Bitcoin is not Good Enough

That’s a fantasy. The normal level of inflation (pandemic measures and such excluded) is just a consequence of the fundamental fact that certain amounts of money in the future is worth less than the same amount of money today.

There are two exceptions.

You can gamble. But on average you’re not going to beat inflation. Most if not all of cryptocurrencies are essentially in this category. Bitcoin is a very long gamble that will likely pay off for a good while longer, but that’s essentially what it boils down to. Gambling.

You can invest. Here there’s potential to beat inflation on average because you’re putting money into something that generates value to society.

Currencies that have a fixed cap are fundamentally bad for investments. Most investments are built on some form of debt. For debt you want fractional reserve banking so you can generate enough capital for all the potential positive sum investments people could potentially make.

Fractional reserve banking isn’t a new invention. It’s just an abstraction over the way most things have always been built: you help me build a grain silo now, I pay you back in grains later. That promise is fundamentally the same as printing money, and does drive inflation as well (your labour is taken off the market for that period which drives up the cost of labour). We’ve moved from this kind of informal debt, to debt managed by banks, who are much better than you at judging whether I’m good for the debt. It’s also better for you to just get money rather than a future favour.

For banks to be competitive with that kind of informal debt, banks MUST be able to “print” money. Otherwise the system is not competitive with other informal and more risky systems of debt.

I can recommend reading into Chinese shadow banking for some ideas about what kind of incredibly dangerous situations you can get into when the government and public banking sector doesn’t print enough money to cover the demand for debt.

What do people think will happen when Bitcoin reaches saturation? Very few will be repaying debt in Bitcoin. Nobody is paying their taxes in Bitcoin. Nobody needs to buy Bitcoin. If it can’t attract a significant number of new people willing to stuff their money into the Bitcoin machine, Bitcoin essentially loses all of its value, since it’s no longer a gamble that is likely to pay off. People will jump onto to the next viable cryptocurrency. And then the next. It’s all a system of gambling which such a long timeframe that it’s easy to get fooled into believing it’s a store of value.

When the whole ecosystem of cryptocurrencies is saturated, investing into a basket of cryptocurrencies it will not beat inflation. It’s impossible. The system requires the burning of a lot of value, in the form of electricity and chips. (Less so for PoS, but still a signricant amount). That value has to come from somewhere. And it certainly doesn’t come from people who didnt invest in crypto. So where do you think it will come from?

The only way to beat inflation is putting the money into a system that generates rather than burn value. The boring conclusion is that the best way to do so is obviously an index fund.