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this post was submitted on 06 Feb 2024
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Bitcoin is deflationary because there is a fixed amount of currency. But wealth isnt fixed, new wealth can be generated(or destroyed). And you want a currency that can adapt to that, otherwise you get a deflation(or inflation).
For example, i buy wood for 1 bitcoin. I make a chair that i want to sell for 2 bicoins(to compensate for my work). Thus i changed something that was worth 1bitcoin, into something that is now worth 2bitcoins(or at least 1+ bitcoin).
In a world where no new money can be created, money will just rise in value over time. Why? Because new wealth is created but no new money is generated. So current money can buy more things(since more things are generated over time).
But if 1 bitcoin can buy more things tomorrow than it can buy today, why would i spend it? I wouldnt. Thus i will be removing currency from the circulation(essentially hiding it under my matress). Which creates even more deflation and deflation is literally the worst thing it can happen in the universe.
Deflation discourages purchases and discourages investment. Why would i spend 1 bitcoin to buy wood to make a chair, when i can just save that 1 bitcoin under my mattress and get a chair with it in the future(since its value will rise).
The only people who support these things are economically illiterate people. There is a reason why there are almost no modern economist who are proponents of gold. It isnt because they are all sold out to governments, who just want to print endless money. It is because printing money is necessary for an economy.
The when and how money should be printed differs depending on the school but they all agree on this.
One of the main reasons that we abandoned gold as a currency was because rich people kept hording it, which meant that it was removed out of circulation. So you literally didnt have enough currency for the economy to function. Money is not a thing, it is a medium of commerce.
Also modern day production enables us to generate wealth orders of magnitude faster. Industrial revolution and the internet means that even if metal based economies could somewhat work in the past(due to mining), modern day economies have a much larger need for a fiat currency.
Simple: because you want something. Have you ever bought a computer? Why? Because if you waited a year, you could get a computer with double the performance for the same amount of money. Your money would buy more tomorrow, yet you spend it today.
Deflation discouraging purchasing is not necessarily a bad thing. It means products need to be better, all else being equal, to be purchased by you. Maybe that means they will last longer, be more sustainable, etc. We want people to buy things because they need or want them, not because they want to get rid of currency as quickly as possible because they know it's losing value. Production for production's sake is pointless. It's like government paying workers to build a road to nowhere (as China has been doing with their rail). Does it pump your GDP numbers? Yes. Does it make jobs? Yes. Does it make your economy look like it's growing? Yes. Is it a waste of earth's resources and government money? Yes. Is it sustainable fiscally or environmentally? No.
If you are talking about why we moved from gold to paper money: It was also a major pain to transact with compared to paper money, I would argue that was the driving factor for abandonment. Rich people hoard money now too, they just put it into assets and securities and generate a return, then live off the interest. We have massive growing wealth inequality. So it's not like fiat solved that problem. I'm not saying Bitcoin would, I'm just saying we didn't solve the people hoarding gold problem. People can still hoard gold and other assets.
If you are talking about why we moved away from the gold standard, yes there being a limited supply was a problem. We pegged a dollar to a certain amount of gold and pretty soon we ran out of gold to buy to maintain that peg. The government wanted to print money it couldn't find gold to back. It wanted to fund things it didn't have money for. That's a money printing & budgeting problem, not a gold problem. That's a spending more than you have or make problem.
Money do not exist as wealth, they exist to be used as a medium for transactions. They are a representation of wealth but they are not wealth. Their only function is the get circulated. You are seeing things pretty narrowly. Let's say you have 10million. You have the option to keep them under the mattress and they will worth 50% more in 1 year. Or you can invest them into something.
What would you choose? Why would you risk investing that money into something when you can guarantee increasing their value by keeping them? Now imagine if everyone is doing that. Everyone is taking out of circulation trillions of dollars because it is more profitable and less risky for the future.
What effect would that have in the economy, quality of life, technological progress, literally on everything? And this is why deflation is orders of magnitude worse than inflation.
Almost all production is for production's sake. Humans need nothing to survive. You can become a hermit and consume nothing. Yet here you are, being inauthentic and buying things that you ultimately do not need for survival. Clothes, coffee, phone, haircut. Even your diet is not maximized for calories needed.
People adapt. Thats how someone can live in extreme poverty with less than 2 dollars a day. Think that next time you buy a 5 dollar coffee. You could have fed 2 people for a day.
You should read more about the history of gold. We created silver coins because we run out of gold because the rich people hoarded all the gold and did not use it because by not using it, its value kept increasing. So we got the silver coins but then the rich kept hoarding them too. So we made fiat(or their era equivalent).
Bitcoin is not a good currency. The fundamental use of a currency, the whole point of its existence is to be used. Bitcoin is heavily throttled by design and cant be used as an every day currency. No crypto can replace VISA without become centralized and VISA like(which defeats the point of crypto).
I have been following crypto for 10+ years. It is a cool tech(decentralized database) but everything related is a "scam". Even if it isnt a deliberate scam, it is still part of pump and dump and an unusable speculative asset. All volume is whitewashing and gambling addicts. Crypto has basically 0 real world use atm, lower than the use it had 5 years ago. Noone cares about adoption anymore, i wonder why.
Yet the market is up. That should tell you everything you need to know about crypto. It's value is not representative of real world use. Not to mention that the whole point of crypto was decentralization and not having a middleman but most people keep their crypto in exchanges. Crypto dudes are literally reinventing the conventional economic system, with fiat and banks. What do you think the whole layer 2 stuff is? It would be hilarious if it wasnt so sad.
Exchanges are literally banks and your account there is literally FIAT. Not your keys, not your money. Your money is just a number in an exchange spreadsheet. And could disappear tomorrow, just like it has happened many times so far(every time an exchange goes bust).
Most people still keep their money on an exchange because ultimately it isnt about the crypto technology, it is about gambling and get rich quick schemes.
True but at still in theory, the central bank can nuke their monetary wealth. So they are forced to use it. Buying assets is vastly preferable to keeping the money under the mattress. Again, it is all about circulating the currency, thats its main purpose. This is not a bug, this is a feature of the currency. You arent supposed to hoard it.
Money is a transaction tool. Money is not wealth, it is just used to represent wealth as a convenience. Hoarding money should not be your goal, your goal is to use that money to acquire things, either things that you "need" or "investments".
Again, you assume money is wealth. But even if you think it is the evil governments who want to have infinite money, ask yourself, why literally no economist supports the return to gold. Economists are the most contentious breed of people. They disagree on everything. Why do they agree on this?