link to original reddit post by /u/FRESH__POTS
There is a purely economic type of discussion I wanted to have and I thought this would be a better sub for it since some of the crypto subs can be a little fanatical to be honest. I know a lot of people here are into crypto as well but I think this is a better venue to try and take an objective look at cryptocurrencies and the function they can provide.
To start out I want to explain why I am interested in cryptocurrencies. Simply put it is the idea that there could be a decentralized competitor to whatever fiat currency you are forced to use. So if you live in Europe, the idea that there is at least one other decentralized currency that you could use instead of the Euro is super cool to me. Imagine going to the store, getting whatever you need, and at the checkout there is a QR code that you scan to pay and it’s sent over instantly without any third parties involved. Or imagine that a friend in your group has fallen on hard times and needs some financial assistance. You could just open an app on your phone and send directly to their wallet. No central authority involved, no sketchy insolvent banks, just you and the person you’re trading with. Super cool!
Traditionally, fiat currencies have run into issues such as inflation. In just about every country on the planet (at least, that I know of) there is a central bank that controls the amount of currency in the economy as well as the interest rates. These central banks adhere to this idea that a little bit of inflation (about 2% per year) is an overall good thing. In the short term this provides a boost to money spent in the economy but in the long term it erodes savings. Essentially, each fiat currency has an unlimited supply. Sure, the central bank COULD contract the money supply but it seems that all they ever do is add to it at astronomical rates. I think we are all of the same mindset here that this policy is an overall bad thing.
This sort of led me to thinking about the fact that the vast majority of cryptocurrencies have a fixed supply that can never increase. In fact, they can in effect contract due to people losing their private keys. I have seen many people saying that it’s estimated that up to 1/3 of all Bitcoin has been lost due to people losing their private keys. I don’t know how true that ratio is but anecdotally I did some bitcoin mining back in the day and I lost the private key to the wallet I was using. I think I did it for maybe a few days, it was a super small amount I had acquired so nothing worth crying over but to me this is overall a problem for crypto.
So while fiat currencies have the problem of inflation, cryptocurrencies have the problem of deflation. Before we go further I want to say that I think this is a perceived problem because it depends entirely on your perspective of cryptocurrencies. Bitcoin has been called digital gold and I think that’s an accurate description as bitcoin has become an asset for people to store value in. That’s fine and all but it is not what bitcoin was intended to be. In my opinion it is no longer a crypto CURRENCY. It is completely unrealistic to use in your day to day life. It is NOT a competitor to fiat in its current state. This is the point I am trying to make.
Since there is no central authority for most cryptos we can’t say that there is a policy of deflation but it is a feature that is built in since there is a fixed supply. This is a fantastic feature to have if you are looking to store value but it is not a good feature to have if you are trying to spend money. Any asset that is being used in lieu of bartering is best when it has a stable price. If the value of my currency will be less tomorrow I am encouraged to spend it now and my savings will be worth less, making me less wealthy overall. If the value of my currency will be more tomorrow I am encouraged to save it, bringing economic activity down. Over time the economy contracts and while the value of my currency may go up I won’t have as much to spend it on. It’s the opposite problem of inflation. However, if the value of my currency will not change tomorrow, next year, 10 years from now, or even 100 years from now, I am not encouraged to do one thing or the other. It is a stable asset that I can freely use whenever I deem it is best for me to do so. This is the ideal scenario for exchanging value. Price stability allows actors in the economy to know the true, objective value of things too by comparing prices over time. It allows for better resource allocation.
I think something sorely lacking in cryptocurrencies overall is a currency that will expand and contract based on supply and demand for that currency. I think that a currency that focuses on price stability without being tied to a fiat currency is what will truly bring competition to fiat. As long as crypto in general remains a traded asset that you are looking to make money on we will never truly move away from fiat. If the Euro or USD crashes they will simply replace it with a new one and we will then talk about how many new fiat bank notes our crypto is worth instead of thinking about the groceries I can buy with the crypto I own.
I want to hear your thoughts on this.