bank have more than 20% of your entire cash money, buy as many different investments as you could, precious metals, stocks, solid bonds and let them be on safes or clearing houses that's not attached to a bank.

And most important stay away from banks from countries with large public debt.

Bitcoins look interesting but the current price shift caused by interest in them is disturbing. Mining on anything but a current generation AMD card isn't worth the electricity and the advent of ASIC cards is going to make mining on any consumer hardware pointless. So you can't mine and you can't buy without exposing yourself to a lot of risk right now. Given the current bubble is based on people joining the game , that is a risky proposition for bitcoins as a whole.

You forget people can join the game by just accepting BTC as payment for their goods and services.

Since I actually pay taxes (you know, that thing adults do), I doubt that this will work for me.

Adults who understand taxes know that if they receive payment in something other than dollars, whether it's foreign currency, gold, bitcoins, or barter goods, it's up to them to pay taxes on the dollar value of it.

Right, and that is the point: even if you accept Bitcoin payments, you still need to eventually get USD. Ultimately, this is why I believe that Bitcoin cannot survive with the Bitcoin exchanges.

Right, and that is the point: even if you accept Gold payments, you still need to eventually get Euro. Ultimately, this is why I believe that Gold cannot survive with the Gold exchanges.

How many markets are using gold as currency?

You don't have to get dollars for the whole amount, you just have to report the dollar value of your earnings to the IRS, and pay your taxes in dollars.

That's a shame. I guess you'll just have to stay poor with the rest of the patronizing adults.

How do you set the value of the goods you're selling?

Assuming you manage your life with some other currency (USD), you would ideally want something that has reasonable value when converted to your other currency.

Lots of risk to buy. Far more upside risk to not buy.

Just like houses in 2007, or Apple stock last year, or Tulips in 1637...

Bitcoins are one asset among many, and just as prone to booms and busts.

I wouldn't own Libyan dinars unless I lived in Libya. Since I don't live on the Internet, I won't own Bitcoins.

Multinational corporations use foreign currencies as a hedge against exchange rate fluctuations. Speculators win and lose big on bets re: exchange rates. Owning foreign currency can make sense for a variety of reasons.

And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.

> Multinational corporations use foreign currencies as a hedge against exchange rate fluctuations

Because they have business there, so in a sense they do live there.

> And while I don't live on the Internet, I do conduct some of my economic life on the Internet: buying, selling, consuming, and creating.

Maybe that's the logic leap I have to take to use bitcoins: I don't consider that I buy things from the Internet, I use the Internet to buy things from stores. Maybe when we have a Snow-Crash-type Metaverse I'll start using virtual currencies :)

Many people pays their loans in Yens or other currencies just to save money. Argentinians for example are best know for putting all savings in american dollars.

People also put their savings in Apple stock. That doesn't make it currency...

Sorry to correct you: Currency is something that is used as a medium of exchange; money. Anything can be a currency from day to night.

You don't live in a gold mine either, but I bet you wouldn't mind owning gold. Same thing with Bitcoin, no?

I can't go into a store and buy a suit with gold, so it's not a useful medium of exchange for me. If gold, or bitcoins, fell out of the sky and into my lap, I certainly wouldn't mind. But given the same value of gold, bitcoins, or dollars, dollars tend to be the most convenient for me.

the only issue with them is that little by little they lose more and more of their purchasing power so you should either invest or use all immediately

I don't own gold either.

I can't wait to see the face of doomsayers once Planetary Resources (or other company) starts mining gold from asteroids. I'm sure Gold's intrinsic value will hold up, with the increased supply...

Even the US dollar and euro, supposedly bastions of stability, have seen their exchange rate jump from US$0.80 per euro in 2002 to US$1.60 in 2008 (100% jump), only to drop back down to US$1.20 in 2010 (25% drop), then jump to US$1.45 in 2011 (20% jump), only to drop back down to around US$1.29 today.[3]

Are these movements different than a historical norm? You provide numbers with no context - it seems as if a movement of 100% in 6 years is meant to be shocking because 100% is a big number.