Bitcoin: Illogical Excitement and Its Fate

As the advocates of Bitcoin attempt to ignite the transition of currency — from traditional money to cryptocurrency — the topic of money is becoming a target of public debate. Tired of the continuous “problems,” they argue, caused by Federal intervention and the control of money by central agent, advocates of “Bitcoin as a national currency” envision a society that is owned truly by people. Their ideas and visions heavily rest upon the distrust toward government and central authority, making it natural for them to be gravitated toward the idea of decentralization. It seems to me that the propeller of such movement is rather their excitement to revolutionize our currency than the deep contemplation of its likely outcome. Under such circumstances, people are no longer realistic nor rational. For those reasons, I felt the sense of necessity to share my throughs on Bitcoin and its likely outcome if it were to be used as our national currency.

In this article I would like to discuss my thoughts by following the four points outlined below:

  • Bitcoin is a wealth gap accelerator

Before we go into more in-depth analysis of Bitcoin, I would like to briefly give ideas about what Bitcoin truly is and why people are overly enthusiastic about its promise.

Bitcoin is designed after the financial crisis of 2008 that almost blew up the entire global economy and is originated initially from our distrust toward the banking and government institutions. It is the first successful attempt to decentralize the currency using cryptography and the peer-to-peer networking system and is often regarded as one of the promising financial technologies that might have the potential to entirely replace the financial industry.

Here is the brief description of Bitcoin, and I would like to begin with discussing the inevitable scenario created by replacement of dollar by Bitcoin.

Bitcoin is a wealth gap accelerator

Bitcoin in its current form is rather the target of a speculative investment than the medium of exchange, and it is owned by speculative traders, investment portfolio managers, and so on, to profit from its capital gain. There is no problem with such a situation itself because investors are taking their own risk with a full understanding of its consequences. However, this current situation inevitably creates a massive wealth inequality, as we shift toward the nationalization of bitcoin as a currency.
In its current state, as I said, Bitcoin is owned by relatively few people in comparison to the number of people who own U.S. dollars. Therefore, when there is a massive transition of national currency from the dollar to Bitcoin, it creates a scenario where a few people who have been possessing Bitcoin before the transition will highly benefit from the price increase resulted from the sudden jump in demand. In other words, such transition would disproportionately benefit the early buyers of Bitcoin and create a huge wealth disparity. This situation is inevitable, which means there is no healthy transition available at this point.

Just to give you an idea, as of Feb 2021, the aggregated value of all Bitcoins amounts to approximately $600 billion dollars. However big it seems, total value of all the Bitcoins is dwarfed by the $19 trillion dollars of the aggregated value of all the U.S. dollars. Think of how much price increase and wealth inequality it would cause, if all the U.S dollar is converted into Bitcoin, and the transition only benefits the early riders.

To repeat, the current situation makes it very unrealistic for bitcoin to serve as a currency because doing so would necessitate the transition, which in turn accelerates the already-increasing wealth gap to a dangerous level.

Decentralization of currency is more likely to do harm than good

The main idea of bitcoin is that it can serve as a decentralized currency that is not controlled by the central agency, which means there is no risk of hyperinflation caused by government failure or any mismanagement of money. However, what is equally important is that there is no agent that can save the nation from market failures, like the ones we saw in 1929 and 2008, and reduce the effect of depression and inflation.
I cannot imagine a society where there is no treasury bonds or monetary policy, but that would be the kind of society we would live in if we were to nationalize bitcoin as our main currency.
What would happen if there is no central agency controlling the supply of money and the economy? First of all, the market would suffer from a perpetual state of depression if there is no central agency. This argument is supported by the research done by Milton Friedman, which concluded that depression could have been recovered earlier than it actually took if the central government had stimulated the economy by printing more money and increasing the monetary base and M2 subsequently (active monetary policy). Keynesian economics also supports this argument as well, for it emphasizes the role that government can play under depression through fiscal expenditures (fiscal policy). I will intentionally avoid the discussion of the money multiplier theory and the problem of fiscal deficits created through fiscal policy, but the point is, without the government or FRED taking an active role to relieve market distress or cool down the overheated economy, the economy would suffer from highly volatile inflation/recession and unemployment rate.
For those reasons, one can conclude that decentralized currency would do more harm than good by destabilizing the economy.

Necessary conditions for currency

For something to become currency, it needs to meet certain conditions. Firstly, it has to be stable. Secondly, it needs to be widely distributed, regulated, and generally accepted by the public as a currency. Finally, it has to be exchanged into other forms of assets with ease. I will elaborate on each of those points in depth, beginning from the first point.
First of all, the currency has to be stable so that people can easily exchange it with other things — nobody would wish to settle with an unstable currency that gains or loses half of its value every second.
Second of all, the currency has to be widely distributed, regulated, and generally accepted by the public. Everyone must have easy access to Bitcoin under any kind of economic condition. For instance, a situation where someone cannot afford to own a phone and have sufficient access to the internet is intolerable because such a person cannot participate in the market transaction under Bitcoin society. Also, the currency should be regulated to have stable value because unregulated currency often become the target of confiscation or illegal reproduction, which results in distrust of currency value itself. Finally, though this might seem obvious, the currency should be generally accepted as a currency. If a group of people rejected Bitcoin as a currency and refused to accept it as such, it would become a huge disturbance of free trade.
The final point is that currency has to be easily exchanged and stored, meaning currency has to be small and portable, for which Bitcoin has no problem.

According to those points, however, Bitcoin in fact meets only a few conditions.

What is the use of Bitcoin then?

We have discussed the likely effects of having bitcoin as a currency and discovered that Bitcoin is not suited to become a currency yet. However, that is not to say that Bitcoin is entirely useless.
Bitcoin has the potential to become a national currency (although it is very unlikely), meaning under some circumstances, it can become more attractive than dollars as a medium of exchange. One might wonder, “If Bitcoin is more suited for currency than a dollar, does it need to be more stable than a dollar and has to overcome all the benefits one can gain from holding traditional currency, such as economic stability and so on?”
The answer is Yes, Bitcoin has to exceed the benefit of dollars in any of these measures.
“But how?” one might wonder.

The answer is if the nation is experiencing hyperinflation, severe stagflation, or other forms of monetary phenomena resulted from governmental failure, Bitcoin becomes a more attractive currency. You can almost regard Bitcoin as insurance against government failure — almost as like a safe-net for the unlikely scenario.
Under such special circumstances, Bitcoin can make a transition to become our next national currency, but such a shift is far from healthy and stable.

In this article, I discussed the likely outcome of the nationalization of Bitcoin as a medium of exchange by pointing out the expected, inevitable disasters and issues. I based my argument in defense of monetary and fiscal policy by the central agents and predicted the economic instability that might arise due to the decentralization of currency. I also discussed the inevitable wealth gap that is likely to be created between earlier holders of bitcoin and late adopters in the process of currency decentralization. Finally, I supported the idea of bitcoin as an “insurance” against government failure.

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Yuya Ogawa

just writing whatever comes to mind I study math/philosophy/economics