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.


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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Donald Trump's rise is a reaction to Obama's two terms as president

This week, from Barack Obama’s legacy to memories of Angela Carter.

My children can’t believe that I grew up in a racially segregated Alabama, or that I reported on the election of Nelson Mandela in South Africa (for this magazine). One of their earliest memories is of helping a family friend sell coffee and hot chocolate in sub-zero temperatures to the crowds celebrating the inauguration of Bar­ack Obama in Washington in January 2009.

My past is ancient history to them. I strongly recommend that anybody who still feels that way watches In the Good Ol’ Days, the YouTube trailer for a documentary called 13th by Ava DuVernay, the director of Selma. It splices physical abuse of black people at Donald Trump’s rallies (and his taunts about how they would have been “carried out on a stretcher” in the past) with documentary footage from the 1960s. It’s chilling.

When Obama won the Democratic nomination for president, I went back to my old school in Montgomery to see how attitudes had changed. It was no longer segregated, of course, but it was still predominantly white. A former classmate told me that when he was five, the family handyman got chucked over a bridge and left for dead by the Ku Klux Klan. We never heard these stories in school. Then I met the progressive headmaster, who assured me that everything was non-discriminatory now. But, as I left, I was escorted to my car by the school bursar, who told me he didn’t trust Obama because he was a “Muslim”. The way he said it made it sound like the N-word to me.


Going South

There has been surprisingly little discussion about the extent to which the rise of Trump has been specifically a reaction to Obama’s two-term presidency. Yes, we have heard how Obama’s legitimacy has been questioned by the “birther” movement and we have listened to Trump crow about forcing the first African-American president to produce his papers (or rather his birth certificate). But when even a former grand wizard of the KKK – an absurd title – says that Trump talks “a lot more radically” than he does, it is impossible to ignore the racial dimension to this election.

The two big states that Trump still hopes to swing his way are Pennsylvania – memorably described by the Clinton adviser James Carville as Philadelphia and Pittsburgh with “Alabama in between” – and Ohio, where my mother was born. She is from the northern Democratic stronghold of Cleveland; Cincinnati, she used to sniff, was the South. She didn’t mean geographically.


Bill and Hill

There are many good reasons to be wary of Trump but I have never felt comfortable with Hillary Clinton. The governor of Alabama in my day was Lurleen Wallace, who was in office because her notoriously racist husband was ineligible to run for a consecutive term. She didn’t even bother to disguise that she was a proxy candidate and ran as Mrs George C Wallace, while he became known as “the first gentleman of Alabama”.

Admittedly, Hillary Clinton is far more her own woman than Lurleen ever was but Bill Clinton, remember, is a former Southern governor, of Arkansas. Bill and Hill had the idea long ago of a “twofer” run at the White House – and they’ll definitely have known about the Wallaces’ example. Alas, it’s too late to dwell on how much better it would be if the first female president of the United States hadn’t already been its first lady and Bill Clinton hadn’t set his sights on returning as first gentleman. But it’s Trump v Clinton and, thus, no contest.


Granny knew best

Enough about the US elections, hard though it is to tear our eyes away from the car crash. Last week, I went to the launch party at Daunt Books of Edmund Gordon’s wonderful biography of Angela Carter, a literary heroine of mine. I was a young publicist at Virago in the late 1980s when I visited Carter at home in Clapham, south London, where she was living with her much younger husband, Mark, a potter, and their little boy. She looked like a magnificently eccentric granny to me, with her shock of thick, wavy, grey hair. I thought that she was ancient because she’d had a baby at 42 but, as ever, she was just ahead of her time.


Partial eclipse

I’d no idea until I read The Invention of Angela Carter just how many Virago novelists she had nurtured. Pat Barker, for instance, the author of the Regeneration trilogy about the First World War, was one of her protégées. The photographs, though, show Carter with the young men who eventually eclipsed her: Salman Rushdie and Kazuo Ishiguro. She taught Ishiguro creative writing at the University of East Anglia and introduced him to
her agent, Deborah Rogers. He told me at the party that there were only half a dozen students on the course with him and the university couldn’t be bothered to find enough people to fill the places the following year. Yet it has since become the stuff of legend.


Lost treasure

Carmen Callil, Carter’s great friend and the founder of Virago, was also at the party. She told me that her joy in publishing faded when Carter was offered only £60,000 for her last novel before she died of lung cancer in 1992. By then, the men – Rushdie, McEwan, Amis, et al – were getting far bigger advances of several hundred thousand pounds, even though she was every bit as good as them (or better).

At the end of her life, her thoughts were on money and how her “two boys” – her husband and son – would manage without her. She told her literary executor, Susannah Clapp, to give permission to everything and anyone who wanted to use her work for commercial purposes, however naff or vulgar. Her last book, by the way, was to have been a fictional life of Adèle Varens, the vivacious young ward of Mr Rochester in Jane Eyre. How I would have loved to read it.

Sarah Baxter is a former political editor of the New Statesman and the deputy editor of the Sunday Times

This article first appeared in the 20 October 2016 issue of the New Statesman, Brothers in blood