Grafic: Owner of Bitcoins become richer. Owner of Sats not.

3 arguments for Bitcoin, 1 problem

or: Bitcoin still needs to be thought through to the end

E.L. Tankred

Published in

Coinmonks

8 min readDec 12, 2022

(Klicke hier für die deutsche Version.)

Bitcoin is complex, they say. To understand it, the authors of countless contributions draw on knowledge from fields such as computer science, physics, economics, and game theory. As long as the list of creators is, one experience is lacking:

Bitcoin‘s impact on society

These effects can be both positive and negative. In the following, I would like to focus on a problem for society that Bitcoin will reveal in the future. I‘m going to derive this problem from three arguments. Up to now, nobody has been able to refute it. So far, no one has questioned it. Can you?

Before I address the problem that Bitcoin will present us with in the future, I want to assure you of one thing: I love Bitcoin. It will solve a lot of problems of the present. I am firmly convinced of that. Below, I stress the problem that Bitcoin will create in the future because I would like to see solutions to it.

Argument 1: The winner takes it all

Only the fewest can conquer a market all for themselves. This is due to two conditions that are difficult to fulfill. Bitcoin seems to be able to claim both:

1. Network effect

Like the telephone or the Internet, Bitcoin as an electronic peer-to-peer money system is subject to a network effect. This is characterized by the fact that each new user makes the network disparately more valuable [1]. For Bitcoin, this means that the more people use it for savings or payments, the more valuable it becomes for its users.

2. Properties that are difficult to imitate

Without a doubt Bitcoin‘s most important characteristic is that it has an inventor, but no boss. No other cryptocurrency offers this quality. Since Satoshi Nakamoto retired from Bitcoin, a group of volunteers has been watching over his code. However, they have little influence on the rules governing Bitcoin. Its decentralization does not provide governments or other stakeholders with a contact person that could meet their demands or even be venal. The equality of all users makes Bitcoin independent of politics and forever guarantees its limitation to a maximum of 21 million pieces.

This characteristic of Bitcoin (and many others) suggests that it will become the world’s dominant money. It will absorb all values [2].

Argument 2: The world’s only imperishable good

„…for all that comes to be. Deserves to perish wretchedly“, Faust already knew in Goethe’s work of the same name. When you look at nature, not only life passes by. The leaning tower of Pisa bends toward its fall, the Euphrates and Tigris rivers dry up, and the continents tear Pangaea apart. Even the sun, which makes our life possible, will die in about 5 billion years.

In nature, nothing lasts forever. Bitcoin, however, will outlast people. It will conserve your savings as long as you don’t spend it. Because of its peer-to-peer architecture, it can no more be destroyed by you than others can destroy your saved Satoshis. To destroy Bitcoin, everyone would have to decide against it. And that is completely unlikely.

Bitcoin’s advantage of independence from politics and individual interests becomes a disadvantage if it enables infinite growth like cancer tumors. Where I see this danger is shown by the third argument.

Argument 3: Deflation is the risk-free increase in purchasing power for the rich

Unlike nature, Bitcoin will probably never be destroyed by humans. Anyone who changes its code will only create a new coin. They will not destroy Bitcoin itself, because it is first and foremost a network.

If even a single Bitcoin Node survives with its ledger, Bitcoin survives. What might Bitcoin look like as a cancer? I would like to explain this to you with a thought experiment. Before I start, though, let’s quickly brush up on what inflation and deflation are (Just skip that part if you can tell the two apart):

— — — Start of brush up — — —

1. Money and its value

Money reflects the value of services and goods. Consequently, all the money in the world can only be worth as much as the world’s economic output.

2. Inflation

Inflation comes from the Latin ‘inflare’ and means ‘to expand’. If the money supply expands more than the services and goods, we speak of inflation. Prices rise because more money is available for the same quantity of goods and services. In the case of inflation, therefore, the purchasing power of money decreases because fewer goods can be obtained for the same amount of money.

Grafic: We speak of deflation, if the money supply is reduced more than the services and goods. — inflation vs. deflation

3. Deflation

Deflation is the opposite of inflation and means ‘to reduce’. If the money supply is reduced more than the services and goods, we speak of deflation. Prices fall because less money is available for the same quantity of services and goods. Of course, the reverse is also true if the same amount of money is matched by more services and goods. In deflation, therefore, the purchasing power of money increases because more goods can be obtained for the same amount of money.

— — — End of brush up — — —

We know about Bitcoin’s halvings. Every 4 years or so, fewer Bitcoin enter circulation with each new block. Currently, this is 6.25 Bitcoin, which currently corresponds to an annual inflation of 1.7 percent. By about the year 2140, Bitcoin’s inflation will drop to 0 percent. Without this inflation, Bitcoin cannot lose any purchasing power (or very little until then). Therefore, I will not consider its loss of purchasing power further below.

Unlike inflationary fiat money, Bitcoin will be deflationary. This means Bitcoin will gain purchasing power as the productivity of our economy increases. This is because both our technology and our methods are getting better. Example:

A fisherman who hunts with his bare hands catches less than the one with a fishing rod. More than these two is brought home by a fisherman with a net who drags it through the seas.

I captured productivity growth using real GDP, i.e., adjusted for inflation. (If you know a better method, please leave a comment.) According to FRED, U.S. productivity growth averaged 0.75 percent from January 1947 to July 2022 (median: 0.7%; min: -9.3%; max: 7.3%) [4].

What impact an annual productivity growth of only 0.7 percent would have on Bitcoin assets is shown in the following table:

Grafic (Table): With one Bitcoin and 0.7% increase in productivity, your purchasing power increases forever — Table: impact an annual productivity growth

Suppose you have one Bitcoin (100,000,000 Sats) and you need 100,000 Sats for your living expenses. Due to the increasing purchasing power, you will need less and less money from your assets in the following years to maintain the same standard of living. Since the budget needed for your standard of living decreases faster than your assets, your purchasing power increases risk-free. This benefit begins when your assets exceed 14,285,715 Sats.

(Remember, fiat money is NOT risk-free because inflation lowers its purchasing power).

If, on the other hand, you have less than 14,285,715 Sats, your wealth will dwindle under the same conditions. This is because you have to spend more on your living expenses than your savings gain in purchasing power.

As to what that means for those without any Sats, I can only speculate. (I assume that a few with the right idea at the right time will make a fortune. But all others will be deprived of this success. Their dependence will increase). In the end, it doesn’t matter either. Whether the numbers of my thought experiment are correct is equally unimportant. Because the phenomenon remains. If you can save more Bitcoin than you need for your living, you can look forward to your future without risk.

The problem: rich get richer

Unfortunately, slavery, feudalism, and capitalism teach us that money leads to money. As shown so far, Bitcoin cannot change that. Ever since humans took their place in the world, a few have always used their opportunity to gain advantage at the expense of the majority.

Money can be used to defend one’s own goals. With savings that are not needed for their own livelihood, Bitcoin whales can buy anything that benefits them. To get an idea of this future, we only have to look at the present: Be it media outlets that profitably disseminate an opinion. Be it competitors who are bought out so as not to endanger their own business model. Be it politicians who ensure pro-business laws, etc. [5]

For today’s No-Coiners or future low-income earners, this means that their chance of living in freedom will be less than that of the rich. The fact that Bitcoin also protects the savings of the poor will not help them as long as others can dictate their living conditions. Of course, I cannot name these living conditions as of today. But the history of wealth rhymes from slavery to capitalism.

History will continue to rhyme in the future. Isn’t it time to prevent that?

Summary

Bitcoin’s properties, its network effect and its imperishability will continue to promote its spread in the future. The arguments I have put forward will not change this. Quite the contrary. The arguments are virtually in favor of hodling Bitcoin.

Nonetheless, we will need a mechanism to prevent the benefits of the few coming at the expense of the majority. The redistribution of Bitcoin and wealth would be such a mechanism. Exactly what this might look like is something we need to discuss as a society. My wish would be to offer everyone the same starting conditions and free competition from birth. It is important that everyone is subject to this competition and not just those who cannot buy their way out of it. Only in this way can competition further improve the lives of all.

There can be no patent solution because we would be creating the opportunity for fair starting conditions in life for the first time. Will you use the opportunity?

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