Does anyone remember some dude named Thorsten Veblen? In 1899, he published The Theory of the Leisure Class. Veblen wasn't really an economist. He was a... [gulp]... sociologist.
Excuse me while I take a big swig of my coffee to wash out the foul taste in my mouth.
Veblen's text is most famous for the concept of "conspicuous consumption." People buy shit, not because it is intrinsically useful or valuable, but to show off what they have. There are goods that you consume, not because they are utilitarian, but as affectations. I'm a pretty utilitarian person, and even I do it. I don't like that I do it, but I do it.
Conducting economic transactions in dollars will be more efficient than conducting transactions in bitcoin for as long as the government prohibits payment of taxes in bitcoin, and the government will never let you pay taxes in bitcoin (see Part II). For some people, though, conducting transactions in bitcoin will just be... appealing.
1. Techno-libertarians. This is the primary group of people to whom bitcoin appeals. There is a segment of the population who has a generally skeptical view of government, combined with a positive attitude towards technology and a view that technology will solve problems that government either creates or cannot solve. Bitcoin is catnip to these people. If it costs a little extra to pay for shit with bitcoin, they'll do it as an ideological statement. That's as good a reason as any for conspicuous consumption.
2. Hipsters. There is an overlap between techno-libertarians and hipsters, even if hipsters tend towards the old rather than the new, at least in appearance. Some may find bitcoin appealing simply because paying for things in dollars seems so bourgeoisie. If it costs a little extra, well then, that's just more conspicuous consumption. Veblen strikes again.
3. Anyone trying to break the law. Remember that efficiency/inefficiency thing? The whole point of transaction costs is that they apply to any business that has to convert back to dollars to pay their taxes. What if, and just go with me on this, you are trying to not pay your taxes or otherwise conceal income? This could be because you are just a tax cheat, or because you are engaged in some other nefarious activity. Banks, which are federally regulated, report suspicious transactions to the feds. Bitcoin? Nope. That's part of the point. You can move money around secretly. If your goal is secrecy, then bitcoin is really appealing. So, whether you are trying to avoid taxes, move drugs around, or anything like that, bitcoin will continue to be really appealing. And, any transaction costs wind up being totally worth it.
4. Speculators. Group 3 is actively using bitcoin now, and Groups 1 and 2 are potentially growing. Mostly, though, in order for this to shake out, the speculators have to get the fuck out of the market so that the value of bitcoin can stabilize because, as I wrote in Part I, bitcoin is totally fucking useless to any sensible person as currency unless its value is stable, and even an increase in price, relative to the dollar, makes it stupid for anyone to pay for anything with bitcoin.
Techno-libertarians, hipsters (of a different variety from yours-truly), and drug-dealers. Basically, anyone willing to absorb the transaction costs either as an example of "conspicuous consumption," or those for whom the cost is simply part of doing business because avoiding government eyes is necessary. That's your crypto-currency economy in any country with a functioning government. And notice that part of that is where the government fails! That's not an accident!
Oh, and notice that I said that this is your "crypto-currency economy," rather than your "bitcoin economy." After all, bitcoin could be replaced by another crypto-currency!
Still, there is a niche for it. But, at what price, relative to the dollar?
Nobody is even trying to figure that out right now. Speculators are just driving up the price, as every buyer looks at the price, and buys figuring they can sell at a higher price to someone thinking the same damned thing. That's how asset bubbles work. Until they pop... Why? Because there aren't enough businesses that actually take bitcoin for it to have real use as currency, in part because its lack of stability makes it useless as currency, and it can't stabilize as long as these speculators keep driving up the price because by definition, that upward movement is lack of stability! And it doesn't even matter if it does stabilize because no government will take tax payments in bitcoin, which will make it intrinsically inefficient anyway.
So, I've just spent four posts ranting about the internal contradictions in the arguments for bitcoin's future as currency. Notice what I haven't done. I haven't addressed the arguments that bitcoin advocates use, for the most part. I pointed out that you can't use the upward movement in bitcoin's price as an argument for its future as currency, but I haven't talked about the basic underlying premise of a non-government-backed currency.
That's worth doing. Coming soon, but I'll probably delay that because today is the Alabama special election, and I suspect I'll have a lot to say about that tomorrow morning. I'll swap my economist hat back for my political scientist hat.