Bitcoin is a Big Disruption
Bitcoin is considered to be deflationary due to its hard cap of 21 million units. Does that mean its value will always go up? And isn’t deflation a bad thing? Celebrating the 10-year pizza transaction, Bitcoin rose in value at an average compound rate of an astonishing 403% annually for the last 10 years.*
His eyes swept across the avenue as he hustles through the urban jungle crisscrossed by the canyons of glass and steel skyscrapers. Kenny is ready to embark on a cut-throat dive towards his meal. It’s a winner takes all event prompting instant U-turns and near right-angle lane changes that reverberates pulses of traffic mayhem down the island as soon as a fare signals for a taxi.
That is the life of a NYC cabbie. But those were the “good” days. But on this day after quietly waiting for alternate side parking to lift, Kenny eases his cab into a spot to wait out the final 30 minutes for when it will effectively become legal. At 2pm, he takes a deep breath, exits his yellow cab and locks it before walking across the park to get a view of the East River. A glimpse of the other side is Queens where he lives with his wife and daughter. And then Kenny jumps into the river. His body was recovered two weeks later near the Brooklyn Bridge.
They Don’t Call It Disruptive for Nothing
Kenny Chow, 56, under a pile of debt with seemingly no escape could no longer withstand the depressive pressures. It wasn’t the mortgage to his Queens home that did it. In NYC, taxis are heavily regulated requiring ownership possession of a medallion. In 2013, a medallion was sold for a record $1.3M due to the limit supply of only 13,605. The Washington Post had even stated that medallions are the best investments in America.¹
Kenny seemed to have done well having purchased his medallion for about $750,000 in 2011. His wife told him to sell it near the record high, but he trusted that the medallions could never go down.
But then came Uber, Lyft, and the ride-sharing companies pulled the rug from under the medallion monopoly causing its price crash. A medallion was recently sold for $137,000 in 2019. In 2018, Kenny was the 5th medallion hack suicide in 5 months, now a commonplace tragedy.
Bitcoin is the next Medallion
With the recent 3rd halving of Bitcoin to 6.25 BTC per block and the hard-coded limit of 21 million coins, it is understood that Bitcoin is deflationary even without factoring in the occasional lost private keys and thus coins. As demonstrated by Japan’s lost decade of the 90’s, and well into the 2000’s, the opposite of inflation, deflation, is actually a worse affliction as the country was mired in economic stagnation. When spending and investment stops, the economy is crippled. Sometimes permanently as Japan will probably never return to its economic glory days.
Is Bitcoin Doomed Since It Is Deflationary
The biggest challenges to Bitcoin currently are its volatile nature, its dismal acceptance as a means of payment, and its limited adoption as a store of wealth. There are only about 32 million BTC wallets and the world population is bumping against 8 billion.
This past Saturday I celebrated the 10th anniversary of the first Bitcoin transaction when Laszlo Hanyecz purchased two Papa John’s pizza with 10,000 BTC. Having spent only 0.00096 BTC for my two Domino’s pizza made it even better. If you are wondering, that means that Bitcoin has risen 403% a year annually with respect to the US dollar for 10 years. Talk about hyperdeflation!
Note: assumes that the two large pizzas are approximately equal in costs.
But let me be upfront, I used local fiat, not Bitcoins, as Domino’s does not yet accept the coin. And don’t expect the 403% rise to continue, or to not have to endure future crisis. But it still is an impressive gain nonetheless and there is good reason to believe that its upward trajectory is not over.
Interestingly though, the fact that Bitcoins are divisible down to eight places, otherwise known as a Satoshi, can support Bitcoin’s through a long deflationary phase, usability-wise. But there is more than payment usability in preventing Bitcoin from dethroning the US dollar.
The Fed Aims for 2–3% Inflation
The Fed’s mandate from Congress is the pursuit of maximum employment, and stable prices. It wasn’t until 2012 that the Fed publicly announced that they have been targeting a 2% long-term inflation rate, which begs the question: how did they come up with 2%?
Our economy and financial markets are based on growth. US population growth is about 0.6% which means that at a minimal it needs that much just to support the human growth. The stock market prices its equities on future earnings, so any threat to its growth will be met with bearish sentiment.
Interest and inflation rates have a complex relationship as they are tied in a reciprocating feedback loop. Interest rates must shadow inflation rates since a lender will require receiving more compensation due to the weakening buying power. Yet when interest rates are low, businesses and consumers will borrow more which tends to drive up wages and prices which is inflationary.
The Fed uses its ability to lower interest rates as a tool to prevent or to soften foreboding recessions. Without a built-in 2–3% inflation, the Fed would also lose one its most potent monetary weapons and thus its ability to manage the economy.
As with all Things Moderation is the Key
The world’s central banks and the financial markets do not like disruptions and view Bitcoin as an existential threat to the global financial markets. Moderate inflation is the underpinning that drives the financial mechanism of lending, borrowing, and liquidity that support those markets.
Things can change quickly but Bitcoin and other digital currencies will develop into its own asset class, and work in a hybrid manner with existing fiats. In times of crisis, gold is perceived to be safe haven. Its the closest model for Bitcoin at this phase of the coin’s development. Likewise, there is nothing to prevent a new, yet to be created digital currency which can usurp Bitcoin. There is no way of knowing yet as Bitcoin adoption is still in its infancy, and it will not be a medium of exchange until its volatility is ironed out.
Disruptions are painful. Innocent people can be greatly harmed, regardless of the overall betterment of the disruption. Will it be a betterment or end up as a scourge? It depends. What will its relationship be with the financial markets, the central banks and last but not least, the people? Will it simply be hoarded? Will it be converted for fiat as needed for spending?
Bitcoin can be a really good thing if it helps the underserved population and improves the efficiency of money. Bitcoin is definitely a disruption and one not to dismiss mildly. It will disrupt and reshuffle the power of money from its current order. These are some of the most interesting times in the evolution of monetary development.