1 bitcoin = 10 000 dollars
Can it ever rise that high? Count with me (M stands for million).
- There are (will be) a bit over 20M bitcoins.
- There are roughly 9 000 000M dollars in M1 and M2 money supplies. But that is not all, there are other currencies like euro, pound, yen or yuan. Let’s assume there is about 30 000 000M of dollars (or equivalent) in the whole world.
If bitcoins capture just 1% of current money market, each bitcoin will be worth 30 000 000/20*1% = 15 000 USD.
If bitcoin becomes mainstream it would capture more than 1%. Then we may be looking on more than 100 000 USD per bitcoin. This is insane!
The joys of digital currency
Few weeks ago I wanted to write an optimistic article about bitcoins. I have been selling my own software for the past years and receiving money online has been a pain. I had to and still have to trust several banks and companies and each one of them takes a cut. PayPal even holds me liable if someone uses a stolen credit card to buy a license for my software.
Digital currency removes a lot of that pain and I would rejoice if there were a way to get rid of all these middle-men that do not add any value.
Bitcoin promises a lot in this regard. A distributed system, not controlled by banks or governments. Double-spending protection. No fake credit cards. Direct transactions.
But then there is this one downside – the limited supply and the inherent and unavoidable deflation it causes.
The devil is in the details
What is the big deal with the deflation? The market will stabilize. Do not worry about it. That is the kind of talk you’ll hear on the bitcoin forum. The few, who raise concerns about the future of bitcoins are not welcome. People there like the deflation and they want it to continue.
So, why is this a problem?
Because it turns bitcoins from a digital currency into an investment commodity. The goal of digital currency is to be used as a currency. Gold is not used as a currency, it is bought and sold in order to make money.
Digital gold is useless to me. Normal people do not pay with gold, they invest in gold. I want digital currency. I want it be used without thinking whether it will be better to wait 2 days before spending a coin or not.
What is sustaining bitcoins now?
It is the marketing hype. It is the promise of astronomical profits. 1 bitcoin > 10 000 dollars, remember? Each time an article about bitcoins appears, new people learn about it, do the math and some of them are lured in by the vision of profits. This is a bubble, because:
Seller’s perspective
I have been accepting bitcoins as payment for my software for some time. Not a single person showed interest. Not a single visit from the bitcoin website (where there is a list of sellers accepting bitcoins) either. There are no buyers there, because:
Buyer’s perspective
You have just installed the bitcoin purse. You have no bitcoins. The software eats your computer resources and you still have 0 bitcoins. Mining does not work – ordinary person has slim chance to mine a bitcoin. You get bored and turn the software off.
You find a store that accepts bitcoins. Should you purchase a bitcoin just to be able to pay with it in that store, which also accepts dollars? Why bother?
Where does this leaves us?
No incentive for buyers to use bitcoins, no incentive for sellers to accept bitcoins. All the good things are shadowed by the terrible deflation that lures in the wrong kind of people – the investors looking to make (real) money.
A tiny detail (limited supply) rendered bitcoin unusable as a currency. Makes me sad.
I want bitcoin 2.0
The concept of digital currency is still incredibly attractive to me. I still accept bitcoins on my web, but I do not expect anyone to actually use them to pay. By doing this, I am validating investments of other people in bitcoins for free (despite owning none). Why? Because I believe that the world needs to know about digital currency and break free from the rule of banks and paypal-like organizations.
But I am ready for the change. As soon as an alternative to bitcoin appears and it solves the deflation problem, I will switch my support immediately. Who’s with me?
June 9th, 2011 at 6:56 pm
you can’t get rid of the deflation “problem” without a central authority diluting the money supply “as needed” (and with that extracting buying power without serving anyone’s needs). they do that to the point where average joe’s don’t really take the falling price of flat screens as deflation anymore, but instead call it the natural progression of technology…
i’m not sure at all about bitcoin… a lot of resources are wasted to run the system, and the only intrinsic value/demand i can see is that you can run anonymous transactions.
another possibility would be to liberate money issuance, and with that create a competition for current central banks. the car repair shop around the corner could issue money. but deflation of the money of one specific issuer (people want to hold it more than they did before) will be part of that system, too. but it’s all fine.
of course the issuer can decide to issue more money to serve the new masses who want to hold his money, but overdoing that will quickly change the people’s opinion, unless he has just made a promising scientific discovery or something else that will boom his business.
people should realize that the option is either moving prices for competing moneys, or a violence monopoly controlling money and meanwhile sucking out the blood from the actual welfare producing economy without adding much useful work.
IOW, people either take the effort and understand how money works, or they live in ignorance and be content with “stable” prices (hah! USD lost about 98% of its buying power since the FED was established in 1913).
responsibility and freedom are attached, they never part. you give up responsibility (e.g. refusing to keep an eye on the issuer and embrace the moving prices of competing moneys), or you accept that the ruling elite will control the means of exchange and suck your blood (and hope that they will never be too stupid to suck so much that you dry up).
more reading e.g. here: http://mises.org/money.asp