From The San Francisco Chronicle
While bitcoin remains a hot-button issue, most of the talk has centered on the technology of this virtual currency. There are lots of questions: Is bitcoin really secure? Is it truly anonymous? Can it be counterfeited? Are transaction costs actually lower?
I have a more fundamental question: Is bitcoin a viable currency?
My answer is no, and not just because of the wild fluctuations in the value but because these fluctuations are destined to continue. A good currency serves three purposes. It is:
A unit of account, used to measure and write contracts for income, wealth and goods.
A means of payment, used to avoid barter.
A store of value, held to be able to make future transactions.
Of these, the third historically has been the most important. People will be wary of accepting something that might lose lots of value, and something with a volatile price makes a bad unit of account.
Basically, bitcoin lacks a mechanism for setting the supply equal to the demand. That is needed in order for bitcoin to maintain its value.
History is replete with examples of what happens to currencies with fixed supplies. When governments tie their hands in the supply of their currencies, much like bitcoin has done, the value fluctuates.
Read the full post at SFGate
Jonathan A. Parker is the International Programs Professor in Management and a Professor of Finance at the MIT Sloan School of Management.