>This doesn’t mean bitcoin is doomed. It just means that for it to succeed, we’ll need significant external buy pressure. As I wrote awhile ago, I think the key thing we need for this is people actually using bitcoin for transactions instead of speculation (and merchants willing to hold bitcoin balances). [3] Unfortunately, transaction volume still appears to be trending down.

Let's look at this. Yes, one easy way in which bitcoin can "succeed" is by becoming a worldwide currency in actual use. In fact, this is probably a design objective.

However, its extremely limited supply dooms it from the start in this endeavor.

We can reason about this by counterexample (reductio ad absurdum). First, let's take for a given that within ten years bitcoin will have a role in the world money supply similar to gold (cap of $7.2 trillion on all gold ever mined) or the M2 money supply of USD. (http://money.howstuffworks.com/how-much-money-is-in-the-worl...)

This doesn't count other currencies and is not "most" of the world money supply.

There is a limit on the number of bitcoins that can ever be mined, at 21 million. (More than half have been mined, so let's use that upper limit - you may want to multiply by two to account for the current supply instead). If were to divide $7 trillion by 21 million we would get a bit over $330,000 per bitcoin.

Since we started with the assumption that bitcoin would become a world currency or money supply, and the bitcoin protocol limits supply to 21 million ever, we are forced to continue our argument with a target price of $330K/bitcoin over 10 years.

This does, however, pose a problem.

We started with the assumption that bitcoin succeeds as a currency.

That means people have to get their hands on it and use it.

But if we go from today's price ($445) to our logically mandated target price ($330K) in ten years, that means the value of bitcoins increases by a factor of 741 (330 000/445) over 10 years, i.e. a compound average of 94% per year. (1.94^10 = 741).

Do we have a contradiction yet? I think we do.

--> Is it possible for the price of bitcoin to rise an average of 94% per year, for ten years, while:

--> it is also being adopted as a world currency?

I believe the answer is "no". Let's look at some of the behavior that's necessary in order for it to count as a "world currency":

1. Borrowing BTC for productive purposes.

One of the major reasons, if not the major reason that USD is a currency of business and gold is not, is that you can borrow USD for productive purposes. Indeed, this can happen directly by increasing the money supply centrally in a way that gets to people for loan purposes, but also happens implicitly due to systemic inflation. Inflation mandates that some USD will always be lent. This is because inflation is a hidden taxes on keeping USD qua USD. If you come to possess $1M in cash, you would be insane to keep it as cash for 20 years. Inflation would just eat a large chunk of it. Not so with currencies that do not experience inflation.

2. This deflation is toxic to using bitcoins by people who have them.

If bitcoins are going to increase in value by 91% if you keep them for a year, then if you possess bitcoins, you would be crazy to spend them on anything that does not produce a 91% return for you within a shorter time period. This is going to seriously hinder spending, and adoption. Certainly, some people may be "forced" to sell some of their bitcoins. But that is not the way in which a currency succeeds. By people preferring not to spend it, but having to do so in some extraordinary cases.

3. Fees on exchanges may be higher. If btc has a high price, and is considered an investment, you may be leery of buying some from somebody (which may cost you percentages) to buy goods that are not actually denominated in BTC. The volatility may also put you off.

In this sense bitcoin would behave more like Picassos than like USD or any other world currency. People are just going to hang on to it.

4. So what if people need money? Wouldn't they still just get some BTC at the current spot price?

The thing is, if most people are hoarding BTC with very little spending of it, when it can be at all avoided, there will NOT be a price set by deep markets of goods and services. There is no "floor" on the price. That is dangerous for bitcoin. It is still possible to buy and transfer "just in time" to be sold back into fiat by the merchant.

But people are not going to print menus, catalogues, ads, or other more than transient pegs to price, just as nobody prints prices in ounces of gold.

You will therefore have a case in which there is no built-in usage or acceptance of bitcoins, denomination in bitcoins of goods and services, or large transactions such as investments being built against bitcoin. Since nobody uses bitcoins as an actual currency, there is no floor to its adoption. Essentially actual users of the currency are priced out of it. This is contrary to our initial assumpion!

You may say - well, so what if it is hard to get. People will still get it at a spot price, to pay for goods, even if nothing is denominated in BTC.

But then we must ask - well, why in BTC then? Why not another alt currency? If only the spot price matters...

So any POSSIBLE floor on the price will drop out, since btc does not have a unique position. Will it take on a role that Gold has over thousands of years - that people recognize its value implicitly, even after it has long since not been used as currency, and there is no obvious substitute (like silver and platinum)?

Well, here's the thing. Gold has several unique properties that most other precious metals don't have. It's easy to essay, very dense, can be recognized and verified, and has a long history of acceptance all over the world. Bitcoin does not have a long history of acceptance all over the world, the software can break, but, if the software is not broken, if its verifiability is in tact - THEN IT IS NOT UNIQUE IN THIS REGARD!

Indeed, anyone can use litecoins, doegecoins, or other currency. As bitcoin becomes too valuable to spend (unless you can get a 91% return), it would simply make sense to use the spot price of another currency to trade with instead.

So by the very fact that its properties are not totally unique, it does not have actual usage as a unit of account, it is failing in its bid to become the default online currency.

At best, it can end up like gold compared to USD, and fail to be an online currency. At worst, it can tank.

So while it is certainly possible for BTC to maintain their value - as a currency it can never reach much use. Moreover there is a large risk that the speculation will cease - i.e. that the hoarding behavior was a "bubble". Look at the volumes of litecoin and dogecoin versus BTC. This may easily happen.

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I believe that an online currency could be created that is more like USD than like Gold.

Here is how the USD has been treated since 1913:

"The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act: Maximum employment, stable prices, and moderate long-term interest rates"."

Today, bitcoin fails at all three. (It will not create employment from people spending it to whom it is lent; the price of goods denominated in BTC is extremely unstable; and it would have extremely high interest rates.)

I believe that there is a way to do far more in a digital currency. But BTC is not it.

It simply, logically, cannot succeed as a currency or world money supply. Its behavior as an investment is also completely uncertain - nothing makes it unique versus other alt currencies, not the technology, not acceptance, and its price fights against real adoption.

This sets up a dangerous tulip-like situation. I personally would not invest in BTC holdings, nor do I think it is a good candidate for Internet money.