The Bitcoin Paradox

If Bitcoin were a currency, it would be performing worse than even the Russian ruble, as Bitcoin prices fell by nearly 50% over a two week period in January of this year.  However, Bitcoin is not truly a currency in the sense that most things cannot be bought with it.  Therefore, it is more of a speculative investment that one day people may use it as a currency.

BB

However, according to Gresham’s Law (which states that with two competing currencies, people hoard the one with more material value and use the one with less material value), this speculation actually means it is less likely that Bitcoin will become widely used- Bitcoin investors expect the value to increase and do not spend their bitcoins.  Ironically, once the Bitcoin mania bubble bursts, it will become a more viable alternative currency, since people will not expect value increases and will actually spend Bitcoins.

For more information:

http://www.bloombergview.com/articles/2015-01-21/bitcoins-gold-bugs-and-money

http://www.coindesk.com/information/what-can-you-buy-with-bitcoins/

5 comments to The Bitcoin Paradox

  • HeeJu

    I wonder if the fluctuation of Bitcoin price may be influenced by the fact that it is not a widely accepted medium of exchange. If Bitcoin becomes a more viable alternative currency, maybe its value will stabilize?

  • vonhassellc16

    I often think it is best to think of Bitcoin simply as a payment system / medium of exchange and not as a currency. It has little to offer as a store of value or unit of account. The two things you can do with Bitcoin are speculate and transact for goods and services. At this point, the former certainly does seem to be driving the supply and demand mechanics. However, I agree that if transaction demand for bitcoin rises that could lead to some overall price stability. If it ends up being really easy to exchange Bitcoins for traditional currency, the equilibrium price could still be very low. However, if there remains significant exchange costs (both time and fees), strong bitcoin transaction demand could somewhat justify hitherto rampant speculation.

  • deplautt

    I was not aware of all that you could buy with Bitcoin until browsing the CoinDesk article. Seeing companies such as Overstock, Dell and various physical stores makes Bitcoin seem like a much more legitimate form of currency than I had previously thought. Retailers and companies have started to accept Bitcoin more rapidly and I wonder if they are getting an increasing amount of transactions through Bitcoin or if it is merely incentive for consumers to increase their holdings of Bitcoins but not necessarily use them, in terms of Gresham’s law.

  • People talk about speculation and inflated value … I think they still have no roof, no one is a fortune-teller, but they have a lot of market ahead …

    https://rubengrcgrc.com/freebitcoin/

Germane comments welcome! – others treated as spam.