1) Bitcoin has a bootstrap advantage, not disadvantage; like all Ponzi schemes, it has the potential to return real profit to early adopters.
2) Deflation for a primary store of value in an economy is definitely a bad thing; not least, because it does weird things like causing the value of debts to increase over time, potentially to the point of requiring negative interest; and think about what that would mean - the bank pays you to borrow money from it. Bitcoin probably isn't going to become that, though, so I think it is less of a cause for concern.
3) Convertibility is a systemic problem because it's a confidence game. If the value of bitcoin is on a downward spiral rather than an upward spiral, then you would expect fewer buyers, and those buyers would pay less for declining assets. Paying less in turn sets the market value lower; it becomes cyclical.
And that's where (4) comes in. The reason "when something goes wrong, it will die" is a valid point is because of contagion and panic selling, and the reduction in the number of buyers in the market. It makes perfect sense to me, because it's the exact reverse analogue of why bitcoin has a built-in bootstrap advantage.
I'm getting the impression that people who like Bitcoins are the same kind of people who think gold has an intrinsic worth as a currency, rather than a commodity; in other words, they don't understand that the value of money is a product of supply and demand, no matter whether fiat or specie. Don't forget that 80% of gold production is used in jewellery and industry, rather than bullion etc. What fiat money has going for it is a degree of control to get out of systemic problems.
Ownership of a stock is a claim on the net value and future profit of the company. In a theoretically efficient market with perfect information, stock price would be fixed; its value would be the same as the net present value of all income streams associated with that stock. But we don't have perfect information, especially about the future; so a certain amount of the stock price is formed from expectations about future profit.
It is of course possible that there can be a bubble of expectations in a kind of echo chamber that cause a stock to act like a Ponzi scheme, but ultimately over time there must be returns. The return can be as a stock price rise (but that can't go on forever) or dividends; if the cost[1] of the money invested in the stock doesn't match the return over time, then people will sell the stock and it will fall in price. If too much of the stock price is formed from aspirational expectations of the future (i.e. a bubble), then the price fall may be drastic.
[1] Money has a cost; for example, compared with the interest rate on a risk-free government bond. If an investment isn't making at least that much, it's losing money.
In principle, you're right, currency is just traded like anything else; but the fundamentals are different. A company is (presumably) engaged in profitable production (the future profit, i.e. it does something) and is composed of various capital assets (the net value, i.e. it has something). A currency has neither attributes; its claim on future production and assets is only valid in so far as people have confidence in it and will take it in exchange for other things. A share, meanwhile, is a direct claim on things themselves.
Currency can have its own features that make it worthwhile. No matter what happens with btc's popularity, as long as I have one other party to trade with, some features will be available to me through btc that are not available through normally denominated national currencies. Can't I buy btc because I think these are valuable features and their desirability will drive interest and users, just like I would buy Google because the desirability of its features drives interest and users?
A share of an ETF is a claim on a financial asset that is backed by claims in other financial assets, usually stocks. So while it is one level higher than directly owning securities, it is still a claim on productive economic assets.
> Deflation for a primary store of value in an economy is definitely a bad thing
How can having your assets increase in value be harmful? Traders already account for many stock variables, why would deflation be any different?
> and think about what that would mean - the bank pays you to borrow money from it.
Oh no, not that :P
> "when something goes wrong, it will die"
Sort of like hyper inflation?
> they don't understand that the value of money is a product of supply and demand
They also understand when supply is in control by a few bankers, so is the demand. Who do you trust to ensure supply isn't ramped up: your friendly banker, or math? This isn't hypothetical either http://en.wikipedia.org/wiki/Hyperinflation
Suppose you need capital to commence on some enterprise. You'd like to borrow against and/or sell a share of future income. How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?
In an inflationary scenario, money is declining in value. People with a lot of it are actively looking for ways to put it to work, otherwise they'll end up poorer. But if the money is not losing value over time, and is in fact appreciating, what incentive do they have to put their capital to work? They need much larger returns on investment to make up for the loss of their existing risk-free return.
[1] For bank, read anyone who could lend to or finance you.
> How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?
Why do people invest in stocks when they can play it safe in a bond market? They have a different appetite for risk.
I do see your point, a constantly inflating money supply encourages people to invest. The flip side to that is, are the investments worth it? Inflation is an artificial incentive to invest, which some believe is the cause of bubbles. Remember all those stupid investments in the dot-com bubble? Some believe it's because money was too cheap.
I think this is obvious -- a bank will lend you money if you can offer returns in excess of the risk-free rate of return, balanced by the perceived risk and collateral for the loan.
Similarly, an individual will deposit money in a bank rather than keep it under their mattress only if the bank offers returns in excess of what it gets sitting in the mattress.
Since at the moment there is no FBDIC, as an individual you must also balance the risk of depositing in the bank against the return they offer.
But in a hyper-deflationary environment, which seems bound to happen with a currency with a fixed supply in a growing economy, almost no investment could provide returns in excess of the risk-free rate.
"How can having your assets increase in value be harmful?"
Ponder the implications of bread jumping to an effective price of $25 a loaf. That can and has happened in deflationary collapses, as the reserve fraction jumps toward 100% (due to credit panic).
By assets increasing in value I was referring to currency, not the cost of commodities.
In your story, I would attribute the $25 a loaf bread to the credit panic, not the resultant of a consumers increase in purchasing power -- such as the expected deflation in BitCoins.
2) Deflation for a primary store of value in an economy is definitely a bad thing; not least, because it does weird things like causing the value of debts to increase over time, potentially to the point of requiring negative interest; and think about what that would mean - the bank pays you to borrow money from it. Bitcoin probably isn't going to become that, though, so I think it is less of a cause for concern.
3) Convertibility is a systemic problem because it's a confidence game. If the value of bitcoin is on a downward spiral rather than an upward spiral, then you would expect fewer buyers, and those buyers would pay less for declining assets. Paying less in turn sets the market value lower; it becomes cyclical.
And that's where (4) comes in. The reason "when something goes wrong, it will die" is a valid point is because of contagion and panic selling, and the reduction in the number of buyers in the market. It makes perfect sense to me, because it's the exact reverse analogue of why bitcoin has a built-in bootstrap advantage.
I'm getting the impression that people who like Bitcoins are the same kind of people who think gold has an intrinsic worth as a currency, rather than a commodity; in other words, they don't understand that the value of money is a product of supply and demand, no matter whether fiat or specie. Don't forget that 80% of gold production is used in jewellery and industry, rather than bullion etc. What fiat money has going for it is a degree of control to get out of systemic problems.