I was asked a tough question, who can help me answer?

[nakowa]

If Bitcoin is a currency with deflation property, that means BTC has to be appreciated (which in reality means BTC is a fancy collectible)

Therefore a rational BTC user will hold BTC rather than spend it.

but if no one spend BTC, then what's the point of such a currency?

================

who can help me find out the fallacies in this reasoning? thank you!

================

Edited 22nd, July, 2011:

Summary from responds to this post:

1. History has proved that such a senario didn't emerge that most users hold BTC rather and spend.
2. The definition of "rational" varies from individual to individual. Holding might well be rational for some, while spending is rational for others.
3. Let we assume bitcoin is deflationary. However, not everyone is 100 percent confident on the outcome of this assumption. Theoretically, only those who have 100 percent confidence will "rationally" choose to hold rather than spend.
4. Like any other products, the market price of BTC and the true value of BTC don't always meet, and deviation always exists, which always attracts speculators. A "rational" speculator's choice would be to gain as much as possible through buying and selling along with up and down waves.
5. Holding forever is meaningless. Money (including bitcoin) itself represents nothing, only when it's spent the value realizes. Nearly none of us is willing to holding money forever.
6. Before 2133, bitcoin is in fact not deflationary, since before that time, the amount of BTC circulated has been increasing. At current period, bitcoin is in effect an inflationary currency.

[BitVapes]

If Bitcoin is a currency with deflation property, that means BTC has to be appreciated (which in reality means BTC is a fancy collectible)

Therefore a rational BTC user will hold BTC rather than spend it.

but if no one spend BTC, then what's the point of such a currency?

================

who can help me find out the fallacies in this reasoning? thank you!

This is the 'deflationary spiral' argument which the wiki covers. 

The deflation vs inflation argument has been going on between economists for a long time before bitcoin.

[hugolp]

If Bitcoin is a currency with deflation property, that means BTC has to be appreciated (which in reality means BTC is a fancy collectible)

Therefore a rational BTC user will hold BTC rather than spend it.

but if no one spend BTC, then what's the point of such a currency?

================

who can help me find out the fallacies in this reasoning? thank you!

1. The price of bitcoins depends on supply and demand just like anything else. Only the supply of bitcoins is known, the demand is unknown. So the price of bitcoins (that is the purchasing power of bitcoins) is unkown and can change. Because usually the productivity increases with time, its assumed that the purchasing power will go up, but in the short run nobody really knows.

2. Its false that people stop spending when money appreciates (I dont even want to go into defining what a rational person is, the fact of the matter is that people spend even when money goes up in value). Bitcoin merchants have reported that when the price of bitcoins were rising sales were higher, as people were lured by the lower prices. You also have numerous examples in history of price deflationary economies were people kept spending.

The idea that people dont spend because a currency appreciates is just a myth.

[triforcelink]

Would you rather hold on to something something that is going up in value (like bitcoin) or something that is constantly going down in value? (like the us dollar) And in fact, why would you EVER want to hold on to something that is constantly dropping in value? Sure, a rational bitcoin user would hold onto their bitcoins... until they saw something that they would much rather have like an asset which appreciates faster than bitcoin, or food.

[kiko]

Did Existing home sales dry up to nothing in 2004 because everyone thought the price was going up? No, people were buying ans selling like mad. This rational agent argument is a huge fallacy and is not reflected in the markets at all.

[GoWest]

If people were unwilling to spend Bitcoins, I would not be able to go on MtGox right now and buy a Bitcoin for $13.70, but I can!  Right now the market has determined that they are willing to sell their Bitcoins for anything worth $13.70.

If your argument was true, they would be infinitely valuable, already.

[Piper67]

Would you rather hold on to something something that is going up in value (like bitcoin) or something that is constantly going down in value? (like the us dollar) And in fact, why would you EVER want to hold on to something that is constantly dropping in value? Sure, a rational bitcoin user would hold onto their bitcoins... until they saw something that they would much rather have like an asset which appreciates faster than bitcoin, or food.

Or that video game they wanted to buy... Or that car... Or that house... Or that theatre show... Or rent... The two are unrelated, because bitcoin is BOTH a commodity and a currency.

[Xephan]

If Bitcoin is a currency with deflation property, that means BTC has to be appreciated (which in reality means BTC is a fancy collectible)

Therefore a rational BTC user will hold BTC rather than spend it.

but if no one spend BTC, then what's the point of such a currency?

================

who can help me find out the fallacies in this reasoning? thank you!

Same reason why people buy food and stuff now even if they know they can get better/more next year. Otherwise, if the argument holds true, then nobody should be spending money on cars or computers since a better one will always be made next year therefore a "rational buyer" will hold out infinitely for the better item than buy an inferior one at any "now".

[RogerR]

Simple. What needs to be paid for in bitcoins, will be bought with bitcoins. What doesn't need to be bought with bitcoins, will either be bought in USD (that is, if the merchant still accepts them then) or won't be bought at all.

Enough of the waste in resources. Bitcoins for both eco systems!

[FreeMoney]

Say to him "Geez, I guess if it were 100% guaranteed to rise in value it couldn't work." Maybe he'll get it. In case you don't, it's a completely self exploding argument.

If the increase in value is what makes it fail then it won't increase in value therefore that can't be the reason for the failure.

Anyway it should be obvious that people will still want stuff instead of saving it all until they are past dead no matter how good of a deal they are getting for saving. If I multiply your savings by 100 every day how much would you spend this week, month, year? Probably 0 right? I don't think so, you are going to buy more than ever in your life. If you keep spending even when you get near infinite annual return I don't think whatever amount Bitcoin appreciates is going to bring people's spending to a halt.

[Sukrim]

If Bitcoin is a currency with deflation property, that means BTC has to be appreciated (which in reality means BTC is a fancy collectible)

Therefore a rational BTC user will hold BTC rather than spend it.

but if no one spend BTC, then what's the point of such a currency?

================

who can help me find out the fallacies in this reasoning? thank you!

Spending money for computers is one ot the most stupid things you could do (as they in the past ~doubled their speed every 1-2 years or so, depending on which part you look at). still everyone buys PCs - why?
Because they need them more than these few hundred Dollar on the bank, even if they could buy a twice as good PC in just 1-2 years! It might even be a good deal, if they earn more money because of the PC than what they would have gotten as interest (here I'm assuming that interest is higher than inflation btw.)

The same goes for Bitcoin, only that you don't need to put them on a bank to get "interest" (= you can buy more in 2 years than now)

[wormbog]

Would you rather hold on to something something that is going up in value (like bitcoin) or something that is constantly going down in value? (like the us dollar) And in fact, why would you EVER want to hold on to something that is constantly dropping in value? Sure, a rational bitcoin user would hold onto their bitcoins... until they saw something that they would much rather have like an asset which appreciates faster than bitcoin, or food.

Or that video game they wanted to buy... Or that car... Or that house... Or that theatre show... Or rent... The two are unrelated, because bitcoin is BOTH a commodity and a currency.

The OP's concern is legit. If btc will not replace USD, they will both exist in parallel. If btc is appreciating and USD is depreciating, a consumer will spend their dollars and hoard their bitcoins.

Bitcoin needs a parallel digital currency that slowly depreciates to motivate spending. The two digital currencies would work together like gold (store of value) and USD (transactional currency) do now, just without the central banks and governments meddling with them.

[FreeMoney]

The OP's concern is legit. If btc will not replace USD, they will both exist in parallel. If btc is appreciating and USD is depreciating, a consumer will spend their dollars and hoard their bitcoins.
 

What happens when everyone wants to get rid of dollars and get and keep bitcoins?

[realnowhereman]

The OP's concern is legit. If btc will not replace USD, they will both exist in parallel. If btc is appreciating and USD is depreciating, a consumer will spend their dollars and hoard their bitcoins.

What happens when everyone wants to get rid of dollars and get and keep bitcoins?

You mean when supply falls and demand goes through the roof? What will happen then?  Just a guess, but the price of bitcoins would go up.  And up.  And up.  Eventually hitting a price were someone will sell and a new equilibrium will be set.

It doesn't have to be dollars of course; the same argument applies to buying anything.  The seller of cars has to offer at a price the buyer is willing to pay.  Even if that price is 0.00001 BTC.  If that car will also sell for $50,000 then by implication 0.00001 BTC is worth $50,000.  If it will sell for (in vastly depreciated USD) $500,000 dollars, that is the rate set, even if you can't find anyone willing to trade BTC for dollars.

[FreeMoney]

The OP's concern is legit. If btc will not replace USD, they will both exist in parallel. If btc is appreciating and USD is depreciating, a consumer will spend their dollars and hoard their bitcoins.

What happens when everyone wants to get rid of dollars and get and keep bitcoins?

You mean when supply falls and demand goes through the roof? What will happen then?  Just a guess, but the price of bitcoins would go up.  And up.  And up.  Eventually hitting a price were someone will sell and a new equilibrium will be set.

It doesn't have to be dollars of course; the same argument applies to buying anything.  The seller of cars has to offer at a price the buyer is willing to pay.  Even if that price is 0.00001 BTC.  If that car will also sell for $50,000 then by implication 0.00001 BTC is worth $50,000.  If it will sell for (in vastly depreciated USD) $500,000 dollars, that is the rate set, even if you can't find anyone willing to trade BTC for dollars.

Yeah, my point was that what people want to save is what has value, what they want to get rid of does not.

The ultimate equilibrium will depend on the value of productive uses of dirty paper that has already been printed on.

[Anonymous]

Would you rather hold on to something something that is going up in value (like bitcoin) or something that is constantly going down in value? (like the us dollar)

Bitcoin is on a decline right now. The dollar may be low but at least there's no realistic chance it will become with nothing more than the cotton it's printed on. I love bitcoins, but the rose tinted glasses here are crazy!

[stic.man]

it's on a decline for a few weeks

its up a ridiculous amount since March

[eyal]

If Bitcoin is a currency with deflation property, that means BTC has to be appreciated (which in reality means BTC is a fancy collectible)

Therefore a rational BTC user will hold BTC rather than spend it.

but if no one spend BTC, then what's the point of such a currency?

================

who can help me find out the fallacies in this reasoning? thank you!

1. The price of bitcoins depends on supply and demand just like anything else. Only the supply of bitcoins is known, the demand is unknown. So the price of bitcoins (that is the purchasing power of bitcoins) is unkown and can change. Because usually the productivity increases with time, its assumed that the purchasing power will go up, but in the short run nobody really knows.

2. Its false that people stop spending when money appreciates (I dont even want to go into defining what a rational person is, the fact of the matter is that people spend even when money goes up in value). Bitcoin merchants have reported that when the price of bitcoins were rising sales were higher, as people were lured by the lower prices. You also have numerous examples in history of price deflationary economies were people kept spending.

The idea that people dont spend because a currency appreciates is just a myth.

+1

[billyjoeallen]

Computers get cheaper every year. Rational consumes would never buy them because they would always be cheaper next year, yet the computer industry is one of the healthiest in the world. People will still spend deflating currencies, but perhaps not as rechlessly and that's a good thing.

[Anonymous]

it's on a decline for a few weeks

its up a ridiculous amount since March

Which implies it's horribly unstable as it is now.