tl;dr: The soaring value of bitcoin forces those holding currency to hoard it. The Bitcoin economy has, in effect, experienced massive deflation.
What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich.
This is where I think Bitcoin fails as a currency. While some people invest in currencies, the point of currencies is to allow goods and services to flow through the economy. Currency is and should not be primarily an investment vehicle.
What you're talking about are securities[2]. There is a distinct difference. Bitcoins are ostensibly a security masquerading as a currency.
Also the deflation effect should only be this great in the early years of the currency. Once it becomes a solid popular currency (like say the euro or the dollar), and it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller and insignificant to people who would want to "invest" in keeping bitcoins to themselves, because there won't be an avalanche of people wanting bitcoins anymore, so the value of the currency won't surge so much from that point forward. The currency would become more stable and with a more steady growth as it also becomes affected by the law of big numbers.
Nope, it was overborrowing. One of the reasons that the economy is sluggish is that consumers are underspending.
>> it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller
That's when deflation in bitcoins will get worse, because while wealth will increase, the amount of currency in circulation will not.
So yes, a lot of that overborrowing was for investment.
All of which is beside the point, unlike banking transactions each bitcoin computer needs to be connected to the internet so you can't create a truly secure network. If the average American had 10+$ in bitcoins on their computer a significant number of them would get hacked on a regular basis and simply lose all that money. Which means for the average consumer they need to deposit that money into some sort of bank and there is no FDIC for bitcoins so when that bank is hacked all that 'money' goes up in smoke. I think we may end up with a pure digital currency sometime soon but bitcoin’s don’t really work (yet). If you want secure anonymous transactions we already have cash and several digital equivalents based on cash, but if you want stability commodity bubbles demonstrate that finite quantities does prevent bubbles and their associated crashes.
As it happens I consider the need for a private third-party money transferring organization to be one of the larger failures of North American consumer banking systems, but I digress. It's slowly improving in Canada, I can now do inter-bank digital transfers between my accounts without shelling out $50 for a wire. Maybe in another decade or two we'll get to SEPA level.
Coincidentally, with the market looking like it does, at an individual level it's absolutely the right thing to do to hold them, or at best to slowly diversify out, while still not using it for much purchasing. As long as it seems like the right move to hoard them, and their transactional use is a tiny fraction of the amount hoarded, they're not going to be a successful currency as he defines "successful". Closer to a ponzi scheme and/or asset bubble IMO.
By the way, "hoarder" is a loaded term. One man's "hoarder" is another man's "saver". Without people who save, there's no way people can borrow, and so on.
By the way, you seem misinformed about the way people are mining bitcoins. Nowadays it's done mostly by professionals running rigs with tons of GPUs, not by individuals who put an extra graphic card on their gaming PCs.
See http://www.npr.org/blogs/money/2011/08/19/139791374/the-frid... and http://www.npr.org/blogs/money/2011/09/06/140211340/swiss-to...
cube13's characterization is a simplification, but I think it still captures their intended uses. Bitcoin's deflation, and the Swiss franc's high value compared to other currencies, harm their ability to act as they were intended to. Right now, I agree with Duffy's original point, which is that bitcoin is more of a commodity than a currency.
A square is a rectangle, but not all rectangles are squares.
Scott is on the right path -- there's some sort of threshold where a substance is more valued as a transaction medium than for its intrinsic value.
I personally believe that it will never achieve anything other than niche status as a currency for trading illegal goods; it will be used for other types of transactions, but it will be a very small number of transactions when compared to contemporary financial transaction systems like, e.g. credit cards, or paypal. I say this only because in practical terms it is not very easy to use, and furthermore, its benefit of being pseudoanonymous is also is downfall; very safe for the recipient to receive bitcoins but very risky for the sender to send them since the sender has absolutely no insurance or any recourse in the transaction. There is no authority to appeal to for transactions gone bad, and even if you could sue over bitcoin transactions and the courts would understand them, the pseudoanonymity would make it very difficult to know who to sue.
- Easy of use: this is mostly a matter of software, and I see no reason to believe it has to be difficult to use. With current proposals such as specific tags for websites and such, sending money can be made as easy as inserting someone's email address, the amount and hit "send."
- Unsafe for the sender: nothing in the design of bitcoin prevents the creation of escrow services. It's simply not an issue to be fixed by the currency but by higher level services, just like with other currencies.
- Pseudoanonymity: it's mostly a red herring. When I'm buying from a random Chinese 'shop' through Ebay I won't be able to sue him either. When I'm buying from a reputed shop in my country, I don't need to ask its bank to know who I need to sue.
You could say a commodity is like a currency many people can produce.
Considering how commodities are often produced, the term "Bitcoin mining" is shockingly apt.
Often in those situations, cigarettes come into the economy as a ration (or a purchase limit) that people get whether or not they are smokers, and the economy revolves around getting this commodity that everyone gets to the minority that need it. Pretty quickly, you end up with non-smokers trading cigarettes with each other, because you can always get whatever you want through paying a smoker in cigarettes.
Bitcoin could benefit from that if it encouraged a very large drug market, because people need their drugs. If an easy, comfortable bitcoin drug market could get a lot of volume, it would become a lot easier to buy a cup of coffee or a car with it, and the prices would rise and fall based on the relationship of the ease of purchasing drugs with bitcoin vs. the ease of purchasing drugs in dollars. Maybe money laundering could keep bitcoin stable, too. In any case, to be successful, IMO bitcoin will have to be driven by something other than belief in bitcoin.
The use of the USD? It can be used to pay US taxes.
What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich.
By that logic the best money will be hot potatoes.
Still I doubt that cans of mackerel have no other use than monetary in prisons. Not many McDonalds around, beside if those were never consumed their supply would be grow continually which will to "mack" inflation.
P.S. Have you missed the point about the hot?