As the monetary base of Bitcoin sharply rises past $1 billion, spending the coins on physical goods makes little sense.
People who think they are ‘late to the game’ are quick to call Bitcoins a pyramid scheme. The currency can seem ridiculous, like Farmville tokens. It becomes only more suspect as holders of Bitcoins preach their merits in the cacophonous chambers of the Internet. Those simultaneously holding and explaining Bitcoins sound nerdy at best, and unapologetically crazy at worst. “But it’s worth something because of the GPUs solving problems, really!”
On the other side of the coin, those flush with coins who invested early have their own problems, and these are more easily discussed in terms from behavioral economics. If you bought a pair of alpaca socks using Bitcoins two years ago, you spent what amounts to several hundred dollars in BTC today. In two years, could those coins buy the farm? From an outsider perspective, this rapid rise in the price is stunning. From a buyer’s perspective, this severely changes how you approach the act of spending even a tenth of a BTC in the future. Knowing with some surety that the value could increase dramatically in a matter of months causes our decision-making process to be dynamically inconsistent. This has implications for the liquidity of the currency. Let’s call this the alpaca problem.
It’s not an easy thing to anticipate. How will our future selves react to value increases in money we hold? How does an economy function amidst reliably increasing purchasing power? Buyers, sellers, traders, miners, and hoarders alike must come to terms with the behaviors of their future selves and adapt to their own predictions. Everyone in the mix needs to somehow map out their disparate approaches to this unique currency for a healthy economy to form. While the future supply of Bitcoins is predictable based on the rules built into the protocol, the psychology of actors within a deflationary virtual currency is completely unknown territory.
The $1,000 Pint of Maple Syrup
Onto a concrete example. I’ve setup a site to sell maple syrup from my girlfriend’s family’s farm in Vermont for Bitcoins. At first, I thought it would be a popular item. Maple syrup doesn’t spoil, it’s something many people buy (especially in the U.S.), and I even discounted the price by 30%. It’s the cheapest place to buy organic Vermont maple syrup, which normally sells for much more than plain old maple. However, in the 6 months the site has been up and advertised, only four pints have been sold. FOUR. I think it’s worth mentioning that my order number on Bitmit.net, the ‘Ebay of Bitcoins’ for the most recent order was #8900. Bitmit came on the scene in September of 2011, so that gives us about 16 orders a day. If people can’t expect “Bitcoin Millionares” to purchase things, what’s next?
Pricing for Deflation
Here’s how deflation affects merchants: As a ‘merchant’ (if four pints a merchant makes) I know that I can heavily discount items sold for Bitcoins due to the current trajectory of the currency. I could even put up the syrup for 50% off and expect to break even within two weeks. As long as deflation feels predictable, the merchant can confidently undercut brick and mortar fiat merchants.
If buying additional Bitcoins to offset any expenditures is part of the buyer’s plan, this can work to everyone’s benefit. Sellers can expect to earn more money when their held Bitcoins increase in value, and spenders benefit from low prices and increasing purchasing power, especially if they replace spent Bitcoins. Of course, this assumes that the merchant’s costs are low and can hold onto a portion of sales, and that one can move money into exchanges easily (this is not always the case).
The smell of lost opportunity
Not all transfers in the Bitcoin economy cause the spender to dwell on increasing purchasing power. When the transactional benefits of Bitcoin become a more central part of ‘the spend’, Bitcoins flow more freely. Here are the core situations where the alpaca problem is less of a problem:
- Sending money across borders. Expensify is smart to make this a part of their featureset.
- Avoiding credit card fees and chargeback risks, or helping a merchant lower their costs
- Sending money to a family member — the recipient benefits from any increase in purchasing power, and could convert quickly to another currency to avoid risk.
These uses will continue to drive the demand for Bitcoin, but I will continue to watch the relationship/activity among merchants and consumers. Spendes of Bitcoins (and consumers of syrupy pancakes), must confront a cloudy crystal ball. “What will these 78 mBTC become in a month when I’m done with this maple syrup?”
Spending on physical items for oneself, no matter how small or large the purchase is, sets the stage for an unique case of buyer’s remorse months later. The possibility of deflation doesn’t inherently give buyers pause. The buyer feels it, sometimes months later. Holding something in your hands that had the potential for so much more value leaves a bad taste in your mouth. This taste is unique in the history of money and it’s something everyone using Bitcoin needs to come to terms with. Until the rate of increase in purchasing power slows, it’s much more psychologically palatable to purchase durable goods with old fashioned money.
I love this photo: the exploratorium exchanging hands.
Adobe Books, an independent bookshop and gallery in San Francisco, was confronted with a major challenge in the form of a massive rent increase that threatened to close it’s doors forever. Rather than accept the fate of so many historic independent shops throughout the Mission District (and San Francisco in general) and close down, a group of dedicated members of the Adobe family decided to fight back in the form of a major fundraising campaign through Indiegogo and a series of events in the shop and elsewhere. (There’s a show with the Dodos & Two Gallants on Monday!)
Here’s how you can help out:
- Donate on Indiegogo (select a cool award, like one of the signed prints or books!)
- Bid on one of the donated artworks on Ebay!
As many of you know, Indiegogo projects are not funded unless all of the money is received. Go get em!
Some Recent Press on Adobe Books
Adobe Books: An Appreciation
SF Bay Guardian:
Save Adobe Books?
James has been slamming out Jamesjams for decades. Have a listen to one of my favorites:
More by James:
Interactive content. Tell your story. Get crackin:
Trevor Paglen, artist/geographer
Presented in conjunction with Litquake, Creative Time, and the release of artist/geographer Paglen’s latest book, The Last Pictures, this multimedia performance/lecture attempts to explain to an audience in the distant future, long after the traces of human civilization have disappeared, what happened to the people who built a ring of communications satellites around Earth.
Listen to the lecture here:
Check out Noa P. Kaplan’s game at the Hammer Museum until February 17th in LA. Part of ‘Game Room‘.
The problem with navigation applications during the act of navigation is that there is way too much information at hand. Once I start a navigation app, the two questions I have in mind are “When do I need to turn, and in what direction will it be?” I am under the assumption that most navigation occurs in the context of a city, while driving or biking — distractions are unsafe and unwelcome.
On a long drive, I pondered up a hands-free way to navigate without looking at a screen or listening to a nagging voice. Here’s my attempt to answer this question in the form of a smartphone app:
The app sits just inside your peripheral vision, and its sole purpose is to kick into gear when your next turn approaches with highly visible indicators. For example, if a right turn approaches, the app’s screen:
* fades from a neutral color to yellow, as if to say slow down
* a HUGE arrow facing in the direction of your turn slides down from the top. When the vertex of the arrow reaches the bottom of your screen, make the turn.
The idea is that you can navigate to a location without ever looking at a device after the initial destination’s input — the information about the next turn is fed to the user without any effort. Less time with your head down, fewer deaths on the road, and sharper focus on what lay ahead.
Try looking off to the side, and hit the ‘Right Turn Approaching’ button below: