In 2010, a Florida man parted with 10,000 units of a new-fangled anarcho-currency thing called “bitcoins” in return for two hot, fresh, tasty pizzas.
At the time, that was about $40 worth of these “buttcoins” (NSFW), so that was already quite an expensive pizza. (Must’ve been a pretty serious case of the munchies.)
Three years later, and Bitcoin has boomed, busted, and boomed again. It’s been used by Cypriots, Iranians, dope fiends, and people who just want to buy a pizza without Big Brother knowing whether or not they like anchovies.
And after three years, one bitcoin buys you right around USD 100 – so those pizzas back in 2010 are now worth a cool one million dollars.
Bitcoin does this occasionally. Unlike most currencies, the supply of bitcoins is extremely tightly constrained, so the currency undergoes sharp bouts of deflation whenever Bitcoin becomes trendy. And if a currency’s undergoing deflation, you’re not going to buy anything using that currency (lookin’ at you, JPY); you’re going to hoard the currency, and the deflation becomes a self-fulfilling prophecy.
And when the supply’s as tight as it is with Bitcoin (and when it’s not possible to borrow the currency to short it), you end up with the world’s first case of what’s been coined “hyperdeflation“.
Let’s imagine a hypothetical pizza… like the potato pizza at Ragazza on Divisadero. It’s really good pizza. It’s got potatoes, smoked bacon, leek, thyme and gorgonzola on a thin, crispy, crunchy, tasty crust. And it costs USD 16 – or 0.16 bitcoins.
But let’s imagine you live in Bitcoinia, where the currency’s deflating by two-thirds every month. (BTCUSD’s gone from 33 to 100 in the last month, so this is pretty much bang on.) In a month’s time, if this trend continues, that pizza’s only going to cost one-third as much – about 0.05 bitcoins. Would you buy a pizza now for 0.16 bitcoins if you knew it would only cost you 0.05 bitcoins in a month’s time?
…okay, you probably would, because Ragazza’s pizzas are phenomenally tasty. (Don’t tell anyone, though. It’s our little secret, OK? Just you, me, and the internet.)
But imagine if you were talking about a big durable good, like a car. Would you pay 2400 bitcoins for a brand-new Ferrari California if you knew you could get it in a month’s time for only 800 bitcoins?
Exactly. And neither would anyone else – so your economy grinds to a Japan-style halt.
That, incidentally, is why central banks actively try to encourage inflation – because the alternative is so much worse. It’s also why Bitcoin is a badly-designed currency – its natural deflationary tendencies mean people will hoard it instead of spending it.
Unless they really, really want a pizza.