Bitcoin is a failure as a currency

Bitcoin shares none of the properties that characterize a well-functioning mean for payment or storage of wealth.

The internet flourishes with amateur economists with weird economic theories on why Bitcoin will become a world currency. The common denominator is that they lack basic knowledge of economics.

For example, bitcoin fans have a strange fascination for gold. They are obsessed by the idea that everything was better when the money supply was determined by the amount of gold in the vault of the central bank. Since the supply of Bitcoin is given by its algorithm, it is apparently perfect as a world currency.

But when was the last time you used gold to pay for something? That the supply is fixed does not mean something is a good medium of exchange. Rather quite the contrary. When the central bank stabilizes its currency, the bitcoin community views it as a conspiracy and manipulation. But it is this exact manipulation that makes conventional currency far more suitable for exchange than Bitcoin or gold.

Since 1950 gold volatility relative to consumer prices has been six times that of the dollar.

When prices increase too much, it means that the value of dollars fall relative to goods and services. The Fed then stabilizes the real value of goods and services by increasing the interest rate. This immediately reduces the amount of dollars in circulation, which in turn limits the decline in dollar value.

The Fed and other central banks do this because the population primarily want a stable currency, not an erratic one. Very few people like the idea of a checking account where the balance can halve or double without notice. This is the exact reason the gold standard was abandoned. It inflicted unnecessary damage to the economy by imposing volatility and harming growth. It was an obvious dead-end.

Another bizarre idea is that Bitcoin must increase incredibly much in order to cover the rising demand for it as a medium of exchange. The market value of Bitcoin is now less than a tenth of the amount of American notes and coins in circulation. Since there is a given amount of Bitcoins available, the increase in transactions cannot be covered by issuing more coins. The only solution is that Bitcoin must rise in value to insane levels.

But the Bitcoiners do not understand the very obvious inconsistency in this argument. If Bitcoin against all odds were to rise so much, it is completely implausible that the owners would start spending those dear coins on a hotdog on 7-11. Those who at this time do not own Bitcoin, probably do it for a reason. It is therefore difficult to envision that many outside the choir will adapt it.

The large fluctuations, the enormous increase in value and lack of a stabilizing mechanism makes this currency completely useless as a means of payment or for storing wealth. In contrast to stocks, Bitcoins yield no dividends. If it does not become a means of transaction there exist no good reason why it should have any value at all. Nevertheless, it is trading for more than $8,000. Bubbles do not come any cleaner than this.

Economics-101 could also have helped Satoshi Nakamoto, the obscure inventor of Bitcoin. The first thing an inventor of a new world currency should check out is the required capacity. With a quick search on the internet Nakamoto would have learned that there are two-three hundred billion currency transactions worldwide annually. Bitcoins crumbles by a decimal of a percentage of this.

This development bug led to a split in August into a new currency Bitcoin Cash, with more capacity. A short while ago, the SegWit2x split was canceled. It is common knowledge that the original Bitcoin does not have enough capacity to become a new world currency, but the community is unable to agree on what to do with it.

Block chain technology is a very promising technology, but Bitcoin is not a promising currency. For a cryptocurrency to be a stable, secure and acknowledged medium for exchange, the platform must include a credible institution that automatically stabilizes it. I propose the name “Central Bank”.