Bitcoin might be an interesting investment vehicle, a storage of value, but something that will at some point replace the dollar? No.
It would actually be better to have some sort of currency which expands based on the number of transactions... There's a pretty large theory behind it and I out line some of it on my blog, where I also explain how a crypto currency can "potentially" work[1] or you could read one of Friedman[2] or Knights[3] books.
[1] http://austingwalters.com/the-currencies-of-tomorrow/ [2] http://en.wikipedia.org/wiki/Milton_Friedman [3] http://en.wikipedia.org/wiki/Frank_Knight
Further, economic system and in turn the manipulation of the Dollar in the U.S. is based largely off Kaynes work, which for the most part (we now know) is an inaccurate portrial of economics.
The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.
That 21 million number is not set in stone, and will change if there is a need for it.
This is hugely important and obvious to anybody who has taken Econ 101.
Everybody knows this.
So why would you invent a currency that was deflationary in nature due to an artificial cap? Well, once you realize that the guy(s) who invented it are holding 10% of it, you'll have your answer.
Bitcoin is in a huge bubble at the moment. My only hope is that this bubble bursts before the inventors can cash out. Oh, sweet justice.
After the collapse, there is every reason to believe that Bitcoin will become something genuinely useful or at the very least, inspire something that will be useful.
Fractional reserve lending of bitcoins seems highly unlikely to happen any time soon, if ever. And if it does start happening, it is likely to be made quickly illegal, because the system simply won't work.
Cryptocurrencies have several interesting properties that these traditional mediums of exchange do not, for example:
- the supply is fixed and precisely known at any point in time, with very little chance of that ever changing by unilateral decision (e.g. politics, war); surely this will factor into future decisions to price goods and services, in the same way businesses already factor inflation into their business models
- low transaction costs for high value cross-border payments could see a niche use that no fiat currency can compete with (unless you somehow believe there will be a unified global real-time gross settlement system or the like any time soon)
- settlement times could also see a niche use that no fiat currency can compete with (if it works, and your transaction is confirmed in seconds/minutes/hours rather than days as with ETFs, then I foresee people using it for certain value transactions)
- accessibility (just look at M-PESA in Kenya -- everybody has cellphones, but moving physical cash around is expensive and dangerous)
- up until all the coins are mined, and probably for some time thereafter, the value will be quite volatile; after that, however, value will pretty much reflect real economic activity and volatility will be less predictable -- why is there this obsession over the present volatility? All the coins will be mined within a fixed time frame provided 1 person continues mining, which is almost a certainty, and eventually the price will have to stabilise.
I fear the article is comparing apples and oranges. Maybe the author just wants to sow FUD while he buys some cheap BTC :)
Don't get me wrong - I have my doubts that Bitcoin has what it takes (among other things, I think the initial unequal distribution of wealth is a serious problem), but cryptocurrencies in general are likely to be a successful and inevitable medium of exchange at some point in the future.
It's also hard to beat cash for settlement times.
I disagree regarding cash. You're making a blanket statement and I'm saying there are niches where cash sucks.
Aside from the M-PESA example I've given, another is overseas travel. Cash can be a big waste of time - depending on your local laws, obtaining forex prior to departure can be a pain (e.g. in South Africa), the withdrawal fees are exorbitant and often unclear, the risk of theft significant, you have to be aware of local exchange rates and if you want to save money you have to be aware of the exchange rate of the cash you have on hand vs. your debit and/or credit card processor etc., then when you get back (again in South Africa at least) you have to resell your forex within 30 days, and you also have limitations on how much you can purchase in a year.
Another is cash payments over a certain value -- again in South Africa, walking around with more than a certain amount of cash in your pocket is asking for trouble.
I didn't say cash was always better than bitcoin, I just pointed out that it is very hard to beat on settlement times (and you revised your comment to say fiat currency rather than cash). Maybe I replied to an early draft.
Of course you can have a deflationary currency. The problem is that people won't spend it. The dollar is not naturally inflationary. Instead, the fed allows for a controlled amount of inflation every year to encourage spending. Automatically managed currencies like you discuss still suffer from inflexibility—as our understanding of monetary economics adjusts, or qualities of the economy change (as with the change in velocity of money during the 80's-90's), it would be difficult to adjust the algorithm to better stabilize the money supply.
More importantly, cryptocurrencies are region agnostic. I take it you learned about optimal currency area in your studies? Any arbitrary threshold would risk having inconsistent effects in different places. Expansion may be just the thing to encourage additional transactions in a recessionary region, but may encourage rapid inflation elsewhere. The result is always high volatility, making it unfit as a store of value.
People keep saying that just because it's deflationary, they are never going to spend the coins. But as someone who grew up with hyperinflation (1980's Brazil) I can tell you that people still saved, they just used other currencies. I clearly remember my father buying dollars after getting his paycheck. Investment-wise it was a bad idea, but all people wanted was some sense of safety. When hyperinflation finally came to an end and I knew that my lunch at school would cost the same thing every week (instead of costing 20% more every Monday!), people started spending/selling their dollars.
The problem of BTC now is a problem of trust. And this lack of trust is due to the crazy volatility, not its deflationary nature. So, it is a chicken-and-egg problem. The more merchants you have accepting BTC, the more people will be able to spend their coins. Sure, the merchants buy be turning the 100% of their BTC into fiat right as they get them, but BTC could still be defined as the transaction currency.
However, the present system is perhaps not the only possible system. Some alternative schools of thought in economics see possibilities beyond systematic inflation.
Alternative theories can be wrong or right. Don't oppose them because they're alternative: oppose them where the evidence compels you to.
And that time has passed, the world moved on.
Regardless of the nice graphs, Bitcoin is currently NOT deflationary. Every 10 minutes 25 new coins are minted and placed into circulation. The rate of new Bitcoin creation will be halved every four years until there are 21 million BTC in circulation. Additionally, there are a slew of other cryptocurrencies with varying degrees of mining rates - some have a constant rate of inflation built into them. Time will tell which ones are adopted.
The miners who are minting these new coins are helping secure the currency (adding value) are putting work into the system by way of capital expenditure on equipment and costs associated with power. They expect a return on their investments and are probably the determining factor to the current price.
When firms like Apple sit on hoards of cash, the amount of currency can grow quite a bit faster than the economy without inflation.
Incorrect, demand alone has made it hugely deflationary; if everything were priced in Bitcoin right now, prices would have to be adjusted downward constantly, that's deflation. Money supply inflation is not inflation which generally refers to the overall prices of goods and services rising and money supply deflation is not deflation which is the fall of overall prices of goods and services. Bitcoin is currently hugely deflationary.
Oh, you! Tulips were better. You at least got the pretty flower after all was said and done.