Putting aside the issue
of whether Bitcoin will succeed as a transactional currency, I can’t help but
challenge some of the detractors.
One
argument I’ve seen cited a lot is Krugman’s paper from 1998, about the
“Babysitter Co-Op” as if it somehow foretold the failure of Bitcoin.
This is
the original 1998 Krugman piece: Baby-Sitting the Economy
In it,
Krugman refers to a Babysitting co-op and the coupons they invented to allocate
babysitting duties. The upshot is that the babysitting co-op entered a
recession because there were not enough coupons in circulation. The lack of
circulation was due to the couples’ propensity to save and hoard the coupons. That story touched
Krugman, and he frequently uses it to generalize to the economy, where he
typically offers it in support of expansive monetary policy (to show the perils
of high interest rates, low inflation, and too much saving).
Since Bitcoin’s early
adopters include a hefty pool of passive investors, the saving rate is quite
high. This, combined with the 21 million circulation cap, has caused people to
draw parallels between the Babysitting Co-op.
Along
these lines, a nuanced case for why Bitcoin will never work comes from Felix Salmon, who spells out the danger of hyper-deflation, and why
Bitcoin's upward trajectory would be necessary deflationary, making it
untenable as the primary currency of an economy.
Article is here: The Bit Coin Bubble and the Future of Currency
Basically,
if the value of the currency used to make payroll is doubling every week, who
is going to hire someone today? A whole population adopting this “wait for my
currency to deflate” mentality would have disastrous consequences for any
economy.
Furthering
Salmon’s case is the fact that if Bitcoin succeeds as a transactional currency,
the value per BTC will necessarily be enormous. Were Bitcoin to capture any
“bit” of share in the currency market, you would need an aggregate value in the
trillions, not billions. And with a finite circulation of 21 million, you would
end up with a per-bit-coin value north of $100,000.
In other words, it is the circulation cap that ex-ante dooms it as a transactional
currency, because the only way for a currency to properly function in a growing
economy is to naturally create more units as there's more growth.
Still here, he's too drastic with
his deflationary concerns. Because BTC doesn't need anywhere close to 100%
market share of any economy to be a long term store of value, Bitcoin can
capture significant market share without ever having wages denominated in BTC.
Furthermore, it would have to
approach an astronomical value before a single wage in the developed world was
ever denominated in BTC. The point at which BTC has a robust enough market cap
to be the currency of use for wages, growth will be on a much slower
trajectory. Yes, the value today of a Bitcoin may fluctuate 200+% in the course
of a week, but that is because the market is still in its infancy, with only a
few billion $USD total in total circulation. If it were to become a
transactional currency, it would necessarily have a big enough aggregate
value, to make any additional value generated as a result of economic growth, a
much slower phenomenon. Assume that the currency needed to keep pace with GDP
growth; even that would warrant just a few percentage points per year. Hardly
enough deflation to prevent you from spending your bitcoins today.