Bitcoin is deflationary, isn’t it? How could it ever replace fiat if just by merely holding it you are guaranteed in the long run to increase value? You need mild inflation to get people to actually spend and not hoard. Bitcoin’s supply is fix so there is no point in ever spending it unless you want to cash out.
Bitcoin's constrained supply is almost a red herring at this point.
The usual fallacy is when proponents claim that Bitcoin is the only asset able to escape inflation due to fiscal policy interventions. This couldn't be more false. The very definition of inflation is an increases in prices, or a decrease in buying power. However, investors have been buying assets and investments to avoid inflation long before Bitcoin was even invented.
Bitcoin isn't a particularly good store of value because the price is driven purely by demand, which is currently in a state of market mania. It's not even the first market mania around Bitcoin. Past bubbles were also met with a "this time it's different" attitude before the inevitable sharp losses.
Bitcoin has value not because someone coded a 21 million coin limit in the code somewhere. Bitcoin has value because people want Bitcoin. Why do people want Bitcoin? Because the price goes up up. Why does the price go up? Because people want Bitcoin. As soon as something breaks that cycle, it doesn't matter what the maximum number of coins is. Without demand from the belief of future increases due to increasing demand, the price will go down. The purchasing power decreases.
Everyone likes to demonize fiscal intervention, but the reality is that counter-cyclical fiscal intervention tends to benefit the average person. Running inflation too hot is bad, but swinging to a full deflationary currency (Bitcoin) would also be bad for the economy.
The primary argument for holding bitcoin is as a store of purchasing power to counter every government and central banks addiction to printing money.
The economic theory is that money printing is the primary cause of inflation and bitcoin, as the first purely fungible commodity with a fixed total supply that is perfectly inelastic to demand, is an ideal hedge against inflation.
Imagine if gold went up 100x in price. New gold mines would be opened. People would come forward with their gold jewelry, etc which would increase the supply of gold.
If bitcoin goes up 100x, it’s supply cap and inflation rate would remain unchanged.
If you believe the government or central banks will stop printing money, then the argument for bitcoin collapses.
Every fiat currency is inflationary. Bitcoin is designed to be deflationary, so every Bitcoin will be worth more and more forever. Using Bitcoin as a currency makes no sense.
I'll agree with you on that, but I think a good point was raised. As an inherently deflationary currency, particularly once the maximum number of bitcoins are created, wouldn't the natural thing for people believe it will eventually be incredibly valuable be to hoard them? I'm not saying that a deflationary currency cannot ever work, but with an inflationary currency, there is greater worth in spending one's money on goods or investments that will accrue worth at a greater rate than the inflation, no?
The point of this discussion as I understand it is that the limited supply of bitcoin does not help with inflation in practice and, further, that monetary supply is not the only source of inflation to begin with.
It is correct that bitcoin is designed with limited supply in mind, but that does not necesaarily stop inflation and definitely doesn't in practice because currency risk dominates the perceived value of bitcoin.
As far as i remember, people often claimed that bitcoin protects against inflation, that statement has so many requirements attached so it doesn't matter in practice.
On a philosophical level, I think the flawed premise you’re presenting here is that inflation is a problem that needs to be solved. Inflation is unpopular because it’s effectively a tax on unproductive wealth. Inflation incentivizes investment because idle wealth will lose it’s value at the rate of inflation.
On a technical level, Bitcoin is worse than a currency because it’s value can fluctuate wildly constantly and transaction fees are high. I don’t know what’s going to happen when we get a “Run on the bank” type of scenario but I suspect it’s not going to be good for the little guy.
The ability of central banks to manage a crisis isn’t a bug, it’s a feature. The trade off is one we’ve made throughout history, we have to give control to other folks who may not have our best interest at heart.
I fundamentally believe Bitcoin will collapse the next time we have a global economic catastrophe and it’ll have no tools to handle it.
that's the Keynesian viewpoint. The prevailing wisdom right now is that policy-controlled inflation helps prevent a wide range of issues. Bitcoin is inherently deflationary, which scares the crap out of people with their stake in the Keynesian camp.
Obviously, if you are a user of the currency and don't want it to be inflated by the central bank, there's at least one thing in bitcoin's favor, as it has a fixed maximum supply.
You can argue that's a bad thing if you want, but just ignoring that it exists doesn't make much sense.
I'm afraid bitcoin will always be too volatile to be used as a currency because it's not backed by anything, and can't be inflated/deflated. The government actually serves a useful function by controlling money in circulation, even though it's not backed by gold anymore, at least it's stable (as long as inflation rates are maintained) which allows it to be used as currency. Sure everyone complains that USD is being printed, but at least that gets people spending - using the currency, instead of hoarding/saving which is what's happening with BTC. At current levels of volatility, merchants will abandon the currency.
Perhaps there's a some theoretical solution out there, whereby the inflation rate of BTC is a function of volatility ... ?
You didn't address my argument. If bitcoin being deflationary would truly prevent people from buying things, then why doesn't it do so already? You can already buy bitcoin instead of anything else you want to buy, so why do people buy things other than bitcoin?
If you can explain why people might want other things more than they want bitcoin, you can explain why the existence of bitcoin won't prevent people from buying those things. And whether they already hold bitcoin or not is totally irrelevant.
If 10000 people buy bitcoin at 60k per coin as an investment and later have to sell at 10k per coin to make ends meet, I somehow doubt that the guy that pocketed the difference will contribute to inflation as much as the 10000 guys trying to put up a meal for tomorrow.
It feels like saying Elon Musk will make make your next stop at the grocer's more expensive, because selling his 10% of shares for $20 billion will contribute to inflation because of all the stuff he's gonna buy with that money.
I agree that deflation is probably the biggest criticism of Bitcoin. The finite supply means that there's more of a temptation to sit on your heap of gold rather than to participate in transactions. This could lead to the currency becoming increasingly static and difficult to obtain over time. A better system would be to have a modest but constant rate of inflation, such that there is an incentive not to stash your cash for too long.
Deflation is exactly why Bitcoin is flawed. Why would I buy something today if it's cheaper tomorrow? When people stop spending our current system grinds to a halt...
"Bitcoins, like gold, are beholden to no government; they can’t be printed by any central bank, and they certainly won’t be subject to hyperinflation, since the global supply of bitcoins will never exceed 21 million."
This defies everything he previously wrote. If there is a bubble, and it pops, you have inflation. If each Bitcoin can only purchase a tenth of what it previously purchased, that's heavy duty inflation. If people stop using it outright and the value drops to zero, then you have hyperinflation. Just having a finite money supply isn't enough. (And this is coming from someone who has read Milton Friedman)
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