A new opinion piece from a Bloomberg economist suggests the unthinkable: the real problem with Bitcoin is that it’s deflationary.
A new op ed by Noah Smith – former assistant professor at Stony Brook University – has set the cat among the Bitcoin maxis.
This is of course heresy among Bitcoiners who think that one of Bitcoin’s greatest strengths is its fixed supply.
They believe this is the key to its value, as central banks print ever increasing amounts of money to get themselves out of debt at the expense of the savings accounts of citizens.
"People will use this asset as currency because it's more valuable than other assets", said a bunch of people who didn't know Gresham's Law
— Noah Smith ???? (@Noahpinion) February 23, 2020
High volatility means Bitcoin will never replace cash
However, Smith argues that Bitcoin’s high returns come at the expense of high volatility:
“An asset like Bitcoin, or the U.S. dollar, can be a good investment or can be good for buying stuff, but unless the economy is deeply dysfunctional, it can’t be both,” he says.
— Tuur Demeester (@TuurDemeester) February 23, 2020
Smith is no Bitcoin hater, and he stated in the Twitter responses that he owns Bitcoin in the expectation of high returns.
He also understands the concept of hard money and the reasons proponents argue that Bitcoin’s deflationary nature is the key to its value – he just questions the idea.
“One of the basic ideas of Bitcoin, which stems partly from the hard-money beliefs of its creators, is that the cryptocurrency should be deflationary — that its supply should be limited, and its value should increase over time due to increasing scarcity.
“This means that eventually, miners will have to be rewarded with transaction fees instead of new Bitcoins.”
Bitcoin should be more like fiat?
Smith cites the views of economists Jonathan Chiu and Thorsten Koeppl:
“They argue that Bitcoin should be inflationary. Transaction fees are currently levied on a very small population, but if miners were paid with inflation this would spread the cost out among everyone who owns Bitcoin.
“This could be exactly what cryptocurrency needs in order to turn into real money.
“Negative expected returns — essentially, a low and stable inflation target — would make Bitcoin less attractive as a long-term investment.
“Instead of hoarding it, people would be fine getting rid of it in exchange for pizza. The currency’s value might then stabilize, as speculation decreased.”
Not a popular idea among Bitcoiners
As you might expect, this heretical idea has gone down badly among Bitcoiners.
Alex Gladstein, chief strategy officers of the Human Rights Foundation, points out that Bitcoin is already inflationary to a certain extent.
Bitcoin’s current inflation rate is 3.6% – basically the amount of new Bitcoin created in the form of block rewards annually by miners. After the May halving the rate will drop to 1.8%.
Gladstein also argues, like many, that the limited supply is literally THE POINT.
“Elites being able to socialize the cost of money printing away to the general population] is literally the thing that Bitcoin was created to avoid,” he tweeted.
And he takes issue with Smith’s lack of acknowledgement that Bitcoin could be used as digital cash via the Lightning Network.
1/ Thread on Noah's Bitcoin article. Even though it misses the mark, it was written in an engaged, interested, and curious way, something that is sorely lacking in the mainstream media. This is great and suggests he may be Bayesian and willing to change his mind. https://t.co/efR6MeoBdI
— Alex Gladstein (@gladstein) February 23, 2020
Founder of Adamant Capital, Tuur Demeester, also seemed pretty down on the idea. He tweeted a link to the story for his 200,000 followers writing: ‘SMH …economists becoming experts in bitcornology