Paul De Grauwe, economics and entrepreneur, believes that Bitcoin will not be the currency of the future. (part 2)

However, there are other - perhaps more important - reasons why bitcoin and other cryptocurrencies have no future in the role of means of payment and value measures (ie they can not fulfill two basic functions of the currency). First, the supply of bitcoins has been determined asymptotically (there is a designated, but never reachable threshold of their number), and thus the dissemination of them would lead to permanent deflation (ie negative inflation). It would work because the global economy is growing and it needs more and more money supply in order to allow transactions of ever greater global value. In the bitcoin economy, you can deal with this challenge only by gradually reducing the price of goods and services denominated in bitcoins, i.e. negative inflation. The quantitative theory of money maintains that the second way to deal with this problem is to increase the speed of the money circulation, but it can not grow indefinitely. That is why the bitcoin economy would have to deal with permanent deflation, which is not a particularly attractive prospect.

Capitalism is based on entrepreneurs who take risky initiatives. They are usually people optimistic about the world. They expect that in the future the sale of their products will increase. This optimism drives the dynamism of capitalism. In a bitcoin economy, a drop in prices that is repeated each year would have to negatively affect this attitude. Price decreases induce consumers to postpone planned purchases, and investors to move to a more distant date for the implementation of their projects. This is a world of less optimism and probably less economic growth.

To avoid this problem, cryptocurrencies would have to have a protocol built in to allow them to increase their supply at a steady pace. Even a Friedman mechanism would be enough, according to which the supply would have some fixed, unchanged annual growth rate. Something like this bitcoin, however, does not offer, and so exceptionally does not work in the role of money of the future.

There is another, even more serious issue that makes bitcoin unfit for currency. I will say more: that it would be dangerous. If the world switched to bitcoins, banks would start to give cryptocurrencies to individuals and companies applying for a loan. But running a bank is a risky business. The problem is that because bitcoins have a constant supply, in the time of the banking crisis there would be no lender of last resort, which could provide support and lend them liquidity. And some crisis will finally happen. Even if bitcoins or other cryptocurrencies had the above-mentioned Friedman mechanism of constant supply growth, this problem would still not be solved.

The backbone of the last instance lender (LoLR) assumes that central banks can create money out of nothing. In monetary systems, where the money supply is fixed (or grows at a steady pace), no LoLR can exist. This leads in the long term to regular banking crises, which will result in bank insolvency and further unfavorable domino effects. That was exactly what we were dealing with at the time when the gold standard prevailed. This period was characterized by frequent banking crises that led to deep recessions and much suffering. Let's repeat it again: the bitcoin standard - like the gold standard - is the past, not the future.

Generally speaking, the problem with the bitcoin economy lies in the fact that in times of financial crisis - which will doubtless come again - there is a general escape into liquidity. Such moments require the central bank to provide as much liquidity as it needs. Without it, people, one by one, are trying to secure their liquidity as quickly as possible, selling off their assets, which leads to deflation of their prices and the insolvency of many people. Bitcoin-based economy is inflexible in this respect and therefore would not withstand financial crises. In a capitalist system that regularly generates crises, the bitcoin economy would have to break down.

Today, the bitcoin bubble will not break yet. This is due to the belief that there is a certain inner value in this cryptocurrency. It is a derivative of the belief that bitcoin is the money of the future, and for this money available in limited quantities. But when enough people realize that bitcoin and other cryptocurrencies have no future as a means of payment, it becomes clear that the king is naked, and bitcoin has no immanent value. The bubble will fall, and many speculators who have joined it too late will be breaking their arms.

This does not mean, however, that the blockchain technology used in cryptocurrencies has no other important applications. The storage of large data sets enables its decentralization, for example, which opens up a whole new range of applications. The current structure of bitcoins, however, determines that it can not be a stable currency of the future.

The idea that bitcoin is the currency of the future is very popular among free market fundamentalists. The cryptocurrency awakens a crazy enthusiasm for them, because it is created entirely outside the control of central banks, which the institutions themselves consider to be the source of evil in various forms. Fiduciary money created by central banks, according to the fundamentalists, is supposed to lead to hyperinflation and other catastrophes.

In fact, there is a problem with the construction of fiat money. Because producing it is so cheap, there is a risk of overproduction. This in turn leads to inflation. Since the 1990s, many central banks have, however, strictly adhered to the policy of limiting inflation and it turns out that they have very big successes in this field. Thanks to them, in the majority of industrialized countries, the annual inflation rate has been maintained for almost 30 years for almost 30 years. For example, in the US the average annual inflation was 2.35% from 1990 to 2017.

However, it will not convince market fundamentalists. They will continue to be convinced that hyperinflation will come. For many of them Bitcoin has become a symbol of the free market world. A world in which markets with unlimited government control will create tremendous wealth for the broad masses of people. The world in which markets regulate themselves and prevent the emergence of financial crises. Indeed, in such a tale, bitcoins would be an anchor stabilizing the entire economic system. But not in the real world.