That's a problem because then BTC is a perfect investment which always grows at exactly the same rate as the global economy. So it gives you the exactly average return on investment with zero volatility. So it seems like a near-perfect store of value and people will want to hold it rather than spend it.
Assuming BTC gives exactly the average return on investment with zero volatility we shouldn't expect all people to hold it rather than spend it. Neither an economy of actual humans nor an economy of ideal agents would act that way.
With respect to consumption: Use as a transactional currency for spending would track convenience factors. People buying stuff with one fungible asset is much the same as buying stuff with another asset then transferring between their two accounts. For spherical cow in a vacuum purposes we can ignore this. Investment spending is the issue here.
In the counterfactual BTC currency which perfectly tracks the global economy the incentive is for anyone who believes they know of any investment that they expect to have higher returns than the average of the global economy to spend their bitcoins and invest in that opportunity. Those who don't believe they have any knowledge of anything that will produce better than average returns or who are risk averse will instead purchase bitcoins either directly or indirectly from those that do have that knowledge.
In that idealised scenario the BTC currency is essentially operating as a vehicle to efficiently transfer real-world capital to places those who people with value expect will provide better return in investment than the average growth of the economy. Note that I am emphatically not claiming that this is an ideal system, it would be bizarre if something so arbitrary happened to be optimal. Just that it doesn't seem to quite have the degree of problem that is described. People would certainly want to spend it.
There are plausible reasons why predictable inflation of the above currency could be more desirable than precisely zero inflation. Let's say Satoshi had arbitrarily decided that BTC mining should go on indefinitely, with the bitcoins produced per year exactly equalling 2% of the number of bitcoins already mined. Then the incentives to the the participants change slightly. Rather than people who expect an investment to grow at more than the average for the global economy to be the only ones to so invest, it is any (risk neutral) person who expects an investment to grow at not less than 98% of the rate of the global economy. That has (well known) advantages.
The unfortunate problem with the above monetary policy is that we just effectively dedicated 2% of the of the value stored in the bitcoin currency each year to the computation of irrelevant hashes (in addition to irrelevant computation that is proportional to transaction fees). This problem applies to any cryptocurrency based on cryptographic mining. There may not be a good solution to that problem that potentially prohibitive degree of waste that does not rely on something external to the cryptocurrency as basis. (And the latter is not necessarily a problem. The currency having value in itself isn't the most potentially useful feature of bitcoin.)
Let me rephrase: The problem is that Bitcoins will have an advantage over the average productive investment, e.g. stocks (sort of), as a store of value, since Bitcoin has all their average expected growth with none of their added (local) volatility. This is what presents the starting problem in an economy that starts out with a steady velocity of Bitcoins, and then increased holding makes the velocity go down (and the value go up, and the bubble effect hit even harder). This is why we don't get an equilibrium with steady Bitcoin velocities. Even if we ...
Should you probably donate a bitcoin to your future self?
Bitcoin has been in the news a bit lately. In case anyone hasn't been following recent events, its price hit $266 per coin, toppled to $50, and then climbed back to a rate which has been between $80 and $140.
This goes to show its high volatility at the present time, which means that any individual trade you make will be something of a gamble with a noisy, hard-to-predict outcome. You could be buying in right before a boom or a bust. Buying and then selling at random intervals will probably cost you more money than you make, due to transaction fees. Trying to outsmart the market in the short term with nothing but your own human instincts and powers of induction will probably cost you even more money because Markets are anti-inductive. The most realistic way of making much money with bitcoin -- sans owning your own exchange, having skill and resources for serious technical analysis, a faster-than-usual trading bot, or fantastic luck -- is if you can determine that the current price is very poorly calibrated relative to its future value, and if you buy and hold very long-term.
Market swings constitute a psychological attack, assuming you know and care about them, so employing the buy-and-hold strategy can be more difficult than it looks. However, as it happens, you can render bitcoins almost purely unspendable (i.e. impossible to transfer via the network) for a finite period of time as a technical matter. You could for example create a brainwallet based on a lengthy memorized passphrase with a random value appended to it. The larger that appended value, the (exponentially) greater the amount of processing time needs to be spent to find out what it contains. Having access to the memorized passphrase gives you the overwhelming advantage over a brute force attacker, whereas the appended random value immunizes it against dictionary attacks. (Todo: Find or write a program for this. Prove it works, and move some of my bitcoin holdings to a wallet requiring a day or more to unlock.)
Early adopters with moderate crypto skills could thus have a distinct advantage compared to the average investor and realistically hope to beat the market on that basis if mere human psychology and resistance against short term panic-selling is the fundamental constraint. So that's one consideration that could play to our advantage. Assuming, that is, that bitcoin is worth taking seriously to begin with, and not just a matter of geeky fun.
The question that matters for that consideration (the one that differentiates long term speculation on bitcoin from various speculative bubbles in gold, real estate, tulips, etc.) is this: Of all the possible worlds, where is the probability mass concentrated with respect to the future of bitcoin, in terms of how it will actually be used? Is there an overwhelming tendency for bitcoin to fail and be replaced by other things (e.g. other cryptocurrencies, or fiat dollars) -- or is it actually likely (in at least the minimal sense of "not overwhelmingly unlikely") to turn into a major store of wealth in coming decades?
I rather think it is the latter. But first, let's consider what I believe to be the strongest argument against it, which unpacks to three parts:
Taken together, this seems like a pretty good knock-down argument. It apparently implies, as a matter of basic economic law, that some other cryptocurrency must win over it in the long term, and/or that fiat money will retain its dominance. But the thing to notice is that it's not so effective against bitcoin as a massive store of wealth per se, so much as a currency that will be directly used, in a manner directly analogous to how government-backed monetary units are used. Non-currency forms of wealth which serve some other purpose can safely handle quite a bit more volatility, because their value is not dependent on being trusted as a currency, but rather as a value storage mechanism.
Here is the general scenario that I think holds more probability mass than bitcoin-as-a-traditional-currency, and yet works as a fairly realistic alternative to bitcoin-as-a-flop:
Can this be done? Consider the following more specific scenario as an example:
This is just one example I've come up with, and may not be the best. Various other schemes are possible. (For example, it could be possible for any dollar-owner to convert them back to bitcoin, as opposed to the person who originally minted them.) What the various possible models for doing this have in common is that they allow you to set up currencies which dynamically increase and decrease in supply, depending on how much bitcoin people are willing to invest into them, and how badly people want bitcoins back later on.
A competing scenario to the above would be one in which a better-optimized cryptocurrency protocol implements this, or some other stability-prone algorithm and thus outcompetes the volatile, easily manipulated, "primitive" bitcoin protocol in use today. I used to think I could just jump on the bandwagon when this comes around, maybe strategically sell someone a pizza and end up a millionaire.
However, I've somewhat lost faith in that possibility of late because I realized that bitcoin is much more powerful than it seems, and is capable of substantial self-modification if needed for compatibility with a newer and better system. The only thing locking us to the current protocol is the degree to which bitcoin-owning miners find it in their best interests to continue to use it as it is. A competing algorithm that makes bitcoins more valuable without violating existing expectations would probably not be hard to get people to update to.
Another thing that makes me think bitcoin will tend to self-improve to the point of winning against competitors is that at least some people with substantial assets in bitcoin form are likely to be very proactive in defense thereof. Assuming they remain committed to the long game, and are able to acquire sufficient short-term wealth to pursue their goals, they can do a number of things to defend it against the various plausible attacks: Hiring programmers to improve the client software and render it less hackable, hiring lobbyists to protect it against regulatory interference, employing botnets to attack competitor currencies, slowing down or preventing transactions that appear to be going through anonymizing laundries that could be associated with tax-dodging and illegal drugs, and so forth.
So it seems to me like owning at least one bitcoin and holding onto it for long-term purposes is probably a good idea.