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Bitcoin went up more than tenfold in less than six months. Then if fell by more than half in less than one month. So I strongly disagree that most people would want to use that for their checking account, paycheck, etc.

I am also baffled by "they're easier to transfer" than dollars. Yes you can email BTC. But I can literally hand you dollars. No smartphone needed! And large amounts are trivially easier - I squiggle some lines on a piece of paper and hand it to you. Or if you want to stick to smartphones I can pull one out and send you dollars using one of dozens of e-payment platforms.

Interesting thesis though.

You can hand me dollar bills, but how many dollar bills do you have? I just counted. I have $36 in bills in my possession. I should to go to the ATM today to get more in case I run out. Eventually, Bitcoin will be similar in that most of our wealth won't be stored in the actual currency, but in bank deposits. I could withdraw actual currency from a Bitcoin bank with the tap of a button and have it on my phone in 10 minutes. Getting dollars requires going to a physical place to get physical bills.

Transferring large amounts of dollars takes days. Transferring Bitcoin takes 10 minutes or so.

But why does transferring large amounts of dollars take days? There is nothing physical preventing banks from supporting fast transfers. They can do fast transfers with BTC or USD.

Transfers are slow because there is little need to transfer large amounts of money quickly, and slower transactions help address issues with fraud. If you are buying a car, or paying for a house there is little need for a fast transactions. So with BTC or USD, transferring large amounts of money will take days.

It's got nothing to do with fraud checks. Transfers take days because banks largely run on mainframes programmed in the 1970s. Because of the (by todays standards) peculiar designs those machines had, the bulk of the work is done at night in batch jobs. The vast size and complexity of the software, combined with archaic platforms, their business-critical nature, and almost total absence of competition means that banks don't upgrade to more modern systems unless forced (see the UK same day payments initiative). Then the banking network is not a perfectly connected system so sometimes payments must be routed via intermediate banks. That's why it can end up taking days.

Good point. I think the debit card replacement angle is much more attractive than this one.

> Getting dollars requires going to a physical place to get physical bills.

My debit card/square/venmo might have something to say about that...

I'm taking about cash. For cards and digital services, the Bitcoin advantage is near zero transaction fees.

Zero transaction fees? The bitcoin network costs something like $3.5 million per day to run, and optimistically handles tens of millions in transactions. That's a transaction fee of 10%.

You just don't notice it because they pay the miners by printing money. I'll be really interested to see what happens when they stop that and start relying on up front transaction fees to fund the network.

This is an excellent point. I'm curious to see how that pans out. My guess is that since Bitcoin transaction fees are supposed to be set by the market, they'll stay competitive. If mining is unprofitable at the rates credit cards are offering, fewer people will mine, which makes mining cost less energy, leaving more profit. Eventually an equilibrium will be reached.

The mining network shedding capacity is a bad thing for Bitcoin.

If 90% of the network is powered down to reduce transaction fees, that gives someone the opportunity to buy up 20% of it on the cheap and corrupt the network. Bitcoin has to use as many resources as possible to stay secure.

This is the biggest practical flaw I've understood so far, but it still seems fixable. If Bitcoin becomes uncompetitive with traditional payment systems and mining activity decreases, miners could collectively decide to alter the mining reward.

The problem with keeping mining rewards high is that Bitcoin is supposed to be deflationary.

Right now the mining rewards being minted increase the Bitcoin supply at a rate of 11% per year. If demand for Bitcoin were constant, this would amount to 11% inflation. Demand for Bitcoin is currently increasing, so it is net deflationary, but this only lasts as long as the demand for Bitcoin is growing constantly. If you kept mining rewards high after the demand for Bitcoins had stabilized, you'd have five times the inflation of the dreaded US dollar, as you paid for your infrastructure costs through inflationary taxation.

(Which Benjamin Franklin and I actually like, but that's another issue entirely.)

"But I can literally hand you dollars." You can do the same with Bitcoin, just print the keys on a piece of paper and hand it to the person. Right?

Unfortunately the squiggle trick doesn't work to send $0.20 to that friend in Angola who runs the water and sanitation project? It also doesn't convert to Mpesa in Kenya [1] (Bitcoin now does). And wiring $500k to China for that shipment on a Sunday doesn't work either with squiggles or e-payments.

[1]: http://www.economist.com/blogs/economist-explains/2013/05/ec...

On the other hand, all of your examples could easily be addressed if there was sufficient demand for it.

So Bitcoin could be valuable in disrupting payment systems:

  Step 1: Bitcoin becomes superior to traditional payment systems.
  Step 2: This becomes relevant enough in the large scheme of things
    that Bitcoin gets serious adoption outside of speculation.
  Step 3: Traditional payment providers up their game.
  Step 4: Traditional payment providers win, because their intrinsic costs are lower
    (mining is inherently costly and not needed for traditional payment systems).

So - there's a buck to be made in Bitcoin, but it's implausible that Bitcoin should remain superior to more traditional systems in the long term (except for illegal purposes).

I fully agree. It's not something traditional payment systems couldn't do (at least in principle. In practice I don't know if they can operate on such low fees). The actual success of Bitcoin over the next decade is a much more uncertain issue.

Do you know anyone in China that will accept $500k in BTC for real goods and services, or is your Bitcoin example just as hypothetical as the squiggle?

The manufacturer of goods I export from there has taken small six-figure USD transfers solely in BTC, so, yes.

Inflation is a function of money supply and velocity.

If everyone adopted bitcoin, the velocity of the dollar would approach zero. Which means that inflation would go down, not up.

And yes, I would rather have my [savings] account in a hard, non-inflationary currency. On the other hand, I can only earn interest when someone is willing to take a loan in the currency and pay interest on it. And I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand. So, you're going to have a hard time finding a bank that pays interest on bitcoins. This is why "bad money drives out good", aka Gresham's law.

I'm referring to price inflation. You seem to be referring to monetary inflation. Less dollar use will lead to fewer dollar equivalents in circulation, but prices in dollars will go up because people will value them less.

Okay, sure. In your (imho wildly implausible) scenario, the transaction costs of doing business in dollars would rise and consumers would pay an increasingly steep premium for using them. Don't really have an argument with that logic.

>I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand.

Sadly it is not so easy to make money this way, the forward exchange rates will cancel out any gain from the interest earned in the inflationary currency. Otherwise everyone would do this.

You can make money doing this but really you are just taking a bet on exchange rates, you can easily lose money as well if the fx goes the wrong way during your investment period.

There are very few risk free ways to make more money than investing in US Treasuries.

Sorry, to clarify: I meant take out a loan as a borrower. Deflation will tend to increase my real interest rate over time, inflation the opposite. Obviously in equilibrium theory, interest rates will cancel out these effects; but they do not always do so in practice. So borrowers will tend to favor moderately inflationary currencies like the dollar.

If you plan to spend your investment on rent, food, or fuel then Treasuries are a losing investment for sure. At best they reduce the amount of loss compared to holding cash.

30-year government bonds grow faster than inflation, at least over here. (This is possible because economic growth is a thing)

> I am not about to take out a loan in a hard currency when perfectly good inflationary currencies are easily at hand.

Assuming the interest rates are the same, I'd agree. Would they be?

> Assuming the interest rates are the same, I'd agree. Would they be?

I doubt they'd be the same in either nominal or real terms. But that's a side issue.

You could already do what you're talking about with gold. A bank could offer gold savings accounts that pay interest on gold loans. They don't do it. Borrowers are deflation-averse and no one wants to deal with the exchange rate fluctuations.

BTC has some legit uses (like buying unjustly banned consciousness-expanding products over the internets) but the built-in deflationary death spiral in its design pretty much ensures that it will never be a serious full-spectrum parallel currency, much less a replacement for the dollar and euro.

When gold was the primary currency, there were interest-bearing gold deposits. When paper currency was pegged to gold with full convertibility, interest-bearing currency deposits were effectively interest-bearing gold deposits.

When Bitcoin is the primary currency, there will be interest-bearing Bitcoin deposits.

It isn't designed to deflate. That's a common misconception:

http://bitcoin.org/en/faq#wont-bitcoin-fall-in-a-deflationar...

This is an important point, because interest rates would exactly make up for the undesirability of the inflationary currency; i.e. the inflation risk would just be "baked into" a lower interest rate for the dollar-denominated loan. Unless you had a substantially different inflation risk tolerance than society as a whole, you'd be neutral about what currency to make the loan in.

Same goes for the borrower and deflation risk.

Edit: I guess if the deflation risk tolerance for the borrower and the inflation risk tolerance for the bank are asymmetrical, then you would just end up with being able to loan one or the other. I suspect, per Slurry's point, that it's BTC that loses here.

>If every merchant you patronize today accepted Bitcoin, would you rather have Bitcoin in your bank account or dollars?

At this point, and in the foreseeable future? Dollars. I'm not sure where people find all this friction relating to using dollars in the real world. I have no problems whatsoever. Besides, it's all virtual currency.

As far as your theory of widespread adoption of bitcoin leading to hyperinflation of the dollar, I'm don't even begin to understand how you see that working.

The bitcoin supply can't be trivially manipulated.

It's still vulnerable to computational attacks (no matter how impractical they may be) and miner collusion.

Bitcoin's limited supply will make it very vulnerable to traditional market manipulation.

Agreed, but I think both the computational attacks and miner collusion are on a similar level of difficulty as printing passable counterfeit dollars.

So someday we might see the secret service enforcing rules about how much computing capacity any one entity can control; to prevent collusion attacks on widely used cryptographic ledger systems?

I think the most likely outcome is that governments will become the largest miners to secure blockchains. The security of a blockchain is a public good.

There's no need to regulate computing capacity when you have the power to tax enough wealth to ensure that the government always has more computing capacity. It's an arms race without the nuclear winter, and with the side effects of increased pollution and rapidly advancing processing power.

There are a limited number of bitcoins that can be mined. Would inflation even be possible once 100% of coins are in circulation?