When you say private currency what do you mean, could you give me an example? The difference with BTC is that it's a decentralised virtual monetary tool and that's what makes it unique. It's available to everyone the world over. I don't think there's been anything like it before to take advantage of this digital age.
That it's virtual is the only thing that makes it unique. The nature of its generation makes it unique. The actual application, the nature of its existence, the lack of a central regulatory authority, the deflationary nature and wild shocks in price, all old hat.
Private currency is any currency issued by a private organization or independent of government. The most bone basic, rudimentary example of a private currency is the stereotype of cigarettes in prison. But a private currency can be just about anything, issued by anyone. Some resemble legitimate currency. Until recently, there was effectively an alternative USD called the Liberty Dollar. Actual coins and paper backed by a bimetal standard. (It was also, in this case, completely shut down and considered a crime, but it's a good example of something akin to actual currency)
Do you think anything can be done to counter this deflationary spiral that BTC is on and if BTC is considered a commodity, is deflation not beneficial to it?
The only way to counter it is to completely change the nature of the currency. Bitcoins are fixed-supply in order to combat inflation. The problem with fixed-supply currency is, well, it's fixed-supply. As your economy grows, if you don't inject new currency into the system or your currency's growth doesn't keep pace with the growth of the economy, it leads to a deflationary system. Yesterday, two bitcoins might have been enough to buy, say, a loaf of bread. Now you can get three times as much bread for the same price. That's a great thing for you, right? But the deflation of fixed-supply currencies encourage hoarding, something which we're already seeing with bitcoins. Prices decrease relative to the value of the coin, and people begin hoarding it expecting that if they wait a bit longer, they will be able to buy even more or cash in for a higher return on investment. As you remove money from circulation, it further increases the value of the currency in circulation, which encourages more people to hoard. Eventually, everyone or almost everyone begins hoarding. Circulation stops. Circulation is the
whole point of currency; to facilitate transaction after transaction after transaction. The moment money stops circulating, it has no function. A currency without function has no value. A currency without value is a scrap of toilet paper, and a virtual currency without value is a meaningless line of code. No, it doesn't happen overnight, but without a central regulatory authority or the capacity to introduce new levels of currency into circulation, there is nothing you can do to stop hoarding except ask nicely and pray for people to spend it.
Another problem with making bitcoins fixed-supply is that that is completely artificial. The developer (or, more probably, group of developers under a singular pseudonym) can and has imposed an artificial cap. And, hey, that's great. I mean, not so much, but you want to limit the supply of your currency that's your business. You might not be able to create bona fide bitcoins, but the thing about bitcoins is they're completely artificial. It's all virtual, and it's not actually backed by anything (e.g. specie). There's no reason to assume anyone who is willing to accept bitcoins will not accept knockoffs. Which, again, is a problem due to the absence of a central regulatory authority. A government can up and decide you can't accept any currency that is not the currency of the sovereign state in which you reside. Anyone tries to use a private currency, you shut that shit down. A government can up and decide creating or issuing your own currency is illegal -- which is exactly what happened in the case of the Liberty Dollar. Nakamoto doesn't possess anywhere near that degree of control over the completely volatile and independent marketplace of the internet. The supply of bitcoins is already artificially narrow courtesy of the developer's plans, and now is further contracted by hoarding, and hey presto! Johnny Code Monkey makes his bitcoin knockoff, it starts taking off, and some of the places and people that accept bitcoins start accepting it. Suddenly the value of bitcoins start sinking rapidly because they aren't the only currency on the block, and the lack of circulation means they can't compete.
Hoarding is the
whole reason BTC is so high in valuation right now, and it's also an artificial valuation on the part of the people behind it and dealing in it based on an overly optimistic assessment of the currency. Bitcoins have no real value as a store of wealth* (see: circulation problem), and, moreover, investing in
any currency is stupid. Currency has no productive value. Currency is a medium of exchange, intended to facilitate transactions and nothing else. And the people valuing bitcoins didn't assess it as such.
Any currency you come up with is going to be convertible in terms of USD so long as USD is the universal standard, which it is at the moment. Your assessment has to work in terms of USD, not BTC, and it has to be measured in terms of the velocity of the currency against the totality in circulation. People
didn't take into account hoarding and in particular the effects of hoarding on fixed-supply currency, and assumed there would just be this magical circulating currency that keeps relative pace with the growth of its economy, if not matches pace outright. A lot of speculators had their assessment at about one hundredfold, and some went super fucking unrealistically high.
Rampant speculation is another problem, by the way, and part of why the market continues to be even more volatile. It's fucking ridiculous how some speculators react. The convertability goes from $150 to $148 and people start fleeing, which causes another temporary plummet in value and more people leave in droves, and it takes time for it to stabilize. And even then it
doesn't really stabilize, because there is literally nothing to make it stable. Even something as simple as affixing the price to gold (which is, historically, not the most stable) would go a long way towards preventing things like the events of today -- where at lowest it had lost
61% of value from its peak, and has when last I heard "stablizied" at almost $100 less than where it was at its apex. That 61% isn't over a sustained period, it's a market shock. And the nature of how bitcoins work also facilitates those shocks. The record of past trade is requisite on all (or at least a consensus) of miners accepting it. Any sizable disagreement means there's no way to be certain what transactions have or have not actually occurred, so it's fucking impossible to measure the actual fluctuations in value.
Bitcoins are literally impossible to actually value. Valuing bitcoins is like valuing gold or silver or copper, except there is no genuine historical basis to run off of. We'll come back to this in a sec.
Another thing on the hoarding note. It's impossible to know who's actually hoarding, and what currency has been lost because of disk failures etc. etc. Because bitcoins are fixed-supply, any lost currency is lost
in aeternum, and lost currency is the same as hoarded currency in that it is not in circulation, and therefore facilitates deflation. But because it is not able to be put back into circulation, it creates perpetual deflation relative to the value of the lost coins. So the
actual deflation bitcoins are experiencing is in fact probably quite worse than all reports suggest, but it's impossible to know who's sitting on their money and what's just straight gone. And the incentive to hoard negates its purposes as currency. I know I'm repeating myself a bit but currency is about transactions. The point of the monetary system it rests on is transactions. It's not to make
you rich it's to distribute wealth across the system. That doesn't have to be equally, or fairly, or whatever, but pooling it defeats the purpose.
*I know, I know. Money as a store of value is actually kind of how we measure the valuation of money. But people are treating bitcoins
in and of themself as a kind of stock, or investment. Generally unless you're a sovereign nation buying up debt, you don't actual invest in currency. You don't take a $10 bill and put it under your mattress and expect to cash in at a market high when the value of that $10 magically becomes $300. You invest it in something, something relative to something productive, that will see the total valuation and the valuation of your investment increase.
But because it's being treated as an investment, it is an investment. And that makes it not a currency. It's a commodity. A stock. It may not necessarily be a bubble (if it isn't, it's remarkably close), but it is bad. Now to come back to the inability to value thing. The value of a conventional stock is relative to cash. What's the stock worth now vs. the expected future cash flows of whoever you're investing in. Walmart generates cash flows. Woolworths used to generate cash flows. Bitcoins don't. Bitcoins are a thing. Just like gold doesn't generate cash because gold is a thing. We value gold by guessing how much someone will be willing to pay for it. And it's the same thing for bitcoins. And because there is no base to it, nothing backing it, the value of a bitcoin can be whatever you assess it to be. You just have to persuade someone (or, preferably, a lot of people) that your assessment is correct, or at least
less wrong than the other guy's. That's an upside from the standpoint of, well, investing because if you can convince someone that tomorrow your store of bitcoins should be worth $4,500 then conflatulations, you've just made a big return on investment (if you haven't,
stop everything). But that's a terrible thing in the long term, that's a terrible thing for stability, that's a terrible thing for currency and that's why it is not a currency. The deflationary status intrinsic to it further undermines its status as a currency. Deflation is
bad. A little eensy bit of deflation now and again can be good, but sustained deflation is toxic. Deflationary spirals are destructive. Anything which assumes deflation as its nature is doomed to failure. You don't necessarily need a central bank, as such, but you do need the capacity to introduce new money into the market beyond and at a rate greater to what the bitcoin schedule is.
Again, a central -- and I would argue the chief -- problem to this unregulated currency is the lack of backing. It is fiat money. Fiat money without the power of a sovereign behind it is meaningless. And, again, it's open to all kinds of crazy shocks. If tomorrow Uncle Sam or John Bull decide bitcoins ought to be illegal, that's going to be a big hit to the market. In the case of the former, it would actually probably completely end bitcoins entirely. (And, let's remember, bitcoins' biggest market is Silk Road, which is effectively one giant internet drug trade, which would gleefully be the target of many a government) Get
something behind it so it stabilizes. The volatility of bitcoins right now is
ludicrous. It's
at least twenty to thirty times that of the USD. Stable currency is the only meaningful currency, otherwise people abandon it and it stops being currency, just toilet paper.
