Bitcoin: The deflationary dilemma
Let me start by saying that even though I’m an economist and I’ve been pondering a lot about this issue, I am not an expert and I don’t care if I end up being right or wrong. Actually I think I would prefer being wrong on this one.
I love this issue because it represents a contradiction in my line of thought. I consider myself a libertarian, so much that I hated studying economics in the University of Barcelona because Mises was basically non-existent, the Austrian school of economics got overlook class after class. It was a very disappointing experience (But what can you expect from a socialist country?).
Now, if you are not versed in the different schools of economics just ignore the last paragraph, its not important. The point that I was trying to make is that, I consider the inherent deflation of bitcoin something that will contribute to its demise even though I’m a libertarian and we basically believe deflation is good.
Bitcoin is constantly compared to gold because its finite, 80% of the 21 million btc have already been mined. The comparison is only valid because of that only trait, Its finite. But Gold is a very unique and special element (more so if you add human history regarding it as such), In few words, and please look more into this if you haven’t because its a fascinating subject; gold is thought to have been produced in supernova nucleosynthesis, and from the collision of neutron stars, and to have been present in the dust from which the Solar System formed. Because the Earth was molten when it was formed, almost all of the gold present in the early Earth probably sank into the planetary core.
The comparison now seems a little farfetched doesn't it? Which is not to say that what Satoshi Nakamoto created was not a thing of beauty in its complexity and functionality, it absolutely is and I have no doubt in my mind that he (or she or them..) changed the world for the better.
Another comparison that some bitcoin fans give you when you bring the deflation problem is Art. yes, Art. Its like…. fuck, I’m not even gonna get into that. I’ll just skip this art nonsense and walk into the octagon…
What’s the bitcoin dream?
It usually includes one or both of the following statements:
- The one I call “beautiful utopian future” where everybody can use bitcoin as a currency, central banks and comercial banks have lost a lot of their power if not all.
- And the “Wishful thinking capitalist” dream which sounds something like; by the time the 21 million btc get mined, they are all just gonna keep rising in value, 50 thousand, 100 thousand, fuck it, a million dollar each satoshi. (Just to be clear, if this is the right one, I’m gonna be pissed and probably jump of a bridge like Roy Raymond).
Hold your horses
My crypto adaptation of the Gresham’s law or Copernicus Law:
The law states that any circulating currency consisting of both “good” and “bad” money quickly becomes dominated by the “bad” money. So, its my understanding that in the case of widespread adoption of bitcoin alongside USD, EUR, GBP, etc. assuming I am wrong and people start trusting it like gold and its price develops a similar pattern (price stability and regarded as inflation proof) that Bitcoin will gradually disappear and kept safe. Just like gold is now days.
Food for thought (where I’m coming from): In under developed countries bitcoin has given the people a way to survive, to exchange goods and to avoid government interference. In Venezuela for example, the currency is in hyperinflation, making the local fiat currency basically worthless and this situation has pushed people into using USD or BTC. Everybody, absolutely everybody in Venezuela would rather use and trade with the local currency and safe their USD and BTC.
Inflation and deflation in modern times
Inflation is regarded as an important part of the economy in modern times (Keynes and Friedman), a 2% inflation rate is considered healthy and desirable and as I said before, I’ve never been completely convinced about this, I tend to align myself with Mises but only when it came to individual countries. Its a very different ballgame when we are talking about a decentralized global currency like Bitcoin.
Inflation is not only the prices of goods, it’s the creation of money from thin air basically (think of any “quantitative easing” from the federal reserve during the crises). The United States has 300 million people (approximately, don’t be a smart ass) and the population growth rate is of 1,1% year over year. How are the economies gonna keep up with the money demand? If we think about it globally it gets even more complicated.
And now I’m suppose to believe that a 21 million “coin” digital currency is gonna stay and be the game changer, even if we acknowledge that every Bitcoin can be divided into 100.000.000 Satoshis;
- Every micro transaction has to be registered by a miner and the cost of that will not be able to compete with normal micro transactions in todays world.
- One we reach the 21 million, thats it. The system is not meant to expand but we as sexual greedy humans will, our economies will keep growing, our population will keep expanding into the tens of billions and the innate human selfishness will keep triumphing until a malthusian catastrophe happens (I told you in the beginning, I wanna be wrong about everything).
Every crypto has a silver lining
I like crypto, I‘m very hopeful and see infinite potencial in blockchain technology. just not in Bitcoin.
Its the first one and the champion of the first few lapses in a very long race, many have come out of it and many more will be born, most of them to become utter failures like in every industry but a few will change how we see and function in this world.
Bitcoin in a few decades might be one more token in your digital numismatic collection, or I might be wrong.
