Bitcoin Is Fundamentally Flawed

The concern then, is that when there is a fixed amount of coins available, people will begin to hoard them because they will appreciate in value. The system avoids this by allowing coins to be subdivided to 8 decimal places (the smallest unit is called a Satoshi). This results in 21 * 10^48 possible Satoshis available to the economy. It is expected that this will be a sufficient amount of currency for the network to avoid hoarding. If hoarding is still an issue, the code can be changed to further subdivide a coin.

The mistake Nicholas makes in this article is confusing the comparison between the dollar and the bitcoin. If you divide a $100 bill into 100 $1 bills, you will not feel any richer because the value of a single dollar bill does not change. If you divide a bitcoin into 100,000,000 Satoshis, the demand for more currency will cause an inflation in the value of an individual Satoshi.

If you sub-divide Bitcoins further to purchase the same items then it's still a deflation: What you used to be able to sell for 1 BTC now you can only get 0.1 BTC for. If all prices drop proportionally at the same time that's not really so bad, but it is bad for any kind of delayed payment agreements (e.g. credit, loans, etc.) as your ability to repay, say, a 40 BTC loan continually gets less and less.

If you don't sub-divide then you make it more and more difficult for currency exchange to happen at all; i.e. the BTC becomes more valuable, which is also deflationary.

In a deflationary economy it's better to hoard your money (which is growing in value without action on your part), which reduces the pool of BTC available to spend, which leads to more deflation, etc. etc.

Of course this is a disaster only if BTC becomes the only currency, but it would seem to put a hamper on the idea that BTC could completely supplant our current currencies. I'd certainly never take out a loan in BTC at this point; even if the lender agreed to "deflate" the principal at a certain APR, the volatility of the BTC value is too high to be sure I wouldn't get taken to the cleaners on the loan.

In the end, Economics involves the behavior of people acting on free will. How anyone can attempt how people are going to behave with respect to something? If anyone could predict what society is going to value in the future, or how people will react to some new technology would he be writing blog posts about what is going to fail? Has there been anything remotely similar to the Bitcoin now in history?

I don't know whether deflation is good or bad but I consider the potential advantages of a deflationary currency, if it works, worth trying it. Why not, nobody is being forced to get into Bitcoins. If you don't like it, ignore it and move along.

Be wary of financial explanations, because in most cases when a business person or economist says its good, they either mean its good for keeping things stable, its good for the elite, or its good for the average person, all of which might not be you. For example, you might see someone on CNBC saying they need to make sure they don't have a disorderly default, but really if you are in a position to take advantage of that temporary disorderly market you could gain from that.

But, that doesn't really matter because Bitcoin is _not_ a national currency. It really is more like gold in that it's not really a currency in itself, but a way to store/transfer other currencies. No one buys something with gold without first doing the conversion to their local currency and I don't see that ever changing with Bitcoin either. And, it doesn't have to.