It's not like exchange particles, where lower densities leads to lower transfer of force. Any quantity of money, as long as it is divisible, can attain a sufficient value to be useful as a store of value. A medium of exchange merely needs to be a store of value.
Because of the lack of dependence of the value of the total money supply on its total quantity, nominal spending declining due to deflation does not reduce real spending and the market is always able to sell of the merchandise on the shelves, with the value of currency adjusting to what is needed to serve the role of store of value in exchange.
What deflation does do is discourage lending. This is a legitimate economic problem, but it's not that pronounced. The Bitcoin economy would have 3% deflation a year if the world adopted it. This is not drastic and would still allow significant lending.
But this contradicts itself. If it makes it a lousy currency, then people wouldn't expect its value to rise, and hence would have an incentive to spend it, hence it would be a good currency and its value would rise.
People are not all going to hold on to it and not spend. Some people are going to feel that due to hoarding, it won't become a currency, and hence it's not a good investment, and will be more likely to spend.
"...due to hoarding, it won't become a currency, and hence it's not a good investment..."
Not necessarily.
The prospect that it's not a currency is what makes it attractive to hoarders. Hoarders/investors don't want Bitcoin to be a viable currency; they want it to be an investment commodity. And that's the crucial problem with Bitcoin: its use as a currency, and its use as an investment, are fundamentally at odds with one another. At any given time, it makes sense to be either buying/selling (hoarding) or buying/spending (transacting); at no point in time does it make sense to be doing both.
Transactors essentially believe that the value of Bitcoins will converge around a stable mean, thereby facilitating the currency's use for transactions. Hoarders believe the opposite: that the value will either be totally volatile (with lots of peaks and valleys against which to speculate), or that it will steadily climb.
Finally, we should distinguish between "selling" and "spending." A hoarder who wants out of the market will not spend his hoard; he'll sell it. A transactor also buys and "sells" Bitcoins, but in his case, "selling" involves spending them on goods or services -- not converting them back to dollars. This is a subtle, but crucial distinction. Both users buy into the market, but they exit the market differently and with different outcomes. And both will only be able to exit the market if there's liquidity in the form of willing new buyers or willing acceptors of BTC in exchange for goods and services. Each of those two outlets has a different liquidity dynamic, too.
"The prospect that it's not a currency is what makes it attractive to hoarders. Hoarders/investors don't want Bitcoin to be a viable currency; they want it to be an investment commodity. "
Bitcoin will not be a good investment unless it's a currency. It has no other uses besides as currency. It's not a precious metal with industrial or ornamental uses for example. It's an abstract piece of data that could be useful in trade.
" Both users buy into the market, but they exit the market differently and with different outcomes. And both will only be able to exit the market if there's liquidity in the form of willing new buyers or willing acceptors of BTC in exchange for goods and services. Each of those two outlets has a different liquidity dynamic, too."
An investor who believes bitcoins will drop in value has the option of selling it or trading it for a good/service. Both accomplish the goal of getting out of a depreciating asset.
Some people are going to feel that due to hoarding, it won't become a currency, and hence it's not a good investment, and will be more likely to spend.
But if I as an individual consumer feel that bitcoin won't become a currency, why would I even be converting my money into bitcoin in the first place?
"Think of the psychological effect of having to CONSTANTLY lower your prices on your goods. At some point, you'll hang yourself. You want to charge more, not less. It is absolutely depressing and has a real effect."
This is not a big deal and people adapt to what provides the maximum real profit. You're only going to get depressed if you're used to the old trend of ever increasing prices.
This is not a case of bitcoin being run by any one, this is an independent party running a service dealing with bitcoins, and their service failing. Your comment is like asking the dollar to be dragged behind the shed and put down because of Bernie Madoff engaging in fraud involving dollars.
It's funny that the US is spending so many billions of dollars trying to sabotage Iran's economy and nuclear plant, when the country poses zero threat to the US, and the US faces enormous fiscal challenges.
When I write funny, I mean utterly tragic, wasteful and a result of a relentless propaganda campaign which has resulted in every political candidate falling over themselves to prove how committed they are to facing down the menacing Iranian threat.
The propaganda is mutual. The US finds it convenient to have an enemy while Iranians are cowed into supporting the aytollahs for fear of US invasion. This is a dangerous kind of equilibrium.
These parts suggest the author doesn't understand it that well:
--
I can't speak to the economic implications of limiting # of bitcoins
to only 21 million -- it's probably based on the fixed rate of coin
generation and the desire to have it stop by 2016.
---
Bitcoins are generated until 2140.
---
Also, if you are serious about making a currency for the
whole internet, 21 million seems like a few order of magnitude too small due to number of participants.
--
Each coin is made up of 100,000,000 atomic units, so using the bitcoin denomination is arbitrary, and smaller denominations can be used as the value of a bitcoin increases.
Those are the most superficial points of the post; everything else he says is spot on, particularly the disconnect between the claim the the protocol is easy to update and the nearly impassable practical obstacles to doing so for a contentious update.
He's studying the protocol yet doesn't know when generation ends or that each coin can be divided down to the eight decimal place. It doesn't give me confidence he has done a thorough job.
The author also writes:
--
Due to the
cryptographic nature of transactions, it's simply not possible to have
realtime transactions with bitcoin as the network scales (it already
take 5-10 mins on average for the network to see a single
transaction).
--
When transactions were never meant to be real-time.
The only criticism that is valid IMO is this:
--
Having the ability to upgrade algos is really, really important IMO.
As it stands, the entire bitcoin economy would go to zero, nearly
instantaneously, if SHA-256 is broken. There MUST be a way for the
network stay ahead of crypto changes and improve security over time.
Rotation of currency, as in the real world, must be designed in.
--
But he offers no means of doing this while maintaining a decentralized network.
I think you've misunderstood his focus. He's describing the network protocol, not the overall "Bitcoin system" that's sometimes called the "Bitcoin protocol." He explicitly points out that the economic details are beyond the scope of his argument.
You could tie an upgrade of the protocol to a consensus by a majority (or perhaps supermajority, if you're clever) of mining strength. Or you could try to give up the total decentralization of Bitcoin, given that it's an illusion anyway and the source of most of the expense, security problems, and unwieldiness that will come to haunt the protocol.
That's a good point, but if he studied the protocol, he should still know when bitcoins stop being generated and how divisible they are.
---You could tie an upgrade of the protocol to a consensus by a majority (or perhaps supermajority, if you're clever) of mining strength.---
The problem then would be that a >50% attack could overtake the entire network by inserting malicious code in the upgrade.
As it is now, the damage that a >50% attack could do is somewhat limited as long as it doesn't persist for too long.
---Or you could try to give up the total decentralization of Bitcoin, given that it's an illusion anyway and the source of most of the expense, security problems, and unwieldiness that will come to haunt the protocol.---
Decentralization is the only way a program that would be as targeted by law enforcement as bitcoin can survive.
Bitcoin's not at all resilient in the face of an attack by a government.
You're right about limiting damage from a 50% attack, however. Of course, you could agree in advance on an amount of time the majority of hashing power would have to assert that an upgrade was needed, but it's possible that would raise other problems. It may be that there's no good way to handle upgrades without an out-of-band mechanism, but if so, that counts as a strike against Bitcoin, not one in its favor.
" As someone else pointed out, in a pure capitalism, we'd have slaves, child porn, thugs for hire, assassination contracts, etc."
No you wouldn't. All of those things are the exact opposite of capitalism, since they prevent voluntary association and threaten body, liberty and property.
It's not like exchange particles, where lower densities leads to lower transfer of force. Any quantity of money, as long as it is divisible, can attain a sufficient value to be useful as a store of value. A medium of exchange merely needs to be a store of value.
Because of the lack of dependence of the value of the total money supply on its total quantity, nominal spending declining due to deflation does not reduce real spending and the market is always able to sell of the merchandise on the shelves, with the value of currency adjusting to what is needed to serve the role of store of value in exchange.
What deflation does do is discourage lending. This is a legitimate economic problem, but it's not that pronounced. The Bitcoin economy would have 3% deflation a year if the world adopted it. This is not drastic and would still allow significant lending.