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Ok, I have a M.Sc in economics, so I know what I`m talking about, the flaw is in the mining/difficulty adjustment process/mechanism which makes the Bitcoin actually a heavy inflationary currency, and in some cases even worse than fiat.And also there are other problems.
Now i`m not saying that the fiat currencies are perfect, but surely the flaws of the fiat money has been thought about, and some solutions have been offered, while in Bitcoin i see none.
The main problem with bitcoin is the non-elasticity of the monetary supply, which means that it's monetary base it's capped. 21 million, and no more, which is not a good monetary policy.
Here's why, what happen's if there is a shortage in the supply ? For example everyone hoards the bitcoins in anticipation of a higher price, like we see now (it's a fact), which makes bitcoin a speculative currency, creating heavy swings in the price and not very viable for commerce.
So what happens if everyone hoards it (like it is happening without a doubt), is that the price will increase rapidly, and after there is no more supply left, the price will crash. You see, with a Central Bank, when they see a bubble forming, they immediately fire up the printing press, to add more liquidity into the market, and to slow down the speculative price increase by devaluating the currency (ok, the fact that they buy junk bonds and crappy assets is a side issue, but the QE itself is not a flawed principle, it has it's own need if liquidity is small)
Without QE, or any form of increasing the monetary supply, you will definitely have bubbles. Which is funny because bitcoin was created to avoid the flaws of the fiat currency (inflation and depressions), but without inflation you will get crashes
So let's recap: if there is no way of increasing the monetary supply and people would not sell their bitcoins (because everyone hoards it, in anticipation of a bigger price), then bubbles will form guaranteed! And eventually it will pop out in a big crash.There is no way to avoid it, as we saw in 2014, when the bubble popped.
Second problem:
Elasticity & The mining/ difficulty adjustment mechanism
Pretty flawed in my opinion, here's why:
If the demand for mining is lacking, due to small prices ( as miners wont mine if the incentive is small/ the profit margin)
, then the difficulty will decrease ,yes ? Yes.
A decrease in difficulty will mean that, the other miners which have better equipment /a.k.a can mine at a cheaper price, so their profit margin is higher, they will keep mining, further more, at a lower difficulty level, they can mine more.
=>WHICH RESULT'S IN: HIGHER INFLATION. => EVEN LOWER PRICES
The mere fact that the difficulty drops due to lack of demand and lower prices, will make the other miners mine more faster, which will create more inflation, and will decrease the prices even further.
This is a huge flaw, I cannot believe nobody saw this before, so this mining mechanism is completely flawed, it will forever decrease the price, as the difficulty will drop, and create more inflation which will decrease prices even more!
Third problem
External demand: yes, both problem 1 and problem 2 can be avoided if the demand for BTC will always rise, but that's not the case. With problem 1 due to price swings and bubbles, merchants will have a hard time adopting a currency which fluctuates like madman, without any value stability.And without merchants you can hardly build an economy on it!
It's better to have a small inflation, than to have bubbles and crashes every single year.
And due to problem 2, as it's price decreases perpetually, perhaps we can gain some stimulus, so that people would consume, but not that much since i`ve seen nobody to shop with bitcoins if the price decrease, they will rather convert it back to fiat.
Keynesian consumer stimulus theory doesn't apply to it, because the monetary base it capped, so basically everyone will just buy bitcoins, to anticipate a better price, and not for to make a currency that can be used to build an online economy.
Because of this BTC will forever remain a speculative currency, and will have a really hard time becoming a real money that can be used in trading
I`m really sad that this is the case, but this is the truth, now I`m not defending Keynesianism here, it has it's flaws aswell, fiat money is not perfect, but compared to bitcoin, i think its better.
Any opinions?
