Tag Archives: currency

Bitcoin breaks the limits of natural division, being deflationary isn’t a bad thing

Naysayers have remarked that Bitcoin is a Ponzi scheme. And that it will ultimately fail for various reasons.[1] Of course, take what I’m about to say with a grain of salt, as I have most definitely drank the crypto Kool-aid. (And it tastes really, really good!) If Bitcoin is a Ponzi scheme, then so is every stock market exchange on the planet. In some, limited ways, I suppose I do agree. These exchanges, especially the more unregulated they are, can be environments where the strong pray on the weak. Value is not created out of thin air in these markets. When someone profits off their market positions, it’s directly due to the loss of someone else’s position. It’s not entirely bad, but you can see how this environment can represent a sort of “Ponzi scheme” where wealth transfer goes from one group of people to another. It becomes a full-fledged “scheme” when those big players attempt to manipulate the market and influence price swings in their favor.

The Slate article I linked above is rather old, but I wanted to address specifically one point the article makes: that Bitcoin’s inherently fixed supply is a bad thing. Bitcoin has a maximum supply of about 21 million units, all of which won’t be released until¬† around the year 2140. I disagree with the Slate article because I feel the author fails to understand the beauty of Bitcoin as a completely digital currency. Because it is digital, it is represented using mathematics. It is not tied to physical limitations, like how many times you can split a gold nugget until it cannot be perceived as valuable by the human eye. Today, a Bitcoin can be split to fractions of 10^8. Most people who transact in Bitcoin today (at the end of 2017) don’t deal in whole Bitcoins. Today, a single Bitcoin would run you about $8,200.00 USD. This means that if we used Bitcoin for day-to-day transactions, like buying a coffee at Starbucks, it would cost you about 0.00061 BTC (~$5 USD). That might seem like a silly fraction, and it might be difficult for people to work with numbers represented that way. That’s why the classical metric prefix system exists! You can express this same quantity as 0.61 milli-BTC. Or maybe even 610 micro-BTC. Because Bitcoin is currently split with up to 8 digits of precision, this allows it to gain in value without reducing it’s ability to be used for smaller value transactions.

It is certainly possible that a single whole BTC will reach astronomical values. If this happens, it may be necessary to change the software algorithm to allow for more significant figures. While not trivial, it is definitely something that is possible to do. Bitcoin is not a static technology, it is constantly being worked on and improved. If the time comes that more significant figures are needed, they will most certainly be added. In this hypothetical future, we could be transacting in amounts of 0.000000001 BTC (or 1 nano-BTC). Let’s run with this for a moment: what if a $5 USD coffee costed 1 nano-BTC? That would place the value of a single whole Bitcoin at $5 billion dollars. Okay okay! Before anyone bites my head off, I’m not suggesting this will be the valuation of Bitcoin any time soon. I’m just providing a hypothetical scenario which is easily decades away, if it ever came to be.

But what about hoarding? The theory goes that in a deflationary currency, it is a problem because the value of the currency increases, while the cost of goods and services decreases. This could cause individuals to hoard the currency, because it will be worth more tomorrow than it is today.[2] Sure, there is definitely some truth to this, but I believe the one difference here is exactly what I explained above. We have never had a system that can so naturally adjust to using a smaller and smaller precision of numbers until now. Even when the House of Medici, the historic Italian family which created one of the most prosperous banks in the world which made use of novel book keeping and accounting methods, there was still a natural limit to what they would record. At the end of the day, they were recording physical things: 1 gold, 5 silver, 10 copper. 4 eggs, 1 cow, 20 loaves of bread. Each of these has a slightly different limit of “natural division” that can be applied to it. In terms of precious metals, you could divide them up quite a bit, but you’d eventually want to stop at a size that you were able to hold comfortably. Any smaller than that and it could be lost too easily. All of these concerns are now¬†gone with a system of accounting like Bitcoin.