Bitcoin maximalists are convinced that Bitcoin is going to be the everything money. It will take over the world and very little will exist. Most of them are convinced that Bitcoin will usurp the USD as the world's reserve currency. Yesterday I wrote 5 Reasons why the USD will not lose its reserve status.
In this article we will cover the 4 reasons why Bitcoin will not be the world's reserve currency.
1. Unit of Account
One of the main characteristics of money is that it serves as a unit of account. So I ask you, what is a Satoshi? Better yet, ask the average person, especially one who is not involved in cryptocurrency.
The US Dollar is an excellent unit of account because most understand what it is. We have 4 generations of people who were reared in that world. Anyone who deals with the United States, in terms of exporting, understands how much their products are worth in USD.
Trying to teach people a completely new system is no easy task. In fact, it is damn near impossible. The USD is ingrained in the minds of people and most will not give that up.
For this reason, it is not surprising to see stablecoins being tied to the USD. While some are literally backed by USD holdings, even the algorithmic coins like the Hive Backed Dollars (HBD) use the dollar as a unit of account.
2. Not Based Upon The Free Market
Bitcoin is not a free market coin. In fact, it is driven less by the market than the USD. With the latter, its creation is dependent upon the commercial banking system meaning lenders and borrowers have to agree to "print" more USD.
With Bitcoin, there is none of that. The emission rate is coded in. If that is not bad enough, money equilibrium is impossible. There is no way Bitcoin can be determined by the free market.
The cap on Bitcoin is 21 million (and whatever the associated Satoshis work out to be). Where did that come from? And more importantly, what is the free market requires 25 million Bitcoin? Were do we get that? The answer is you do not. Hence the economy will have to do without.
Of course, the flip side is true. What is 21 million is actually too much for the economy? How do you reduce liquidity? Once again, it cannot happen.
Bitcoin has no elasticity, one of the 3 functions of a reserve currency (liquidity, adjustment, and confidence).
Whatever is pre-determined is what Bitcoin operates upon.
3. Fixed Money Equals Tyranny
History is riddled with lessons about fixed money. The fact that supply is capped is advertised as a positive by Bitcoin supporters. However, when we understand what fixed money does, it only leads to more inequality and, ultimately, tyranny.
People do not seem to grasp who will be in control of Bitcoin going forward. Michael Saylor, a Wall Street guy (and not a very big one), is already in possession of 120K Bitcoin (whatever that equals in Satoshi). He already stated he is never selling. Why would he? He can always collateralize it.
What happens when the rest of the world figures out what Saylor knows and decides to do the same? We will see central banks, sovereign wealth funds, and major financial houses all piling in. If Bitcoin was the only game in town, what do you think is left over for the rest of the planet?
Talk about the rich getting richer. Even if we operate from a 5% return perspective, with a capped supply, the money will move into the hands of those who can afford to hold it. Since the wealthy do not require spending all their income, whatever is excess can attract, in this instance, more Satoshis. Who will that comes at the expense of? Those with very few Satoshis.
Now we truly get the golden rule. We know that with an elastic money supply, wealth and income inequality can result. At the same time, we see tyranny spreading throughout the world. People seem to think this will get better with a fixed monetary system.
4. Economy Killer
Money is a tool for collaboration. This is what enables our economies to expand. People are innovative, curious, and desiring ever more. Basically this requires money.
A fixed money supply means progress stops. There is little incentive to invest since, with fixed money, there eventually is no return to be had.
At the same time, wealth in the form of businesses and assets will plummet. People who think deflation is a good thing should look at Japan over the last 25 years. Or better yet, take a reading about the Great Depression. That was not an inflationary period in history. Tell us how that worked out.
What was the cause of that? One of the major problems was the money supply was contracted significantly. A lack of money when it was needed turned what was likely to been a severe recession into one of the worst economic periods in history.
Bitcoin would top that if it were the reserve currency.
Bitcoin's Benefits
There are two things that Bitcoin could be very good at.
The first is secure transactions. While the network is slow and clunky, it is very secure. If sending large sums of money, this is not a bad way to do it. Yes it is faster than the present settlement system now, but that will not always be the case. The FedNow system is implementing instant settlements in 2023 or 2024. Nevertheless, if sending a few million (or more) Bitcoin is not a bad way to go.
To me, the best use case for Bitcoin is as pristine collateral. Since it is liquid and transparent, this could be an agent that really provides the global financial system with what it is lacking. The ability, especially when tied to the USD value, for it to keep expanding as more collateral is needed exists. This could put the market cap at $20 trillion, if not higher.
We have hundreds of trillions in global debt and the only securities that banks take between themselves classified as pristine is US Treasuries. Bitcoin could really aid this market.
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