When economists say bitcoin is at risk of a deflationary spiral (people hoarding the limited supply, having little incentive to spend today but always waiting until tomorrow), I wonder whether they are missing two key points?
Not a Monopoly Currency
When a country has an isolated economy and single official currency, the model is different from the environment of bitcoin. (Economists love pure models that they can analyze, but that aren’t realistic, driving the old joke “reality is a special case”.) There will still be inflationary currencies in a world with bitcoin, just as there are still such currencies in a world where gold exists. Yes, gold acts funny when compared with currencies, and yes, people hoard it, but it still has function as just one of many ways to store wealth.
But gold is cumbersome and not very portable. All the bitcoin in existence could easily fit on a tiny micro SD card.
I guess I am saying that economists have a point, but is it a fatal flaw or just one property of bitcoin?
Slices into Very Thin Traunches
There is a feature of bitcoin that is unique in my knowledge of such things: it can be sliced really thinly. As I write this 1 bitcoin is nearing a thousand dollars US. This could be a cumbersomely large value for a more physical currency, but bitcoin can be used in really small fractions. The smallest transaction currently possible is 0.00000001 bitcoin (1 satoshi). At today’s rough value, a thousandth of a US cent. If the value of bitcoin climbs a thousandfold, this is still just 1 penny.
If someday bitcoin gets to valuable that even this is too large, I am told the protocol could be changed to allow smaller fractions.
I know of no currency nor physical asset that has this property. Only artificially defined financial instruments can do this. (Imagine a derivative BRK.ZZ stock.)
What does this property do to the deflationary spiral, if one can always shave off a smaller and smaller slice to, well, maybe buy a shave?
-kb, the Kent who doesn’t own any bitcoin, yet.
© 2013 by Kent Borg