I like to follow the wider crypto currency news and industry developments. I often come across wild exuberance and extreme criticism. Over time I have noticed that a lot of points against digital currencies that while valid at the time quickly change with the adoption of new people and technology.
Early on the most common criticism of Bitcoin was that it wasn’t worth anything. People were mining 50 BTC in blocks with hardware on there desktop. Anyone could accumulate hundreds of BTC if they wanted to unfortunately no one could have guessed that they would become as valuable as they are now. In hindsight it seems funny to criticize the absence of price when it is often the most significant characteristic to newcomers.
After the value criticism was that no one accepted it for payment. Only a handful of stores accepted bitcoin. While most businesses still don’t accept bitcoin there are a significant number now and new integration services that make it easy for new stores to start. Also now that the value Bitcoin is widely known more people are now willing to accept it in place of dollars.
The next criticism was that Bitcoin has no intrinsic value. It was common to compare it with the Dollar but in comparison there is no intrinsic value of the dollar. People also compared it with gold because you can hold it and that is true but it doesn’t mean that an electronic currency can’t provide value on it’s own.
Lately the criticism of Bitcoin is that the network doesn’t have the capacity to handle enough transaction volume to support a larger economy. While the core network is limited to about seven transactions per second there are many groups working on solutions that will allow significantly more in the next few years.
I’m not saying that criticism can’t point out valid issues with Bitcoin but in the context of changes already in motion it makes sense to make a hedged guess and use the opportunity as an investment.
One of the most bizarre criticisms that I disagree with is that Bitcoin, or others like it, can never be used in a functioning economy because the deflationary nature of currency issuance will cause people to save instead of spend. As a result businesses in their economy will not have enough customer demand to survive and the economy will collapse.
I believe that most people who make this criticism are viewing this as a variant of the broken window fallacy. The broken window fallacy says that destruction of a local town shop window is good for the economy because it necessitates the services of a local window repair person, thus earning them money to support their family. Of course this is a fallacy because the net result is a loss as the cost to the shop owner is more than the gain to the window repair man. The shop owner also would have used the same money paid the repair person to spend in the economy.
In this example the breaking of windows is analogous to inflation of the currency.
Most people have lived in a financial system that inflates savings for their entire life and simply can’t comprehend anything different.
In an economy with a different monetary policy people will still need to buy things in order to live. Currently with dollars there are incentives to spend because the value of dollars are eaten away as time passes. In a Bitcoin based economy the incentive might be to hold rather than spend if they are on the fence of a purchase. But people would still buy the things they need.
The key point is that people have to work in a dollar economy to replace the value that is eaten from holding dollars. Does this necessitate the creation of unnecessary work? Is the current expansion of production and consumption of natural resources unsustainable? I think so.
People right now need to work because in a fractional reserve based economy any assets are quickly eaten away with a small amount of deflation. Most people need full employment to just get buy.
I’m not suggesting that Bitcoin will become a predominant currency but rather than the hypothetical outcome isn’t necessarily worse than the current system.
As a counter point to the broken window fallacy comparison the argument has be made that the key point of the effect of deflation is reflected in the use of effective resources rather than the observation that some things are broken. In other words it is more desirable irrespective of currency system to make optional use of all available resources, human labour and capital as it provides opportunity for growth and leaning. Additionally people don’t hold dollars because of inflation and as a result don’t significantly suffer as a result. All interesting ideas.