A: You relate Bitcoin most closely to gold in the discussion of intrinsic value. Yet I don't think this is correct. Gold, finally, can be used for something, whether industrially or decoratively. The reason that someone in (say) Vietnam saves in gold and not Dong (which is a GREAT name for a currency btw) is that no matter what happens,the value of gold can never go to zero. A person in Sth Africa or Cuba knows the same thing. They know that someone, somewhere, will ALWAYS want it. That, if you have enough of it, you can escape your country and buy a house in Brazil or whatever. This is a very important distinction between Bitcoin and gold (and no, I'm not a gold bug)....which brings me to my next point.
I didn't see a question, only a statement.
Most of us old salts don't think that bitcoin is similar to gold except that it is designed to
mimic gold if it could be used in a digital realm.
B: Stability. Going to zero in value (see point C) doesn't even need to happen for Bitcoin to never get off the ground in a significant way. As long as everything flows along nicely, of course there are no problems. But you haven't had a real test of the currency yet. No-one has bought a house with it. No-one has started accepting it as their wage exclusively etc etc. Now, this may happen in the future of course, and I'm sure that it will be all over the media when it does. But for it to get off the ground, people must be able to put their faith in it. Right?
Right? Well, at least there was a question mark, but there still isn't a specific concern that can be addressed.
And faith is a weird thing.
Imagine you amassed enough Bitcoin to actually buy something significant. Looking on your site, I see people selling bandwidth for Bitcoin. O.k, say I get enough Bitcoin playing poker to buy a server companies ENTIRE bandwidth. All of it. For 25 years. So I basically own it and then on-sell the bandwidth for Euros. So the owner of that server company is trading his income stream, the one he pays his taxes with and buys groceries with, for Bitcoin. So my problem (a huge pile of Bitcoin) is now his. He is fine, as long as he can trade it for (say) some dudes entire stream of T.Shirt production for the next 15 years. But what happens when someone says 'no'?
People say no all the time. That's the default response even in the fiat currency world. If you were really coming from an economic background, you would know that the market doesn't function anything like the above scenario.
We saw it in the housing bust. House prices always go up. Until they don't. A 'million dollar house' is only such until someone pays a million dollars for it. Otherwise, its a million dollar house on PAPER only. You say "Its worth a million bucks." O.k, fine, sell it for a million bucks then. But you can only sell it as long as the next person believes the same thing. The last person left holding the bag loses a LOT. This is the 'greater fool' problem. The first person to blink will cause a cratering in value across the market of ALL Bitcoin.
Prices go up, prices go down. That is the way of the world. Bitcoin isn't different in this respect, except by a matter of scale at present.
Therefore people will always hedge their bets with Bitcoin. They won't have much faith. They will say "I'll take Bitcoin to X small amount". Or make sure they can move significant amounts before they will accept any, impacting liquidity. Or run a small side business in Bitcoin but not their main job.
Perhaps they will. That wouldn't detract from it's usefulness as the currency of the Internet.
The less 'intrinsic value' something has, the less stable it is, but the main point impacting stability is the currencys lowest bound value. Silver may drop in value by 80%. But you can always sell it for SOMETHING to scrap metal dealers. Houses may drop in value by 80%. But you can always live in them.Linden Dollars can always be used as long as Second Life is going etc etc. This very fact makes them more stable than Bitcoin. A million dollar house's lowest bound of value (or silver, or Linden dollars) is NOT actually zero. But Bitcoins lowest bound IS zero (see C). Which makes Bitcoin NOT a good currency.
Bitcoin is no worse in this respect than any fiat currency that you can name. And bitcoin has the advantage that no one is passing laws to compel you to use bitcoin.
C: Bitcoin could easily drop in value to zero, by becoming a victim of it's own success. You say it has intrinsic value.
No, we don't. Who have you been listening to?
But thats just it. YOU say it does. But Bitcoin is a concept that has no 'accepter of last resort'. Yes, fiat currency is printed out of the air. But a Government, by decree, will only accept taxes in that currency. Therefore, it DOES have a value. And a big reason that fiat currencies die, is not overprinting per se. Its the fact that Zimbabwe stops accepting ZIM from its own people and demands USD instead. Or the army does.
The army stops accepting wages in ZIM because the government has printed so much that it's market value trends towards zero. The death of a fiat currency is
always a political event.
Bitcoins algorithm itself is not special (if I understand correctly?
). Anyone can start another algorithm of their own and say "O.K, THIS is the new digital money." Right?
Technically, yes. Go ahead a try it. Let's see how successful you are at playing catchup to Bitcoin. It's taken Bitcoin two years to reach this point.
So Bitcoin has 'value' because enough people are using it that it is established. But as soon as someone with more power as an 'accepter of last resort' shows up, Bitcoin will be shafted. Not instantly maybe. But 100% certainly.The concept will live on of course. Its just that Bitcoin itself won't, making everyones current Bitcoin worthless.
That is a risk, but is dependent upon the 'accepter of last resort' having enough credibility to make the case that their version is actually better than Bitcoin.
If Hollands weed bars suddenly started using Ganja-coin, or Morroco (being tired of ruinous inflation) start using their own algorithm, Bitcoin will instantly begin dropping in value to zero. Why?
Why, indeed. Why would these institutions start their own currency to compete with Bitcoin? That's not a trivial question, motivation is important.
Say, for example, Apple decides it likes the concept. It racks up its own algorithm and with every Itunes or software download it also sends the customer a slice of the AppleCoins it has mined. It also lets people mine AppleCoins themselves.These can be used to buy whatever Apple is selling, from here on out. Boom. You guys are out of business because everyone who likes the idea of digital currency will use that instead.
Not everyone. Not me. Applecoins would be centralized, and when the government comes to get their cut, applecoins will drop in value relative to Bitcoins.
People will instantly make the mental leap "Well my wealth is in Bitcoins. These non-Bitcoins will also go up and down in value, but at least I will always be able to buy a house in Marrakesh/ 500 grams of weed/ 10,000 copies of Tron/ whatever and SELL THEM." This fact will cause people and businesses to ditch Bitcoin for the 'safer' option.
That depends on whether or not the public actually agrees that Applecoins are the safer option. I would not.
The very reason that someone with 1,000,000 Euros can sleep at night, even with Greece causing it to go up and down like an elevator, is the fact that the person knows that no matter what happens, Siemans or Vodafone or whoever, will want those Euros to pay their taxes. Or a cop will take it as his salary.
Wait, you actually still expect the Euro to exist in another decade?