Jan

6

Tyler Cowen recently wrote and article about "how and why bitcoin will plummet in price".

I think the argument is 100% flawed. A currency works because everyone agrees that it does — nothing more and nothing less. Even the Gold Bugs don't seem to understand that. That is, you accept dollars for your product or service because you think that you can use the dollars to pay employees and vendors and then use the leftover money to buy stuff for yourself. People accept Bitcoin's now because at some level at least they are confident that they can spend them on goods that they want. (and that there won't be a Zimbabwe like debasing of the currency in the meantime).

From his post he writes: "For purposes of argument, let's say that a year from now Bitcoin is priced at $500. Then you want some Bitcoin, let's say to buy some drugs. And you find someone willing to sell you Bitcoin for about $500."

And he follows up with an explanation of a theoretically superior digital currency and says: "So you buy some newly minted QuitCoin for $400, and its price springs up pretty quickly, at which point you buy the drugs with it."

Here's the flaw: No, you don't. Why not? Because the drug dealer isn't going to take the Quitcoin because he hasn't heard of it and doesn't know what he will do with it when he gets it. Tyler than argues that the Quitcoin isn't going to work either because a digital coin superiorior to the Quitcoin is going to come along, and so it goes.

But that only supports the Bitcoin, actually. People will keep taking bitcoins and keep transacting in Bitcoins because people take them now. The thought that there is an infinite other amount of digital currencies that will just come along is only going to get people to just stick with what they already know.

Bitcoin is simply an agreed upon medium of exchange.

That being said I don't personally think that it will survive in the long run. I can't imagine any government allowing it to succeed. With the total market value of bitcoins outstanding it wouldn't cost all that much for a government to engineer massive run-ups followed by crashes in order to scare people away from them. I wouldn't be surprised if that is what we are in the middle of right now, but I don't want to get too political in this forum.


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search