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.

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Q&A: What happened at Barnet's polling stations this morning?

Eager democrats who arrived early in the morning to vote in the London elections were turned away. 

What’s going on?

When polls first opened at Barnet’s 155 polling stations at 7 this morning, many registered voters found that they were not on the station’s voting lists, meaning they were unable to cast their vote. Many reports suggested that the overwhelming majority were turned away. Rules were later relaxed in some, but not all, polling stations to allow those who arrived with their polling cards (which explicitly state they are not needed to cast a vote) to vote.

Why is this happening?

It is, needless to say, unclear. But some reports have suggested that polling station staff only had the updates to the electoral register (that is, those who have newly-registered) rather than the entire register itself. Which makes you wonder why nobody realised before 7am that there might be rather more people wanting to vote in Barnet than the lists suggested.

Is this a conspiracy?

No, of course it’s not. And if you think it is, take the tinfoil hat off and stop watching Russia Today. Barnet is a Tory-led council. If this mess harms any party it is likely to be the Conservatives. We don’t know how Barnet voted for mayor in 2012, but we do know the votes of Barnet plus predominantly Labour-supporting Camden: Boris Johnson got 82,839 first preference votes while Ken Livingstone received 58,354. But remember London’s not just electing a mayor today. It is also electing the members of the Greater London Assembly – and one of them represents the constituency of Barnet and Camden. The incumbent, Andrew Dismore, is from the Labour Party, and is running for reelection. He won fairly comfortably in 2012, far outperforming Ken Livingstone. But Tory campaigners have been talking up the possibility of defeating Dismore, especially in recent days after Labour’s anti-semitism ructions (Barnet has London’s largest Jewish population). Again, if there are voters who failed to vote this morning and cannot to do so later, then that will hurt the Conservatives and help Dismore.

Is it the fault of nasty outsourcers?

Seemingly not. As we’ve written before, Barnet Council is famous for outsourcing vast proportions of its services to private contractors – births and deaths in the borough are now registered elsewhere, for example. But though postal votes and other areas of electoral administration have been outsourced by Barnet, voter registration is performed in-house. This one’s on the council and nobody else.

What has Barnet done about it?

The council initially issued a statement saying that it was “aware of problems with our voter registration lists” and admitting that “a number of people who had not brought their polling card with them were unable to vote”. Which was a bit peculiar given the polling cards say that you don’t need to bring them to vote and there were plenty of reports of people who had polling cards also being denied their democratic rights.

As of 10.40am, the council said that: “All the updated electoral registers are now in place and people can vote as normal.” There appear to be no plans to extend voting hours – and it is not possible to reopen polling tomorrow morning for the frustrated early birds to return.

What does this mean for the result?

It’s very hard to form even a vaguely accurate picture of how many voters who would otherwise have voted will not vote because of this error. But if the margin of victory in the mayoral election or the relevant GLA contest is especially slim, expect calls for a re-run. Frustrated voters could in theory achieve that via the arcane procedure of an election petition, which would then be heard by a special election court, as when Lutfur Rahman’s election as Mayor of Tower Hamlets was declared void in April 2015.

Some have suggested that this may delay the eventual result, but remember that counting for the London elections was not due to begin until Friday morning anyway.

Is there a dodgier barnet than this Barnet?

Yes.

 

Henry Zeffman writes about politics and is the winner of the Anthony Howard Award 2015.