I believe Bitcoin cannot survive as merely a store of value (or “digital gold,” as some call it) and that its hard cap of 21 million coins must be removed in order to ensure its long-term adoption and survival.
The price of Bitcoin has risen by roughly 800% in the last year.1 Meanwhile, in Venezuela, the Bolivar has experienced roughly 800% inflation this year (and the IMF anticipates it to experience 2300% inflation in 2018).2 Neither of these are representative of a good, functional currency.
Now, imagine a world where all 7 billion people on the planet would love to get their hands on a few Satoshis.
On the Internet, the conventional wisdom goes that inflation of fiat currency is one of its great shortcomings, a problem which a deflationary currency like Bitcoin can prevent. But neither 800% inflation, nor 800% deflation make for a usable currency, or a good store of value for that matter.
A remark today on Reddit caught my attention. A commenter remarked about an image about how deflationary Bitcoin is, and said that “this is why [Bitcoin] is not a usable currency, yet” (emphasis mine).
Should Bitcoin actually gain more widespread adoption its deflationary tendency will only make it more and more ineffective as a currency. In fact, Bitcoin is currently inflated by a tiny percent every 10 minutes or so due to block rewards granted to miners. This percentage will slowly decrease over time to 0, when all 21 million coins have been mined. Yet, even with the introduction of 1800 new coins per day (approximately €1.08 million) into circulation, the astronomical demand for Bitcoin has made it so deflationary that it’s difficult for anyone with a remotely limited supply to justify spending it on anything. Factor in the fact that Bitcoins are constantly lost forever through lost keys, and it’s clear deflation is here to stay.
Some have argued this is what Bitcoin is meant to be: a hyper-rare store of value, hence the term “digital gold.” First of all, Bitcoin was not meant as such; the sub-title of Satoshi Nakamoto’s founding paper is “Peer-to-Peer Electronic Cash” (emphasis mine). Whether it has outgrown Nakamoto’s intentions can be debated, but it’s clear what those intentions originally were.
Secondly, gold’s rarity is not simply dependent on the fact that it is very (very) difficult to find in the ground and there exists a limited supply, but also that it is impossible to create a new precious metal sharing all of gold’s properties, and insert it into the periodic table.
This is not the case for open-source software like Bitcoin. Anyone can create an exact clone of Bitcoin, similar in every way apart from the name and user-base. Any entity, government, country, municipality, business, bank, or pair of buddies can create a block-chain to store value (i.e. a recording of who owes who what). This is, after all, all any money really is, since its origins thousands of years ago.3
In fact, it could be argued that a store of value which deflates as much as 800% in a year is not a good store of value at all, since that value is changing. Imagine buying a house with Bitcoin, and the debt you owe on the house balloons at a rate of 100 or 1000 times the rate your new property appreciates value. The $10 million pizza story becomes the trillion-Dollar car or university diploma story. And the house? Well that mathematically will never, ever, be paid off. Fantastic.4
The thing that gives Bitcoin value over those examples is its usability within a larger context. The two buddies can store value just fine in their private block-chain but they can’t then transfer that value to a local business they frequent. Bitcoin, in theory, allows for that (fees and transaction times are a discussion for another time). But that doesn’t matter if neither want to spend their Bitcoin on anything.
Without every-day utility, Bitcoin’s own deflation will cripple it.
But what about alt coins? They could be used, but then we’re back to where we are today: making every-day purchases with Dollars and Euros and holding onto Bitcoin with the hope that it’s someday worth more than it is today. And Bitcoin’s promise of moving money freely across borders is all good and well, but hardly a concern if I need to keep several crypto currencies in my wallet and convert between them on a day-to-day basis.
What’s to be done?
Certainly at this point nothing can completely stop Bitcoin’s runaway deflation as demand grows rapidly. But something can be done to moderate it and provide stability in the long term.
The 21 million hard cap is perhaps the only bad design decision on Satoshi Nakamoto’s part. It’s likely born out of a misunderstanding of the gold standard and an attempt to recreate it digitally even though doing so is not possible (see above).
Instead of the hard cap, there’s a middle ground that can be achieved, lying between “No new coins, ever” and “the government can create more fiat whenever it pleases.”
Removing the 21 million coin cap and replacing it with a mathematical model that keeps inflation within a certain percent (maybe 2%, maybe 0%, maybe -1%) and which perpetually introduces more coins in fair, distributed, consistent way would be ideal. This would not require placing one’s trust in a government entity, and would help to ensure that even in a world where everyone uses Bitcoin, buying two pizzas with Bitcoin would not be the dumbest thing you could do.