The whole bitcoin craze may be happening based on the faulty assumption that currency hyper-deflation is any better than currency hyper-inflation.
A historic primer:
Immediately after World War 1 and continuing into the mid-1920s, the German Deutsche Mark experienced what is referred to as hyper-inflation of their currency under the Weimar Republic. The value of the Mark against the Dollar and most other currencies was reduced exponentially.
People would often have to buy food and other items in the morning before prices changed.
That state led to the collapse of the Weimar Republic, which took over leadership in Germany after the World War 1, and set the stage for Hitler and the Nazis.
A more recent example of currency hyper-inflation is the Venezuelan bolivar, which saw currency hyper-inflation, in the last two years. “Venezuela’s currency is so devalued it no longer fits in ordinary wallets.” Read a Washington Post article from November 2016.
Is Hyper-Deflation Good for Currency
What bitcoin and many other crypto-currencies are currently experiencing is the other side of the coin: currency hyper deflation.
The entire run up assumes that hyper-deflation is good for currency.
If that’s the case, why were China and other third world which have experienced strong economic growth have been manipulating their currency to make them weaker?
Indeed, Donald Trump made China’s currency manipulation a major issue in the campaign; he argued the Chinese, Mexicans, and others manipulate their currency so that their labor is cheaper to foreigners, mostly the US, and their goods are cheaper abroad.
But Crypto-Currency Is Not Tied to a Nation
Crypto-currency is not the same as the US dollar. It’s not tied to a nation, so what the Chinese might be worried about bitcoin owners would not.
But this only means that hyper-deflation is of crypto-currency affects them differently, not that they are immune from its effects.
The Amazon Hypothetical
To understand, let’s imagine that bitcoin or another cryptocurrency signed a deal with Amazon to use those cryptocurrencies in a significant way to purchase on their site.
How would this work? Amazon is a great example as it has mastered, more than most, seamlessly transacting in multiple currencies.
If one wanted to make a purchase in US dollars they’d go to the flagship site, amazon.com, in Canadian dollars, amazon.ca, and so on.
Since crypto-currency is not tied to a specific country, it could be available on every Amazon site. This gives it an advantage over other currencies, but it’s the only advantage.
There would be two ways in which crypto-currency could be used for transactions.
One way is that Amazon would be able to in a real-time manner calculate the spot price of bitcoin versus the dollar, or whatever currency is being used, and figure out your payment that way.
Another way, is that the crypto-currency price would be set and displayed on Amazon (So it would be $4.99 for the book or an equivalent cryptocurrency price) along with the price in the regular currency.
The second would never work with the currency crypto-currency gyrations since the price would either need to be changed constantly or Amazon would take a hit repeatedly.
The first could work in theory- though it’s unlikely that many retailers would be able to build code which would be able to translate spot crypto prices)- but it would rarely if ever make sense to use it.
When the crypto-currency is in a period of hyper-deflation it only makes sense to hold it because it’s constantly worth more. If one is to use it to make a purchase that is value which will immediately be lost.
As such, in its current market state, crypto-currency has no practical value. Currency is primarily used to exchange for goods and services, and while crypto-currency is in a state of hyper-deflation there will be little of that going on.
Even if hyper-inflation stops but the currency experiences hyper volatility, the currency will have little use for its main function.
As such, the more the value continues to increase the less substantive value it has.
That was never the goal of crypto-currency. From the very first 2008 white paper, the goal was an alternate method of exchanging money for goods and services.
Bitcoin was not intended to be a speculative vehicle and yet, today, that’s its primary use.
Meanwhile, the purpose for which it was invented is largely non-existent.
To believe that these two dynamics can continue to co-exist is naïve.