Bloomberg Briefs: Special Bitcoin Report

Thoughts on the commentary by Noah Smith?

IGNORING THE RHETORIC He argues that bitcoin needs to "die" as an investment to become a currency. Yes, he agrees with the Washington Post columnist who referred to Bitcoin as a Ponzi scheme, which is sensationalist and inaccurate. However, let's ignore the rhetoric and consider the basic idea; it's not a new idea, so perhaps some of you have a more sophisticated analysis than Smith?

SMITH'S ARGUMENT He seems to argue that fiat currency works well as a medium of exchange because it typically loses value slowly, due to inflation, so people are willing to spend it. He concludes that in order for bitcoin to be used as a medium of exchange, it needs to lose its potential as an investment.

APPARENT FLAW Bitcoin is not like any asset that has existed before, so conclusions drawn from the behavior of traditional asset classes need to be considered carefully.

In this case, Smith seems to forget that bitcoin is a finite resource. If it starts to be widely used as a currency, so that it's exchanged for goods and services with a high collective value, then bitcoin's value would likely have to go up (since the transaction velocity of bitcoins used in commerce will likely remain limited, e.g. due to the 10 minute average block confirmation time). Isn't that right?

It doesn't seem possible for bitcoin to be widely adopted as a currency, in the way that Smith suggests, while simultaneously "dying" as an investment.

REMAINING QUESTION None of this resolves the issue of whether or not the mainstream consumer will spend bitcoin if he or she expects it to increase in value. This has probably been hashed out before, but I don't remember seeing an in depth discussion on this.

Here are a couple of ideas I've heard.

  1. Discounted prices, due to lower transaction fees, will counter the hoarding effect.

  2. Services such as Coinbase could make it standard practice to offer a kind of "replenish" feature, in which people can replenish their bitcoin holdings immediately after a purchase by linking a fiat account to each bitcoin wallet.

Thoughts? Other ideas?

/r/Bitcoin Thread Link - newsletters.briefs.blpprofessional.com