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  • Writer's pictureRohan Bhatia

An Economic Future with Bitcoin

What does Bitcoin have over fiat currencies? Does Bitcoin have what it takes to play the role that gold has played historically? Can it act as a reliable currency?

Elon Musk. Memes. Diamond Hands. When you combine all three what do you get? Bitcoin. The cryptocurrency taking the world by storm, Bitcoin has amassed a cult following online from those with ‘laser eyes’ - bullish investors who believe in the cryptocurrency’s viability as an investment opportunity. But Bitcoin, as invented by Satoshi Nakamoto, was intended as a currency - not a speculative investment. This article isn’t a beginner’s guide to Bitcoin - but it instead endeavours to ask the crucial question; What does Bitcoin have over fiat currencies? Does Bitcoin have what it takes to play the role that gold has played historically? Can it act as a reliable currency?

In his book, “The Bitcoin Standard”, Saifedean Ammous explains how the most important feature of a stable, reliable currency is its ability to maintain value across time. Should a currency be easily depreciable, then individuals lack any real incentive to hold onto the currency for a period of time - as its value is quickly deteriorating. We see this deterioration of currency happen in countries where inflation is high - causing prices of goods and services to rapidly increase. In such a scenario - the purchasing power of the currency quickly falls. Imagine for example in 2021, that $10 can buy 5 chocolate bars. In other words, the cost of one chocolate bar is $2. Then imagine, due to inflation, each chocolate bar costs $2.50 the year after. Hence, in 2022 - the same $10 note could only buy 4 chocolate bars. The lesson to take away here is that the $10 note in 2021 is worth more than a $10 note in 2022 - it buys more chocolate bars. As a consequence, economic agents (like you and me) are much more likely to spend their money now to maximise the benefits they get from their money. In the 1920s, Weimar Germany illustrated this problem with the hyperinflation experienced post-WWI. To repay its reparations from the war, the Weimar German government just endlessly printed currency - completely destroying the value of the German Mark. A loaf of bread that cost 160 German marks in 1922 cost 200,000,000,000 marks just 12 months later. From 160 to 200 billion. That’s right. If a loaf of bread cost 200 billion marks in 1923 - imagine how worthless the 160 marks that would’ve bought that same loaf just a year ago would be. For that reason, holding onto currency and saving would make no sense - completely eroding the value that individuals would hold.

And whilst Keynesian economists will be quick to tell you how important this immediate consumption is for the economy - what they don’t tell you is the even larger benefits of delaying this gratification for spending. If we can put off the need to immediately spend our money to avoid its decaying value - then our money can be saved and invested toward growing a prosperous human civilization. After all, key inventions like computers and aeroplanes were not created because people went on spending frenzies. Instead, they came about because people were able to hold off instant gratification, and instead invest their money toward building such amazing innovations. The wealthiest people in our society get there because of their ability to save and invest in assets - not by just spending their money brainlessly on goods and services that provide instant benefits. A currency that is stable does not erode in value quickly and is not prone to inflationary spikes is one that will induce intelligent, beneficial behaviour by economic agents. The same behaviour which has allowed our societies to prosper and grow over centuries. The behaviour of focusing on the long-term, rather than the short-term.

That’s where Bitcoin comes in. Unique to the cryptocurrency is Bitcoin’s absolute scarcity in supply. Once fully mined, there will be a maximum of 21 million Bitcoins - and each Bitcoin consists of 100 million Satoshis. Why does this matter? With an absolute limit on the number of Bitcoins - the capacity for excessive inflation to occur is massively squashed. There is no uncertainty whether the federal reserve will print more Bitcoins. Because they can’t. It’s that uncertainty that leaves our fiat currency prone to volatile inflationary movements. And as we have established, these inflationary pressures can be devastating for economies.

Bitcoin is free from government control - yet it maintains security and privacy through blockchain. It eliminates the need for third parties to regulate payments, like banks and other financial companies like Mastercard and VISA. Instead, payments using Bitcoin as currency are totally peer-to-peer. This would also likely massively reduce the likelihood of fraud and theft.

It’s therefore this freedom from overbearing government control that makes Bitcoin so powerful. It’s what made gold so powerful as a commodity currency for hundreds of years. Try as they might, but governments could never just ‘flick a switch’ and produce tons of gold to finance their fiscal expenditure. Gold was and still is a precious, difficult to mine mineral. Its supply was unable to massively increase in a short period of time and therefore it remained a stable currency option. In fact, the world’s most significant economic progress occurred under the gold standard; the 18th/19th century Industrial Revolutions.

By Rohan Bhatia- Commerce & Advanced Studies (Finance and Economics)


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