Matt O’Brien for WaPo‘s Wonkblog doesn’t seem to have much use for Bitcoin and, possibly, libertarians. Besides noting the energy consumption problem I noted here, he also sees another limitation:
The first thing they don’t understand is that money isn’t just a store of value. It’s also a medium of exchange, or what we use to buy things with. And if it’s going to be much of one, then it not only has to avoid losing too much value, but also gaining too much. Otherwise, why would you ever spend it? You wouldn’t. You’d just hold on to it as long as you could in case, like bitcoin, it went from being able to buy $900 worth of stuff one year to $19,000 the next. Which, if it ever did replace the dollar, would bring the economy to a halt while everyone stopped buying anything other than the essentials and waited to become bitcoin millionaires.
To stop that from happening, you’d need to be able to increase the supply of bitcoins as the demand for them did. This is more or less what is known as “printing money,” and, as is often the case, it can be either good or bad depending on whether it’s done appropriately or not. Do it too much and you can get the type of persistent inflation the U.S. had in the 1970s; way too much and the kind of currency-killing hyperinflation Germany had in the 1920s; but too little and the economy might fall into a doom loop like the whole world did in the 1930s. Bitcoin, though, is set up under the assumption that people — or, more accurately, governments — can never be trusted to do this, and that pretty much anything that reduces the value of a currency is by definition bad. That’s why its pseudonymous creator decided there would only ever be 21 million coins, even though that hard limit has meant prices have zoomed up and down and back up again as interest in bitcoin has itself. That’s made it the best penny stock and the worst currency in the world.
I wasn’t aware of the 21 million coin limitation. Yeah, as long as humanity predicates economies on expansion, a limited currency is doomed. Once that last coin is dispensed, the relative worth of each coin will inevitably increase as the economies expand (because each coin must represent some part of the economy), and once a substantial portion of the population realizes this, hoarding will start, depending on the external context. What does that mean? That means are there alternative currencies, such as … the American dollar? If so, then we’re going to see a boom and bust cycle as value slides back and forth between the two currencies, where value means transactions taking place. Does a bitcoin represent a pound of flour – or 10000 pounds? Well, it depends on whether someone wishes to use a bitcoin or a dollar.
And if there’s not an alternative, then people will hoard, but that’ll put the brakes on the economy, so then they’ll lose value. I think. Sounds like a roller-coaster.
Hey, I’m not an economist, but Matt’s article, which is worth perusing, makes me think I made the right decision not getting into Bitcoin for the long term. Right now it appears to be a short-term game of last one holding the coin loses.
