The value of a currency lies entirely in the perception of that value. I don't consider bitcoin different from a traditional currency, except that its rate of production is known in advance. It will keep having value because by now enough people think it does.
It's in a strange position right now, though. Its value is not based on anything that makes any sense. Public perception - yes - but public perception of what? Nothing is priced in bitcoin.
Once things begin to be priced in bitcoin, proponents hope its value will stabilize. This might happen. It did with fiat, but fiat had the advantage of a stable start and slow detachment from gold.
The real funny thing to me is, I believe the currency could do its job just as well no matter what the value per bitcoin. And I don't think volatility matters at all, because companies like BitPay assume the volatility risk for you (both the merchant and the consumer)
I don't know that bitcoin can be used as a store of value, especially for future adopters. But it is definitely a great method for real transactions of wealth.
> I don't know that bitcoin can be used as a store of value, especially for future adopters.
All else being equal, it seems to be designed to be a perfect store of value because it is deflationary by design. Obviously it is far more volatile and risky than something backed by major world governments at this stage, however it does come with certain guarantees that no central bank could credibly make (if the crypto holds). For people who have had their wealth stolen by governments this could prove a very attractive pull.
Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever. Traditional currencies, on the other hand, are at least fractionally backed by (usually) gold and government bonds which in itself are backed by a government's ability to tax its citizens.
There is also a second problem in that BTC is deflationary by design. Deflation leads to hoarding of currency units while reducing the velocity of money and suffocating the economy. Most people will agree that deflation is the worst thing that can happen to an economy which is why central banks will do everything in their power to avert it. It is hard to imagine how a stable Bitcoin economy could develop under these inherently flawed circumstances.
> Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever.
Well, no, its not; the purest form of fiat currency is a currency backed purely by government fiat (hence the name).
Bitcoin is one of the purest forms of speculative "currency".
>> Bitcoin is different in that is the purest form of a fiat currency in the sense that it is backed by nothing and thus has no intrinsic value whatsoever.
It's backed by the tremendous amount of electricity required to run the transaction processing network (ie. "mining"). Remember this is the world's largest distributed supercomputer.
BTC is a proxy for electricity, that's why mining equipment ended up at ASICs so quickly- in mining, less W = more $$. By a lot.
The USD is currently backed by absolutely nothing. There is no way we could print the $2000 trillion dollars[1] of derivatives now in existence. You couldn't cash out all of it or even too much of it.
The USD is "fake". And high finance is not ignorant to this fact, at all.
[1] Or more, no one actually knows. Goldman Sachs would have the best idea of this.
The costs of producing BTC or USD are not their backings. You can't exchange your BTC back into electricity.
The USD (and usually most other currencies) aims to be indirectly backed by the corresponding amount of goods they represent within the currency zone and their legal status.
BTC isn't even indirectly backed. It just exists. And that's okay for its purpose.
Re your comment about currency production costs: A spike in electricity costs would directly effect existing bitcoins' value. A spike in cloth paper prices would not cause a meaningful change in the value of already-printed dollars. And the price of the dollar would spike with electricity costs indirectly. They're not the same, it's an invalid comparison that neatly evades their inherent technological and conceptual differences.
"Store of exchange-value" != currency, and BTC is currently behaving best in that role. Admirably, really- see how it's spreading like hotcakes in China. That's as a store of exchange value, not a currency.
You can't turn your gold "back into" ore or your diamonds "back into" carbon. The cost of an airline ticket is mostly determined by the current price of fuel.
When BTC starts to be used as a currency in earnest we can revisit the issue. Although at that point, you will be able to exchange your BTC back into electricity or other commodities through speculation or arbitrage. Which you can actually do directly right now if you know the right people, anyway. Profitably.
For up to about two weeks, until it adjusts to the new, lower norm, and de/inflation continues at the same rate as before. But technically true over that period, yes.
Which really puts the lie to the idea of currency being "backed by" a scarce resource at all, which is the main premise of goldbugs. I'm totally okay saying that a currency is backed by the entire economy of goods being exchanged for it myself.
The meaning of a backed currency is that it's backed by the issuer with a specific commodity (or service). You can go to the issuer and exchange the money ("symbol of value") into the real thing ("value").
With BTC you can't go to some miner (=issuer) and exchange it back into the electricity that was used to produce it.
But I can't expect that I will be able to exchange the BTC for a fixed amount of electricity, which is the same as the fixed amount of electricity I originally exchanged for BTC. Hence BTC is not convertible, and not "backed"
I can buy gold with the US dollar, but it doesn't mean the US dollar is backed by gold.
The USD is backed by the material value of everything USA, at a minimum. It's practically impossible for the USD to go to absolute zero, there's still some gold in the reserves and oil and mining to be done at absolute worst.
Obviously our debts exceed this, but that's a different issue. Say everyone cashed in at once - they'd get a percentage of our debts, not zero, since there's still material value.
You can't "undo" Bitcoin's power -> money exchange, though. There's no gold sitting in vaults providing some real, physical insurance. If I lift this brick, I've done work (but nobody cares) but even that has intrinsic value as it can be "redeemed" by lowering it, powering something. Bitcoin is different.
US Debts do not exceed the value of everything in the US.
They barely exceed 1 year's economic productivity from the US (~15.58 trillion USD).
And since the US is not going to stop being a country any time soon (and such a thing would be a calamity which makes national debt completely irrelevant anyway) it has a very long-term ability to make repayments.
And this is ignoring the fact that each year the US basically reinvests heavily, since GDP grows while the debt does not (necessarily). For example, current GDP growth of 2.2% means the US GDP increases by ~$344 billion per year. Conversely the value of all US debt per year decreases due to inflation - currently about 1.2% meaning the US debt effectively decreases by about $188 billion USD per year.
This is all somewhat beside the point, but it pains me to see people proposing the US has debts exceeding its capital and productive value as an entire country.
One year's worth of productivity does not mean it's redeemable. I'm not sure what the immediate material assets of the USA are, but it's substantially less than the USA is worth, yes.
And anyway, I'm talking absolute worst value, not any sane measure.
If the U.S. government fell, any bodies of power that arose in the aftermath would be quite likely to repudiate the debts of the old government. So no, the dollar isn't quite backed by the material value of everything in the U.S.
It is backed by the stability of the U.S. government though.
True, though it won't fall in an instant, so there's some warning. And other governments seem likely to hold at least some power over any brand-new government, so it's still unlikely/impossible that they'll get nothing back from the debts.
There are also examples of post-fiat currencies. Immediately following the toppling of Saddam Hussein there was still economic activity denominated in the old Iraqi currency, most probably on the assumption that it would be convertible at some rate with whatever came next.
There's also a certain amount of inertia. If I stop taking your old Iraqi currency, you'll stop taking my old Iraqi currency, so it's worth a lot to me to maintain the fiction, to believe really hard that the old fiat currency is still meaningful.
>> There is no way we could print the $2000 trillion dollars[1] of derivatives now in existence.
This is a red herring. You also couldn't print the money to pay for all the patents now in existence. Or all the copyrights in existence. Or even all the software now in existence. These things still get bought and sold in USD on a regular basis.
>> The USD is currently backed by absolutely nothing.
At the base, USD are backed by the fact that one can only pay taxes to the US in USD and US bonds are denominated in USD.
I like your first point, but your second point makes no sense. Products are not currency, and talking about inflation/deflation in products does not make sense, unless people buy them as a long-term value-store in which case "assets" might be more appropriate. Except they're still not fungible so they can appreciate or depreciate, but that's not inflation or deflation.
To explain: The fear that often is associated with deflationary currency (like bitcoin) is that no one will spend it, because waiting always gets you a slightly better deal.
And if that happens the economy will grind to a halt with everyone waiting to spend. The point of my second statement is that we have examples of cases where even though every month your money buys more, people still do buy things.
There may be specific examples (HDTV) where waiting means your money buys more, but overall the more you wait the less your money is worth in the economy due to inflation. Technology making products cheaper is not an example of deflation. Inflation and deflation pertain only to currency not products.
If however you hold your currency and everyday its worth more, besides the bare essentials there is barely an incentive to spend it. Also there is no guarantee that the HDTV will become cheaper, however it is guaranteed that a deflationary currency will gain value the more you hold on to it.
Inflation and deflation pertain only to currency not products.
Inflation is when your currency buys you less stuff tomorrow than today. Deflation is when it buys you more. Falling prices due to efficiency gains caused some deflation during the industrial revolution, and technology making products cheaper is definitely a kind of deflation. From Wikipedia:
Growth deflation: an enduring decrease in the real cost of
goods and services as the result of technological progress,
accompanied by competitive price cuts, resulting in an
increase in aggregate demand. A structural deflation existed
from 1870s until the cycle upswing that started in 1895. The
deflation was caused by the decrease in the production and
distribution costs of goods. It resulted in competitive price
cuts when markets were oversupplied. The mild inflation after
1895 was attributed to the increase in gold supply that had
been occurring for decades.
Ah I see, that makes more sense. Yes, I think fears of deflationary currency are probably quite a bit less rational than fears of environmental cataclysm as long as society doesn't come to term with the fact that there are in fact physical limits to growth on some time scale.
That's a pretty irrational fear... If my money grows all the time, why wouldn't I buy stuff? I'm buying most of my Humble Bundles with Bitcoin and it's great - every time you pay less and less and by the time the next Humble Bundle is available my money has recovered itself to more than what I had before... I may have had doubts to buy some of them with another currency, but with Bitcoin it's just a no-brainer. You'll get it all back and more.
In the frame of a single transaction, and the point I'm making, it doesn't matter which side of the purchase equation causes the deflationary more-for-your money effect.
The point is that the more-for-your-money effect does not stop even discretionary purchases like TV's from happening.
With regards to the deflation, it would be interesting to see some graphs comparing exchange volume with actual trade conducted with bitcoins. I'd be willing to bet we'd see actual trade drop off with the recent surge in exchange rates. Not sure how possible this would be, however - the charts on blockchain.info don't seem to be granular enough to pick up on such a trend, and it's hard to determine what is "trade" vs. bitcoins changing hands because of a sale on an exchange.
The deflation risk can be solved, I think, if the core developers and core decision-makers (key movers and shakers in the community, like miners and vendors) all agree to a "split" event moment where every 1 previous BTC transmutes into say 1000 subsequent BTC (or whatever, picking numbers out of thin air). Making it easier to get BTC because old values which were too close to the smallest fraction floor now become splittable and more easily transferrable again. The core folks driving Bitcoin at the moment are already well aware of this risk scenario and what the set of decent mitigation actions can be. This mitigation/evolution is not unlike when key folks in the Internet community realized that IPv4 would run out one day and thus something with a much bigger pool of addresses would be needed: IPv6. A similar hack is possible with Bitcoin too, or with any other e-currency or cryptocurrency. It's all just software. We can make it do anything we want, revise it, migrate to something else. Everything's based on trust and honor system anyway, even the notion of physical property ownership in RL: a home is only "yours" as long as your neighbors/community/government continues to honor that notion, or until/unless people with guns come and forcibly take it from you under threat of violence.
The lack-of-guaranteed-taxability risk is a larger one, imo. But I know it's possible to build a kind of wrapping/middleman service on top of Bitcoin, to give one example, if a government wanted to, and legally require citizens to use it in order to ensure their income/sales are tracked and automatically taxed (with fees taken out automatically to act as tax inflows to that gov). It's physically possible, anyway, without requiring any physical change to the protocol or blockchain. Just the Ages Old solution governments everywhere have used: the threat of violent force for non-compliance.
2. they can be split further, if ever needed. which is what I just said. if enough people agree to it and enough people migrate forward, via cooperation and "this-will-only-hurt-briefly" actions
Splitting currency down like that is not a good answer to the monetary deflation issue, which is why he said he didn't think you understood.
It's not simply the quantity of available currency that is the problem with deflation, it's the appreciating value of currency compared to goods and labour.
Splitting does not resolve the issue of deflation that is that a given unit of value (1 btc, 1000 micro-btc post-split, whatever) increases over time. It doesn't matter what you do to it or how you measure the quantity of value - if that same value is worth more tomorrow than it is today, there is a prevailing negative pressure on spending it and the result is that people will prefer to hold on to the currency rather than exchange it.
This is where the bitcoin boosters start to seem a little looney to me. 99% of my experience with currency has been with USD, which have been relatively stable from month to month.
It is a difficult situation because it appears that when people take the time to learn about it, they become big fans of bitcoin but also start worrying about the total collapse of the fed and the USD. I am trying to understand the argument, but I remain skeptical.
It is very interesting to watch and play with though.
If you actually think there is any possibility that my unsupported assertion that people committed to therapies like homeopathy or reiki are generally a bit less enthused with medical testing and conventional medicine than the general population is incorrect, please feel free to make that argument...
Just because every other currency has been devalued doesn't mean that the USD will. The argument typically goes that the USD must collapse because it isn't backed by anything meaningful. Except that the USD is backed by the largest and most powerful stockpile of weapons ever amassed in the history of the world.
On a more serious note, the silver denarius actually holds up pretty well today. It has about $2-5 worth of silver in it, and originally had a nominal value of $20-50 (depending on how you calculate it, not debasement). If you're collecting them today, you can get some of the cheaper coins for $20 or so.
I'm no historian, but I'd wager the denarius never collapsed the way - say - the Confederate dollar did. It probably just became rarer and rarer in circulation as old coins were melted down to mint new ones, and then one day it was worth more as a store of historicity than value
In all seriousness, if you really believe this, I suggest you pick up a copy of that book. History doesn't repeat itself, but it does rhyme, and you'd be surprised just how similar this time is.
I do not think usd will collapse but it is loosing it value every day. Year on year the Money supply is increasing and that the value of usd is decreasing. The increase in Money the last 12 months is around 8%
If somebody sues me, and I offer to pay my debt in bitcoins, the court may refuse to recognise this payment. But if I pay in the national currency, the court is required to recognise this payment.
This is part of the legal system in every country. It's one of the mechanisms governments use to force citizens to use the national currency.
