Why Bitcoin will never be the future of money
the influence and motives of governments
I am a Bitcoin enthusiast, and was lucky enough to be introduced to crypto by one of the bigger names in this space. Since then I have heard so many good things about crypto and rarely pulled myself back and think critically on what Bitcoin will become and why I am hodling. This series of blogs is a journey for myself to step back and organize my thoughts on Bitcoin/crypto. I hope it would attract feedback and discussions from professional and enthusiasts as well as from people who don’t believe in crypto at all.
In 2013, a time traveler named Luka_Magnotta appeared on Reddit. Luka claimed to be coming from 2025 and he told us what will happen to Bitcoin. “…to 1,000 dollar in 2015, to 10,000 in 2017, 100,000 in 2019, and 1,000,000 in 2021. From here onwards, there’s no good way of expressing its value in dollars, as the dollar is no longer used, nor is any central bank issued currency for that matter. There are two main forms of wealth in today’s world. Land and cryptocurrency.” The price prediction is correct so far. However, in 7 year’s time will we really live in a world where there is no central bank issued currency and everyone uses cryptocurrency as money?
To answer this question, let’s look at what is money. According to IMF, money is something that serves as a store of value, a medium of exchange and a unit of account. In order to be money, Bitcoin or any cryptocurrency has to have all three characteristics. That means Bitcoin has to hold its purchasing power over time, allow people to transact with it, and be used to price all the goods and services in an economy. In this article, we will only focus on the unit of account criteria.
Unit of account is a common denominator that can be used to value goods and services. In other words, it is something that prices everything in the economy. Today in the UK everything is priced in GBP, in the States everything is priced in USD and in China everything is priced in RMB. In 7 year’s time will everything be priced in BTC, BCH or other decentralized cryptocurrencies? The answer is No, or extremely unlikely.
Nothing will be priced in Bitcoin unless governments adopt it as legal tender
In order to be a true unit of account, the currency needs support and adoption from governments. Imaging you are Elon Musk. You believe in BTC (or ETH according to your recent tweet?) and would like to sell Tesla Model S at 10 BTC per car. Now all your revenue is in BTC. In order to predict cashflow and control profitability, your cost should ideally be in BTC as well. You may be able to convince all your staff and suppliers to accept BTC, but how about taxes, which is a significant cost for doing business. Will the government accept the tax in BTC？Maybe, as Arizona state government already do, however, will the government price tax in BTC? Will the surplus tax you paid last year remain in BTC and offset the BTC tax you need to pay this year? Or will it be converted to USD and then offset the tax you need to pay in USD? If any conversion is happening between crypto and fiat for tax, i.e., tax is priced in fiat and not crypto, it would create uncertainties on profit due to volatility of exchange rates. This is something you don’t want to happen. Hence, you will not choose to price the car in BTC. You may argue that when the mysterious and widely talked about ‘institutional money’ comes in, BTC price will be so high and in comparison the volatility of exchange rate will be so low, you won’t even feel the volatility when buy or sell a general item. However, currently the entire global economy is built on fiat, even if Bitcoin price is stabilized against fiat, without governments support and adoption it still won’t be a unit of account. Imaging all socks on NASDAQ is priced in Bitcoin, your superannuation is paid in Bitcoin, the mortgage you get from the bank is in Bitcoin. Will all of these happen without government forcing it and adopting Bitcoin as a national currency? No, it won’t.
Governments will never adopt Bitcoin as national currency because they love/have to create money out of thin air.
Bitcoin cannot be used by governments to create inflation. Bitcoin is decentralized by nature and is based on a Proof of Work (POW) algorithm, which means it is not controlled by any one individual/organization, and can only be created by solving complex mathematical problems. This means no government or organisation can artificially add lots of 0s to their bitcoin ‘account’ without doing the work. Also, it has a 21 million cap, which is the maximum number of Bitcoins that will ever be created. The number of bitcoin will not be increasing forever, unlike the money supply of fiat currencies. Hence, if everything is priced in Bitcoin there will be no inflation.
On the other hand, governments all over the world love (a moderate amount of) inflation. They believe a moderate amount of inflation is healthy for the economy, and more importantly they can use the newly printed money to pay for things and fulfill their election promises, which they don’t have the money to do otherwise. In the UK, the target inflation rate is currently set at 2.5%. If the economy looks like its not going to reach the target, the Bank of England will print more money to inject into the economy to give the economy some sugar high and reach the 2.5% inflation. This is called quantitative easing.
The country that loves quantitative easing the most is the United States. In the US, money is created by the Federal Reserve, which is privately owned, interesting enough (lots of conspiracy theories around this, but won’t go into details in this article). Most of the new money created by the Fed is used to purchase US government treasury bonds. This is a loan to the US government, which the US government has to pay interest on. As at today, the US government debt has reached $21 trillion. If you change it to $1000 notes and stack it up, it is 63 miles high, almost 6 times the highest altitude commercial airplanes can fly. In their 2018 budget, the US government was planning to pay $310 billion interest on these debts. The only way they can afford to pay this interest is by printing more money and issuing more debt, which will lead to more interest to pay, more printing of money and more debt. This is a downward spiral. If the US government ever decides to change the national currency to Bitcoin, there will be no printing of money out of thin air, and the government will not be able to afford the interest payment and will, therefore, default on its debt and bankrupt. Hence, the US government or any other government will never adopt Bitcoin as the national currency. This is understandable, who don’t want to wake up in the morning and have a few extra zeros in their bank account.
In summary, in order to be money, Bitcoin has to hold its purchasing power over time, allow people to transact with it, and be used to price all the goods and services in an economy. Due to the 21 million cap, decentralized and uninflationary nature of Bitcoin, it will never receive government’s adoption as a national currency. Without government’s support, it will never be used to price all goods and services in an economy and will never be money. Then what will Bitcoin be? a form of digital gold, a private currency or a method of remittance? I will try to explore in my next article.
I would love to hear your feedback and thoughts on this topic. Please leave your comments below or contact me on twitter @tracysjiang
