Bitcoin Is Not The Currency Of The Future
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There seems to be no end in sight for the Bitcoin bubble. This comes close to the great bubble developments that we have known in bitcoin future currency marketing, including the tulip bulb bubble in sixteenth century Holland, the South Sea bubble in the eighteenth century, and many others. But each time these bubbles came to an end and the prices collapsed.
Nothing could be farther from the truth. In fact, the Bitcoin is an archaic currency like gold used to be. Archaic currencies are created by using scarce production factors. Gold had to be digged deep in the ground by using a lot of labor and machinery. The same can be said of Bitcoin. The computers needed to mine Bitcoins use a lot of electricity and thus large amounts of scarce energy sources crude oil, coal nuclear energy, renewable energy sources.
According to some estimates, bitcoin future currency marketing energy needed to produce Bitcoins for one year is equivalent to the energy consumption of a country like Denmark. A phenomenal cost, if we also take into account the external costs, such as the CO2 emissions, associated with the production of electricity. Although Bitcoin is perceived as the currency of the future, it is in fact, like gold, a currency of the past. The contrast with modern money is striking.
Of course, the production of paper money costs a lot, but we use less and less of it. Instead we use more and more electronic money by making payments with debit and credit cards. Electronic money is produced with minimal use of scarce resources. As the cost of communication continues to decrease, the use of electronic money will become even cheaper in terms of resources needed to produce it.
In this sense electronic money, not Bitcoin, is the money of the future. It is possible that technological innovations lead to a further decline in the resource cost of mining Bitcoins.
But surely, today the handicap of Bitcoins in providing a resource-cheap-form of money compares very badly with the existing forms of electronic money that can be produced with small fractions of the cost of Bitcoins. There are, however, other and possibly more serious reasons why Bitcoins and other cryptocurrencies have no future as means of payments and units of account, the two essential functions of money. First, as the supply of Bitcoins is fixed asymptotically, its generalized use as a means of payment would lead to permanent deflation negative inflation.
The reason is that the world economy is growing and in need of an increasing supply of money bitcoin future currency marketing make growing bitcoin future currency marketing possible. The only way this can be dealt with in a Bitcoin economy is by declining Bitcoin prices of goods and services, i.
The quantity theory of money tells us that it could also be dealt with by increasing the velocity with which Bitcoins are used, but there is a limit to that possibility.
Thus a Bitcoin economy would face permanent deflation, not a very attractive situation. Capitalism is based on entrepreneurs taking risky initiatives. These entrepreneurs are usually of the optimistic type. Bitcoin future currency marketing expect increasing sales in the future. It is the optimism that drives the dynamics of capitalism. In a Bitcoin economy where prices are declining every year this optimism is negatively affected. Price declines lead bitcoin future currency marketing to postpone their purchases and investors to postpone bitcoin future currency marketing projects.
It is a world with less optimism and probably less growth. In order to avoid this problem, cryptocurrencies should provide for a protocol that allows the supply of these currencies to increase in the steady state.
This is not the case of the Bitcoin, making this cryptocurrency particularly unfit to function as bitcoin future currency marketing money of the future. There is a second and even more serious reason why Bitcoin is not suitable as a currency.
In fact it would be a dangerous currency. If the world turns to Bitcoins, banks will start lending Bitcoins to bitcoin future currency marketing and firms in need of credit.
But banking is a risky business. The problem is that as the supply of Bitcoins will be fixed, there will be no lender of last LoLR support in times of banking crises. And these are certain to occur. Even if the supply of Bitcoins or of other cryptocurrencies could be subjected to a constant Friedman growth rule it would not solve this problem. The LoLR support bitcoin future currency marketing that the central banks can create money out of nothing. In a monetary system where the stock of money is fixed bitcoin future currency marketing growing at a constant ratethere is no such LoLR possible.
This leads to the prospect of regular banking crises that will lead bitcoin future currency marketing failing banks and further negative domino effects on the economy. This is exactly what bitcoin future currency marketing observed during the heydays of the gold standard, which was characterized by frequent banking crises leading to deep recessions and much misery.
Again, the Bitcoin standard, like the gold standard, is something of the past, not of the future. More generally, the problem of a Bitcoin economy is that in times of financial crisis, which bitcoin future currency marketing can be sure will arise again, there is a generalized flight into liquidity.
In its absence, individuals scrambling for liquidity sell assets, bitcoin future currency marketing to asset deflation and insolvency of many. A Bitcoin economy does not have this flexibility and therefore will not withstand financial crises. A Bitcoin economy will not last in a capitalistic system, which regularly generates financial crises. Then the Bitcoin bubble will burst and there will be a lot of handwringing of the speculators who have stepped into the bubble too late.
All this does not mean that the blockchain technology used in cryptocurrencies may not have other important applications. For example, the storage of large data using blockchain technology will make it possible to do so in a decentralized way, opening up a vast array of new applications.
The current design of Bitcoin, however, makes it unsuitable as a currency for the future. The idea that Bitcoin is the currency of the future is very popular with market fundamentalists. These are wildly enthusiastic about the Bitcoin because it is created entirely outside the control of central banks. The latter are seen as the source of much evil. The fiat money they create will, according to those fundamentalists, lead to hyperinflation and other disasters.
There is indeed a potential problem with fiat money. Because its production is so cheap, there is the danger that too much of it is produced. That then leads to inflation. However, since the s, many central banks have followed a policy of strict inflation targeting. And that has proved very successful. It has ensured that annual inflation has remained close to 2 percent in the last 30 years in most industrialized countries.
In the US, for example, average yearly inflation was 2. That will not convince the market fundamentalists.
They continue to believe that the moment bitcoin future currency marketing hyperinflation bitcoin future currency marketing yet to come. In addition, for many of them Bitcoin has become the symbol of a free market world. A world in which markets unhampered by government controls create great wealth for many. It is also a world in which markets have self-regulating features that prevent financial crises from occurring. Indeed in such a fictional world the Bitcoin would provide the anchor of stability.
Not in the real bitcoin future currency marketing.
