Topic: Bitcoin can never become a currency. Part 1: scarce supply. - page 3. (Read 833 times)

And then there's the possibility that we could technically add more then those 8 decimals that come after without touching the original scarcity of 21M.
We could just divide it to smaller and smaller adding zeros below that satoshi.

None of what you are saying contradicts any of my statements. I’m not trying to claim that Bitcoin cannot be used as a currency, because it would be an absurd statement. We can use it for payments just as any other more or less liquid asset: money, bonds, Van Gogh’s paintings etc. Certain features of Bitcoin make it an equally convenient payment method along with cash on some occasions and even surpassing cash in a number of scenarios (for example, darknet trade and other legally prohibited activities).

What I’m trying to say is that Bitcoin can never transform into a fully-fledged currency that is, the most liquid asset into which all other assets are converted. To prove it, I use the proof by contradiction method and assume that Bitcoin HAS BECOME a currency. After showing the alleged consequences of this assumption, the conclusion is made that it shouldn’t happen.

Do you know the history about the SegWit2x and other Bitcoin fork attempts? They were backed by majority of miners, SegWit2x was signaled by 90+% of hashpower, and it still failed because community rejected it. Your point 2) even contradicts your point 1), because if it was only for miners, we'd have bigger blocks.

Things change, Bitcoin community wanted Bitcoin to be a currency that will replace fiat, now it's a hedge (a poor one on practice), maybe in the future people will again want it to become a currency. It's still only 10 years old, maybe Bitcoin of the future will, for better or worse, be totally different from what it is now.

A very complicated question you have just touched. Bitcoin cannot change that simple for two reasons:

1) Changing is basically forking. You cannot suspend one Bitcoin blockchain and create another one instead. You can only fork one into two.

I think most of the community agree that the current block size is insufficient, and, given the capabilities of the current Internet infrastructure, we should raise it at least to 4-8 MB. That was the initial idea behind Bitcoin Cash, yet its market cap is still a tiny fraction of Bitcoin’s market cap. Why? Because there is only one true Bitcoin and nobody cares about forks even if they provide undeniable benefits.

Without creating a fork, we can apply only minor adjustments that do not raise controversy and are easily accepted by everyone. Changing the issuance model is definitely not one of such.

2) Bitcoin is totally controlled by major miners. Despite the delusion that the community can influence the path of development, in practice miners can do whatever they want at their sole discretion. For that reason, it is miners who decide what is needed and what is not, but not us.

In addition, I would like to say that the issuance model is one of the core ideas of Bitcoin and changing it would stop Bitcoin beeing itself. It has already transformed into a hedging asset and if another coin gains popularity as a medium of exchange, it has nothing to do with Bitcoin: it will still occupy the same niche and no competition will emerge.

TL;DR.


i hope this is already the part 2.  

there is always a grain of truth about BTC not really going to be widely adopted. just as how we learn about gold but not even used it to buy a product. at the same time we also some technology that we can use today and probably the LN will help us transact to pay 1 satoshi or so. we may yet learn what we'll gonna come up in the future.

BTC will still only be for the geeks if governments digital fiat really comes handy for all. The crypto community couldn't insist everybody to use any coins either but BTC is here to stay.

Yo guys, for those who did not read the whole writeup just kindly read the conclusion that the OP have given.

What my stand on this is that bitcoin was never made, or purposely made to be a currency to use by the whole world it is designed to be just an alternative. Maybe this is the very reason why it is created with scarcity so the government would not take it negatively and would look at it as a threat to current financial structure ( though it's quite ) Well guess what now? most of us is using bitcoin as an investment coz people are crazy over it.

The economy is a zero-sum game unless someone decides to dig up more gold no matter what the cost of production of gold is because it is gold. If it is possible to get it, you get it because you know how to.

That's exactly how bitcoin also works.

Some miners will mine bitcoin because their cost of electricity is zero (stealing from someone else), and some other will mine it regardless of the electricity price (or btc price) because they can afford it.

The economic growth was low back in the day when gold was the king shit because it was real growth.

The wealth came with the FIAT monetary system is only available to the elites and it is mostly stolen wealth.

FIAT's huge fake growth induced the population growth and huge population cheapened the work force because there happened to be more people competing with each other.

Now we don't really need that much cheap work because AI is a thing, they are desperately seeking ways to remove that excessive people. (covid19 might be the part of the big plan)

With the FIAT system, they stole our our wealth from us first, now we have no use to them, they want our lives too.

The current system also created some rich doctors and engineers with a couple of million dollars in their bank accounts but you get a lot more people that live in extreme poverty for every rich doctor/engineer there is. And the rest of the world is living paycheck to paycheck thinking it could have been worse.

If we have had continued with the gold standard, we wouldn't have had iphones/smartphones or maybe they would have come a lot later than their debut but then we wouldn't have had these problems neither.

Instead, now we have super advanced tech but we also a have several billions people that need to be evaporated.

And where is bitcoin in all of that?

Can't be sure but i know it is already too late to reverse these things back.

Think about it they are forcing us to buy a $1000 iphone and a $40-50k car in every few years with their ads coming from every direction. (it is the best if you do it every year)

This system is sustainable as long as you don't save and give back everything you earned.

When you decide to save money, you have no use anymore. You need to be exterminated.

As long as you have internet access, it's definitely better than cash. The only problem is that no country in the world will give up it's autonomy above money supply for free. Especially in crisis times like the corons crisis right now. All the big countries around the world are currently injecting a lot of money in the economy.

The only thing I see possible is that once we have a bigger pressure from countries like China or Russia in the global markets. That people start moving away from the USD and using different currencies to settle international trade. Bitcoins would be perfect for that as it's not controlled by any governement.

Why not just read the Conclusion part? OP is not talking about a potential shortage of units, he's talking about the deflationary nature of Bitcoin, and what would happen if it was adopted as the dominant global currency.

Answering to OP, limited supply is a config choice and not a necessary part of the protocol, so Bitcoin could theoretically change it if it was needed. Especially if a competing coin with unlimited supply would start gaining ground because of this feature. But it's all just a theory, we're indeed lightyears away from discussing the influence of Bitcoin on global economy.

It is qualified to be a common currency, just like every other currency it can be divided into parts also it can be stored easily by anyone,even it is better than cash as you have the anonymity while using it, no one can know who was the person behind the transaction and most importantly you can have billions of dollars in a small space like a smartphone all you gotta have is internet to access those funds, it is more secure than your bank account, etc etc. Only con in this is that the transactions sometime takes a lot of time to get confirmed otherwise it is better than cash, at least for the literates.

On the contrary, everything I wrote has been directly confirmed by history, you just need to look at it more precisely:


source: Wikipedia





I anticipated this argument, as there is a popular delusion that the gold standard era was heaven on earth. If we look at the charts above, however, it doesn't look so optimistic. Do you really want to live in a world where inflation constantly bounces from 20% to -20% and backward and almost no real economic growth happens? Furthermore, we need to take into account that the economic setup during the era of commodity money was drastically different from what we have now.

During its monetary history, gold mostly powered a zero-sum economy, where the economic growth was sustained by the growth of the population and the real output per capita didn’t show impressive shifts (as we see from the chart above). The slow growth of the economy approximately corresponded to the slow growth of the gold supply, which is why it was not strictly a deflationary model.

With the technological progress and the increasing productivity, the scarcity of the gold supply started to exhibit its downsides more distinctively and finally led to the Great Depression.

If we look at the first chart, we can see that the price of gold was extremely volatile by modern standards. We should keep in mind that, given the low GDP per capita at that time, the spending/saving ratio couldn’t be shifted drastically: you cannot cut spending down to zero, since you still need to eat something. When the income barely allowed to satisfy basic needs, the speculative motive couldn’t influence the demand for money on a large scale, yet the inflation fluctuated within a 30-40% gap.

What we have now, is a totally different setup. The real GDP per capita has grown almost by an order of magnitude since we had abandoned the gold standard. Nowadays, in the era of excessive consumption, an average household in a developed country can easily cut expenses by half without any dramatic damage to its living standard. Governments, business and households have accumulated tons of excessive savings (you can google the problem of the global savings glut), which can lure a huge cash flow into the speculative game, as soon as we return to the gold standard or adopt a similar monetary model (Bitcoin included). We will likely see the same chart as above, but with fluctuations by an order of magnitude larger, which fully corresponds to my initial statements.

 

Grin have higher yearly emission. So you should deferentially check it. But eventually will go much lower as is fiat today. I believe it will take about 50 years to catch Bitcoin right now. Middle path is needed and I believe Gold yearly mining emission is about right.

Can't say I agree with everything you said but it was a good read regardless and surprisingly it wasn't a plagiarized text which is rare nowadays. (did a few tests, didn't have any matches)

So technically speaking, fiat currency is still the most reliable currency that we can use for now. Maybe that bitcoin as a currency concept will only applicable in the future when our technology is really far advanced from today. Maybe we should wait for that time but that's 10 to 20 years from now.

We need to improve more the security of our accounts before engaging to that digital currency as a default currency in transactions. It is not that easy to have a secured accounts, the authorities should become more strict about tracing those hackers that can steal our money once bitcoin become a common currency.

I only see bitcoin as a digital currency and that it is supporting the current financial system as an alternative. Also bitcoin unstable nature can make it difficult to use moreover apart from it is limited, bitcoin is not able to be controlled by government and government has control of money which makes governance attractive.

Yes that is for sure. A supply of only 21 million coins will never be able to become a common currency. Many people still believe that bitcoin will be something huge in the future but they do not know that bitcoin is not fully qualified to be a common currency. It is merely a type of high-value non-physical asset and is being used for whales to take full control of this market.

Everything you wrote is directly contradicted by historical fact: Gold, which is scarce like Bitcoin, was successfully used as a currency for centuries. The switch from gold to fiat was due not to shortcomings in the currency, but instead the inability of governments to control their spending.

This is an incredibly wrong long writeup that essentially boils down to saying people would rather hoard Bitcoin because they're incentivized to do so (mostly because of how its value tend to increase over time). I don't disagree with this, and we've been seeing this in practice for quite some time now -- people screaming HODL, merchants not actually getting much business with BTC, etc.

At the end of the day though, I think this all boils down to semantics. Bitcoin has been more of a crypto-asset than a cryptocurrency for a while now, and I don't see that changing drastically in the foreseeable future. It has to be noted, however, that it can be both; Bitcoin can be incredibly convenient to transact with considering its borderless and decentralized nature that there will be cases where people would prefer to use it over jumping hoops with fiat. That niche, along with the fact that some people simply choose to use it because they believe in the idea, are enough to ensure that Bitcoin will never be irrelevant as a currency, regardless of what its primary usage is.

Edit: misstyped long for some reason lmao

TL;DR.

I am just responding based on the subject of this thread. I guess that pretty much sums up everything there is in the OP.

Anyway, there will be 21,000,000 in BTC in totality. Right now, there are around 18,400,831 BTC in circulation. In every Bitcoin, there are 1,000 milliBitcoins (mBTC). If that is not enough, there are also 1,000,000 microBitcoins (μBTC) per Bitcoin. And if scarcity is still a problem with those figures, there are 100,000,000 Satoshis in every single Bitcoin.

Try to multiply 18,400,831 (current circulating BTC supply) with 100,000,000 (Satoshis per BTC). That is what we have right now. I don't know how much that is; my calculator here cannot even tell. Now, tell me, are we having scarce supply?

Introduction

There are plenty of posts on this board and over the web concerning the future of Bitcoin as an actual medium of exchange instead of a speculative asset. People try to forecast when the world will adopt it as a payment method. Discussions often circle around external factors: the attitude of governments, banks, consumers etc.

I believe, however, that the problem is intrinsic. I also strongly believe that Bitcoin will never become a universal medium of exchange widely used for payments and we should call it not a cryptocurrency but rather a crypto-asset with investment/speculative/hedging functions or a crypto-gold, if you prefer. I came across similar opinions numerously and some of the following statements may seem familiar to the reader, but I need to put it all together and add some statements of my own to justify my solution to the problem.

Since we are focusing on economic matters here, let’s leave aside technical issues and discuss why Bitcoin’s economic model doesn’t allow it to perform the primary money function (namely being a medium of exchange). I see two main problematic concepts in Bitcoin’s design that impede the ability of the platform to perform the named function:

• Scarce supply
• Model of reward distribution

This post will be devoted to the scarcity of the supply, while the second matter will be the subject of part 2.

First of all, let’s try to envision how the economy would look like if we adopted Bitcoin as the only payment method.

Bitcoin-powered economy

Imagine that some enthusiast founded a new state called Cryptopia on an inhabitant island and made Bitcoin the only official state currency. People came to Cryptopia and started building the economy: producing goods, trading, forming financial markets etc.

Such conditions create strong incentives for the growth of the aggregate supply, but since the money supply grows very slowly, the price indices constantly drop. The population clearly sees the trend and, knowing that deflation is inevitable due to the hardcoded emission policy of Bitcoin, people prefer hoarding cash in expectation of buying non-essential goods later for a lower price (become hodlers).

Such behavior further impedes the development and the economy stagnates, being unable to develop, until it reaches an equilibrium at some point. When the prices stabilize, people stop hoarding and return their bitcoins into circulation. The increase in velocity provokes inflation, which stimulates economic growth. The economy starts growing until it faces an insufficient money supply and the deflationary trend recommences shrinking the economy to the basic level. This rollercoaster repeats indefinitely making life in Cryptopia a pure nightmare likely followed by high unemployment, uncertainty about the future and even higher material inequality than we have now.

The Bitcoin-powered economy simply cannot sustain stable growth, which is why it cannot serve as a substitution to fiat. We are not even taking into consideration debt deflation and a near-zero demand for bonds and other financial assets, as the economy will unlikely develop that far to form a fully-fledged financial market.

Bitcoin as a secondary currency

There is no need, however, to make Bitcoin the main and only currency. It can easily co-exist with fiat, which it currently does, thus at first sight not producing any strong impact on the state on the economy. This case is much more complicated. There are different opinions on the matter, but I side with those who believe that an inherently scarce asset cannot perform functions of a medium of exchange instead of a mildly inflating asset.

The first problem of modelling a potential scenario is the absence of a theoretical framework. The economic science simply doesn’t research a model with two separate competing monetary systems, one of which is an independent and algorithmically controlled cryptocurrency. The entire money supply is classified into different aggregates depending on liquidity, but each aggregate still represents a form of the same unit. Although there is a notion of multiple-currency economies (practical implementations could be observed all around the world, e.g. Cambodia, Zimbabwe, Vietnam etc.), monetary policy in such countries is still conducted by Central Banks (CB) toward all circulating currencies (except the restrictions applied by the impossible trinity), which makes it inapplicable to our case as well.

We can take two different approaches:

a) Assume that a fiat currency and Bitcoin are different monetary systems simultaneously powering any given national economy. In this case, the total money supply is a sum of the fiat supply and the Bitcoin supply.

b) Assume that Bitcoin forms its own virtual borderless economic zone. In this case, when a good is sold for bitcoins, it contributes to the Bitcoin’s GDP, and if it is sold for fiat – to the national GDP.

Both models engender numerous difficulties, but with the help of the first model, it seems easier to describe the case at hand using the existing theoretical base. For simplicity, assume there is only one country and all bitcoins are accumulated in the hands of its residents (although Bitcoin is spread worldwide, which makes the problem of the money supply complicated).

Liquidity preference

Let’s turn to the Keynesian liquidity preference theory. Although it was created to establish the correlation between the demand for money and the interest rate, it introduces some useful notions for our case.

According to the theory, the demand for money is a result of the following factors:

a) Transaction motive

b) Precautionary motive

c) Speculative motive

Motive a correlates with the primary function of money – to be exchanged into goods and services, while motives b & c represent a different function – to store value.

The liquidity preference theory states that out of two assets people will prefer the more liquid one unless the other one provides a higher potential profit that outbalances the risks. With regard to a modern economy, this means that if other financial assets (bonds, securities etc.) are expected to provide a profit below some minimal margin and/or the value of money is expected to increase respectively, people will prefer hoarding cash driven by the speculative motive.

If this escalates, it forms a liquidity trap: people start perceiving money as the ultimate value storage not willing to exchange it into other assets. The speculative motive encourages saving over spending and functionally money and short-term bonds become near-substitutes. Conventional monetary policy becomes inefficient, since the interest rate is zero-bounded (although experiments with a negative rate are also known) and expansionary policy doesn’t help also: all newly injected money instantly transform into savings and do not contribute to the growth of the aggregate demand.

The trap escape scenario demands breaking expectations and encouraging spending: if the CB is able to convince business and consumers that the currency will devaluate and/or bonds’ prices will rise, hence bringing more risks into staying in cash, people may start spending their savings, thus restoring the healthy state of the economy.

Bitcoin vs fiat

Now let’s try to apply these statements to our situation. Assume we live in an imaginary Bitcoin’s paradise: Bitcoin is recognized by everyone, every vendor accepts it as a payment method and the government creates no obstacles for using bitcoins on par with the national fiat currency. Although this situation is unlikely to occur, let’s intentionally put Bitcoin in the most favorable conditions that Bitcoin proponents dream of.

Given an equal liquidity and an apparently lesser risk of Bitcoin’s devaluation, the preference will be clearly on Bitcoin’s side. Being more preferable for motives b & c Bitcoin will face a higher demand, while the demand for the fiat currency will be driven only by motive a. The growing disproportion in demand will drive both currencies to the opposite directions:

a) The fiat currency will be less favored by both consumers and business, and as everybody will try to get rid of it ASAP, thus escalating the velocity of circulation, it will fall into a liquidity glut. The purchasing power will constantly drop and at some point, when the inflation rate makes it extremely hard to maintain the required margin ratios, business will refuse to accept the fiat currency as payments or set restrictive prices, thus killing it completely. The fiat currency will inevitably lose to Bitcoin unless the government uses its coercive power to protect the former or severely contracts the supply to make the issuance model resemble that of Bitcoin.

b) Meanwhile, Bitcoin will stick in a liquidity trap. Suffering from the growing demand and given the inherently scarce supply it will be perceived as the ultimate value storage. Saving will prevail over spending; the aggregate demand in the economy will contract causing a recession.

I don’t see any scenario where fiat can stand against Bitcoin under the stated conditions and that is the problem. The good old Gresham’s Law completely fails: bad money do not drive out good money, because good money are now out of the government’s reach. When Bitcoin pushes fiat from the market, the government will be left with no opportunities to conduct monetary policy. Without fractional reserve, the real cost of credit in BTC will drastically rise due to the combined effects of the interest rate growth and debt deflation. All this will lead to a prolonged depression and likely launch a speculative inflation-deflation cycle as described above.

The irony is that the scarce supply makes Bitcoin simply too good to be a currency. We need a risky devaluating asset that we can easily part with, while beloved to any hodler’s heart Bitcoin just isn’t up to the task. We need something “spendable” but not “hoardable”.

Fractional reserve

Previously, it was stated that without fractional reserve the availability of credit would likely decrease. This statement raises a question: why can’t we build a fractional reserve system on top of Bitcoin? Indeed, we can. I hope, however, that this will never happen, at least on the scale of the currently functioning fractional reserve banking.

The problem is that a Bitcoin-powered fractional reserve system will be extremely vulnerable to bank runs, which can become a time bomb beneath the entire economy.

Assume Alice deposits 10 BTC to her bank account, following which the bank lends 9 of the acquired BTC to Bob. Technically Alice now owns 0 BTC, the bank owns 1 BTC and Bob owns 9 BTC, as recorded in the blockchain. At the same time, the bank is liable to pay Alice 10 BTC on demand, while Bob is liable to pay the bank 9 BTC and some interest according to the schedule, which makes it a long-term liability. Such imbalance of debts’ maturity jeopardizes the system.

Fractional reserve banking relies on the assumption that only a fraction of deposits is demanded at a time. If Alice wishes to cash out, Carol and Dave arrive and deposit some BTC, 10 of which are given to Alice. From time to time, an insignificant lack of liquidity emerges, which can be countered by borrowing the required funds from other banks or the CB. In extreme cases, when a bank run is about to start and the entire banking system is threatened by a liquidity crunch, the CB can opt for massive expansionary measures (“print” money) that will provide the necessary liquidity and keep the system sustainable (as occurred in 2008).

None of these tricks will work with Bitcoin. Only if a single arbitrary bank faces a significant shortage of liquidity caused by reputational factors or another local cause, can it count on borrowing from other banks or the CB. If the entire economy is facing hardships, nobody will be willing to share and, having started in one bank, the liquidity crunch will rapidly spread and ruin the entire banking system. Even if the CB manages to accumulate some reserves in advance, they will still be limited and known and may turn out insufficient. We are not even considering the fact that someone can simply spread the idea of a Proof of Keys day.

Although a bank run is in many respects a psychological issue, it will be impossible to curb it in our case simply by promising to take all appropriate measures, since everybody is aware that no appropriate measures are actually available. Although we can see that the recent Fed’s announcement of unlimited quantitative easing helped to calm fears emerging from the COVID-19 pandemic without the actual need to apply any extraordinary measures, it wouldn’t work with a Bitcoin-powered economy.

If we set a low reserve requirement (for example, 10%, as currently adopted in the US), people will find out that up to almost 90% of their bitcoins actually doesn’t exist. It is not hard to imagine a devastating impact this situation will cause. A high reserve requirement (50% reserve allows to create only nearly twice more money) will soften the consequences, but not eradicate them completely. In any case, one “successful” global bank run will undermine the trust in the banking system irrevocably.

Protective motive

In his liquidity preference theory, John Maynard Keynes introduced the speculative motive, which refined the model of the money supply, demand and interest rate relationship. The adoption of decentralized blockchain technology allows to introduce one more motive that can have an impact on the demand for money – the protective motive.

One of the distinguishing features of blockchains (herein I refer only to truly decentralized blockchains that do not allow history reversals, which doesn’t include systems like EOS) is the unique legal status of chain-based operations. As a state transition is executed in a decentralized manner and is immutable, blokchain transactions are beyond legal enforcement. For this reason, blockchains are considered to exist within a unique paradigm – code is law. This feature stipulates an additional political motive to prefer crypto-liquidity: to protect the wealth from a possible abuse of coercive power by governments.

The less the population trusts the regime, the more this motive influences the demand. It may play a negligible role in the economy controlled by a transparent democratic regime and gain a significant importance in autocratic states.

With regard to the issue at hand, the protective motive further restricts the opportunities of governments in the times of crises. If the government goes too far with interventions into the business processes, the protective motive can raise the liquidity preference by itself. It is hard to claim that this is undoubtedly bad, as it restrains governments from undue enforcement, but it will arguably make business cycles in a Bitcoin-powered economy even harsher.

Conclusion

As we can see, even if we neglect other problems of Bitcoin’s architecture, the scarcity of supply itself can be a reason that renders an appropriate economic development of a Bitcoin-powered economy nearly impossible. An asset that cannot grow in supply with a pace corresponding to the economic growth will provoke deflationary cycles, as it stimulates hoarding instead of spending. Moreover, certain properties of blockchain can further contribute to the rise in liquidity preference in comparison to fiat-based economies.

One can notice, though, that the model I describe seems unrealistic, for it considers Bitcoin equally liquid with a national fiat currency, while in the real world Bitcoin will unlikely be capable to spread on that scale. We may believe that governments will use their power to hinder the acceptance of Bitcoin as a medium of exchange, but I suppose that there is an intrinsic problem that restrains Bitcoin’s proliferation. That problem will be the subject of part 2.