David Woo, Ian Gordon, and Vadim Iaralov recently wrote an assessment of Bitcoin’s viability and potential for growth.

Their analysis was thorough, but it missed quite a few critical facts, so I’ll take some time to address their points in line.

If you’d like to read the original document, you can find it here.

Here we go…

[Bitcoin’s] high volatility, a result of speculative activities, is hindering its general acceptance as a means of payments for on-line commerce.

…

Money/currencies are generally thought to have three distinct roles: as a unit of account, medium of exchange, and store of value.

However, as a unit of account and store of a value, it has considerable shortcomings which we believe will ultimately hinder it from ascending to international currency status.

By “shortcomings” they mean volatility. The volatility is due to the fact that it’s very young and the target...

Glaucon: Hey, I just bought my first bitcoins! Do you think they’re safe?

Socrates: The short answer: probably not.

If you bought them on an exchange and you still have them there, they’re somewhat safe over the short term, but I wouldn’t trust them there for long.

Keep in mind that if the exchange gets hacked, all your money is gone, and the exchange can’t get it back.

Glaucon: And the same goes for an online wallet like Blockchain.info?

Socrates: Precisely. Online wallets are very risky - quite a few wallet sites have been hacked already, so I wouldn’t store any sizable amount of money in them (probably no more than the cash you keep on your work desk).

G: How about Coinbase? I heard they’re a bit different.

S: That’s true. Coinbase is safer than other online wallets because it only keeps 10% of it’s funds online, with the remaining 90% stored offline. Theoretically, if they...

Pundits frequently cite Bitcoin’s “deflationary nature” as one of the reasons why it will never succeed as a global, widely accepted currency.

But is bitcoin really deflationary? And is this actually a problem for the currency?

In the paragraphs to follow, I aim to address these concerns.

Bitcoin: Deflationary or Inflationary?

We know that a currency is inflationary if its purchasing power decreases over time. Two percent inflation over 35 years means that if $10 originally bought you a 12-pack of beer, it can now only be used to purchase a 6-pack.

Conversely, a currency is deflationary if its purchasing power increases over time (you get more beer for your money if you wait to spend it).

So, how does purchasing power go up or down?

If the growth of the money supply outpaces the growth of the economy, inflation occurs, while if the economy grows faster than the currency supply...