It partially explains the price of gold, yes. Gold’s situation isn’t really the same for three reasons: First, gold can be mined if the price goes too high, and higher prices would imply larger amounts of recoverable gold. Second, a lot of the gold on the market is paper gold, theoretical gold that two parties are trading rather than sending large gold bars around, which also adds to the supply. But most of all, unlike the supposed use-case of Bitcoin, gold is not being used as a medium of account or medium of exchange any more, just one store of value among many, so its real competition is not paper gold or mined gold but other stores of value such as platinum, silver, real estate, and many other things being added to the competition for ‘stores of value’ as the economy grows. If the same fraction of the population tried to store the same fraction of their net assets in gold today as in the 1600s then the price of gold would be vastly higher—or so I would think, I haven’t run the numbers. But this in turn means that the share of the economy represented by gold can easily drop further, making it less than a perfect store of value etcetera, although gold has still tended to be a better store of value than fiat currency.
Of course fiat currency is really supposed to be a medium of exchange and account, not a long-term store of value, though dumb people like me tend to use it as a store of value too because it’s convenient and we haven’t gotten around to setting up anything different and we don’t have that much value to store. And then using your medium of exchange and account as a store of value causes recessions and depressions due to the paradox of thrift; when people want to consume in the future instead of the present they try to hold paper money instead of demanding equity in projects with long-term payoffs. On the plus side, central banks can, in principle, easily rectify some part of this problem by printing more money to meet demand for currency when fear rises, and thus make up for velocity slowdowns, keeping NGDP on a level growth path. On the minus side, central banks are stuck in 30-year-old economic thinking and don’t keep NGDP on a level growth path. Bitcoin has the potential to make things much, much worse though.
New stocks on the other hand are constantly being created as the economy grows—no particular stock, or set of stocks starting at a fixed time, are guaranteed to grow at the same rate as the global economy.
To paraphrase, you’re pointing out that stocks and precious metals come with built-in demand shock absorbers, whereas Bitcoin has none. I’m not totally sure that I accept this point, because I could see alternative cryptocurrencies playing the role of marginal new stocks or newly mined gold. However, even if Bitcoin were unique in having no demand shock absorbers, I’m not sure this matters, because it seems empirically to be the case that these shock absorbers are not always up to the task, and that both stocks and precious metals do experience a great deal of price volatility, even over the medium to long term.
In other words, even if Bitcoin is especially sensitive to changes in demand, it is neither novel nor unique in being susceptible to bubbles.
This would seem to me to imply that Bitcoin’s existence and use as a store of value is no threat to the economy. (And its use as medium of exchange seems harmless as well.)
It would seem that problems would only arise for those who try to use Bitcoin as a unit of account. This is in line with Wei’s comment where he suggests that with a currency in fixed supply, fluctuating velocity of money implies that either prices or GDP must be unstable.
So my conclusion is that using Bitcoin as a medium of exchange or store of value is not detrimental to the economy, but one should continue to price goods or services in some other fiat, ideally NGDP-targeted, currency. Does that sound about right?
Anyone bidding on a Bitcoin is not bidding on a productive project.
It seems that the same goes for gold, real estate, and so forth when they are used as a store of value. The difference is that unlike bitcoin, these things have other productive uses that they could be put to, less expensively, if they weren’t being used as a wealth-counting mechanism.
It partially explains the price of gold, yes. Gold’s situation isn’t really the same for three reasons: First, gold can be mined if the price goes too high, and higher prices would imply larger amounts of recoverable gold. Second, a lot of the gold on the market is paper gold, theoretical gold that two parties are trading rather than sending large gold bars around, which also adds to the supply. But most of all, unlike the supposed use-case of Bitcoin, gold is not being used as a medium of account or medium of exchange any more, just one store of value among many, so its real competition is not paper gold or mined gold but other stores of value such as platinum, silver, real estate, and many other things being added to the competition for ‘stores of value’ as the economy grows. If the same fraction of the population tried to store the same fraction of their net assets in gold today as in the 1600s then the price of gold would be vastly higher—or so I would think, I haven’t run the numbers. But this in turn means that the share of the economy represented by gold can easily drop further, making it less than a perfect store of value etcetera, although gold has still tended to be a better store of value than fiat currency.
Of course fiat currency is really supposed to be a medium of exchange and account, not a long-term store of value, though dumb people like me tend to use it as a store of value too because it’s convenient and we haven’t gotten around to setting up anything different and we don’t have that much value to store. And then using your medium of exchange and account as a store of value causes recessions and depressions due to the paradox of thrift; when people want to consume in the future instead of the present they try to hold paper money instead of demanding equity in projects with long-term payoffs. On the plus side, central banks can, in principle, easily rectify some part of this problem by printing more money to meet demand for currency when fear rises, and thus make up for velocity slowdowns, keeping NGDP on a level growth path. On the minus side, central banks are stuck in 30-year-old economic thinking and don’t keep NGDP on a level growth path. Bitcoin has the potential to make things much, much worse though.
New stocks on the other hand are constantly being created as the economy grows—no particular stock, or set of stocks starting at a fixed time, are guaranteed to grow at the same rate as the global economy.
To paraphrase, you’re pointing out that stocks and precious metals come with built-in demand shock absorbers, whereas Bitcoin has none. I’m not totally sure that I accept this point, because I could see alternative cryptocurrencies playing the role of marginal new stocks or newly mined gold. However, even if Bitcoin were unique in having no demand shock absorbers, I’m not sure this matters, because it seems empirically to be the case that these shock absorbers are not always up to the task, and that both stocks and precious metals do experience a great deal of price volatility, even over the medium to long term.
In other words, even if Bitcoin is especially sensitive to changes in demand, it is neither novel nor unique in being susceptible to bubbles.
This would seem to me to imply that Bitcoin’s existence and use as a store of value is no threat to the economy. (And its use as medium of exchange seems harmless as well.)
It would seem that problems would only arise for those who try to use Bitcoin as a unit of account. This is in line with Wei’s comment where he suggests that with a currency in fixed supply, fluctuating velocity of money implies that either prices or GDP must be unstable.
So my conclusion is that using Bitcoin as a medium of exchange or store of value is not detrimental to the economy, but one should continue to price goods or services in some other fiat, ideally NGDP-targeted, currency. Does that sound about right?
Using it as a store of value is detrimental. Anyone bidding on a Bitcoin is not bidding on a productive project.
It seems that the same goes for gold, real estate, and so forth when they are used as a store of value. The difference is that unlike bitcoin, these things have other productive uses that they could be put to, less expensively, if they weren’t being used as a wealth-counting mechanism.