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Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically.
- David Ricardo
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1.) incapable of being used as a currency
2.) is too volatile as an investment
Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically.
- David Ricardo
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Righto. Let's start by examining the three roles of money (as any intro to economics class will teach you).
These are:
- Medium of exchange (in other words, it replaces barter as a mutually agreed upon means of exchange - instead of me swapping 400 cows for a Toyota I can agree that it costs $40,000)
- Store of value (it needs to hold its value over time) - here's where the problems really begin for BTC
- Unit of account (Prices are information - they carry meaning about the costs etc involved in the production of the good/service - for instance, if the price (information) of wood goes up, the price of pencils will go up. The pencil, in other words, carries the information (facilitated by money) that the price of wood has gone up)
Let's quickly examine why BTC doesn't fit two of these.
Medium of exchange
BTC actually does pretty well here. The clever design of it means that it can be used as a means of exchange between two parties with mutually agreeable terms. It's very moneylike. Further, it's anonymous which is a very money-like quality which facilitates transactions.
The issue here is the transactions are usually not those of a "good" nature - BTC is often used by criminals seeking a less-monitored (not implying that such currencies as the dollar are indeed monitored). The FBI states that it can at least to some extent follow up on this but the prevalence of this as an easy means of exchange for criminals (which is its primary function in this way) [1]. Therefore, its fulfilment of this means essentially that it's an easy target for those you probably don't want to be giving agency to.
Store of value
Here begin the problems with BTC as a currency. We can divide these into two easy problems for ease of access for those who haven't done economics.
First, it's volatile.
Fiat currency (which is the alternative) is broadly based (massive oversimplification here) off the stability of a government - in other words, the value of the dollar is predicated upon the understanding that the US government is highly unlikely to collapse.
Here's a quick story from today (11/29/17) that shows the volatility of the coin. [2] After making huge gains in the day, it then sharply dropped by two thousand dollars. Such crashing in value would be enough for any regular currency to be instantly discarded. I could quote more but I think the point is made - that BTC isn't a stable store of value.
(As a side note, it's interesting that BTC is usually measured in terms of the dollar. This is because the dollar is a stable store of value and therefore suitable for use as a currency)
Consider, therefore, that for as long as people around the world think in terms of pounds or dollars or euros then BTC will have serious troubles establishing itself as a reputable means of account.
Second, it's deflationary.
This means that it tends to "decrease in value". This seems idiotic - today (11/29/17) BTC had hit a high of $11k per coin. How can we understand this? Simple.
First, BTC has a "cap" on the number of coins that can be in existence - [3] 21 million coins. This sounds great - it avoids inflation, right? Perhaps, but there's a reason that central banks usually aim for an inflation target of roughly 2% pa and that's because wages are sticky. What this means is pretty simple - it's hard for companies to pay their workers less. This can be because of unions, or even simple personal attachment and the idea that the person whose wages are cut will hurt. Therefore, a small amount of inflation essentially "allows" the pay cheques of workers whose wages don't rise in line with the inflation to be cut, bypassing the stickiness of wages. However, if, as BTC always will (the number of BTCs that can be mined each year halves until the cap) the currency is inherently deflationary (in other words, given that the price will always increase assuming demand remains static), which means that the price of everything else, like books and houses and cars will decreases in BTC terms and therefore deflation occurs. This sounds good but it sucks - prices will generally fall which means that workers (who, remember, have sticky wages) will become more costly for companies to keep. Those who are employed tend to hoard money (either by investing it in stable things like gold or houses or by literally stuffing it under a mattress) and as such companies find it even harder to hire workers.
The end result of all this deflation, which is inevitable under BTC because of the fixed number that can exist is higher unemployment.
BTC is not a store of value.
Unit of account
BTC runs into a lot of the same problems as it did before here - prices of BTC are not determined in the way that a usual currency would be - they're mostly determined by those who are attempting to get into BTC as a means of making money. This is really, really bad. This essentially means that the price of something in BTC is determined by supply and demand, which is fine, but it also has the "investment factor" tacked on to it. In other words, BTC's nature as a secondary currency will inevitably lead it to mask or hide the information that is being sent and contained within the price and as such it is unsuitable as a unit of account.
Let's quickly go over what we've learnt.
1.) Bitcoin does fine as a medium of exchange - but not for the kind of people you really want it to
2.) Bitcoin is too volatile and too deflationary to act as a stable store of value
3.) Bitcoin is not suitable as a unit of account.
It's clear that BTC is not suitable as a currency.
Note: BTC isn't fungible either, so it's pretty bad as a means of exchange.
Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically.
- David Ricardo
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Here is recent one
https://www.cryptocoinsnews.com/bitcoin-gold-wallet-scam-nets-fraudsters-3-2-million-after-stealing-users-private-keys/
- Walt Disney
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https://www.cryptocoinsnews.com/why-bitcoin-spending-more-electricity-than-159-countries-is-positive/
What's more interesting though that many experts argue that it's actually good, as it demonstrates value of bitcoin currency
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https://www.coindesk.com/information/what-is-bitcoin/
https://bitcoin-made-easy.com/@Medic
https://www.lifewire.com/big-sites-that-accept-bitcoin-payments-3485965
https://99bitcoins.com/who-accepts-bitcoins-payment-companies-stores-take-bitcoins/
If busincess are already taking it as a payment I would be able to safely say it is now a type of currency.
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I am not saying that it's a good investment right now, but I am saying that it shouldn't be dismissed as a dumb decision.
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