Bitcoins are an awful idea as a currency. The 21m fixed limitation on bitcoins in a hopefully growing economy requires deflationary prices. Deflationary prices in turn discourage consumption and encourage hoarding. Low consumption and hoarding lead to low economic growth, a decreased velocity of money and more deflation.
But what about Bitcoins as an interesting speculative investment? With prices surges recently some could have made serious money. With the inevitable crash, brave souls may make money shorting Bitcoins. (but “markets can remain irrational longer than you can remain solveny” etc.)
But, the Bitcoin supporters say, if there is a 21m ultimate final supply, won’t increasing demand lead to increasing prices? Won’t this become a type of collectors’ item?
Here we run firmly into the absolute lack of intrinsic value for Bitcoins. Gold is a limited, non-corroding, shiny, vaguely useful in electronics element. It also barely has intrinsic value but at least it is truly unique.
What’s to stop someone investing Bacon Flavoured Bitcoins with a maximum supply of 21m (or any other number). A new version of Bitcoins for when the original or “Classic Bitcoins” are so tightly in demand that there is obviously demand for more of the same or similar. We could also have cheese flavoured, bubble-gum flavoured or, my personal favourite, Dutch Tulip flavoured Bitcoins.
Artificial scarcity is not true scarcity and near substitutes can be created at will.
Bitcoins will not remain above USD100 by end 2013.