I hope to set a Bitcoin Magazine record for most succinct argument here, as my profession has an uncomfortable obsession with efficiency. I study economics because I like teaching at the University level, and because I want to improve the field. Here’s how the community can help.
Coin enthusiasts often struggle at convincing economists and academics that Bitcoin is interesting, and that’s largely because the community is misusing many economic ideas.
At the forefront of this is the misuse of the notion of a deflationary currency. Deflation is a decrease in the prices of goods, and yes as prices fall each unit of money is worth more in terms of how much it buys. This is not something that is unique to Bitcoin, it’s a property of any type of money.
When we refer to changes in the price of one currency (or an aspiring one like Bitcoin) in terms of another ($), we should be referring to either depreciation or appreciation: Bitcoin has been strongly appreciating (gaining relative value) against the dollar since its birth. So coinheads have been eager to hold on to their Bitcoin not because of deflation, a change in the price of goods, but because of its eager history of appreciation against the almighty dollar.
Second off, let’s all remind ourselves that Satoshi’s paper only mentions the word currency once in regards to physical currency like fiat. He refers to the protocol as a payment system, which is of course different from a currency. A currency is a store of value (among other purposes), and we all need to be honest with ourselves that Bitcoin, while striving to achieve this, still has much to prove in this area.
Economists love the idea of comparative advantage: the skill that you are relatively better at than your neighbor. Bitcoin’s comparative advantage largely lies in its low transaction costs making it a severe threat to traditional payment networks. For the time being, fiat’s comparative advantage is still stability: that’s why we see coin quoted in world currencies in the first place.
Not all economists dismiss this topic; young professionals like my collaborators and I recognize that the system is perhaps the greatest monetary/social experiment of our time, and much of the empirical analysis is on its way to peer review.
