A Bitcoin Economy Will Be A Stable Economy

By March 19, 2015Bitcoin Business
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A Bitcoin Economy Will Be A Stable Economy

Major economies in the world today, are struggling to grow even at modest rates. Each of the prominent economies, including US, Europe, China, and Japan, are struggling to come out of the protracted economic slowdown because of various domestic and foreign factors. China’s housing market bubble is about to burst, Europe has recently embarked on a massive quantitative easing program to boost inflationary expectations, Bank of Japan is expecting inflation to touch zero levels, and US Fed is still not sure about raising historically low-interest rates even as it shows confidence in the economy.

The global economy continues to feel the repercussions of the 2008-recession, which saw the rise of ultra-low rates. Bitcoin economy can put an end to the reckless debt investing practice, which caused the sub-prime mortgage crisis of 2007-2008, and still distorts the price levels of various sectors of the economy, including housing, education, automobiles, and everything else that can be financed by debt.

So, if it’s about fiat currencies, can we not just switch to gold? The answer is, frankly, NO!

Gold has been mined for thousands of years, and there are not enough signals which indicate a reduction in supply. A limited supply eliminates the risk of devaluation, which has become the norm in fiat currencies. The cryptocurrency’s supply is, however, limited to 21 million Bitcoins by the network protocol. The Bitcoin miners are expected to mine all the Bitcoins in the next two decades, based on their current computational power. This would bring about a tectonic shift in the lending and borrowing rates in a Bitcoin-backed economy.

As mentioned above, Bitcoin’s monetary base growth is predetermined in the protocol; it depends on the rate of Bitcoin mining, and the number of Bitcoins that have been mined. Therefore, it doesn’t respond to the demand pressure in the same way as gold does. Considering that the price of each Bitcoin is P, and the supply of Bitcoins (which is fixed by the network protocol) is S, and the output of an economy is 0, then by the basic law of economics,

Price, P = Output, O/ Supply, S

This means that the price of Bitcoin will only act proportionally to the output of an economy. In simpler terms, the digital currency will truly reflect the growth of an economy.

It is then almost certain that in such an economy, the borrower would have to boost his own productivity more than the interest rate and growth of price of money combined. Meanwhile, the lender knows that money will grow in appraisal over time (as the economy grows), which means Bitcoins can be held as investments and he can spend them later when they can buy more without being exposed to a risk of default by the borrower.

With time, the market would realize the increased productivity of a certain sector is meeting the demands or that the planned investments are reaching expected availability of the capital in the future. Interest rates would factor in these developments and rise accordingly. This would increase the borrowing costs, which would further stoke up inflation, and prevent the realization of investments with unreal return expectations. And we can all fairly agree that, the global economy needs a little more of inflationary pressure to spur spending cycle and can obviously do better without risky investments based solely on cheap and easy debt availability.

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