[Cryptography] On Security Architecture, The Panopticon, And "The Law"

[John Kelsey]

Distinguish the different uses of bitcoins.  For buying things online, yeah, there's a demand for bitcoins based on wanting to be able to do online transactions.  To the extent there are transactions that lots of people prefer to do in bitcoins (whether legal or illegal), there will be a certain amount of demand for bitcoins based simply on how many bitcoins are either involved in a transaction right now, or are being held ready to be used for a transaction soon.  But bitcoins are online, and their volatility makes them an awful store of value.  (They can be a speculative investment, but they aren't where you'd want to park your retirement fund on your 60th birthday.) They're too volatile to be a good unit to price things in, too.  

If bitcoins become a very important way to conduct business online, and they remain as volatile as they are now, I expect people will buy bitcoins only when they need to do an online transaction.  Their actual wealth will be kept in dollars or euros or something.  The inherent traceabiliity of Bitcoin probably creates more demand for holding bitcoins, as well, oddly enough. (You need to go through a laundry or something to get any decent anonymity, which means more latency in your purchases, which means more demand for bitcoins.)  

I am pretty skeptical that much of the economic theory around monetary inflation or deflation applies very cleanly to bitcoins, given that it's all online, with very low transaction costs, and is likely used only to do specific transactions.  

--John