The new crypto-currency Bitcoin means many different things to different people. Bitcoin advocates have long pointed to the fact that is is true “hard money” whose value is truly determined by supply and demand rather than social and political forces.
Bitcoin prices, however, are highly volatile and this is not likely to change in the near future. Over the last three years, the price of a bitcoin has ranged from under $100 to over $1,200. Bitcoins are trading at slightly more than $502 as of 12:45 p.m. EDT today, April 21st.
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A new article by Jerry Brito on Reason.com titled “Bitcoin is No Substitute for Government Money, But a Refuge From Control” points out that while Bitcoin has the potential to be useful as an equalizing factor in the global economy, it is not an effective replacement for “fiat currencies”, nor is it a real hedge against traditional inflation.
Bitcoin is inherently deflationary
Brito highlights that Bitcoin, like gold-or silver-backed currencies, is inherently deflationary given a limited supply. However, a fixed supply is not really a problem for the use of Bitcoin unless and until it displaces the dollar as the primary currency. But history shows us that having a deflationary monetary unit is generally not a good thing for the average consumer.
For starters, deflation punishes debtors because falling prices increases the real burden of debts. Second, unemployment increases during deflationary cycles because it’s generally easier for employers to reduce the number of employees than try to actually cut wages (and businesses must undertake one or both of these alternatives to remain profitable).
Bitcoin is ideal hedge against hyperinflation
Brito does see a place for Bitcoin in the rapidly evolving 21st century economy. He argues that even given its volatility, Argentinians or Venezuelans might be well served by owning some bitcoin as a hedge against the hyperinflation brought on by government policy. “Bitcoin could be extremely useful in countries, such as Argentina, Cyprus, or Venezuela, where hyperinflation is a threat or where the government is otherwise abusing its monetary powers. First of all, it may be the case that despite its volatility, bitcoin may be a relatively better store of value than some imploding fiat currency.”