Bitcoin is “good” money. It’s too good that “bad” money will crowd it out of circulation.
Bitcoin is digital gold. It’s the number one Store of Value in cryptocurrency. But it doesn’t do much for us besides Store of Value. Some Bitcoin supporters argue HODL is a use case. More use cases will come. There is a narrative: Store of Value first, then Medium of Exchange. In this narrative, it’ll take time for Bitcoin to gain widespread adoption. Once it reaches critical mass, possibly hundreds of trillions of dollars, people will then use it as a currency. This narrative is convenient and used to justify Bitcoin’s ever-rising price.
Nobody knows exactly when Bitcoin will reach critical mass. I agree with the Store of Value use case. But I don’t agree that Bitcoin will have other use cases. Bitcoin is currently worth more than 100 billion dollars. We see few indications that it is being used as a currency outside of the crypto world. Bitcoin is a valuable commodity. It will not be used as a medium of exchange.
Gresham’s law: bad money drives out good money
This principle states that a more valuable commodity (good money) will gradually disappear from circulation. It will be replaced by a less valuable commodity (bad money). For example, if people are currently using silver coins as money, the government decides to switch to copper coins. The government decrees that both coins have the same value. In this situation, people will hold on to silver coins and use copper coins. They will spend the bad money (copper coin) and keep the good money (silver coin).
Bitcoin supporters tout it as the good money, the “goodest” money. Hyperbitcoinization will eliminate all bad money. It is misleading to label money as good and bad. Any form of currency has some use if it is in circulation. Fiat money makes good/bad distinction fuzzy. These bad currencies are in circulation because they are just easier to circulate. The good, sound and hard money are simply harder to circulate.
We should classify money as the desirable (good) money and the less desirable (bad) money. There is a spectrum between desirable and not desirable. In this spectrum, Bitcoin is highly desirable, gold is desirable, USD is desirable, Euro is next, Venezuela bolivar is not desirable. Gresham’s law continues to apply to the spectrum. The less desirable money will drive out the highly desirable money.
Bitcoin world domination does not reduce price volatility
Bitcoin needs to reach critical mass for world domination. This is a future outcome that Bitcoin supporters often pitch. In this future, the Bitcoin price will become less volatile. It will be suitable as a medium of exchange. This argument derives from the micro view of Bitcoin economics. If the Bitcoin market cap is hundreds of trillions of dollars, a few hundred billion exchanges will not affect its price. The flaw of the argument is it assumes Bitcoin is micro and local. Bitcoin is permissionless and global. It is accessible by everyone.
The Bitcoin supply is fixed. But its demand is unpredictable. Humans are fallible. We may go into wars and induce a recession. We may achieve productivity breakthroughs and grow fast. The future is unpredictable. Another factor is the high fee. When Bitcoin no longer gives out block rewards, miners will need to raise the fee. When a transaction has a high fee, bitcoin owner will need to have substantial gain to justify its high fee. Otherwise, he/she will do better by HODLing. The Bitcoin price will continue to be volatile.
Bitcoin will not be a medium of exchange because of price volatility.
“Bad” money always exists to prevent “good” Bitcoin circulation
Bitcoin is decentralized money. It exists because many of us believe it has value. It is unlikely that everyone on planet Earth will unify into one single belief. There will always be other kinds of money. These kinds of money won’t be as desirable as Bitcoin. Therefore, people will put them in circulation and keep their bitcoins.
Bitcoin will be a Store of Value. We will use other “bad” money as currency.
Bitflate is a cryptocurrency with constant inflation of 7% per year. Its goal is to unlock the Medium of Exchange use case.