Bitcoin rant

I am one of the few people who has run the gamut of bitcoin usage. I have bought and sold tangible items using bitcoins. I have mined them. I have traded them for dollars. I have researched the techonology behind them. So I feel that I have some right to speak about them. I am an ethusiastic supporter of the concept of a crypto-currency, and I think that one will eventually replace the monetary system as we know it. But it won't be bitcoin.

Here's the problem: bitcoins are inherently deflationary. There will never be more than 21 million bticoins in existance, and so value of the currency necisssarily rises over time.

For years, I have heard the line: "inflation is bad, but deflation is catastrophic". Like so many abstract concepts you learn in college, I accepted this statement on an intellectual level. But I never groked it. So while real economists cried foul at the concept behind bitcoin, I poo-poohed their concerns. Bitcoin was so very clever, and the thought of sticking it to The Man entranced me. But using bitcoins has finally given me a real-world punch in the gut: deflation SUCKS.

Why? Because you get kicked in the nuts when you spend your money. Since the value of your money is constantly increasing, you always hold out as long as possible when buying things;  it becomes stupid to invest your money; sellers engage in a race to the bottom; the dreaded "deflationary spiral" of constantly falling trade volume and prices; the self destructive circle-jerk of currency speculation. When using a deflationary currency, it doesn't make sense to do business. It defeats the whole point of HAVING a currency.

I knew these things in a distant, intellectual way before I ever got involved in bitcoin. But there is no substitute for seeing things first hand. Deflationary currencies don't work. Bitcoin doesn't work. The technology behind it is fascinating and clever, but the implementation is flawed. (Incidentally, gold shares almost all of these problems). In a world with zero economic growth, it would work. But we don't live in that sort of world.

The irony of this foray into crypto-currency is what I have brought back with me: a new-found respect for The Man. A stable currency with just a dash of inflation is the proper way to operate a fiat currency, and the Fed does that.