I'm no economist, but isn't this blurring the lines between what an asset is and what a currency is? Isn't a currency fundamentally a perfectly liquid asset?
As for previous commenters, the fact that the value of a Bitcoin might be worth ten times more (or less) what it is now in a few weeks has more to do with its volatility than its depreciative nature.
Why would you ever risk money by lending it when you could just "hide it under your mattress" and make money? It's appealing to those who have the option to do that, but I believe it's highly suboptimal from an economics point of view.
The funny thing is that even though it's bad economically, its deflationary nature is good for the uptake of the currency, because, provided more people start using it, those who are already using it become richer (which is why some accuse it of being a pyramid scheme).
On the other hand, its mid-term value depends on why people are buying into it now. At the moment, I see four groups of people: 1) the idealists who believe it's simply a more perfect form of currency that can't be corrupted by governments et al; 2) the technologists who think it's a neat idea; 3) the speculators who think it's going to go up because it's going up; 4) the users who find it more useful than regular currency (like those on Silk Road). I can't help but think that the speculators are the biggest group at the moment. But I might be wrong.
To answer your question, no, a currency is not fundamentally a perfectly liquid asset. "Currency" is a really, really big word, but at its heart, currency is any medium of exchange. There are myriad microcurrencies that are out on the market now, of which Bitcoin is just one.
However, the difference is that Bitcoin has been primarily commoditized. People aren't using Bitcoin as a medium of exchange, by and large. They're trading dollars for Bitcoins in a hope to get more dollars back in the future. That's an investment in an asset, not a currency trade.
Now, to confuse things further, there is a FOREX market which allows you to (if you so chose) speculate on currency. By and large, these currencies fluctuate within the FOREX based on their respective purchasing power at that time (there's a lot that goes into this--I'm simplifying). The thing that makes the FOREX unique is that you can trade any currency with any currency in it. It's not a commodity market, wherein you need to sell your commodity to trade for another one.
Bitcoin wants to be a currency, but is a commodity. Until it becomes a viable (viable in the sense of macro-level use and acceptance) medium of exchange, it will only be a commodity. In one transaction, anything can look like a currency, and anything can look like an asset. But when you throw those words around, realize that at a mirco level, they're nigh meaningless.
> Isn't a currency fundamentally a perfectly liquid asset?
I'd say the defining property of a currency is that it's in wide use as a medium of exchange.
> its deflationary nature is good for the uptake of the currency, because, provided more people start using it
Except that the deflationary nature makes people hoard it, not use it.
For Bitcoin to succeed in the long run, the most important influence has to come from normal businesses accepting it as payment, not from speculators attracted by its skyrocketing market price.
You do not "make" money, when you hide them under a mattress.
Assuming a stable money supply, when all is said and done, you own the same fraction of total purchasing power at the end that period as you had when it started.
You do not get richer, if that's what you mean by making money. You just keep what you had.
But you do make money! When the value of Bitcoin goes up, your wealth increases because the entire Bitcoin economy is worth more, even though your fraction of it remains constant.
Or, to look at it another way, imagine that Bitcoin was the only currency in the world and there were only one million people who each owned 20 Bitcoins (maybe they're communists who have just started using money). Now, give it a few years and the population has doubled so that the average person has 10 Bitcoins. Is the person who still has 20 coins richer than he was at the start? I say yes, because, assuming that people are just as productive, the entire economy has doubled in size in an absolute sense (it can produce twice as much), so those 20 Bitcoins can buy twice as much as when there were only one million people.
(As a less important point, as Bitcoins are irretrievably lost, the fraction of Bitcoins that a person owns of the "real" Bitcoin economy grows larger. And I don't see why this deflationary pressure is different to the deflationary pressure caused by somebody new getting into the Bitcoin economy.)
Say there are 1000 people in the country, and WLOG each of them owns 1/1000th of the wealth.
One of them goes away for 100 years and comes back. The entire country is richer: there are more resources, more people, more goods, more IP, more of everything. And this guy still expects to have claim to 1/1000th of everything in the country.
It's extremely obvious why that first-mover would love that system, and try to convince everyone else to go along with it. It's very dubious what the others would get out of it or why they would ever buy in, besides imagining they could some day be the one who gets to exploit the system at the expense of everyone else.
You're confusing money and wealth. And you saying it yourself, to quote "your wealth increases"
Yes, but this is not the same as making money. You're are not richer in relative terms, than you were. It's only stuff who has get cheaper around.. because people have learned how to produce stuff more efficiently, i.e. cheaper.
And you example with doubling population (in a few years no less) is cheating because.. because you have just added a lot poor people into example.. But, OK. Suppose those of two extra people a person A kids.. But what exactly logic are they not entitled to the whole value of their parent savings?
It is deflationary, of course. What I think the sentence shows is that this is not that huge of a problem. You still will spend your dollars, obviously, even though there is a deflationary currency out there that you COULD make a profit on, because at some point you want or need to spend your dollars. The same logic would apply within the realm of BTC.
