Topic: Why Fixed Supply Tokens Can't Become True Currencies (Read 372 times)

Yeah but the problem with altcoins--and even the entire crypto market in general--is that there's absolutely no maximum supply of cryptocurrency.  Anyone can start up a coin based on an old one, slap a new label on it and hope people treat it as the next big thing.  And wouldn't you know, that's exactly what's been done over and over. 

Most altcoins make for better money than bitcoin since they're faster and cheaper to use, and that's fine by me.  Bitcoin can remain digital gold, something that people don't spend and invest in just like you would with gold.

The problem is that all the conventional economic wisdom has been built on a system of fiat currencies that have been inherently inflationary.

So if you try to take that and apply it to a completely different ecosystem of Decentralized Cryptocurrencies, you are going to see these critiques pop up.

I'm yet to see one transaction with BTC fail to go through because it is deflationary, let me just say this...

Normal currencies are inflationary in a way there 100% chance of price inflation to happen, this is not true with bitcon.

What you have in that case is a very very high price of bitcoin, people who could still buy a few satoshi at the very least (you can't have 1 satoshi equal to 1 dollar, that’s too much) and we are talking about other coins as well, which will mean people can get included due to altcoins. Most of those coins are either limited (like btc has 21 million cap) or they are unlimited and we get to mine or stake them as well so it’s not all rich people.

So, in the fiat world rich people have billions and more billions gets printed ended up in their pockets whereas our small investments all become worthless in the long run. I do not see that as a good way of making money to be fair, I believe that it is a very difficult way to make money for wealthy people, they would lose out in the long run. Imagine the fact that there are more than 21 million millionaires in the world, so not even all millionaires will have 1 bitcoin.

I think you are assuming the value will continue to increase, but it won't as much with full adoption. Rich people will have little incentive to hold bitcoins over other assets, just as they currently have little incentive to hold dollars.


Why? Let's say that 99% of the bitcoins are removed from circulation by rich people. That still leaves 21 trillion satoshis for everyone else to use. There would be no shortage, and people would be paid in satoshis that they can use to buy food.

First of all, what kind of currency are you talking about? When you use the word currency do you mean by bitcoin replacing fiat currency and being used as the main? I don’t think that is going to be so. And if you ask yourself, was that even why or the purpose of having Bitcoin; to serve as a replacement? The whole world won’t be making use of the same currency.

So, having a fixed supply doesn’t really matter that much, that’s what makes it deflationary, the value will keep on increasing. And before we get to that fractional part of everything, it’s going to take a really long time before we arrive to that point. Just check how many Satoshi it takes to make bitcoin, that’s a lot. And the market value will also keep increasing to match that amount.

I do not get why we are talking about something that has been done already. I get that the amount is not huge right now but the reality is that bitcoin and some other crypto already found themselves being a medium of exchange. I have been working for crypto for nearly 5 years or even maybe longer these days, I remember that it might be 2016 or something when I first found a job that paid in crypto, and I have been doing that ever since.

I can't explain how difficult it was at first but we made it work and it is a lot better these days, and I mean A LOT better. So, if anyone thinks that we do can't have bitcoin as medium of exchange, they haven't paid attention to what already happened so far.

What if there is someone who actually prefers using bitcoins as a currency, since the governmental issues are a bit too much to deal with?
- International transactions are much easier with Bitcoins
- Transactions beyond a certain amount actually does take a while and ofcourse there are so many steps before as well, using cryptocurrencies like bitcoins, excludes the concept of third parties making it easier.

I understand there are people who prefer using Bitcoins as an investment, but that does not change the fact that, cryptocurrencies like bitcoins can also be used as a currency, something that can be taken as a *world currency*, with the collapse of US, surge of Omicron we might desperately need the bitcoins.

In other words, there must be someone powerful enough to be able to control the purchasing power of money and ensure its stability via price controls, central planning, quantitative easing, and other similar measures aimed at the managing of the available supply of money in the economy. In short, it must be fiat money.

How the price of money is determined? Like the prices of any other goods on the market, the price of money depends on the supply of it and the demand for it. However, the difference is whereas an increase in the amount of consumer and capital goods is beneficial for society, the increase in the money supply doesn't bring about anything useful except for an illusionary and temporary sense of increased wealth. When you print more money trying to accommodate the stability of its purchasing power, you don't create automatically more goods and services. The latters' quantity remains exactly the same, which means you only increased their price artificially. It also follows that by trying to achieve stability you made money even less stable than it had been before your intervention.

Here's some info about the "bullion famine" in 15th century Europe.
According to Wikipedia:

The colonization of America leads to increased supply of gold and silver,which caused the first case of high inflation in the medieval European economy.
More gold means more inflation,but that's just the medieval economy.
Anyway,this article is criticizing Bitcoin for something that we already know.
Being a good store of value is better than being a good medium of exchange,if you ask me.
Bitcoin can be both,but nobody says that Bitcoin is totally perfect.
I wonder why are you comparing Bitcoin to fixed supply tokens.
Scarcity itself isn't enough to give value to some asset.
You could create some centralized token with a fixed supply of 1 million tokens,but that doesn't mean that this token will become better and more valuable than Bitcoin.
Security and utility are what gives the value of an asset.Scarcity can only increase that value even further.

 

Are you talking about the fact their chivo wallet is fractional reserve banking? The fact, they use bitcoin they dont have to give those starter 30 dollars to people?

And people should realize on how its been done and now been applied.! Are they blind?

Doesnt matter if its a fixed supply or does have unlimited.It all matters with recognition and adoption because it wont really be recognized if it was shit on the first place.

We do already have fiat and its not necessary but we do have at least some option to take.

You may consider bitcoin as a currency but there are a lot of people who consider it as asset as well. Which means that they may not want to invest their money into a currency but according to them when they buy bitcoin they are actually not doing it anyway, they are buying assets according to them.

I would say that even buying a currency is a good investment for many people all over the world. Like assuming your fiat is a weak one that gets devalued, holding dollars or euros as an investment is a valid option as well. Turkish Lira for example dropped a lot as far as I know, if they held bitcoin or dollars even as a currency, they would have earned a good amount. That is the type of investment bitcoin is, it is hedged against currency itself and that would mean that we are talking about making a lot of money in this case without having to hold fiat in our wallets.

This can be tested with el salvador, since they use bitcoin.

The strength of the incentive to save vs. spend depends on the the level of deflation. If deflation is low, then it will have little effect on saving vs. spending. Just as low inflation has little effect on saving vs. spending.

The major problem with the tokens are not related to government but rather to users and confidence. But let's be honest, in sociological terms, who wants to actually invest money on a currency? The answer is nobody - people want assets with potential for increasing in value and tokens are ill suited for that if they have to be at the same time a currency. Nope, a deflationary currency is technically not good for trading, as there is a strong incentive to keep it rather than to spend it.

You are precisely on point on this one which is actually true that majority is really in for the money and doesnt really mind off when it comes  to future aspects.
Whether it would really be  a currency or not then they dont  really care with that kind of vision as long they could benefit out then they wont
really care at all. About having fixed supply then this is  something which cant really be the main reason or point on why a certain coin
wont be  a currency., Come to think on what El Salvador had done when it comes to this one.

The sad truth is that most people here are just speculators. They are in it for the money and they really don't care what happens as long as they can make some money.

The part where you said that a lot of people talk about how they want bitcoin to become a currency, but at the same time they are not doing something that shows that they really want that to be the case; that is just the truth.

You will see so many saying that bitcoin is going to replace banks, but instead of them to do according to what they believe and make use of Bitcoin as a steady means of transaction, they would still continue making use of Fiat for transactions, while they keep their bitcoins in their wallets and speculate on prices reaching millions of dollars so they can cash out to the same Fiat lol. When you look at situations like that you would see that we are really heading nowhere with that.

There are a lot of reasons why they "can't" be, but they are, and they will continue to be as well. You could always try to make a up a good reason for them to be not that valid but in the end they will always turn out to be great no matter what happens. Sure if you want to be richer then you will not want to spend it, the fact that the pizza guy spent 10k bitcoins which is around 500 million dollars right now is a "sad" fact for him, but it also shows that how easy it was for someone who are far away being able to buy something for them using crypto as payment.

This is why bitcoin will always be a currency, it shows how much it could provide for people who are in need. You may not want to, but at the very worst case you can spend the crypto and then buy more crypto with fiat in return after you are done and you will be back where you started.

You make some very interesting points and I think the conclusion you come to is true overall. Bitcoin was always handicapped from the start, but that was needed in order for this proof of concept to work. What needs to happen now is a new cryptocurrency, after the model has been proved, can take over and fulfill the gap that Bitcoin will never be able to cover. People always talk about how inflation is a bad thing but fail to grasp that if demand is strong enough for a cryptocurrency and the volume of newly introduced currency is low enough, then the coins they are holding would not lose value in that way if supply was increased - you just need to figure out a fair recipient for the benefits of the newly introduced amounts.

Conventional economic theory of supply and demand just tells you the price per ounce of gold increases if there were challenges in meeting the supply needed to support a gold backed currency system. Realistically, the gold standard was never supportable because the idea of fiscal responsibility isn't something governments can afford. The government would rather be able to manipulate the currency, take out its own debt and repay the debt if they can, but not actually be held to any objective standard.

It's easy to borrow money when you can introduce more currency into circulation, doesn't work that way with gold, and certainly doesn't work that way with Bitcoin.

Bitcoin has the right benefits if applied properly allowing for diversity in practice.  So you mean El Savaldo is doing the stupid thing trying to go against that and make it happen.  At least it doesn't have to do anything bad from inflation to the machine that prints money every year, deflation for bitcoin is the halving that keeps the supply against the inflation hedge.

Yeah, this is the reason, bitcoin is being identified to be more suitable as an asset rather than being a momentary exchange and you need to note that any asset can be used as a currency when both the parties (buyer and seller) agree and no economic rule prevents that.

Gold was a currency in ancient times and now it is a pure asset and a federal reserve for most countries. Same trend could be copied by bitcoin as well.

1 MB block and its consequence of higher tx fees and limited supply are in favor of bitcoin to act as an asset. Not sure Mr. Satoshi coded bitcoin as a future asset but bitcoin may remain as a currency for some time and then people will realize its preciousness and may start treating it as a noble asset which means like one bitcoin may be enough for generations and not just one one's life time.

It's a good thing the writer of that article mentioned "hodlers"... They don't define how the whole crypto community thinks and acts!

Whoever was responsible for writing that part, probably spent the majority of the past decade, living under the rock!

A couple of things:

• None of us will be around when ^{[or if]} it happens ^{[around 2140]}.
• As @odolvlobo pointed out, there's also millisatoshis and if for some reason, that's still not enough, I'm sure the developers will figure out a way to deal with that matter!

Let me guess... CBDCs?! Yeah, right!

Maybe things would get different if by any chance Bitcoins succeeds and would worth around 1 sat to 1 dollar. But I am still wondering if that happens how would the miners get their shares, it is too complicated for to think and I think if someone can enlighten it would be a great of a help.

I too agrees that fixed supply tokens will become true currencies of a Nation, as far as of now I am fond of using it as a means of payment method other than cash.

Actually, this is not too complicated if the government decides to adopt Bitcoin in any type of transaction. For example, payment for food, clothing, or housing, or other transactional matters outside the exchange. As is currently happening in El Salvador. At least like that, if the government and its policies support the existence of Bitcoin as a transaction tool, then whatever we hope for is difficult to realize. Because everything refers to policy, what is considered can and cannot go back to the policy of the country where a country supports Bitcoin or not.

Regardless of the value contained therein, either as a deflationary or inflationary currency. All still, if there is no policy it will become a centralized rule.

I think there are at least two problems, one related to psychology, not economics, for fixed supply tokens to become a used currency. First, we used to have price inflation, thus employers compensate for the price increase by raising salary. This creates the illusion of people getting more money, which actually doesn't. In the deflationary economy universe, this means no wage raise. Worse, at some point, maybe workers will get less nominal wage (not an actual wage cut, but people will think it is). Second, fixed supply token means deflationary as population grows. It incentivises hodling, instead of spending (for productive purpose). It can be bad for the economic growth.

You will have a difficult time supporting that statement. In fact, gold is fairly deflationary, and yet it has been used as money for centuries.

The claim that people won't spend deflationary money is an exaggeration. Clearly, if the money is deflationary, then people may spend less, especially on unproductive assets or on things that have little value, but that is actually a benefit.

I think you are basically ignoring the whole history.
Gold has been a currency since 500 BC (source: https://www.gold.org/about-gold/history-gold/golds-role-money)
Which is more than 2500 years. In the last few decades there was an abandon of the gold standard, but that doesn't mean much.

Bitcoin may replace gold as currency, and even gold standard may come back one day.

The problem is not in the limited supply quantities, but rather the insistence on printing new money without covering it, and therefore when a problem occurs, people will discover that what they have of money is worth much less than its value because part of it is fake.

What happened in the bullion famine and all economic crises is the mismanagement of countries to distribute wealth, as the quantity is limited and lending is carried out with high interest (similar to printing money) and therefore financial problems will appear faster than now (low value of money instead of its absence)

The gold standard was also abandoned when governments could not find enough money.

As for the amount of Bitcoin, it is not limited, there are not 21 million coins, but 2,100 trillion satoshis

This doesn't make much sense because you could also make the same argument with other investments. "Why spend my money if I can buy AMZN/AAPL/MSFT and make money holding them long-term instead?".

I know bitcoin could potentially be worth a lot more in the future, but yet I still use it to pay for things. Why? Because I'm a normal human being with wants and needs.

In theory, maybe yes. In reality, most people are reluctant to use deflationary assets for daily spendings.

This is simply not true.

Bitcoin is a good counterexample of this, the rate at which new coins are minted versus the amount of old coins lost is really going to become equal in the next few years if not right now.

And yet, the institutional adoption as well as the commercial usage of BTC is only increasing. Nobody says that deflationary currencies cannot work as a medium of exchange.

There were many reason's for the economic troubles in Europe at that time. It is not clear to me why the scarcity of a very portable currency such as Bitcoin would be a problem. It seems like a lack of currency would result in its value increasing and thus a decrease in demand. Of course, as I see it, deflation is just as much of a problem as inflation, so there is no simple solution.


I believe the real problem was caused by the government and its policy of spending money that it did not have. The problem was not a general lack of gold, but the lack of gold held by the government. Devaluing a currency certainly makes it easier for a government because they are effectively defaulting on their debt.


That statement shows the flaw in your reasoning. If 21 million bitcoins are not enough, then what about 2.1 quadrillion satoshis? There certainly aren't 2.1 quadrillion dollars, so how can you say that 2.1 quadrillion satoshis aren't enough? What about 2.1 quintillion millisatoshis? Wouldn't that be enough? Regardless, the numbers are completely arbitrary. There will always be enough bitcoins.


As adoption increases, the value of a bitcoin will stabilize and people will no longer expect the value to rise significantly. They will use it as a unit of account and not a speculative asset.


I don't think that trust by a government is necessary. We are already seeing increases in adoption despite a mistrust by governments.


Since inflation is a covert form of taxation, it is unlikely that any government abandon its own inflationary currency for a non-inflationary currency that it does not control.

A very interesting read! They have made alot of valid points there. In terms of projects, there is also Bitflate that is following the same principle, trying to establish a real day-to-day currency.

Original Post: https://bitflate.org/post/2021/11/27/why-fixed-supply-tokens-cant-be-currencies.html

Deflationary pressures and the crypto community itself are preventing fixed supply tokens from becoming true currencies.

As some of you may have noticed, the term cryptocurrency is something of a misnomer. Aside from the unlucky soul who spent 10,000 Bitcoins on two pizzas, Bitcoin hasn’t been used as a means of exchange.

There are reasons for this, both good and bad, and they mean that Bitcoin, and other fixed supply tokens, are unlikely to be used as a mainstream currency – and that’s okay.

Deflationary Currencies Are an Economic Weak Link

Bitcoin is far from the first fixed-supply token. For centuries, humans have relied upon currencies backed wholly or partially by gold – and it has always caused problems.

Gold and other precious metals must be mined from the ground, which means that there is a limited supply. When supply pressures mount, either in the form of lowered gold yields or increased demand, this causes significant problems for governments.

An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.

Abandoning the Gold Standard

A more recent example of the real-world problems with precious metals is the abandonment of the gold standard. In the 1930s, when the great depression hit people panicked. In the UK, there was a mass rush to redeem gold.

The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.

Bitcoin’s Similarities to Gold

Bitcoin, in many ways, represents an attempt to return to the gold standard. It has a fixed, diminishing supply. In the long term, Bitcoin will become a deflationary asset as its coins are lost in locked wallets or destroyed (either accidentally or deliberately).

These similarities mean that we could eventually be in a situation where there is simply not enough BTC to meet market demand, even if we decide to use Satoshis (a fraction of a Bitcoin) as the primary means of trade.

The Crypto Community Doesn’t Actually Want BTC To Become a Currency

The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.

Nobody wants to be the guy who bought pizza with a Bitcoin, and almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.

For Bitcoin – or any other cryptocurrency, for that matter – to become usable as a day-to-day asset, it needs to be stable. However, most of us are using Bitcoin as a store of value, holding it, DCA-ing into it, and not spending it. There is nothing wrong with this, but it precludes BTC from being used as a real-world currency.

It is possible that some form of cryptocurrency may become a mainstream medium of exchange. However, it will need to be one that governments feel they can trust. It will likely be built as an inflationary instrument, albeit one with a fixed form of inflation.

Some projects are working toward these goals, notably Nano (XNO). However, only time will tell if these projects will gain the support they need.