Of course bitcoins value is volatile, it's relatively new and being adopted and accepted. I blame the people speculating on it like crazy without any idea what the fundamental value actually is (and to be fair it's impossible to know until it stabilizes and the bitcoin economy becomes established.)
But this is only temporary, a necessary evil when a currency is starting out.
However it is arguably a good thing though, because all the attention and people buying it hoping it will increase in value, is exposing a lot of people to it that otherwise wouldn't have been. It's helping it grow much faster.
>To replace our entire dollar base money with Bitcoins would require that each Bitcoin be valued at more than $370,000.
I'm confused by what he means by this. Bitcoin is infinitely divisible. Even if there was only one bitcoin in the economy it could still be used perfectly fine as a currency.
>In contrast, a good monetary control system would fix the value of the currency unit (in terms of gold or something else real) and then adjust the size of the monetary base on a moment-by-moment basis in order to maintain this value in the markets.
This doesn't really make too much sense either. It takes a long time for arbitrary changes in the currency supply to have any effect. And all they can do is print more money, which makes everyone else's money worth less and therefore makes them worse off.
One interesting thing I've been thinking about is that since it's digital currency inflation and deflation can be corrected for a little. People could have their sites change prices based on the current inflation or deflation rate (if they really care about it so much.) This was harder to do with real world price tags. It's not a solution of course but it might help a lot. Usually the criticism of changes in a currencies value is that prices don't adjust fast enough to deal with it. But with the internet information is transmitted and changes can be made instantly.
>No modern economy could survive the constant, grinding deflation that having a fixed monetary base would eventually produce.
So this is more controversial, but I don't see why not. A currency that actually increases in value rather than decreases would have a huge advantage over everything else. Because if you had a choice what would you store your money in? It also insures that bitcoins can never artificially be devalued by any central organization. Sure new bitcoins can be mined, but that's heavily limited and a necessary evil to distribute the first bitcoins fairly.
As for them being collectibles that may be true for some people, but they have a few very good advantages to them that can't be beat by other currencies and that insures they will always have a use as a currency with some people. Mainly that they are anonymous and don't have transaction fees. I have seen a lot of interesting uses for them that would be unfeasible in real world currencies. Like people giving each other small tips over the internet.
> A currency that actually increases in value rather than decreases would have a huge advantage over everything else. Because if you had a choice what would you store your money in?
The large part of point of fiat currency is divorcing the "store of value" function from the "medium of exchange" and "unit of account" functions of money, retaining the latter two but largely abandoning the former, in favor of the investment role being taken by productive assets.
The purpose of this is to encourage people with wealth to invest that wealth in productive assets rather than holding on to money.
Its true that, if you are looking for something to use as a store of value, something that increases in value over time is better for that purpose. Its less than obvious why this should be a feature of "currency". As a medium of exchange, it is generally good to have protection against short-term volatility, and as a unit of account the same is true, though against somewhat longer-term volatility (though not really "long-term", necessarily.)
For a long-term investment, short- to medium-term volatility is less important, but long-term expected growth is more important. The features that make a good investment aren't the features that make a good currency (medium of exchange) or a good unit of account.
> Because if you had a choice what would you store your money in?
That's actually noted as one of the problems with a deflationary economy. People tend to store their capital instead of spending it or investing it, which puts a hamper on economic growth (or even maintaining the economic status quo). If your job depends on receiving income then you can appreciate why it also depends on other people spending money.
> It also insures that bitcoins can never artificially be devalued by any central organization.
Countries have actually sometimes arranged to devalue their own currency to help with the local economy by boosting exports, so in that sense it is beneficial to have a central organization in your country's control to do that. Given the ongoing economic crises in Europe I'm just not sure how good an idea it is to have economic policy so completely decoupled from currency policy.
But on the other hand that feature of Bitcoin does make it very useful as a collectible or commodity. You can "invest" in it without worrying that the Central Bank of Satoshi will make your dilute your investment tenfold or worse.
>If your job depends on receiving income then you can appreciate why it also depends on other people spending money.
Well the point is prices adjust. If people aren't spending money, then prices just fall until the people that are spending money can afford it. Sure you make less income, but everything is cheaper too so it's not a loss. Actually it's a gain. The same amount of goods are in the economy, but since some people aren't buying things, everyone else can afford more things. The pie is the same size but the people saving money haven't taken any slices of it, leaving more for us.
Besides when people save money, they generally invest it or put it in a bank which loans 90% of it back out.
>Countries have actually sometimes arranged to devalue their own currency to help with the local economy by boosting exports, so in that sense it is beneficial to have a central organization in your country's control to do that.
Exporting more things isn't necessarily a good thing. Ideally we could import everything we need and not have to actually work to produce things to export.
> > If your job depends on receiving income then you can appreciate why it also depends on other people spending money.
> Well the point is prices adjust. If people aren't spending money, then prices just fall until the people that are spending money can afford it.
But remember that the reason the prices are dropping is because no one is spending money. This is a positive feedback loop: the only reason that sellers are dropping prices is because they are under extreme pressure to make some income somehow. So they drop prices and receive a bit of income. So these businesses are then unable to pay their suppliers, who are forced to either drop their prices or suffer default, and so on straight up the chain.
So it's not that deflation itself is hazardous per se, but that it tends to amplify its own effect. If you reach the "flashover" point the whole economy goes to crap, much as what happened when the mortgage failure rate finally got high enough with the sub-prime mortgage derivatives.
> Exporting more things isn't necessarily a good thing. Ideally we could import everything we need and not have to actually work to produce things to export.
That would perhaps be ideal, but it can't possibly occur that every country only imports and doesn't export. Someone has to lose in that transaction. Is that ethos really what we want to base a global financial system on?
>So it's not that deflation itself is hazardous per se, but that it tends to amplify its own effect.
It will stabilize eventually though as no new people start saving instead of spending, or as the people who were saving eventually need to buy things or decide to finally cash out and spend their money.
>That would perhaps be ideal, but it can't possibly occur that every country only imports and doesn't export. Someone has to lose in that transaction. Is that ethos really what we want to base a global financial system on?
The point was that we shouldn't strive to export more things as if that was a good thing in and of itself. The benefit of exports is the foreign money you get in return, and the benefit of that is the imports you can get in exchange for it.
> The pie is the same size but the people saving money haven't taken any slices of it, leaving more for us.
Until they do, and then the prices increase dramatically (at least in the short term) in response making it near impossible for the poor bitcoin users to afford anything. If you're only entering the economy after 10 years of deflation your salary will be a pittance compared to the savings of those who've been active in the BTC economy during that time.
> Ideally we could import everything we need and not have to actually work to produce things to export.
But who would trade with you and what would they trade for? If you aren't producing something (physical or intellectual) you'll eventually run out of funds to support your import only state.
...all the attention and people buying it hoping it will increase in value is exposing a lot of people to it that otherwise wouldn't have been. It's helping it grow much faster.
I feel like the same thing happened with Beanie Babies. Look where they are now. Is that a good thing?
Bitcoins actually have a use though, as a currency. Beanie babies are only valuable because a few people want them for... well however they find value in just owning beanie babies.
Bitcoin has a networking effect. When more people use it, it becomes more valuable simply because there are more places to use it or get it. And that creates more users of it still.
But this is only temporary, a necessary evil when a currency is starting out.
However it is arguably a good thing though, because all the attention and people buying it hoping it will increase in value, is exposing a lot of people to it that otherwise wouldn't have been. It's helping it grow much faster.
>To replace our entire dollar base money with Bitcoins would require that each Bitcoin be valued at more than $370,000.
I'm confused by what he means by this. Bitcoin is infinitely divisible. Even if there was only one bitcoin in the economy it could still be used perfectly fine as a currency.
>In contrast, a good monetary control system would fix the value of the currency unit (in terms of gold or something else real) and then adjust the size of the monetary base on a moment-by-moment basis in order to maintain this value in the markets.
This doesn't really make too much sense either. It takes a long time for arbitrary changes in the currency supply to have any effect. And all they can do is print more money, which makes everyone else's money worth less and therefore makes them worse off.
One interesting thing I've been thinking about is that since it's digital currency inflation and deflation can be corrected for a little. People could have their sites change prices based on the current inflation or deflation rate (if they really care about it so much.) This was harder to do with real world price tags. It's not a solution of course but it might help a lot. Usually the criticism of changes in a currencies value is that prices don't adjust fast enough to deal with it. But with the internet information is transmitted and changes can be made instantly.
>No modern economy could survive the constant, grinding deflation that having a fixed monetary base would eventually produce.
So this is more controversial, but I don't see why not. A currency that actually increases in value rather than decreases would have a huge advantage over everything else. Because if you had a choice what would you store your money in? It also insures that bitcoins can never artificially be devalued by any central organization. Sure new bitcoins can be mined, but that's heavily limited and a necessary evil to distribute the first bitcoins fairly.
As for them being collectibles that may be true for some people, but they have a few very good advantages to them that can't be beat by other currencies and that insures they will always have a use as a currency with some people. Mainly that they are anonymous and don't have transaction fees. I have seen a lot of interesting uses for them that would be unfeasible in real world currencies. Like people giving each other small tips over the internet.