El Salvador abandons Bitcoin as legal tender

If king for the day with a sovereign wealth fund I wouldn't forbid investment choices like this on risk grounds, I mean you need risk assets as well as boring ones, right? But I have problems with the moral quality: it's like state investing in the casino business. Monaco? works fine. Anywhere else? It's got problems.

Like a lot of people, I probably fall into severe errors which would be bread and butter for "bad economics" reddit groups but truly, I can't see how this wasn't forseen and expected. It was about WHEN, not IF.

This. Bitcoin proponents often claim that eventually everyone will use Bitcoin for payments ("Finally no more governments or central banks!") and that's why it will increase in value, so everyone should invest in BTC.

But this argument is fundamentally flawed: A currency, in order for it to work (in order for people to be able to trust it), needs to be stable in value. Which contradicts it being an investment vehicle and drastically varying in value over time.

The reality is, Bitcoin and similar, are not being used to actually purchase things. Not at any notable percentage. You're "best bet" is to horde it, and that doesn't make a good currency.

But most of the comments are about how stable currency and stores of wealth are actually bad! It kind of sounds like we think bitcoin is working.

If USD is inflating and Gold is staying still, is gold “deflating”?

Why would anyone sell? Well at some point in your life you want to use the money to accomplish your life goals

This is time value of money. If I wait 20 years instead of buying a house, I can have more money. But that’s 20 years of my life I didn’t live in the house I wanted.

I could invest more in S&P and not go on vacation, but then I won’t have as much time to go on vacations.

Goods and services now can be more valuable than money later, and that’s why people sell. And that’s why deflationary currency is fine.

If you’re asking if people would not use their deflating currency to buy lattes and sneakers, I disagree. People like sneakers and lattes more than money. They prove this everyday by buying them instead of s&p.

There is an issue of the cost of a transaction - which nis bad for btc and s&p. Nobody wants a tax form for buying a pizza. But the regulatory environment creating high selling costs is orthogonal to the deflationary property.

The argument simply is that exchange should be frictionless and deflationary currency will slow the velocity of money. I guess you agree this will lead to reduced prosperity and economic activity, though you call it frivolous purchases. Your comment about preferences doesn’t play into it; this is about mechanics of exchange, and a precious asset is an inefficient medium for commerce which would lead to reduced economic activity because not only do you have to factor in the opportunity cost of buying a good or buying some other good (sneakers or s&p), now you also have hodling, zero economic activity, as a 3rd option with its own expected return and opportunity cost to forgo. When I buy sneakers, the s&p 500, or btc, my dollars don’t disappear. A counterparty receives them and they stay in the economy. If you pay me in btc and I just hold it, then that money effectively does disappear from the economy.

And I’m not even mentioning all the macro issues of not being able to provide liquidity in the form of new capital in times of crisis.

I’m advocating for stable currency. Not bitcoin.

> you agree this will lead to reduced prosperity

I agree that it will reduce the velocity of money and maybe “GDP”. But not prosperity, individuals being able to save wealth into the future is a better life outcome than more goods changing hands.

> and a precious asset is an inefficient medium for commerce

You are conflating liquidity with deflation. To be a currency it has to be liquid, we agree. We also agree btc is not as liquid as cash. But deflation or stability is orthogonal from liquidity.

> now you also have hodling, zero economic activity,

Already addressed. People want money to buy goods.

> my dollars don’t disappear.

The value isn’t lost in the exchange but it’s lost everyday due to inflation. And by “lost” I mean transferred to government projects.

> that money effectively does disappear from the economy.

No it merely is saved for a future consumption date. If we average consumption needs of participants in the economy there is no reason to expect a monotonic hoarding effect. That would mean consumers are not satisfying their desires for goods.

Here is one last framing. The economy is not money, it’s goods and services. Money is just a tool for claiming them. So what does an inflationary currency do to help the economy? Does it cause more people to get out of bed and create new goods and services? No. It just transfers claims to resources to someone else.