Bitcoin is in hyperdeflation

Bubble or not, the underpinnings of Bitcoin pose problems to its use as a popular currency.

Business Insider's Joe Weisenthal covers the still-soaring price of Bitcoin – which has now broken $100 – and puts an interesting spin on the situation: the Bitcoin economy is now suffering hyperdeflation. He writes:

So a few weeks ago, a pizza might have cost you one Bitcoin. Today it might only cost you a fifth of a Bitcoin, which sounds great, but then if you're looking at the above chart, why would you spend anything?

Why would you buy a pizza (or pot or anything else) when tomorrow your Bitcoin will be worth more? With this kind of chart, you'd be insane to do anything but hoard your coins.

So yes, all the hype is great for some folks in the ecosystem, but ultimately there's a reason that over time, government prefer to see their currency slowly depreciate. A surging currency leads to hoarding which kills real transactions.

I've written repeatedly that I think the current price of Bitcoin is the result of a volatile bubble – though I'm no more certain than anyone else as to when that bubble will burst – and that explanation is part of the reason why. The faster the Bitcoin price rises, the fewer actual transactions you'll see being made with it. Insofar as there is a "real" price of the currency, as opposed to the inflated price it's showing now, that must be based on people actually using Bitcoin, rather than hoarding it. While the currency is in hyperdeflation, that won't happen (outside of a few crazy people doing things like selling their houses in it).

But while the bubble-like price of Bitcoin at the moment must be separated from its long-term prospects, those are also harmed by the promise of deflation.

The way the currency works, an ever-decreasing amount of new coins are introduced to the money supply, until 2140, when every coin in existence will have been created. Since Bitcoins can be destroyed – losing the private key for your account is basically the same as shredding your wallet – the economy will actually enter deflation some time before then, even counted in Bitcoin terms. With deflation comes hoarding, as things become cheaper to buy in the future rather than now; and that slump in demand would have the same effect as a permanent recession.

A normal currency could implement some unconventional policy to fight that. A tax on cash holdings, for instance, would serve to drop the real interest rate low enough to prompt some spending again. But that can't happen with Bitcoin, where holdings are anonymous by default, and – let's be honest, here – a large proportion of the actual use of the currency is criminal in nature.

Bubble or not, the underpinnings of Bitcoin pose problems to its use as a popular currency. Hyperdeflation may not spark the same populist fear as hyperinflation, but it's just as bad.

*pop*

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Nicola Sturgeon and Tony Blair. Photo: Getty
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Nicola Sturgeon's SNP, like Tony Blair's New Labour, is heading for a crash landing

The fall of Tony Blair should be a set text for anyone wishing to know what happens next to the SNP.

If there was one thing the SNP and New Labour had in common, it was the hope. Both offered themselves as a burning torch of optimism to publics that had become tired of the same old gang running things in the same old way. Both promised a fairer, more equal society and a fearless embrace of the modern world with an appealing freshness and energy. The voters bought it: both won big, repeatedly.

The thing is, if you’re elected on a mandate to be different, you’d better be different. In many areas, for a long time, New Labour managed to be just that. The smiling PM with the huge majority pushed through radical policies, some of which even worked. Tony Blair’s methodology was so successful and so convincing that the Conservatives and the Lib Dems reshaped themselves in his likeness. Arguably, a form of New Labour won in 2010 and 2015.

But, as they say, it’s the hope that kills you. When the inevitable attritional realities of governing start to weigh, when you make, as you will, bad decisions, when the list of enemies grows long, when you’ve just had your time, you’ll fall like all the rest – only, when you’ve soared so close to the sun, you have that much further to plummet.

The fall of Blair and of Labour should be a set text for anyone wishing to know what happens next to the SNP. Sunday night’s debate between the Scottish party leaders was, I think, a foretaste of what’s coming – a public that until recently was politically and emotionally invested in the Nats is growing restive. In time, this will turn to disenchantment, then anger, then revenge at the ballot box. This is the unbreakable cycle of democratic politics.

Some of us have warned since the start that the SNP had over-promised and could only under-deliver. Its raison d’etre is independence; everything else - literally everything else - is just another brick to build the path. And so education reform cannot be either radical or unpopular, even if it needs to be so to work, because the SNP cannot afford to alienate teachers or the teaching unions or parents. Bricks, you see. Same with the NHS and doctors and health unions and patients. All the separatists have done – all they could have done, given their nature - is deploy the rhetoric of the radical while in reality body-swerving hard choices and conflict at any cost. And where they have found themselves taking flak, they’ve pointed south to Westminster: "it’s no’ our fault, it’s theirs".

But voters show signs of wearying of the predictable blame game and waking up to the time-limited strategy of show-over-substance. Middle Scotland is either ignored or maligned by the middle-class socialists who drive the nation’s political debate, but it is where elections are won. The SNP has secured the support of enough of these people to win every recent election in style, but somewhere along the way the party seems to have forgotten this was a mandate not for independence, but for good government. Ten years in to SNP rule, each new audit of public services seems to wail like a warning siren – things aren’t just not improving, they’re getting worse. The SNP is not keeping its part of the deal.

So, during Sunday night’s debate it was Nicola Sturgeon, not Ruth Davidson or Kezia Dugdale, who found herself in the audience’s cross-hairs. It will have been a strange experience for a woman more used to public adulation and a clamour for selfies. There were the teachers, who complained about the damp squib that is the Curriculum for Excellence, the SNP’s flagship education policy; who pointed out that a fifth of primary pupils are leaving without basic literacy and numeracy skills; and who warned that lowering the standard of exams in order to push up the pass rate was not a mark of success.

Then there was the nurse who said she had been forced to use a food bank (the existence of which has been used repeatedly by the SNP as a stick with which to beat the Conservatives and Westminster): ‘I can’t manage on the salary I have [which is set by the Scottish Government]. You have no idea how demoralising it is to work in the NHS. Don’t come on your announced visits, come in in the middle of any day to any ward, any A&E department and see what we’re up against.’ She delivered the evening’s killer line: ‘Do you think your perceived obsession with independence might actually cost you… in this election?’

The list of reasonable criticisms is growing and will grow further. The ideological obsession with free university tuition for Scottish students is increasingly seen as a sop to the better-off, while in England the fee-charging regime has seen the number of students coming from poorer families climb. Ms Sturgeon’s demand for a quick second independence referendum, when a worried middle Scotland was focused on what Brexit might mean for its future, was tone deaf.

The SNP has another problem (one that New Labour, for all its flaws, didn’t face): its doctrine of infallibility. The Nats’ constitution explicitly prohibits its elected members from criticising the party, its policies or each other. While total unity is useful when you’re on the climb, it starts to look bonkers when the cracks are showing. Allowing public self-criticism, far from being a sign of weakness, is a necessary vent for inner tensions and a sign to voters that a political party is something more than a cult.

That ‘cult’ word has long dogged the SNP and its supporters. The party has tried hard to normalise its electoral appeal while keeping the flame of independence burning bright, but it has been a difficult balancing act. The pro-independence mob is an ugly thing when it is unleashed (and it has suited the leadership to open the cage at times). Claire Austin, the nurse who criticised the First Minister on Sunday, has found herself at its mercy. Immediately after the debate, the Nats briefed (wrongly) that she was the wife of a Tory councilor. The SNP branch in Stirling said Tebbitishly that if she was having to use food banks "maybe she needs to tighten her belt a bit more?" Joanna Cherry, a QC, MP and the SNP’s Home Affairs spokesperson, was forced to publicly apologise for spreading "Twitter rumours" about Ms Austin.

The ravening horde has largely kept its head down since the 2014 independence referendum, but we now see it hasn’t gone away - it is not enough for the SNP’s critics to be debated, they must be destroyed. This isn’t the behaviour of a normal political party: it’s the behaviour of a cult.

I might be wrong, but I have a feeling that when the SNP does fall it will fall quite quickly. Its belief in its infallibility, its inability or unwillingness to do self-deprecation or apology, will increasingly aggravate voters. There is nothing to suggest the current public policy failings will be addressed, and plenty of signs that things will get worse. How, then, do you arrest your fall?

The SNP offered hope and promised it was different, and the voters believed. The sense of betrayal could make for a very hard landing indeed.

Chris Deerin is the New Statesman's contributing editor (Scotland). 

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