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November 07, 2013, 05:22:00 PM |
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Simple enough question to ask, a hard one to answer. Context:
The process of moving to a bitcoin economy may essentially be a story of massive wealth distribution on a scale never before witnessed. The best way to visualize this is the case of the Norwegian chap who bought $27 of bitcoins in 2009 and was rewarded with $885,000 and change for the investment. The world economy hoovered up $885,000 and handed it to him. In his eyes, wealth has certainly been redistributed. But where exactly did it come from? As I watch my bitcoins increase in value, one has to ask where that wealth is being transferred from. It is obviously not being created out of air. The answer is simple but elusive:
Every time bitcoins rise in value, the value of a dollar goes down.
This statement may sound bizarre, but let me explain. The pool of dollars as a representation of wealth is huge compared to bitcoins. When the price of btc jumps from $100 to $200, this is a huge movement because the bitcoin market cap is so small. This also correlates to loss in dollar value, but it is so small compared to the available pool that it is unnoticeable. Perhaps every dollar loses a billionth of a cent in purchasing power. But billionths of a cent add up when you consider every dollar in existence. Those billions of a cent by definition must add up to the new market cap of btc. When btc hits 3 billion in market cap, 3 billion in value is removed from dollars... spread out across the trillions and trillions and trillions of them. It is almost invisible.
But at some point, the market capitalization of btc WILL be noticeable. The value of the dollar is already decreasing due to government and banking policies. We know this as inflation of course. Bitcoins currently are such a small factor adding to this inflation that no one would even think of tracking it. But imagine a trillion dollar market cap for btc. That is like the fed printing up another trillion dollars. Would that be a noticeable inflation? How about 10 trillion? 100 trillion? Start thinking Zimbabwe.
A million dollars can always buy a million dollars of bitcoins. The problem lies with just exactly what goods your million dollars can buy at this point. Maybe a toaster or a gallon of gas. maybe. We are already seeing the first stages of the prisoners dilemma. Those who move their fiat to btc first will get the most. The longer you wait to defect the worse off you will be. He who defects first defects best the saying goes. The wealth will be distributed to the early adopter, not so much to those who wait. The last will be trading toilet paper fiat for a few satoshis. It is from the late adopters that the wealth will all be transferred.
So it is important to ask this question.
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