Because a dollar is not always worth a dollar. A bitcoin is always worth a bitcoin.
The dollar doesn't have a "reference rate," as it is subject to arbitrary inflation. The dollar has had several reference rates in the past, based on weight in silver, and later, gold. The purchasing power of a dollar has declined rapidly since these reference rates were abandoned.
A bitcoin has a reference rate which is eventually 1 in 21M. There is an initial inflationary period until it reaches that, but we're already 1 in ~18M, so most of the inflation has already occurred. We will be very close to the 21M in another 13 years, and after that we will only be adding small fractions.
If you had a dollar in 1918, it would be worth only a small fraction of a dollar today. 1/16 or 1/40, depending on what estimations you use.
If past performance is anything to go off, then a dollar in 2118 will be worth 1/16th of a dollar today. If you hold onto 16 dollars today, they will have the purchasing power of 1 dollar in 2118.
On the other hand, if you hold 16 bitcoin today, you have 16 of 18M of the bitcoin supply. In 2118, you will have 16 of the ~21M total supply.
In the same 100 years, bitcoin will inflate by most 16%. The dollar will inflate by 160% in the same period, if the past century is anything to go off (it isn't, this century will be much much worse).
Or put it in to shorter timeframe. If inflation is approximately linear over the 100 years, then every 6 1/4 years, your bitcoin will lose 1% of its purchasing power. In the same timescale, your dollar will lose 10%.
Which of these are you going to save money with?
The above is based on the assumption that demand for bitcoin will not increase in relation to demand for the dollar. Given Gresham's Law, this is highly unlikely.
That only pins the value of a bitcoin in relation to other bitcoins - it does nothing to pin the value of a bitcoin to real-world goods. And the only practical value of a bitcoin, in the long run, is its value in relation to real-world goods.
It's also worth remembering that once the inflation of bitcoin stops at the 21m mark, it can only ever deflate from there as wallets (and their associated coins) are lost. As bad as inflation is, a deflating currency is not any better.
Of course, the proposed solution to bitcoin deflation was (at least at one point) just to inflate the bitcoin currency by effectively moving the decimal point to the right (one bitcoin becomes 10, etc).
> That only pins the value of a bitcoin in relation to other bitcoins - it does nothing to pin the value of a bitcoin to real-world goods.
This is true, but it's also true for dollars. No goods are inherently pinned to a dollar value. Goods are priced in dollars with the expectation that the seller will earn a profit if sold at a given rate.
But if that dollar loses its purchasing power, mostly due to it being inflated by central banks, then the price of goods in dollars will have to increase for the seller to earn the same profit. It is not sufficient for the seller to just increase their goods at the rate of inflation either, because the cost of all their expenditures increases too. To earn the same profit after inflation, they need to increase their revenue more than the rate of inflation. This has a ripple effect over all industries.
On the other hand, if the non-inflationary currency is not losing its purchasing power over the same periods, then merchants will prefer to obtain the non-inflationary currency over the inflationary one. If they obtain both, they will use the inflationary currency first to purchase new materials, and only dig in to the non-inflationary currency as and when they run out of the inflationary currency.
If eventually, businesses decide to price their goods in bitcoin, rather than the dollar amount of bitcoin at the current market exchange rate, then they might be able to expect that they will not need to keep raising prices annually for inflation, but might instead be able to lower them, or keep them at the same rate and increase their profits for as long as a cheaper competitor does not appear. However, if these goods are priced both in bitcoin and USD, then while the bitcoin value remains the same, the dollar value must continue to increase for inflation.
Since bitcoin also enables a certain level of transactional privacy too, it will also be used for grey and black market transactions, which make up 10-20% of economies. Most people interact either directly or indirectly with these markets for saving money or generating additional profit. Cash has traditionally been used in these cases, but as the effort of states to make money digital, under mass warrantless surveillance increases, the practicality of using cash decreases. Bitcoin is well suited to fill the gap being created.
> As bad as inflation is, a deflating currency is not any better.
I often hear strawmen arguments against deflation, but never any real sources or evidence of how terrible it supposedly is. I'm led to believe that people won't spend money in a deflationary economy, but peoples need to eat and drink suggests otherwise.
An example of deflation in action is in Moore's Law. If I buy a computer now, it will be half as powerful in 1.5 years. Why would I not just wait 2 years and buy a computer then? People continue to buy new machines all the time, and they don't wait 2 years for the next iteration, because they know that in another 2 years, that one is out of date. People will spend for as long as they perceive the transaction is worthwhile now for the labour effort they put in to acquire that amount in currency. In a deflationary economy, people simply make better decisions, because they're not simply comparing the amount to what they earned recently, but in any significant transaction they need to weigh the importance of the transaction against their future self.
I think the real complaints about deflation are from socialist types who worry that the rich will get richer. Too bad for them, they can't prevent this any longer. The state no longer has the capacity to steal people's bitcoin if they take the right measures to secure their keys. The rich might get richer, but anyone can get better off if they shift to a low time-preference mindset, instead of being stuck in the debt spirals that are encouraged by high time-preference economies.
> Of course, the proposed solution to bitcoin deflation was (at least at one point) just to inflate the bitcoin currency by effectively moving the decimal point to the right (one bitcoin becomes 10, etc).
The "bitcoin" denomination is really just cosmetic anyway. All of the values in the bitcoin protocol are measured in satoshis, as a 64-bit integer. It is not trivial to change this denomination as it would affect the entire UTXO set of transactions. On the other hand, moving the decimal place for the cosmetic appearance of satoshis could be trivial, but it doesn't change much.
Dollars have one major advantages over bitcoins (in the US): They are legal tender for paying all debts, private and public. Bitcoin requires the merchant to accept bitcoin - something they are not, and will never, be required to do.
Bitcoin also has a cost associated with it that the dollar does not - a transaction processing cost (yes, there are costs for the handling of money, but it's both significantly less than bitcoin transaction costs, and is relatively constant).
WRT deflation, the biggest problem (that I'm aware of) is that it disincentivizes spending, something generally considered to be a bad thing for the economy. Sure, people may buy the necessities with a currency that is deflationary, but they're disincentivized by the currency itself to do anything more than that.
In other words, why would anyone (not just the rich) spend more than the bare minimum when not spending means their net value increases?
Any form of investment that can't accrete value faster than the currency itself becomes a wasteful product. Stocks, bonds, houses, cars, bicycles, startups, family businesses, education - all have the potential of losing all their value when compared to hording currency.
> Dollars have one major advantages over bitcoins (in the US): They are legal tender for paying all debts, private and public.
This is true, but the practice is such because the government has previously granted a monopoly on the issuance of money to certain private entities which have little accountability to anyone. Previously, it was not possible to compete with this monopoly, because the state enforced it through the threat or use of violence.
The money issuers now have competition, and the government has no way of "shutting down" the competition due to the way it was designed. Merchants now have alternative options in terms of what currency they're willing to accept and how they can save money, rather than simply spending.
If it happens that the new competition is more desirable to possess than the previous money (due to lack of inflation, meaning it is more likely to retain its purchasing power in the long term), then people will save in bitcoin, and spend in dollars.
The result is that a large amount of wealth will essentially "disappear" from circulation which the state thugs can levy taxes on via use of violence. Economies will take a hit as a result, but the people saving in bitcoin won't be impacted as heavily as those who don't. In fact, it could have the effect where each hit taken by a national economy drives more people to bitcoin, pushing up the demand and value, making those who were smart enough to accumulate it earlier even more wealthy than before the economy took the hit.
As long as there are liquid enough markets (whether those are AML/KYC compliant, or black-market) for people to trade some of their bitcoin back into USD for the purpose of paying taxes, then the dollar is not going to retain its advantage.
> Bitcoin also has a cost associated with it that the dollar does not - a transaction processing cost (yes, there are costs for the handling of money, but it's both significantly less than bitcoin transaction costs, and is relatively constant).
Transaction fees in bitcoin are not consistently high. Some fees were high last year due to the sudden increase in speculation, poor fee estimation in software, and services which were not making efficient use of block-space, at their own cost, or the cost of their clients. Much of this has improved, although we have a long way to go.
The main developments are in the more scalable technologies pinned to bitcoin, which aren't competing entirely for a share of the limited block space. Fees on the lightning network, for example, have a base rate in satoshis (per transaction), and a proportional fee of 1 millionth the value transacted. The fees total fractions of cents. Bitcoin transaction fees are only paid in the creation and destruction of payment channels, which may be very infrequent.
> WRT deflation, the biggest problem (that I'm aware of) is that it disincentivizes spending, something generally considered to be a bad thing for the economy. Sure, people may buy the necessities with a currency that is deflationary, but they're disincentivized by the currency itself to do anything more than that.
The reason that reduced spending is seen as a "problem," is because governments can't cover the interest on their debts unless people are actively spending and paying taxes on those transactions. Governments are not really paying their debts off - they're paying off the interest, and kicking the can down the road even further. The debt will never actually be paid. It is impossible to pay off. At some point, who knows when, your government is going to default. This is inevitable.
> In other words, why would anyone (not just the rich) spend more than the bare minimum when not spending means their net value increases?
People spend because they want something, and they're willing to let go of something else which they value in exchange. For some that might be the bare minimum. For others, they might want to continue wealth-signalling with expensive cars and watches.
Think about that one. The value of that car depreciates by about 20% immediately upon purchase, and then by a further X% every year. It has a lifetime of around 10-15 years before it is basically worth the value of its scrap metal. Yet people are still buying cars frequently. Could it be that people still spend money on products and services which provide them value now, and not just save everything like the deflationary scaremongers suggest?
> Any form of investment that can't accrete value faster than the currency itself becomes a wasteful product. Stocks, bonds, houses, cars, bicycles, startups, family businesses, education - all have the potential of losing all their value when compared to hording currency.
Some of the examples you pick, like cars, bicycles, houses (sometimes), actually depreciate in value over time, which throws away the argument that people won't spend money if they don't see a monetary ROI.
Consider renting a home as another prime example. People will continue to put money into an "investment" which will eventually net them zero return when they move home or get evicted. Yet people still rent.
Many "investments" are simply full of rent-seekers who do not provide any real value to society. If people stop throwing money at these, it won't be missed.
Education is an example of something we can't even measure the ROI on. We just know from observation that the better educated a society is, the higher its productive capacity appears to be a few generations down the line. We also know that some academies do a better job than others, and that some people are willing to pay more to have their children educated at those academies, with no guarantee that they will see a ROI. (The child could turn out rebellious, or just not smart anyway). People still invest in education despite there being no obvious profit motive - their child's future is more important than the value of the money.
The real difference in investment when it comes to deflation is that people simply make better decisions. The incentive is skewed more towards saving than spending, but this is not absolute. People will spend, but think twice about buying that useless gadget that they didn't really need, but they bought on impulse because they had $1000 burning a hole in their pocket.
The argument against deflation is essentially the same as saying "people won't save money if there is inflation," because money is depreciating over time. The incentive is towards spending, but people still save money. The only time they don't save is during hyperinflation, when the value of the money depreciates more rapidly than they earn and spend it. The reverse is true for a deflationary economy. As long as deflation is low, people will still spend, but with more preference to save. It is only if hyperdeflation occurs that people will "hodl" and only spend the bare minimum to survive. Hyperdeflation will occur as bitcoin gains adoption, but it is not the eventual state. Once peak adoption has occurred, the rate of deflation will begin to decrease, with the eventual state that it will be relatively stable. In the even longer term, bitcoin could become inflationary by accident, if the human population as a whole begins to decrease rather than increase - because demand will be reduced.
The inflationary money is bad in comparison to the non-inflationary money, because the inflationary money sees people's purchasing power lose value from the labour they underwent to acquire the currency, over short terms (a few years). The non-inflationary money however, sees people's purchasing power remain the same as their productive effort to acquire it, if not, increased from when they obtained it due to deflation.
When two forms of money exist and one is better than the other, people will save the better money and spend the worse money.
People do save with currency, usually in limited amounts or limited times, in large part due to its inflationary nature. Inflation forces a high time-preference on labour because the non-spender loses value over time. Putting money into stocks is not the same as saving, but it is investment, with varying degrees of risk. None are guaranteed to even preserve value, let alone profit. At present, Bitcoin behaves like a stock because its value wrt USD is so volatile.
Gold is only valuable because of it's perceived scarcity and historical use as a store of value. It is not priced so highly due to its intrinsic properties as a metal (it is neither that useful nor that scarce), unlike some other commodity metals.
Bitcoin is the digital equivalent of gold. Its value is based on scarcity and perception of value due to the ability to find someone who will trade it at an expected market rate for other currencies or for goods.
(3) It is better to encourage saving than to encourage spending.
(4) Bitcoin is a better non-inflationary currency than gold.
1 and 2 -- sure, agreed.
3 -- This is the most important part of your argument yet you have not explicitly stated it, nor argued in favor of it, anywhere. It is unclear to me why it's good policy not to encourage investment.
4 -- You are right that neither bitcoin nor gold has intrinsic value (not counting the value that gold would naturally have as an industrial material). Both are only valuable because other people perceive them as value.
However, people have perceived gold as valuable for thousand s of years. The fact that gold has value is deeply rooted in human culture and therefore not likely to change in our lifetime.
None of that is true for bitcoin.
So, what are we left with? The only advantage of bitcoin that I can discern in all of this is that it can be transferred via the internet in a censorship-resistant way. I do not think that advantage is important enough for most people to outweigh the disadvantages.
I would modify (3) to say: It is better to encourage saving than to encourage spending on useless shit that won't last.
The problem with today's "investment" is that it is almost entirely on shit that won't last, and is for the purpose of short-term monetary gain than for investment into infrastructure which will last generations. An "investment" today is concerned with the next quarter, 6-months or perhaps even a year. Most companies do not concern themselves with anything longer than 3 years, or anything to do with the well-being of the societies in which they operate. Most companies simply can't operate on the time-scales needed to build and eventually profit from creating infrastructure. Instead of building something with the intent of breaking-even in 10 years, one will instead still be paying back interest accumulated on loans taken out 10 years ago.
The end result is that the role of building infrastructure in developed nations is now almost entirely assumed by governments, or contracted by government, which ends up creating virtual monopolies propped-up or subsidised by the state. Private companies which are profiting hugely from public money, but do not operate like regular companies because they don't have to compete with anybody and have little accountability. It's the worst elements of socialism and capitalism combined into one package.
In the academies, research projects which span 3+ years are now almost unheard of. It's more important to get 3+ publications per year, now matter how garbage they are, else the funding won't come around next year. We're seeing stagnation in many areas of science because research which is not short-term profitable is ignored.
For most of the working and middle classes, the high time preference results in them buying useless gadgets, largely for the purpose of wealth-signalling, eating junk food, getting wasted, anything to fill the requirement to spend the money one has earned, because it is not worth saving the money. For many, paying rent is preferred to buying property, because the latter requires saving to achieve, which is hard when people see their stored value decaying in their bank accounts.
The shift from inflationary money to non-inflationary money will fundamentally affect people's decision making in their purchases. It isn't going to happen overnight, but as people realize they can accumulate wealth without risky investments, they will come to value saving over spending. The companies producing cheap junk for short-term profit will have to change the way they operate to fit the changes in spending habits.
On (4), gold is still inflationary as new sources can be uncovered. It is better than fiat currencies which can be arbitrarily inflated, but it is still worse than zero inflation for anyone who wants to save money.
Gold is not too scarce. It can be more difficult to acquire than Bitcoin in some cases due to red-tape. Gold is not very fungible because it is difficult to separate. It's also difficult to verify that it is real gold. Even under gold monetary systems, a major source of inflation has been to dilute the amount of gold transacted by alloying it with small amounts of other metals. Over time the gold in the coinage has shrunk to fractions of its original amount. This can't be done with Bitcoin.
And the value of transmitting remotely, without censorship or interference should not be underestimated, particularly as governments and technology companies are increasingly pushing towards dystopias in order to attempt to save themselves from their own poor decision making.
Bitcoin also enables a kind of economy that was not previously possible, which is a micro-payment economy for online services. With some of the technology being built on bitcoin, you will soon be able to make instant payments worth fractions of a cent, with transaction fees being negligible. (This can already be done, just not yet at scale).
Since many people are invested both financially, and technologically in this space, it certainly isn't going to go away any time soon. If people happen to have their savings appreciate over that time by holding them in Bitcoin, it will only further cement Bitcoin's future as the next monetary standard.
Good luck sending gold through copper wires. Good luck transporting it without getting mugged. Good luck hiding it when the socialist state comes knocking for it.
