Why Bitcoin is ultimately doomed to fail (not today or tomorrow)

[deisik]

It will fail if it doesn't get accepted by millions of shops. Any currency accepted as a legal payment method could and should survive. Right now it's nothing more than an investment. People trade btc's for real money instead of psychical products. Bitcoin is a product right now, no currency. And one of the biggest problems (if not the biggest) are govenrments and banks who see bitcoins as a serious threat. The chances are realy small that they will accept Bitcoin.

At first I thought almost the same. Now I've changed my mind. As long as Bitcoin is not directly competing with national currencies as it doesn't compete now, it is just one among many other financial products out there. Why would governments and banks see it as a threat if they could just capitalize on it? Governments through taxes (and whatnot), banks through Bitcoin derivatives paying some interest on it (in a fiat currency indeed). And what should change in Bitcoin that would make it into a means of exchange (i.e. a currency) if people are just hoarding it right now?

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[pand70]

This community is digging its own grave by talking against the dollar or governments or the gold or against anything for that matter.
I mean 99.99% of the people that are into bitcoin they just want bitcoin to succeed. We don't want something else to fail.
If in the way something happen to fail then so be it.

[subcoin]

These "papers" allegedly backed up by Bitcoin will in fact leave behind them only inflation, even despite Bitcoin intrinsic deflationary nature

Therefore, your theory is that Bitcoin "will fail" because derivatives will be speculated and loose value?
I suppose such speculation could have some negative effect on Bitcoin.
It would be similar to speculation of sub-prime mortgages derivatives having negative effect on
housing market. However, it did not cause the market to completely fail.
Rather, it led to correction in value, which is a good thing.

P.S. Not to be offensive, but trying to help - your writing is close to impossible to comprehend.
Recommendation: try building simpler sentences.

[PrivateWorld]

So, this time instead of gold we will have Bitcoin (which will be hoarded as per Gresham's law) and all kinds of "paper" derivatives inevitably entering the circulation as a means of exchange. These "papers" allegedly backed up by Bitcoin will in fact leave behind them only inflation, even despite Bitcoin intrinsic deflationary nature...

And welcome back to fiat!

You know, I thought Gresham's Law was going to kick in too, especially on this latest run up.

Bit of background, at easyDNS we started accepting bitcoin in the spring of this year (making us one of only two ICANN accredited registrars who accept bitcoin and the only CIRA certified registrar in Canada who does).

As the price of bitcoin started rising I thought "aha, now we will see transaction volume fall accordingly" - why will people buy their services from us using ever increasing bitcoin?

As an example, we sponsor the Let's Talk Bitcoin podcast, we paid the first few months in USD, because we hadn't yet accumulated enough bitcoin to pay for a sponsorship. Then we switched to BTC as we started getting customers using it.

But a curious thing happened next, the price of bitcoin went over $400 or so, so when I finally met Adam Levine at Crypto-currency-con in Atlanta, I handed him a cheque for our next four months' sponsorship. We were back to using USD, and I literally said "Sorry Adam, I know you like bitcoin but this is Gresham's Law in action".

So on the latest spike, you would expect our transaction volume to fall off a cliff, right?

Wrong. Transaction volume is up, significantly.

So my working theory is because bitcoin is inelastic, the value is rising so fast that the deflationary effect hits some tipping point, offsetting Gresham's Law. There could be some "point" where people don't mind spending the stronger currency, because it takes so much less of it to purchase the desired good or service.

[deisik]

So, this time instead of gold we will have Bitcoin (which will be hoarded as per Gresham's law) and all kinds of "paper" derivatives inevitably entering the circulation as a means of exchange. These "papers" allegedly backed up by Bitcoin will in fact leave behind them only inflation, even despite Bitcoin intrinsic deflationary nature...

And welcome back to fiat!

You say instead of gold we will have Bitcoin. Has gold failed?

Yes, it has failed as a currency, and later as an asset backing up a currency. The said doesn't mean that its price dropped as it actually has increased over time with the dollar constantly depreciating. Gold surely didn't fail as a store of value. Personally, I would go for a tighter definition of currency that assigns more significance to it as a means of exchange before anything else...

[deisik]

I'd say not yet. And when/if gold does "fail", it'll probably be due to a virtual currency. Maybe even Bitcoin.

If Bitcoin becomes electronic, highly divisible gold which can be transferred over the Internet, Bitcoin will have succeeded.

Bitcoin has been electronic right from the start

You're talking here of Bitcoin vs gold as a store of value, and as you might have already guessed from my post above (I'm trying to keep the thread neat and tidy), that was not the point I tried to convey. In fact, it might replace gold to a degree, though that still remains to be seen, but you should keep in mind that paper gold (futures and other derivatives) are also highly divisible and, in a sense, "transferable" over the Internet. And, if I'm not mistaken, you can just buy some physical gold without actually having to transport it anywhere. So gold and Bitcoin are on a par here...

[deisik]

Why would governments and banks see it as a threat if they could just capitalize on it?

Not all government officials are interested in capitalizing on things (or capitalism, for that matter). In fact, people who want to capitalize on things tend to stay away from government. It doesn't pay very well.

Banks, on the other hand. Yeah, they'll come around. It might take them a while, though.

Taxes as such are already a way government capitalizes on profits made by other people. So the government officials don't have to think up or contrive techniques to get there, if you meant this. And banks wouldn't have to either, because they already have everything they would ever need. I don't think this will take long, provided it becomes profitable in the first place...

[deisik]

These "papers" allegedly backed up by Bitcoin will in fact leave behind them only inflation, even despite Bitcoin intrinsic deflationary nature

Therefore, your theory is that Bitcoin "will fail" because derivatives will be speculated and loose value?
I suppose such speculation could have some negative effect on Bitcoin.
It would be similar to speculation of sub-prime mortgages derivatives having negative effect on
housing market. However, it did not cause the market to completely fail.
Rather, it led to correction in value, which is a good thing.

P.S. Not to be offensive, but trying to help - your writing is close to impossible to comprehend.
Recommendation: try building simpler sentences.

No, you seem to get it wrong too. I'm not saying that it will lose value itself. Like gold it can actually gain even more value with time, though this is very questionable. First and before all, Bitcoin will fail as a means of exchange, or as an asset backing up some other means of exchange. That's what its proponents are ultimately aiming Bitcoin at. They say that Bitcoin will be able to substitute fiat currencies in the end. I think they are wrong and they can be proven wrong strictly through economical causes even if we assumed such an opportunity...

The housing market did not fail completely because real estate has, yeah, real application behind it

[deisik]

Wrong. Transaction volume is up, significantly.

So my working theory is because bitcoin is inelastic, the value is rising so fast that the deflationary effect hits some tipping point, offsetting Gresham's Law. There could be some "point" where people don't mind spending the stronger currency, because it takes so much less of it to purchase the desired good or service.

All this has a very simple explanation without ever offsetting Gresham's Law. In fact, it actually confirms this law. Let's assume for a moment that Gresham's Law is infallible and fully applicable in this case. Really, if the principle behind it has been known since Ancient Greece, then why should it fail right now?

Simply put, Gresham's Law says that one money is better than another. If that's true, this would inevitably mean that people still think dollars (or whatever) are better than bitcoins because they prefer to pay in Bitcoin while withholding their dollars, no other way around. Why would they? Deep inside they don't believe Bitcoin will be a success in the long term and are just trying to make use of an opportunity that Bitcoin high price gives them...

And everything is in strict accordance with Gresham's Law

[AnonyMint]

Wrong. Transaction volume is up, significantly.

Occam's heuristic and I can provide a simpler explanation with a chart. Transactions are rising, but an order-of-magnitude slower than the market cap.

Bitcoin has limited uses for transactions. Thus the more people in, the more transactions. But it is too limited and not scaling at sufficient rate to avoid a ponzi bubble.

People are transacting primarily to get FX in and out BTC, i.e. most transactions are from speculation and gambling (I read SatoshiDice was 57%). At a much lower level, they are doing some anonymity things or spending it just because they think it is neat (tech nerds) or they think it will help support its value as a currency.

[deisik]

I hope I made my point clear...

Not really. You can transfer title to gold over the Internet, but you have to trust that your counterparty actually has possession of the gold, hasn't double-spent the gold, won't double-spend the gold, will actually give you possession to the gold when you demand it, etc.

I don't say it is not possible, but if you buy physical this usually means that you can come and take that gold with you, and as long as you can actually do so, your objections don't make much sense. It is not very far from saying that you shouldn't buy gold because it can just be stolen...

[deisik]

Yes, it has failed as a currency, and later as an asset backing up a currency. The said doesn't mean that its price dropped as it actually has increased over time with the dollar constantly depreciating. Gold surely didn't fail as a store of value. Personally, I would go for a tighter definition of currency that assigns more significance to it as a means of exchange before anything else...

Well, if that's failure, then hopefully Bitcoin will fail.

That said, Bitcoin has a number of advantages over gold when it comes to exchange. It's much more easily divisible, down to a fraction of a penny currently and is theoretically divisible even more should one satoshi become worth more than the current value of one penny. It's much harder to counterfeit (nearly impossible unless SHA256d is seriously broken), and it's much easier to check as valid (anyone can do so on a computer with Internet access as opposed to the techniques needed to prove that your gold bar isn't filled with tungsten). And, of course, as I discussed previously, you can irrevocably transfer it over the Internet in a way which can't be double-spent.

The gold now is neither currency nor an asset behind it, so enumerating Bitcoin advantages over gold as a means of exchange sounds really strange these days. Everything would change if you tried to compare Bitcoin against some well-developed fiat currency (say, dollar) or against gold as a store of value...

[deisik]

Then why is the government in so much debt?

Because government can't tax more than people and businesses can earn. Besides that, there is an optimal level of tax rates which maximizes total tax revenues, and in most cases it is far below 50% (welcome Laffer curve)...

[deisik]

Taxes are a way that government steals from the most productive in order to give to the least productive. That's not capitalizing, as in using to one's advantage. Just the opposite, in fact. Government is in more debt than anyone.

You may call taxes various vile names as much as you please, but in any case this doesn't prove that government wouldn't be happy and ready to tax Bitcoin owners if there is such an opportunity. I think it is just a matter of time...

[deisik]

You may call taxes various vile names as much as you please, but in any case this doesn't prove that government wouldn't be happy and ready to tax Bitcoin owners if there is such an opportunity. I think it is just a matter of time...

I'm not sure what you mean by that. Government already taxes Bitcoin owners.

If you think the US government is going to tax Bitcoin owners directly (and not as part of an income tax or a sales tax), well then I'd like to hear how the constitutional requirement of apportionment is going to be dealt with.

I don't get either what can be difficult to understand here. If you get an income, you should pay an income tax. If you sale something, you pay taxes from the profits you make. As far as I know, currently no government collects taxes from an income or profit obtained in bitcoins (but can be wrong here). But in any case, you digress from the initial claim that government is not interested in capitalizing on Bitcoin (read pulling money from Bitcoin users)...

If government already taxes Bitcoin owners, then it was faster than I thought

[PrivateWorld]

Wrong. Transaction volume is up, significantly.

So my working theory is because bitcoin is inelastic, the value is rising so fast that the deflationary effect hits some tipping point, offsetting Gresham's Law. There could be some "point" where people don't mind spending the stronger currency, because it takes so much less of it to purchase the desired good or service.

All this has a very simple explanation without ever offsetting Gresham's Law. In fact, it actually confirms this law. Let's assume for a moment that Gresham's Law is infallible and fully applicable in this case. Really, if the principle behind it has been known since Ancient Greece, then why should it fail right now?

Simply put, Gresham's Law says that one money is better than another. If that's true, this would inevitably mean that people still think dollars (or whatever) are better than bitcoins because they prefer to pay in Bitcoin while withholding their dollars, no other way around. Why would they? Deep inside they don't believe Bitcoin will be a success in the long term and are just trying to make use of an opportunity that Bitcoin high price gives them...

And everything is in strict accordance with Gresham's Law

I guess it comes down to whether you believe bitcoin is a better money than the fiat (which was my underlying assumption - because it's inelastic ) vs what you're saying - that it's not and people are utilizing the higher prices in bitcoin to capture the value by spending it.

To your point, I've been selling bitcoin this week and buying gold and silver (am I going to get ridiculed for admitting that on this board?) because I think the price has just gotten nuts (while gold and silver are at or near their points of maximum pessimism).

[hashman]

You clearly don't understand that 21 million bitcoins does not limit transactions at all.

Let's say it's the year 2300 and there's only 1 bitcoin left in the whole world. (All others have been lost due to wallets being lost etc.) this bitcoin would be worth 1 quadrillion dollars. A pizza would cost $500 due to inflation.

You could buy that pizza with 0.0000000000005 bitcoins

Also the reason people stepped away from gold as a currency was several reasons, including but not limited to:

1) gold is heavy.
2) goold coins where often scraped and molten to more gold, making the gold coin lighter than it should be, but careless people often accepted to coin for it's full value, this was later slowed down by adding markings on the sides of coins, so it's easier to see a coin has been tampered with.
3) it was easier and safer to leave your gold at the goldsmith/banker and pass the 'proof of deposit' around than it was to retrieve the gold from the goldsmith/banker, give the gold to the merchant, an do have the merchant put it back at the bank.

Bitcoins are not heavy at all
Bitcoins are easy to transfer (much faster and easier than most currencies, especially if you consider international trades, not to mention cheaper as well)
Bitcoins can not be tampered with
Bitcoins are inflation resistant.

So, moving from bitcoin to paper bitcoins makes not much sense at all, moving from bitcoin to a banking scam is even more unlikely.

zimma had the first right answer in the list

[RodeoX]

If government already taxes Bitcoin owners, then it was faster than I thought

There has never been a time when the growth in value on a bitcoin is not taxable in the U.S. The law is quite clear that anything you buy and sell at a higher price is taxable, bitcoin is no exception. Of course, the IRS is way behind the curve on this and may be able to do little about taxes.
I think it is a good practice to pay capitol gains when converting to $USD. Failure to do so may bite you later. You might have to pay back taxes and fines later that could wipe you out.

[deisik]

All this has a very simple explanation without ever offsetting Gresham's Law. In fact, it actually confirms this law. Let's assume for a moment that Gresham's Law is infallible and fully applicable in this case. Really, if the principle behind it has been known since Ancient Greece, then why should it fail right now?

Simply put, Gresham's Law says that one money is better than another. If that's true, this would inevitably mean that people still think dollars (or whatever) are better than bitcoins because they prefer to pay in Bitcoin while withholding their dollars, no other way around. Why would they? Deep inside they don't believe Bitcoin will be a success in the long term and are just trying to make use of an opportunity that Bitcoin high price gives them...

And everything is in strict accordance with Gresham's Law

I guess it comes down to whether you believe bitcoin is a better money than the fiat (which was my underlying assumption - because it's inelastic ) vs what you're saying - that it's not and people are utilizing the higher prices in bitcoin to capture the value by spending it.

If you had a time machine which would allow you to travel to the future (say, two-three years ahead of now) and saw the Bitcoins were universally accepted and dollar banned (Bitcoin addicts' pipe dream), would you spend your coins instead of dollars in the present?

[deisik]

If government already taxes Bitcoin owners, then it was faster than I thought

There has never been a time when the growth in value on a bitcoin is not taxable in the U.S. The law is quite clear that anything you buy and sell at a higher price is taxable, bitcoin is no exception. Of course, the IRS is way behind the curve on this and may be able to do little about taxes.
I think it is a good practice to pay capitol gains when converting to $USD. Failure to do so may bite you later. You might have to pay back taxes and fines later that could wipe you out.

I think it is so everywhere throughout the world, but could they really trace you down, and what about the case when you mined bitcoins yourself (paid for electricity and bore other costs)? I'm not now talking about Silk Road and all that underground shit, but if you sold your coins at Coinbase, how would they even know in the first place?