Bitcon: Why satoshis won’t replace fiat
Crypto nuts would have you believe bitcoin is the future of money. Thankfully for everyone with a conscience, it isn’t.
Bitcoin boosters will tell you two things: they’ll say it’s money that’ll eventually replace fiat and that it’s digital gold. The first argument makes no sense to those who understand the monetary system, and the second is so nebulous and vague as to be almost impossible to disprove. It’s a deliberate grift peddled by people who want to see their speculation pay off, even if it’s at the expense of our collective well-being.
There are two main reasons that bitcoin, and its subunits called satoshis, will never replace fiat money properly: First, the government cannot control it and would lose monetary sovereignty, its exclusive control of the currency. Second, bitcoin is deflationary, and its use as money would manifest a deep economic depression.
To comprehend the first point, you must understand the mechanisms through which the state controls and enforces the use of its currency. Those levers are tax liabilities, spending policies, and lawmakers’ legislative authority.
When it creates a tax liability that companies, workers and investors have to pay, the state creates demand for its money. Government money becomes the default medium of exchange as this money is required to measure and settle the tax bill. If economic agents, people or enterprises who make financial decisions, used other exchange mediums, it would be tricky for them to track those transactions in the government’s currency.
Next, the government pays public employees and contractors in its currency. This starts the circular supply and demand system for government money. The state spends its money into the economy, which creates a stock of it. Other economic agents, who need to get that money to settle their tax liabilities to the government, will then exchange for it. This procedure allows the authorities to control how much money is in the economy and where that money goes.
Finally, with legislative authority over the country, the state can mandate that prices and wages are denominated and settled in its currency. The government’s ability to create money and enforce its use gives it monetary sovereignty. This right is necessary to ensure it can generate the funds needed in extreme circumstances like war, famine, or pandemics. Suppose a country that lacked monetary sovereignty was invaded. In that case, it could not create the money it needed to pay for defence. It would become beholden to international creditors who would scalp bitcoin to them at penal interest rates. That would devastate the country.
In that vein, look at the pandemic. If lawmakers couldn’t create the money that paid for furlough schemes and vaccines, millions would have died, and we would have had to rebuild our economies from the rubble. Instead, we have a serious, but not nearly as awful as the alternative, inflationary crisis, which will resolve soon. For the government to function and for the good of our societies, the state must have monetary sovereignty.
The second point is specific to bitcoin: it is deflationary. With an upper limit of 21m coins, regardless of how big the economy or population gets, the supply of bitcoins will always be less than that number. Furthermore, the supply of coins will shrink as people die and their wallets cannot be accessed. If you forget your password, whether through laziness, head trauma, or ill health, your bitcoins, and therefore your money, will be lost to the ether. Suppose this causes the price of bitcoin to increase. In that case, people will be less likely to spend the coins they have and more likely to hoard them. These stashed coins are also effectively removed from the spendable supply.
Economic activity would dry up if countries switched to a deflationary currency. Sure, some necessary exchanges would still happen—people won’t starve themselves to death—but marginal, discretionary purchases would disappear and pull growth down. If spending drops, then so do sales and incomes. Companies get squeezed and earn less. Then they fire workers. Unemployment rises, and people take home less money, so there isn’t as much for them to spend. Aggregate demand drops, and the economy falls into a downward spiral.
Moreover, the cost of capital, the return demanded by lenders and investors to part with their money, would rise to an awful high and productivity gains would disappear. As the available pot of money dwindles, interest rates would increase as people and companies become desperate to borrow or raise equity. Those with bitcoin would lend them out at enormous rates and collect colossal interest payments. The money wouldn’t be invested in new businesses or projects as the return on low-risk loans would be so relatively attractive.
Counter to what bitcon-artists would have you believe, a high bar for investment is bad for society. Instead, the collective hurdle for capital allocation should be low. The more investment happens, the more businesses and innovations we try. That makes breakthrough technology more likely and improves productivity and our prosperity.
Under a bitcoin standard, satoshis would beget more satoshis without any productive application. And everyone would be poorer. The con is on.