Saifedean Ammous and Peter St. Onge are the thought leaders in my opinion on the macroeconomic impact of adopting a Bitcoin standard. The Austrian business school is more reluctant to make concrete predictions and focuses more on theory and big results. Mainstream fiat economists who tend to make these predictions – which are consistently inaccurate – don’t understand Bitcoin or its value proposition, and therefore only produce terrifying views like this one.
This leaves a shimmering void of confusion and uncertainty about what will happen when the world shifts from using fiat currency to adopting bitcoin.
This article will attempt to fill that void by providing the reader with a picture of what is possible and likely for our economic future on earth.
I am not of the opinion that a major depression is looming or that the world economy will “collapse” at some point, but rather I imagine a long transition or realignment. There is already a parallel economy of people who only live and trade in Bitcoin. This bitcoin economy will grow as the “fiat economy” gradually shrinks over time and as people change.
The introduction of Bitcoin will not come through the public’s decision to pay with Bitcoin, but rather by manufacturers and sellers who prefer to be paid for with Bitcoin, thus creating incentives for customers to use it. Expect discounts for paying with Bitcoin and for sellers who only accept Bitcoin.
That is not to say that there will be no turbulence. The fiat system added cheap money to the world economy (2008) and again (2020), which has led to bad investments. At some point there will be a major correction or corrections – a “market crash”. It is impossible to predict when this will happen. The longer the correction lasts, the more capital is misinvested according to Austrian business cycle theory and the more drastic the correction will be.
This is not going to drag a large chunk of the economy into Bitcoin right away. The BTC price might even fall initially as everyone is panicking and selling everything. Central banks and governments will not just turn around and give in. There will be more money printing, stricter laws and higher tax rates, etc.
Hyperinflation will occur in some areas, but remember that Bitcoin is there to be used as a medium of exchange, a store of value, and a unit of account. Weimar and Zimbabwe didn’t have that luxury. They had to revert to a system of exchange, which decimated their economy when everything came to a standstill. Venezuela seems to be slowly getting into Bitcoin and things seem to have gone better than originally expected. They also didn’t have a functioning Bitcoin Lightning network that we already have today.
Some jurisdictions will “prohibit”, prohibit, or heavily tax Bitcoin, making it more difficult, but not impossible, for people to trade in such jurisdiction. Productive people will slowly move from these areas to the areas that freely accept or accept Bitcoin, and these areas will thrive. At some point, the territories that chose not to adopt Bitcoin will either have to start accepting it or they will be turned into an unproductive wasteland as the rest of the world will surpass it. Imagine if a region like the USSR eventually has to submit to some form of capitalism.
As in the past 10 years, anyone who chooses to adopt the Bitcoin standard earlier will be wealthier compared to future users. This will become more apparent over time. There will be individuals and institutions who refuse to adopt for decades and eventually live in non-bitcoin enclaves.
The wealth transfer will be significant, but likely not as spectacular as many Bitcoin maximalists imagine. Real wealth is held in assets such as property, machines, knowledge, goods, resources. The introduction of Bitcoin will not destroy this wealth; the prices are simply given in Bitcoin instead of in Fiat. This includes stocks.
Companies and industries that produce real value will flourish, such as: For example, mining, manufacturing, technology, distribution, retailing, etc. Your stock prices will take a hit if the correction (s) occur, but that has nothing to do with Bitcoin. At this stage the markets are overvalued compared to historical data and prices should adjust in the future.
One sector that is going through massive change is banking. It’s worth taking a closer look at what could happen in this area under a Bbitcoin standard.
It would be fair to argue that banking will be reduced to what it was under the gold standard. Banking is simply a worthy form of lending money, with the banker having the advantage that the money he lends is not his own but someone else’s money. It was deposited with him for interest he pays on it. The banker’s business is to borrow this money again at higher interest rates than he paid for it, and to take the difference as a reward.
Banks play an important and significant role in society. Through their intermediation, capital is transferred from those who cannot or do not want to use it in industry to those who can. In this way, a banker does not increase the total amount of capital available, but the total amount available for production. This is an important service that the bank must be paid for.
According to a Bitcoin standard, the income and value of the banks are largely reduced to what the market is willing to pay for the above service. Note that according to the gold standard of the bank, the public has paid a fee for “custody” of their funds. Since it is safer for a person to secure their bitcoins themselves rather than entrusting them to a third party, banks – or whoever is taking on the capital allocation role – need to encourage depositors to get their bitcoin deposits.
Who knows what new types of capital allocation methods the free market will produce if innovators are allowed to innovate in this area?
Whatever happens, in the long run, bank stocks will inevitably depreciate in real value as the space in which they practice with their regulatory-laden oligarchies shrinks. Some banks can innovate and thrive – the free market could even allow some form of bitcoin banking with partial reserves if the risk appetite is up. But according to the Bitcoin standard, the few connected people are not given free money.
Value, interest rates, inflation and deflation
Disclosure: I hold to Mises’s view that inflation is the increase in the total amount of money in the economy. Deflation would be the decrease in the money supply. If the total amount of money in an economy is suddenly reduced from previous levels, I fully agree that it could, and probably always will, have devastating effects. This phenomenon should not be confused with the increase in the value of a monetary unit over economic goods, which is also known as “deflation”, but which will have many positive effects on the economy and society.
Let’s say for a second it’s the year 2035 and Bitcoin is the most widely used currency in the world. What inflation and interest rates could we expect?
Total Value or Market Cap of Bitcoin: I have no doubt that BTC will hit $ 10 million per coin at some point. The problem is that a coffee could cost $ 5000 at this point because the value of the US dollar would be close to zero from today’s perspective. Hence, calculating the value of Bitcoin in relation to future US dollar prices is a pointless exercise. Yes, measured in US dollars, Bitcoin’s potential worth is really ∞ / 21 million.
Predicting Bitcoin’s purchasing power over goods and services, and expressing that as a number in relation to today’s US dollar value, is a far more complex and contentious topic that will rack your brain many times as you try to get it to solve . I’ll try to discuss this in a future article.
Once the price of Bitcoin stabilizes and becomes widespread as the world’s leading unit of account, a phase of semi-permanent deflation (expressed in Bitcoin) will set in. That said, the value of your currency will increase in comparison to goods and services. This is not because the total amount of currencies is reduced, but because the total amount of purchasable goods increases compared to the total amount of currencies in existence, and also because of technological advances that are making goods more affordable. It’s important to note that this is and was the natural state in the world before governments and banks started fucking with your money.
The interest rates are determined by the free market. What interest rate a lender and borrower agree on will be the rate paid.
Interest rates can be viewed as a cost of capital. Historically, this has been between 3% and 6% per year on the free market. But how does it all fit in with deflation? Let’s say an entrepreneur wants to borrow Bitcoin for a new project in the future. He’ll find a willing lender – likely through DeFi or some sort of bank – and borrow the bitcoin at an agreed rate. Let’s say it’s 4%. If the entrepreneur expects deflation to occur during the life of the loan, he simply adds the expected deflation to his cost of capital calculation.
Interest rate: 4%
Expected deflation: 2%
Total cost of capital per year: 6%
This will not distract the economy from growth and business owners from borrowing. Below the fiat standard, interest rates have risen as high as 15% or much higher in some places, even if the inflation rate is subtracted.
What will be drastically reduced is the fee that the middleman charges for arranging the loan, as mentioned earlier. This is the difference between repo and base rates that we know today. In a free market, whoever offers the lowest “fee” to mediate the transaction will outperform the others, and with modern technology that fee should be negligible.
Under a Bitcoin standard and with modern innovation, the distribution of capital would be much more efficient as someone in Africa, for example, could borrow from someone in Europe or the US at the same rate as others. This will lead to global competition for capital, and those who are most efficient in allocating that capital will thrive.
This brings me to what I consider to be the most beneficial aspect that a Bitcoin standard will bring to the world. Enable free trade between those who choose to. The mere fact that two parties act voluntarily with each other means that both parties will benefit from the transaction. The more such trading takes place, the better it is for everyone involved. The ability to easily, instantly, and cheaply pay anyone around the world will enable more trading, especially on the ground floor for people who previously didn’t have a bank account.
I hope that reading this article has opened up the possibility of a successful and peaceful transition to the Bitcoin standard for you. In the long term, the natural laws of society and economy will play out. What works and what doesn’t for society is becoming increasingly clear.
May the best currency win.
This is a guest post by Handre van Heerden. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.