Could rapid price appreciation prevent Bitcoin's success?

[Coinseeker]

I read this little article and I'm curious how much truth there is to it's claims, specifically:

How can Bitcoin become a real currency if it's not used in transactions? And why would anyone use it in transactions if becoming a real currency offers so much more price appreciation? This contradiction is a core problem, and it's a reason why it's probably doomed to fail (real currencies don't have this issue, since central banks prevent rapid price appreciation, and they mandate that the currency be used).

Read more: http://www.businessinsider.com/if-you-believe-in-bitcoin-you-should-never-buy-anything-in-bitcoin-2013-11#ixzz2kM39YlIJ

[Gabi]

No.

don't have this issue

Yeah sure because an investment growing and growing is an ISSUE now.  

since central banks prevent rapid price appreciation

Now "inflation", wich can be considered stealing, is called "prevent rapid price appreciation"?

and they mandate that the currency be used

Fun fact: bitcoin usage actually increase when the price increase

and it's a reason why it's probably doomed to fail

Suuuuuure

[Lauda]

Could rapid price appreciation prevent :insertrandomstock:'s price?
Bitcoin kind of handles similar to stock. Did the price appreciation of anything prevent it's success?

[Coinseeker]

Could rapid price appreciation prevent :insertrandomstock:'s price?
Bitcoin kind of handles similar to stock. Did the price appreciation of anything prevent it's success?

Well if Bitcoin is just a stock then you're right, but if that's the case, Bitcoin shouldn't be referred to as a currency.  Although I doubt anyone on this forum is going to agree with that view point. Bitcoin is not just a stock and has aims as a legitimate currency, so my question still stands.

[Gabi]

Bitcoin's usage as a currency during price appreciation periods increase.

[lophie]

Bitcoin will definitely fail as a currency when compared to the nowadays's "currencies", But isn't that the point?

[Nancarrow]

This is always the reason I hear for why long term severe price deflation is a terribly bad thing. It goes something like, "if currency X keeps increasing in value, nobody will spend it, everyone will hoard it, therefore no one will buy anything and the economy will grind to a halt".

I don't buy that for a minute. An economy is a system. Variables in a system do not spend their time being 'on' or 'off'. They change smoothly from moment to moment, sometimes being very high, sometimes very low. But very high isn't infinity and very low isn't zero. A diehard bitcoin hoarder won't spend their bitcoins... until they have no other choice. And people need to eat. As long as we all need to eat, we spend. Even if it's a little.

At the moment I'm hoarding bitcoins like a mofo. This is because I still have disposable income in fiat money and still have to buy my basic necessities with fiat money. Because I'm convinced Bitcoin is going to become super valuable, I will keep hoarding until I have little or no fiat money. At that point, if I can buy what I need with bitcoins, I will. Buy WHAT I NEED. Or if I can't, I will sell Bitcoins for fiat. Again, I will sell WHAT I NEED.

And if everyone starts thinking like this, we might just start to become a fiscally and environmentally responsible species. The economy will NOT grind to a halt, but it WILL greatly slow down. And I can't help thinking that is largely a very very good thing.

[Coinseeker]

Bitcoin's usage as a currency during price appreciation periods increase.

Do you have a source for this?

[CurbsideProphet]

Could rapid price appreciation prevent :insertrandomstock:'s price?
Bitcoin kind of handles similar to stock. Did the price appreciation of anything prevent it's success?

Straw man.

[proudhon]

I read this little article and I'm curious how much truth there is to it's claims, specifically:

How can Bitcoin become a real currency if it's not used in transactions? And why would anyone use it in transactions if becoming a real currency offers so much more price appreciation? This contradiction is a core problem, and it's a reason why it's probably doomed to fail (real currencies don't have this issue, since central banks prevent rapid price appreciation, and they mandate that the currency be used).

Read more: http://www.businessinsider.com/if-you-believe-in-bitcoin-you-should-never-buy-anything-in-bitcoin-2013-11#ixzz2kM39YlIJ

We'll here's the thing.  Bitcoins are used in transactions.  The author's theoretical problem has been discussed from the very beginning.  People were raising the exact same issue in 2010 when bitcoins were trading at a nickel...and people went on and bought them and spent them.

I don't know that there's a real academically satisfying response to the complaint.  On the one hand, the author raises a serious economic concern (though, he's quite late to the party in raising it): That the deflationary nature of bitcoin will contributes to the system's failure.  And on the other hand, there is the following fact:  People spend bitcoins.

[Gabi]

Bitcoin's usage as a currency during price appreciation periods increase.

Do you have a source for this?

Bitcoin merchants reported that repeteadly, dig the forum for that.

[Coinseeker]

We'll here's the thing.  Bitcoins are used in transactions.  The author's theoretical problem has been discussed from the very beginning.  People were raising the exact same issue in 2010 when bitcoins were trading at a nickel...and people went on and bought them and spent them.

I don't know that there's a real academically satisfying response to the complaint.  On the one hand, the author raises a serious economic concern (though, he's quite late to the party in raising it): That the deflationary nature of bitcoin will contributes to the system's failure.  And on the other hand, there is the following fact:  People spend bitcoins.

Agreed, people obviously spend Bitcoin's but as they become more valuable, will they be spent more or less?  Isn't it fair to at least question whether the higher the value is, the less you're inclined to spend?  Nancarrow makes good points as well but for the interim we mostly do still have disposable income and can hoard.  I would say that is true for 95%+ of people who are buying Bitcoin's.  Isn't it at least possible that spending could drop drastically as we cross the $500, $1000, $10,000 mark of Bitcoin's?

[Coinseeker]

Bitcoin merchants reported that repeteadly, dig the forum for that.

That's not really a source, that's hearsay.  Not to mention, Bitcoin has never seen prices this high so it's all uncharted territory.  I fail to see how anyone can say with certainty that Bitcoin transactions increase at the same rate at $400, as they do at $100.  Unless of course there is some actual data to support this, which is kind of what I'm looking for.

[proudhon]

We'll here's the thing.  Bitcoins are used in transactions.  The author's theoretical problem has been discussed from the very beginning.  People were raising the exact same issue in 2010 when bitcoins were trading at a nickel...and people went on and bought them and spent them.

I don't know that there's a real academically satisfying response to the complaint.  On the one hand, the author raises a serious economic concern (though, he's quite late to the party in raising it): That the deflationary nature of bitcoin will contributes to the system's failure.  And on the other hand, there is the following fact:  People spend bitcoins.

Agreed, people obviously spend Bitcoin's but as they become more valuable, will they be spent more or less?  Isn't it a fair to at least question whether the higher the value is, the less you're inclined to spend?  Nancarrow makes good points as well but for the interim we mostly do still have disposable income and can hoard.  I would say that is true for 95%+ of people who are buying Bitcoin's.  Isn't it at least possible that spending could drop drastically as we cross the $500, $1000, $10,000 mark of Bitcoin's?

It's absolutely fair to raise the question.  What I'm suggesting is that it's an open question.  I think the deflationary argument against bitcoin is compelling.  And, yes, it's absolutely possible that spending could drop drastically as the value goes up.  But, here's a question:  Has bitcoin spending dropped drastically as the value has gone up?  What's so important about the future values of $500, $1000, and $10,000?  It seems there's enough history now that we can scrape together enough data to make some preliminary judgments.

For example, the value of 1 BTC is more than 400x greater than when I bought my first bitcoins in early 2011.  Has spending decreased more than 400x?  Has it increased?  By how much either way?  If it's increased, what are the best explanations for that behavior?  I've read a lot of anecdotal evidence that merchants see increased spending during rally periods.  I think it'd be a worthwhile project to investigate these claims more rigorously since they offer some early empirical evidence that empirically runs contrary to the deflationary argument's theoretical claims.  

Granted, it's still early.  Still, I'm not aware of a deflationary currency environment of this size from which to draw empirical evidence to either substantiate or contradict an old, and widely accepted economic theory.

[Coinseeker]

It's absolutely fair to raise the question.  What I'm suggesting is that it's an open question.  I think the deflationary argument against bitcoin is compelling.  And, yes, it's absolutely possible that spending could drop drastically as the value goes up.  But, here's a question:  Has bitcoin spending dropped drastically as the value has gone up?  What's so important about the future values of $500, $1000, and $10,000?  It seems there's enough history now that we can scrape together enough data to make some preliminary judgments.

What's important about future values is people's reaction to increased ROI on their investment.  The pizza scenario is a perfect example.  If you can buy a pizza today for say 0.1 BTC but in a matter of days (or whatever) that same 0.1 BTC could be worth $200.  Arbitrary numbers but I'm just making the point that people's willingness to spend something that continues to prove that it not only will be more valuable tomorrow but is actually designed to be that way, very well could stagnant spending.  As ones confidence grows that Bitcoin will be significantly more value next month than today, spending them makes less and less sense, from a investment stand point.  Which is obviously the point the article was making.

For example, the value of 1 BTC is more than 400x greater than when I bought my first bitcoins in early 2011.  Has spending decreased more than 400x?  Has it increased?  By how much either way?  If it's increased, what are the best explanations for that behavior?  I've read a lot of anecdotal evidence that merchants see increased spending during rally periods.  I think it'd be a worthwhile project to investigate these claims more rigorously since they offer some early empirical evidence that empirically runs contrary to the deflationary argument's theoretical claims.  

Granted, it's still early.  Still, I'm not aware of a deflationary currency environment of this size from which to draw empirical evidence to either substantiate or contradict an old, and widely accepted economic theory.

I agree.  I intend to do some digging myself.  There has to be some scenario throughout world history to draw some parallels.  I could of course be wrong in this.  I would add that if the answer to the question is, "there isn't really answer until we get there and find out", that's both an exciting and scary dilemma.

[Ecurb123]

I read this little article and I'm curious how much truth there is to it's claims, specifically:

How can Bitcoin become a real currency if it's not used in transactions? And why would anyone use it in transactions if becoming a real currency offers so much more price appreciation? This contradiction is a core problem, and it's a reason why it's probably doomed to fail (real currencies don't have this issue, since central banks prevent rapid price appreciation, and they mandate that the currency be used).

Read more: http://www.businessinsider.com/if-you-believe-in-bitcoin-you-should-never-buy-anything-in-bitcoin-2013-11#ixzz2kM39YlIJ

I think its true that too much appreciation too fast is not a great thing, it makes people less likely to spend, I can imagine if people have real full scales business in only btc, then it could be a pain if customers dry up because they want to save their btc.

[Ecurb123]

I read this little article and I'm curious how much truth there is to it's claims, specifically:

How can Bitcoin become a real currency if it's not used in transactions? And why would anyone use it in transactions if becoming a real currency offers so much more price appreciation? This contradiction is a core problem, and it's a reason why it's probably doomed to fail (real currencies don't have this issue, since central banks prevent rapid price appreciation, and they mandate that the currency be used).

Read more: http://www.businessinsider.com/if-you-believe-in-bitcoin-you-should-never-buy-anything-in-bitcoin-2013-11#ixzz2kM39YlIJ

I think its true that too much appreciation too fast is not a great thing, it makes people less likely to spend, I can imagine if people have real full scales business in only btc, then it could be a pain if customers dry up because they want to save their btc.

I just read some other replies, looks like my point is more than covered, and I wanted to be clear that I'm not worried by the price at this stage. 

[proudhon]

It's absolutely fair to raise the question.  What I'm suggesting is that it's an open question.  I think the deflationary argument against bitcoin is compelling.  And, yes, it's absolutely possible that spending could drop drastically as the value goes up.  But, here's a question:  Has bitcoin spending dropped drastically as the value has gone up?  What's so important about the future values of $500, $1000, and $10,000?  It seems there's enough history now that we can scrape together enough data to make some preliminary judgments.

What's important about future values is people's reaction to increased ROI on their investment.  The pizza scenario is a perfect example.  If you can buy a pizza today for say 0.1 BTC but in a matter of days (or whatever) that same 0.1 BTC could be worth $200.  Arbitrary numbers but I'm just making the point that people's willingness to spend something that continues to prove that it not only will be more valuable tomorrow but is actually designed to be that way, very well could stagnant spending.  As ones confidence grows that Bitcoin will be significantly more value next month than today, spending them makes less and less sense, from a investment stand point.  Which is obviously the point the article was making.

I understand all of that.  The point I'm making is that that article could have been published 4 years ago, and, in fact, people did write such things 4 years ago, and 3 years ago, and 2 years ago, and last year.  And, yet, it seems, at least anecdotally, that spending has not stagnated.  What I'm suggesting is that we don't need to speculate about future values.  We already have a history of deflation and possible increased spending to explain, which runs contrary to the deflationary argument.

[justusranvier]

There's nothing like rising exchange rates to get the trolls out in full force, rehashing the same discredited arguments over and over again.

[wraymund]

I understand the question; however, I'm not sure the argument is correctly correlating two phenomena. Sure, if Bitcoin continues to rise, hoarding will increase; however, people who use Bitcoin and people who save it are two seperate groups. Bitcoin's value with regard to fiat versus its inherent value as a payment network are two different considerations.