Monday, September 12, 2011

Bitcoin FUD

First, let me say that not all Fear, Uncertainty, and Doubt (FUD) is unwarranted, though I recognize that the acronym "FUD" does imply that.

There was a response to blog post called "Krugman’s Bitcoin Error" that asked a couple of very important questions about Bitcoin, and I was rather too long winded in my response for a simple reply, so I decided to instead post my thoughts here. The two questions asked by "beeemtee" were as follows:

Q: Why would anybody spend a coin that’s destined to increase in value until his/her regular income comes in bitcoin form?

A: I could as easily ask: "Why would anyone buy a computer when you know that next week, a newer, faster model will be available at the same price?" The computer industry has had price deflation in its products since day 0, and somehow people keep buying them, despite this obvious drawback. A equally (in)valid argument would be: why would you accept payment for goods or services in the form of a currency that will be worth less tomorrow, the next day, and every day after that? We're so used to inflating currencies that it's hard to imagine money just simply holding its value from one month to the next.

Q: Why would anybody want to make his/her life or business depend on a currency whose price is highly unpredictable?

A: If I had a business, for now I'd accept Bitcoin at a somewhat unfavorable exchange rate, then cash it out every night. Once (ok, *if*) suppliers start accepting Bitcoin, I think we can assume that by then a good portion of the Bitcoin<->fiat volatility would have died down, and I'd hold enough Bitcoin back for payment to those suppliers. (If I were a supplier at this point, I'd prefer Bitcoin to credit card transactions due to the lack of fees/chargebacks, and prefer Bitcoin to checks due to the lack of worry about bounced checks.)

Once the volatility subsides (which would be a natural by-product of an actual economy transacting business in Bitcoin), it will be a far more attractive currency. The hardest part right now is finding early adopters. I'm not figuring on Bitcoin being a force of nature this year or next, but looking 2-5 years down the road.

Another common question is something to the effect of, Q: "How can Bitcoin have any value when it doesn't exist in a useful form the real world, like gold, or is backed by force of arms, like fiat currency?"

A: The value of Bitcoin *is* its utility in facilitating no-recipient-cost, nearly-instant, and permanent transactions. Usefulness has its own value. If you don't believe me, ask your employer.

The biggest risk, as I see it, is that Bitcoin spits right in the face of the people who control the money right now, and I expect them to react badly when they see their money hose kinked [or even potentially kinked] by Bitcoin. They'll throw matresses full of cash at all of the corrupt (or just easily persuaded) politicians they can find (remember: Bitcoin doesn't have a lobby), and try to find some way to kill it. Online gambling was effectively killed in the US by a law that made it illegal to transfer money outside the US "for purposes of gambling"; a similar law that made it illegal to transfer money to buy Bitcoin (using whatever language they'd need to [a] not name Bitcoin specifically, and [b] not cut off online gaming currencies like Eve Online's ISK or World of Warcraft's gold), or even just a conflation of Bitcoin and "online gambling", would have a very chilling effect on US adoption. I realize that Bitcoin is an international currency, and US laws only apply in the US, but I also realize that as long as it's currency non-grata in the US, its utility (and therefore value) will be markedly constrained.