The Capital
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The Capital

Bitcoin VS. Fiat Money: How to End Boom/Bust Cycles Once and for All

In a barter economy, imagine Peter the miner that produces X ounces of silver. The reason why he mines silver is because there is a market for it: silver contributes to the well-being of people. Peter then exchanges his X ounces of silver for various goods and services. Over time, people have discovered that silver — being originally useful in making jewelry — is also useful for other applications. They now begin to assign a much greater exchange value to silver than before. As a result, Peter could exchange his X ounces of silver for more goods and services than before.

People have also discovered that silver is also useful to serve as a medium of exchange. The additional benefit that it now offers further lifts people’s demand for silver. As a result, the price of silver in terms of goods and services rises further, all other things being equal. People are exchanging wealth for wealth. If for some reason, there were a large increase in the production of silver, and if this trend were to persist, then its exchange value would exhibit a persistent decline versus other goods and services, all other things being equal.

In such conditions, people are likely to abandon silver as the medium of exchange and look for another commodity to fulfill this role. Regardless of changes in the silver supply, silver will remain part of the stock of wealth as long as people find it useful to support their lives.

The “supply problem” of sound money has been solved thanks to Bitcoin limited supply at 21 million. In fact, BTC has further improved money features by adding resistance to censorship, a transparent ledger, a reliable timestamp tool through its blockchain.

Contrast all this with today’s kind of money. It is issued without precious metals deposited for safekeeping. This sets in motion a process of consumption without the creation of real wealth. Fake money diverts real savings from wealth-generating activities to the first recipients. This leads to a fake economic boom: an exchange of nothing for something. Once the printing of fake money slows down or stops altogether, the flow of real savings to the various activities that waste them is arrested. As a result, an economic bust emerges.

Contrary to precious metals and fake money, with BTC, there is a cap on its supply, then no embezzlement is committed. The supplier of silver can increase the production of a useful commodity, but albeit, scarce the limit is the actual technology. If a new tool is discovered or created, then more supply can be mined. By its protocol, BTC has a limited supply, therefore there could never be an exchange of nothing for something. A BTC miner (wealth producer), because of the fact that he/she has produced something useful, can exchange BTC for other useful goods. He/she does not require fake money to divert real wealth to himself/herself. Bitcoin Cash is honest money, and it is obtained by selling some useful goods for it. In contrast, no goods are exchanged to obtain fake money. It is just printed; hence it emerges out of “thin air.” Once fake money is exchanged for goods, this results in nothing being exchanged for something. This leads to the channeling of goods from those people that have produced goods to the first recipients of fake money. Real savings are channeled towards the production of goods that are supported by the counterfeiters of money. As a result, this undermines the production of goods that noncounterfeiters demand. A decline in fake money results in a decline in the production of these goods and their bust.

Boom/bust cycles are about the impoverishment of wealth producers caused by increases in fake money supply. BTC’s limited supply will punt an end to artificial boom/bust cycles, therefore reducing their emergence by a lot. In fact, by using BTC in the mainstream economy, people will see an ever increase in the supply of real wealth and a genuine allocation of capital according to free-market forces. Honest price discovery will return. Hence, a Bitcoin Cash standard is not conducive to boom/bust cycles.

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Melis

Melis

MultiSignature, MultiUser, MultiDevice Bitcoin, Bitcoin Cash, Dogecoin, Litecoin, Bitcoin SV, BCHA, Groestlcoin Wallet: https://www.melis.io/