Satoshi Nakamoto was undoubtedly intelligent when he designed virtual currency algorithm, Bitcoin. He understood the purpose of money very well and used its fundamentals to guide his idea of virtual currency trying to encapsulate ‘faith’ in it. However, some would argue as FT has come up with a loop-hole in his idea stating that it missed a crucial point of considering its value in long-term. FT Journalist Jean-Pierre Landau wrote –
“A good currency must hold its value over long periods. It must also be readily exchangeable for the goods and services that people actually want. Combining those two functions in a single instrument requires a delicate balance. If issuance is too tight, there is not enough money moving around to meet the payment needs of the economy. This can lead to deflation and recession. Yet if too much money is issued the result will be inflation, which erodes the currency’s value. This is the dilemma that “private money”, the creation of banks rather than government authorities, has never been able to solve. Nor have money regimes based on commodities, such as the gold standard. “
It is everywhere, this is a genuine reason, and this is the risk with every currency but there are some other flaws associated with it. It happened during World War II, and even prior to that. I have written about recession and its uncertainty in my previous blog posts 1 and 2, which are omnipresent. I appreciate Mr Landau that he tried to bring something which could be a reason for Bitcoin’s setback, and it has been agreed by economist, but again is uncertain.
In my previous blog post 3, I wrote “ECB (European Central Bank) was one of the first banks trying to understand its impact and suggested that central banks should control its popularity and operations.”
But now many countries are forming independent central bank to deal with this situation. It is evident that money demand fluctuates and is not constant over the period. It is highly important to make money available when the demand grows, and that is the reason these central banks should be independent to guard expansion of money supply. But it has some negative effect in the long-term. This will force aggressive investors to look for other countries to invest which would erode the currency of the country from where it has been invested, and as a result more and more speculation will come into picture to increase the limit. Also, it has ambivalent implication which is better to accept rather to argue.
Money supply expand at a constant rate, but Nakamoto had a different vision. Nakamoto chose different rule, the stocks of Bitcoin will grow at a reduced rate. Today, Bitcoin worth $12m and Nakamoto thought of ceasing it altogether when it reaches $21m. This is the control he suggested to bring in instead of having it done through independent centralized banks. But considering the money demands, it can be made possible to increase its issuance to the people. Putting a cap at $21m is not at all convincing. There is a flaw in considering Bitcoin due to two reasons, if Bitcoin supply increases by 0.6%/year over the next century. And if Bitcoin economy grows faster than 0.6%, the currency will scarce and prices for the goods will depreciate. If the supply of Bitcoin expands slower than the normal currency, and assuming other things remain constant, its value will appreciate progressively.
These are the possible reasons that its price is going too high, today it is $812. Sterlings and Dollars are widely used as medium of exchange and that is the reason they are valuable but Bitcoin is valuable for HOLDING it. It is ironically true that if the prices of Bitcoin kept on increasing then it wouldn’t take too long to be considered equivalent to commodity, and people will not sell it, realizing that its value will go higher and higher. This is not the property of currency.