Bitcoin-fanatic-USD-bears claim that Bitcoin is a good store of value because it has constrained supply. But they miss the demand side of the equation. Similarly, they claim that the USD is a bad source of value because it has "unlimited" supply. That also misses the demand side.
The demand for USD is robust because people need USD to pay taxes and to purchase most goods and services offered by US-based organizations. The demand for Bitcoin is based on... how many people Bitcoin-fanatics can get to buy and hodl Bitcoin.
(I don't count organizations that accept Bitcoin as payment because almost all of them exchange received Bitcoin into the local currency, negating the demand effects of the original Bitcoin purchase. In the US, that's usually USD.)
In economic terms, Bitcoin is inflating as an asset. Specifically, it's demand-pull inflation.
Bitcoin isn't even uniquely positioned to protect against inflation, other than the mistaken public belief on that topic. Inflation is an increase in the price of assets, so investors can (and do) escape inflation by investing their money.
Ironically, Bitcoin's limited supply disincentivizes holders from investing their money.
I don't think this is precise. Inflation of an asset means that the asset itself drops in value, relative to the value of other goods. For example: when prices rise, the USD itself would be inflating because would then take more USD to buy goods.
Bitcoin is rising in price compared to the USD. So it's not "inflating." If we treat Bitcoin as a currency, it's deflating because right now it takes fewer Bitcoin to buy goods than one year ago.
This is also why "asset inflation" is not precise. The asset itself is not inflating, it is actually deflating wrt. to other goods.
That assumes an asset can be used as a medium of exchange. In its current form, BTC is not a medium of exchange, it's a store of value.
In other words - the word inflation has to do with purchasing power. If the asset isn't used as a way to purchase then comparing the characteristic of inflation is basically pointless. It' be like saying "trees are inflating as an asset". No one makes purchases using trees so the concept is irrelevant.
But you're right that Bitcoin is mostly used as a speculative investment, and not to actually exchange goods. (That's not very convincing to crypto-people, though.)
It more accurately conveys the fact that 1) the assets are increasing in value, compared to a basket of goods or the USD; and 2) doesn’t imply that the asset is a currency.
I'm afraid this ship has sailed.
Demand-pull inflation in fact is exactly what is happening with Bitcoin and bitcoiners would agree. There's huge demand for bitcoin and an ever reduction of circulating supply. What that means is that it can maintain/increase purchasing power incredibly relative to other assets that have unconstrained and erratic supply (fiat).
Maybe you are trying to say that the USD is inflating (w/ demand-pull inflation) because USD is becoming less valuable, relative to Bitcoin.
But that theory is still problematic, since you can't measure inflation against just one asset. An asset might appreciate because of a shift in consumer demand -- the currency itself might not have "devalued." Instead, a better way to measure inflation is wrt. a basket of goods, like CPI. CPI has not changed much in the last year, which implies that the USD is not inflating much.
How about another two? Like equities and real estate. Still not inflation?
CPI is a scam - it now includes 80,000+ items muting the shit out of the dramatic price changes in the stuff you actually want and need.
Consumer prices are flat, but the money printer is making investing assets expensive. That's fun for last year's investors but not next year's.
You cite this a priori - but it's so much more complicated than this.
Demand is intimately connected with supply in many cases.
Soemtimes this can be because demand is latent. If production of food goes through the roof - and people were previously starving because the price of food was too high, then that latent demand will be released when supply improves and costs drop.
But currency is different - opposite even. If supply goes through the roof - then demand will respond inversely. People will rush to unload that currency for other assets as they watch their wealth evaporate. It may hit some sort of baseline determined by the daily needs of payroll and tax payments - but other than those moments everyone will try to store there wealth anywhere but that currency.
What is actually happening empirically is that people are coming to see Bitcoin as a reliable store of value over medium to long timeframes. You can continue to believe in your theory a priori, believing that in the even longer term, the lack of goverment mandate in Bitcoin will see its value evaporate... You can even continue to do this when everyone is vested in Bitcoin except you. At which point, you can claim, with 100% theoretical consistency that everyone is a stupid lemming.
But ultimately, it will be the case that the Bitcoin folks had a better explanation of supply and demand than you - and their prediction of reality will be the measure of this.
> But currency is different - opposite even. If supply goes through the roof - then demand will respond inversely.
This is terrible reasoning. It depends on why that supply is going through the roof. Maybe the supply is increasing because of higher demand? (Hint: increased demand for the USD is why the Fed is increasing the supply -- to keep the price stable.)
The phenomenon you're referring to is that, with all else equal, people will shift away from the USD if supply increases make the USD's value drop. But all else is not equal; demand for USD last year effected all-time high issuings of stocks and bonds.
Or, another way I could interpret this sentence is that you are claiming that the USD is not an ordinary good. Do you have some evidence to back that up?
> What is actually happening empirically is that people are coming to see Bitcoin as a reliable store of value over medium to long timeframes.
"Happening empirically." Have some numbers to back that up?
Oh yeah, good luck taking vacations in Europe this year.
Your original statement:
>The demand for USD is robust because people need USD to pay taxes and to purchase most goods
...remains an absurdly simplistic explanation of USD demand. I wasn't citing latent demand as a counter example to this explanation - just an illustration of easy to intuit scenario where demand responds dynamically to supply so that folks can see it happening in another context besides currency.
Clearly I was not referring to latent demand in my actual counter-example - which you even seem to acknowledge later...
> This is terrible reasoning. It depends on why that supply is going through the roof.
I don't disagree. And at least one scenario where USD demand has skyrocketed has been because of its safe haven reserve status... which again speaks to how simplistic your original claim about the robustness of USD demand actually is... and lo - suddenly we have another vector of possible future weakness of USD demand that Bitcoin folk can consider. A vector, mind you, that was completely elided by that simplistic explanation of demand that I contested.
Which is all I really want to achieve here... to remove this veil of simplicity - folks like you repeat ad nauseam these one line, simplistic claims about why Bitcoin demand must be illusory or idiotic... "Because you can't pay taxes with it! Hurrumph!".
But no - there is considerably more complexity and nuance to all this - as you yourself are admitting in your response. That all I wanted / needed to do to demonstrate the obfuscatory contribution to the discussion of your original comment.
Are you willing to provide a more sophisticated explanation for USD demand? The biggest thing missing from my explanation is demand as an investment, or foreign demand to hedge risk. Which right now isn't huge, given interest rates are at 0.
> just an illustration of easy to intuit scenario where demand responds dynamically to supply
Sorry, I was not correct that you were using this as an "counterexample." My intended point was that you seem to be presenting this as an unexpected phenomenon (like how others present "latent demand"), which signals that you don't understand basic econ. (And if one isn't familiar with basic econ, how are they supposed to understand monetary policy, which is based on a second/third year econ (macro)?)
A person who understands economics would usually write: a rise in supply (with all else equal) causes the price of an ordinary good to drop, which shifts the equilibrium to a point where usually there is more demand. "Supply is intimately linked with demand" misses the mark completely! Supply isn't at all "intimately" linked with demand; it's linked with price, which is linked with demand.
That distinction is critically important. It's the difference between central-bank money printing being inflationary (as you seem to suggest) vs. it being stabilizing (which is what is actually happening). And it affects behavior: people don't start buying food when when they see the news reporting an increase in supply. People start buying food when that supply increase causes the price to fall. If the price doesn't fall, people don't buy the food!
The same happens with USD. People don't swap the USD to another currency because they see the central bank creating money (apart from Bitcoin-fanatics). Normal people start migrating off the USD to other assets when they see its value fall (inflation), which isn't happening at all (as measured by the CPI)!
> "Because you can't pay taxes with it! Hurrumph!".
This is a strawman of my argument. Not only can you not pay taxes with Bitcoin, you also can't use it to buy any goods and services. In fact, the only thing it seems like you can do with Bitcoin is to tell others that how Bitcoin is the future, and if they are a disbeliever, that they will be left behind claiming "with 100% theoretical consistency that everyone is a stupid lemming."
I don't particularly feel the onus is on me to provide a full explanation. You are the one providing one in order to show Bitcoin demand is illusory or foolish. All I wanted to do was to point out enough of what yours was missing to show that Bitcoiners are at least not FOOLISH... that there is nuance enough here that if they are wrong, it's likely not because of some 101 mistake.
I did this by pointing out how an explanation of demand of currency must include an account of how supply itself can influence demand. The scenario I painted where supply grossly outstrips initial demand - thus further reducing demand - is possible; it can and has happened - Weimar, Zimbabwe etc... You responded by adding even MORE nuance by pointing out that added supply, rather than representing a hyperinflationary scenario - might itself just be a response to increased demand. And it might indeed! But are we in your scenario or are we heading further and further down the road of over supply? That's a HUGE empirical question... surely. And surely in determining whether or not I want to keep my wealth in USD vs something else, I need to know more about reality than just whether or not I can pay my tax in it, or purchase various things.
Thus I feel I have adequately demonstrated your explanation of currency demand as simplistic - without having to supply a fully rigorous account of my own.
The rest of your reply is worthy and deserving of response - but time is short! :)
Not who you're replying to, but I don't think you can have a reasonably complete explanation of USD demand without mentioning the petrodollar system/international dollar trade settlement. And how a number of countries are looking at ways to break out of that. Also, foreign dollar-denominated debt and debt service.
It matters, in the sense that the government could just adopt a foreign countries' currency and thus the value of that foreign currency would benefit from the power of the USA. The USD would lose its value as a result. I can run my own central bank and mint the hacker news dollar and the currency would still be worthless because of a lack of government adoption.
The US government has decided for itself to be dependent on the USD via taxation and thus it will do everything in its power to protect it. It's that simple. So, yes taxation has a huge second order effect that completely dwarfs the first order effect.
Compare that to oil dependent countries that get paid in dollars for their wealth. They tend to protect their USD based economy at the expense of everything else. Their local currency tax base tends to be pathetic in comparison to the oil money and thus they neglect it.
As for your "HND" hypothetical, it's very plausible that you could mint your own currency and control its value. You would not be able to control the total value of all HND in circulation. In aggregate HND would probably be a relatively worthless currency but so long as you are willing to constrain supply very tightly you will ultimately end up with a market for the few weirdos who are willing to part with $1 to obtain 1 HND. That may be a total of $1000 or less in the end, a laughable sum, but the unit price would still be controlled.
Whether wealth disappears or not is purely dependent on what the money is spent on. If there is a food shortage you can actually spend government money on producing more food and thus end up with more wealth than before. In this scenario each new unit of currency is backed by additional production capacity that guarantees that you can exchange the same amount of currency for food. Since the price of food is still the same but there is more food you actually do need to increase the supply of money to match the supply of food, otherwise the price of food would be going down and we would get deflation.
1. The premise is false. Bitcoin does not have the same demand as the USD.
2. The whole point of my original comment is that value is a result of demand. So your question is circular.
"If Bitcoin had equal demand to the USD, then it would be a better store of value" is as logical a statement as "if my grandmother had wheels, she would be a wagon, if you define a wagon as anything that has wheels."
I could ask the same question about cow dung, or any scarce good. If the demand for cow dung was as high as the USD, will it be a stable store of value? Yes.
The usual fallacy is when proponents claim that Bitcoin is the only asset able to escape inflation due to fiscal policy interventions. This couldn't be more false. The very definition of inflation is an increases in prices, or a decrease in buying power. However, investors have been buying assets and investments to avoid inflation long before Bitcoin was even invented.
Bitcoin isn't a particularly good store of value because the price is driven purely by demand, which is currently in a state of market mania. It's not even the first market mania around Bitcoin. Past bubbles were also met with a "this time it's different" attitude before the inevitable sharp losses.
Bitcoin has value not because someone coded a 21 million coin limit in the code somewhere. Bitcoin has value because people want Bitcoin. Why do people want Bitcoin? Because the price goes up up. Why does the price go up? Because people want Bitcoin. As soon as something breaks that cycle, it doesn't matter what the maximum number of coins is. Without demand from the belief of future increases due to increasing demand, the price will go down. The purchasing power decreases.
Everyone likes to demonize fiscal intervention, but the reality is that counter-cyclical fiscal intervention tends to benefit the average person. Running inflation too hot is bad, but swinging to a full deflationary currency (Bitcoin) would also be bad for the economy.
This is true, but the bottom at which people value bitcoin continues to rise significantly over time. Yes there are crazy bull cycles and bear markets that make the price highly volatile, but even people who bought at the absolute worst time 3 years ago, at $20k, before the price tanked by 80%, are currently nearly at 150% profit.
The price continues to be volatile yet less and less risky and overall trending upwards.
Please stop telling nocoiners this arcane and forbidden knowledge! Instead, encourage them in their belief that Bitcoin is a scam, a collective delusion, a market mania, a bubble, based on nothing, wastes energy, will go to zero, and so forth.
When, in a decade, 1btc == usd1M, we'll all be grateful that such people stayed out of the market long enough to allow us to buy more bitcoin relatively cheaply.
What they can't see is that Bitcoin is now more likely inevitable than not.
https://www.macrotrends.net/1333/historical-gold-prices-100-...
What kind of long term are you talking about?
In a hundred years, there can be wars, reparations, and lots of damage to equity.
I think some distinction should be made on store of value (win for gold) vs asset appreciation (win for stocks), especially once you start talking about 100years.
https://en.wikipedia.org/wiki/S%26P_500#History
This is just a technicality however. In practice you have to buy stocks according to the index yourself or invest into a fund that mirrors the index for you. The secret sauce in ETFs is that algorithms do the work of the fund manager and thus reduce costs.
Germany has weird taxes. There there is a 25% tax on stock market returns. But no tax on gold sales. Nor on Bitcoin sales. Although silver is taxed.
Because a healthy capitalist economy needs an incentive to invest. A steady, low, positive inflation rate is essential to encouraging those with capital to rent that capital out to those who need it for productive uses.
However, this doesn't say anything about Bitcoin, other than that it fails to be relevant as a currency. The reason why Bitcoin is a poor store of value is that owning Bitcoin doesn't guarantee that there will be an economy in the future that actually provides value equivalent to the value of your Bitcoin. If you invest into stocks or real estate you are making sure that there is a company or house out there that contributes to the economy.
How does a static rather than unconstrained supply make something a LESS good store of value?