Matthew Yglesias made a very strange argument about Bitcoins a few days ago.
So if over time more and more people want to use Bitcoins to conduct transactions of various kinds, then the price of bitcoins is going to have to rise and rise. The problem is that if the price of a bitcoin is on a steady upward trajectory, then nobody’s actually going to want to spend a Bitcoin on anything. And if everyone’s hoarding their Bitcoins, then the network is actually useless. Then, since it turns out to be useless, you get a crash.
This seems to completely forget about marginalism. What Matt Yglesias seems to be saying is that people want to hold on to assets which they believe will rise in price. That may be true, but that does not mean they hold on to these assets forever. Don’t believe me? Look in your retirement account. You most likely believe that the assets in there will be more valuable in the future. (if not, you’re doing it wrong) But that will probably remain true the day you retire and sell part of your investment portfolio in order to pay living expenses. Sure, you could wait and get another year of return, but that also means not getting food, electricity, shelter, medical care, etc…The reason Bitcoins so wildly fluctuate is not due to their fundamental deflationary nature. It is because the market is not mature. You have a relatively small number of people who think it is the coolest thing ever and are acting somewhat irrationally. If Bitcoins were to see wide adoption (not something I expect) the total mass of value would increase significantly and the smaller somewhat irrational players wouldn’t be able to swing the market as much.