A short course on Bitcoin — and why it isn’t suitable as a medium of exchange
In 2009, Bitcoin was introduced as an anonymous cryptocurrency in which an anonymous “Blockchain” system was used as a decentralized ledger to record and store transactions among it’s users, along with ensuring a pre — programmed, fixed supply of 21 million total Bitcoins to be “mined” electronically. The long term fixed supply ensures that the currency is inherently deflationary, meaning since there is an inverse relationship between demand (along with price) and supply, so long as the currency is in use — the given value of one bitcoin should increase over the long haul, rather than decrease as with modern centralized currencies. Advocates often suggest this decentralized, fixed supply is superior to a central banking system of monetary supply expansion and contraction, and point to outlying extremities of central banking gone awry such as hyperinflation in Argentina or hyperinflation in the Weimar Republic’s Germany as proof of product. Clearly, protection from inflation to ensure confidence in the currency’s means of transfer are at the core of crypto advocate’s purported belief in the advantage of Bitcoin. In this passage, I’ll be delving into the false rationalizations of this “advantage” and other reasons why Bitcoin is not suitable as a stable unit of accounting or intermediary instrument of exchange.
Staunch Bitcoin proponents frequently present a lack of even an elementary understanding of monetary and fiscal policy, and allow irrational fears to take hold of their understanding of their opposition to central banking as used routinely in Western nations. The advocates criticize inflation in it’s worst case mismanagement at polarized extremes and downplay the crucial role of central banking in a modern economy. Bitcoin, on the other hand, lacks this fundamental attribute of centralized control, and it’s supporters tout this decentralization as a feature, not a flaw.
Unfortunately, this couldn’t be further from the truth. For example — moderate, centrally targeted inflation isn’t inherently bad — much less the root of all evil. Indeed, moderate inflation actually has a role in a well functioning economy, and ensures a certain level of fluidity and investment. Simply put, central banks often attempt to remedy recessions via expansionary monetary policies to lower interest rates, which spurs an increase in consumer spending and investment, even if aggregate price levels consequently rise and the value of the currency is decreased (inflation) slightly as well. Conversely, contractionary monetary policy is used to reduce the money supply when inflation is too high, ensuring runaway hyperinflation does not occur. Yes, these policy techniques are vastly more intricate than one passage can scrape the surface of. However, this should give readers an elementary understanding of the underappreciated macroeconomic techniques used by central banks to prod the money supply and tend to economic growth and maintenance.
Returning to Bitcoin’s deflationary nature — it’s supply is capped at 21 million units. In the long run, if used as a currency, the intrinsic value of each Bitcoin would increase. This sounds great, right? Nope. Deflationary currency causes prices to decrease, and consumer expectations of further price decrements and increased monetary value lead to the stockpiling of money as opposed to the spending and investment that leads to economic growth. Job losses and asset liquidation ensue as a result of the lack of consumer demand, bringing the economy as a whole to a grinding halt. As you can construe from this explanation, a consistently deflationary currency is hardly desirable as a standard means of exchange.
In addition to the decentralization and deflationary nature rendering the cryptocurrency inferior to traditional currency, Bitcoin’s volatile nature exemplifies that of gold or a security more so than a stable medium of exchange. Currencies must have at least some level of price stability, as this ensures their utility as a unit of accounting for measuring wages, prices, etc. Bitcoin, on the other hand, lacks this in it’s entirety. Speculation has been heavily waged over the course of just one year — and the price demonstrates it. In fact, as of January, Bitcoin is five times more volatile than the S&P 500.
What does this mean for Bitcoin? Ultimately, stupors of Bitcoin or decentralized cryptocurrencies replacing traditionally structured currencies are pipe dreams, to say the least. Instead, Bitcoin is increasingly similar to an electronic Gold (and a bubble) of sorts, and it’s moniker as a cryptocurrency is just that — a name.
