What is it?
The popular introductory video on Bitcoin 1 tries and fails to answer the question, “What is Bitcoin?”.
A bitcoin is a proof of
In the past, skeleton parts and seashells were used as a medium of exchange; and if those, then why not wasted bits of computational effort. 3
Both fiat money (money that is paper) and commodity money (money that is gold) can be debased. When commodity money was widely used, often governments would debase the coins by reducing their weight. Fiat money in use today, is also debased by our government when it increases the total quantity of notes in circulation.
Money Masters correctly state of fiat money, “It is not what backs money that is important, it is who controls the quantity” and additionally I would say “who controls the weights and measurements” in the instance of commodity money.
The selling point of Bitcoins (BTCs) is their value cannot be artificially debased.—
Melchiorre, Matthew, Bitcoin: An Escape from Currency Debasement
Deflation is a reduction in the quantity of money needed to sustain the economy. A fixed quantity of money will lead to deflation in an economy that experiences growth.
... built-in deflation won't be helping anyone on the long term. That free money will encourage people to hoard BTCs forever or until another wishful investor buys them, fueling speculation and price bubbles. Bitcoin will ultimately be regarded as a phony investment with no real value, just like the good ol' Pyramid (Ponzi) Scheme where everyone purchases a ticket just to sell it to someone else later for a high profit until the whole system collapses when it runs out of new victims.—
BitcoinTalk, The current Bitcoin economic model doesn't work 4
The very fact that the newly-generated coin supply dwindles as its user base (hopefully) continues to grow will raise that 19% deflation rate even higher. Let alone that many coins are forever destroyed via HDD failures and lost thumb drives, pushing the deflation even higher and higher. High deflation is bad because nobody spends their money, they only save it because it gains value over time. Can you imagine what would've happened if, say, the Japanese government hasn't printed any (or very few) Yens during the last century while the population exploded? One 1911 Yen would have been more than enough to buy a house today. Who then would've spent their Yens in 1911? Why, almost noone of course!—
BitcoinTalk, The current Bitcoin economic model doesn't work 5
A currency which has a fixed supply of money will always end in a deflationary spiral when there a potential for that currency to become unrecoverable.
A currency is used to enter transactions; the more transactions there are, the more of the money you need. As the economy grows, a fixed-supply currency becomes worth more in terms of goods and services, and people begin to hoard it—expecting that if they wait a little longer, they will be able to buy more. Once hoarding takes over, circulation ends, and with it the function of the currency.—
Bitcoin is a Ponzi Scheme: The Internet Currency Will Collapse
Attempts to refute the deflationary spiral nature of Bitcoin often confuse deflation's cause with its effects. 6
3. Szabo, Nick. Shelling Out - The Origins of Money. 2002, 2005. ↩
4. The current Bitcoin economic model doesn't work, May 2012 ↩
5. The current Bitcoin economic model doesn't work, May 2012 ↩
6. Cawrey, Dnaiel. Could deflation cause problems for bitcoin? ↩