Why Fixed Supply Tokens Can't Become True Currencies

[bitflate]

Original Post: https://bitflate.org/post/2021/11/27/why-fixed-supply-tokens-cant-be-currencies.html

Deflationary pressures and the crypto community itself are preventing fixed supply tokens from becoming true currencies.

As some of you may have noticed, the term cryptocurrency is something of a misnomer. Aside from the unlucky soul who spent 10,000 Bitcoins on two pizzas, Bitcoin hasn’t been used as a means of exchange.

There are reasons for this, both good and bad, and they mean that Bitcoin, and other fixed supply tokens, are unlikely to be used as a mainstream currency – and that’s okay.

Deflationary Currencies Are an Economic Weak Link

Bitcoin is far from the first fixed-supply token. For centuries, humans have relied upon currencies backed wholly or partially by gold – and it has always caused problems.

Gold and other precious metals must be mined from the ground, which means that there is a limited supply. When supply pressures mount, either in the form of lowered gold yields or increased demand, this causes significant problems for governments.

An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.

Abandoning the Gold Standard

A more recent example of the real-world problems with precious metals is the abandonment of the gold standard. In the 1930s, when the great depression hit people panicked. In the UK, there was a mass rush to redeem gold.

The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.

Bitcoin’s Similarities to Gold

Bitcoin, in many ways, represents an attempt to return to the gold standard. It has a fixed, diminishing supply. In the long term, Bitcoin will become a deflationary asset as its coins are lost in locked wallets or destroyed (either accidentally or deliberately).

These similarities mean that we could eventually be in a situation where there is simply not enough BTC to meet market demand, even if we decide to use Satoshis (a fraction of a Bitcoin) as the primary means of trade.

The Crypto Community Doesn’t Actually Want BTC To Become a Currency

The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.

Nobody wants to be the guy who bought pizza with a Bitcoin, and almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.

For Bitcoin – or any other cryptocurrency, for that matter – to become usable as a day-to-day asset, it needs to be stable. However, most of us are using Bitcoin as a store of value, holding it, DCA-ing into it, and not spending it. There is nothing wrong with this, but it precludes BTC from being used as a real-world currency.

It is possible that some form of cryptocurrency may become a mainstream medium of exchange. However, it will need to be one that governments feel they can trust. It will likely be built as an inflationary instrument, albeit one with a fixed form of inflation.

Some projects are working toward these goals, notably Nano (XNO). However, only time will tell if these projects will gain the support they need.

[1713264042]

1713264042

[1713264042]

1713264042

[1713264042]

1713264042

[100knot2dae]

A very interesting read! They have made alot of valid points there. In terms of projects, there is also Bitflate that is following the same principle, trying to establish a real day-to-day currency.

[odolvlobo]

An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.

There were many reason's for the economic troubles in Europe at that time. It is not clear to me why the scarcity of a very portable currency such as Bitcoin would be a problem. It seems like a lack of currency would result in its value increasing and thus a decrease in demand. Of course, as I see it, deflation is just as much of a problem as inflation, so there is no simple solution.

The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.

I believe the real problem was caused by the government and its policy of spending money that it did not have. The problem was not a general lack of gold, but the lack of gold held by the government. Devaluing a currency certainly makes it easier for a government because they are effectively defaulting on their debt.

These similarities mean that we could eventually be in a situation where there is simply not enough BTC to meet market demand, even if we decide to use Satoshis (a fraction of a Bitcoin) as the primary means of trade.

That statement shows the flaw in your reasoning. If 21 million bitcoins are not enough, then what about 2.1 quadrillion satoshis? There certainly aren't 2.1 quadrillion dollars, so how can you say that 2.1 quadrillion satoshis aren't enough? What about 2.1 quintillion millisatoshis? Wouldn't that be enough? Regardless, the numbers are completely arbitrary. There will always be enough bitcoins.

Nobody wants to be the guy who bought pizza with a Bitcoin, and almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.

For Bitcoin – or any other cryptocurrency, for that matter – to become usable as a day-to-day asset, it needs to be stable. However, most of us are using Bitcoin as a store of value, holding it, DCA-ing into it, and not spending it. There is nothing wrong with this, but it precludes BTC from being used as a real-world currency.

As adoption increases, the value of a bitcoin will stabilize and people will no longer expect the value to rise significantly. They will use it as a unit of account and not a speculative asset.

It is possible that some form of cryptocurrency may become a mainstream medium of exchange. However, it will need to be one that governments feel they can trust.

I don't think that trust by a government is necessary. We are already seeing increases in adoption despite a mistrust by governments.

It will likely be built as an inflationary instrument, albeit one with a fixed form of inflation.

Since inflation is a covert form of taxation, it is unlikely that any government abandon its own inflationary currency for a non-inflationary currency that it does not control.

[magneto]

This is simply not true.

Bitcoin is a good counterexample of this, the rate at which new coins are minted versus the amount of old coins lost is really going to become equal in the next few years if not right now.

And yet, the institutional adoption as well as the commercial usage of BTC is only increasing. Nobody says that deflationary currencies cannot work as a medium of exchange.

[100knot2dae]

Nobody says that deflationary currencies cannot work as a medium of exchange.

In theory, maybe yes. In reality, most people are reluctant to use deflationary assets for daily spendings.

[mk4]

The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.

Nobody wants to be the guy who bought pizza with a Bitcoin, and almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.

This doesn't make much sense because you could also make the same argument with other investments. "Why spend my money if I can buy AMZN/AAPL/MSFT and make money holding them long-term instead?".

I know bitcoin could potentially be worth a lot more in the future, but yet I still use it to pay for things. Why? Because I'm a normal human being with wants and needs.

[hugeblack]

An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.

The problem is not in the limited supply quantities, but rather the insistence on printing new money without covering it, and therefore when a problem occurs, people will discover that what they have of money is worth much less than its value because part of it is fake.

What happened in the bullion famine and all economic crises is the mismanagement of countries to distribute wealth, as the quantity is limited and lending is carried out with high interest (similar to printing money) and therefore financial problems will appear faster than now (low value of money instead of its absence)

The gold standard was also abandoned when governments could not find enough money.

As for the amount of Bitcoin, it is not limited, there are not 21 million coins, but 2,100 trillion satoshis

[bitmover]

Gold and other precious metals must be mined from the ground, which means that there is a limited supply. When supply pressures mount, either in the form of lowered gold yields or increased demand, this causes significant problems for governments.

An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.

Abandoning the Gold Standard

A more recent example of the real-world problems with precious metals is the abandonment of the gold standard. In the 1930s, when the great depression hit people panicked. In the UK, there was a mass rush to redeem gold.

The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.

I think you are basically ignoring the whole history.
Gold has been a currency since 500 BC (source: https://www.gold.org/about-gold/history-gold/golds-role-money)
Which is more than 2500 years. In the last few decades there was an abandon of the gold standard, but that doesn't mean much.

Bitcoin may replace gold as currency, and even gold standard may come back one day.

[odolvlobo]

Nobody says that deflationary currencies cannot work as a medium of exchange.

...In reality, most people are reluctant to use deflationary assets for daily spendings.

You will have a difficult time supporting that statement. In fact, gold is fairly deflationary, and yet it has been used as money for centuries.

The claim that people won't spend deflationary money is an exaggeration. Clearly, if the money is deflationary, then people may spend less, especially on unproductive assets or on things that have little value, but that is actually a benefit.

[mu_enrico]

I think there are at least two problems, one related to psychology, not economics, for fixed supply tokens to become a used currency. First, we used to have price inflation, thus employers compensate for the price increase by raising salary. This creates the illusion of people getting more money, which actually doesn't. In the deflationary economy universe, this means no wage raise. Worse, at some point, maybe workers will get less nominal wage (not an actual wage cut, but people will think it is). Second, fixed supply token means deflationary as population grows. It incentivises hodling, instead of spending (for productive purpose). It can be bad for the economic growth.

[tulusikhlas]

Actually, this is not too complicated if the government decides to adopt Bitcoin in any type of transaction. For example, payment for food, clothing, or housing, or other transactional matters outside the exchange. As is currently happening in El Salvador. At least like that, if the government and its policies support the existence of Bitcoin as a transaction tool, then whatever we hope for is difficult to realize. Because everything refers to policy, what is considered can and cannot go back to the policy of the country where a country supports Bitcoin or not.

Regardless of the value contained therein, either as a deflationary or inflationary currency. All still, if there is no policy it will become a centralized rule.

[kaya11]

Maybe things would get different if by any chance Bitcoins succeeds and would worth around 1 sat to 1 dollar. But I am still wondering if that happens how would the miners get their shares, it is too complicated for to think and I think if someone can enlighten it would be a great of a help.

I too agrees that fixed supply tokens will become true currencies of a Nation, as far as of now I am fond of using it as a means of payment method other than cash.

[SFR10]

the crypto community itself are preventing fixed supply tokens from becoming true currencies.
~Snipped~
almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.

It's a good thing the writer of that article mentioned "hodlers"... They don't define how the whole crypto community thinks and acts!

Aside from the unlucky soul who spent 10,000 Bitcoins on two pizzas, Bitcoin hasn’t been used as a means of exchange.

Whoever was responsible for writing that part, probably spent the majority of the past decade, living under the rock!

In the long term, Bitcoin will become a deflationary asset as its coins are lost in locked wallets or destroyed (either accidentally or deliberately).

These similarities mean that we could eventually be in a situation where there is simply not enough BTC to meet market demand, even if we decide to use Satoshis (a fraction of a Bitcoin) as the primary means of trade.

A couple of things:

• None of us will be around when ^{[or if]} it happens ^{[around 2140]}.
• As @odolvlobo pointed out, there's also millisatoshis and if for some reason, that's still not enough, I'm sure the developers will figure out a way to deal with that matter!

It is possible that some form of cryptocurrency may become a mainstream medium of exchange. However, it will need to be one that governments feel they can trust. It will likely be built as an inflationary instrument, albeit one with a fixed form of inflation.

Let me guess... CBDCs?! Yeah, right!

[tygeade]

For Bitcoin – or any other cryptocurrency, for that matter – to become usable as a day-to-day asset, it needs to be stable. However, most of us are using Bitcoin as a store of value, holding it, DCA-ing into it, and not spending it. There is nothing wrong with this, but it precludes BTC from being used as a real-world currency.

Yeah, this is the reason, bitcoin is being identified to be more suitable as an asset rather than being a momentary exchange and you need to note that any asset can be used as a currency when both the parties (buyer and seller) agree and no economic rule prevents that.

Gold was a currency in ancient times and now it is a pure asset and a federal reserve for most countries. Same trend could be copied by bitcoin as well.

1 MB block and its consequence of higher tx fees and limited supply are in favor of bitcoin to act as an asset. Not sure Mr. Satoshi coded bitcoin as a future asset but bitcoin may remain as a currency for some time and then people will realize its preciousness and may start treating it as a noble asset which means like one bitcoin may be enough for generations and not just one one's life time.

[marine4u]

There are reasons for this, both good and bad, and they mean that Bitcoin, and other fixed supply tokens, are unlikely to be used as a mainstream currency – and that’s okay.

Bitcoin has the right benefits if applied properly allowing for diversity in practice.  So you mean El Savaldo is doing the stupid thing trying to go against that and make it happen.  At least it doesn't have to do anything bad from inflation to the machine that prints money every year, deflation for bitcoin is the halving that keeps the supply against the inflation hedge.

[Gyfts]

The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.

Conventional economic theory of supply and demand just tells you the price per ounce of gold increases if there were challenges in meeting the supply needed to support a gold backed currency system. Realistically, the gold standard was never supportable because the idea of fiscal responsibility isn't something governments can afford. The government would rather be able to manipulate the currency, take out its own debt and repay the debt if they can, but not actually be held to any objective standard.

It's easy to borrow money when you can introduce more currency into circulation, doesn't work that way with gold, and certainly doesn't work that way with Bitcoin.

[Fortify]

Original Post: https://bitflate.org/post/2021/11/27/why-fixed-supply-tokens-cant-be-currencies.html

Deflationary pressures and the crypto community itself are preventing fixed supply tokens from becoming true currencies.

As some of you may have noticed, the term cryptocurrency is something of a misnomer. Aside from the unlucky soul who spent 10,000 Bitcoins on two pizzas, Bitcoin hasn’t been used as a means of exchange.

There are reasons for this, both good and bad, and they mean that Bitcoin, and other fixed supply tokens, are unlikely to be used as a mainstream currency – and that’s okay.

Deflationary Currencies Are an Economic Weak Link

Bitcoin is far from the first fixed-supply token. For centuries, humans have relied upon currencies backed wholly or partially by gold – and it has always caused problems.

Gold and other precious metals must be mined from the ground, which means that there is a limited supply. When supply pressures mount, either in the form of lowered gold yields or increased demand, this causes significant problems for governments.

An early example of this, Europe’s “bullion famine” in the 15th century. Silver was Europe’s main source of currency and supplies were dwindling at a time of high demand. This led to a shortage of credit and businesses across the continent stagnated as people were forced to return to bartering.

Abandoning the Gold Standard

A more recent example of the real-world problems with precious metals is the abandonment of the gold standard. In the 1930s, when the great depression hit people panicked. In the UK, there was a mass rush to redeem gold.

The banking system was in danger of running out of gold so it was forced to remove the peg between Sterling and gold. Other countries followed suit. This enabled governments to more easily adapt to challenging circumstances in the economy.

Bitcoin’s Similarities to Gold

Bitcoin, in many ways, represents an attempt to return to the gold standard. It has a fixed, diminishing supply. In the long term, Bitcoin will become a deflationary asset as its coins are lost in locked wallets or destroyed (either accidentally or deliberately).

These similarities mean that we could eventually be in a situation where there is simply not enough BTC to meet market demand, even if we decide to use Satoshis (a fraction of a Bitcoin) as the primary means of trade.

The Crypto Community Doesn’t Actually Want BTC To Become a Currency

The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.

Nobody wants to be the guy who bought pizza with a Bitcoin, and almost every Bitcoin HODLer views BTC as a speculative asset, whether we want to admit it or not.

For Bitcoin – or any other cryptocurrency, for that matter – to become usable as a day-to-day asset, it needs to be stable. However, most of us are using Bitcoin as a store of value, holding it, DCA-ing into it, and not spending it. There is nothing wrong with this, but it precludes BTC from being used as a real-world currency.

It is possible that some form of cryptocurrency may become a mainstream medium of exchange. However, it will need to be one that governments feel they can trust. It will likely be built as an inflationary instrument, albeit one with a fixed form of inflation.

Some projects are working toward these goals, notably Nano (XNO). However, only time will tell if these projects will gain the support they need.

You make some very interesting points and I think the conclusion you come to is true overall. Bitcoin was always handicapped from the start, but that was needed in order for this proof of concept to work. What needs to happen now is a new cryptocurrency, after the model has been proved, can take over and fulfill the gap that Bitcoin will never be able to cover. People always talk about how inflation is a bad thing but fail to grasp that if demand is strong enough for a cryptocurrency and the volume of newly introduced currency is low enough, then the coins they are holding would not lose value in that way if supply was increased - you just need to figure out a fair recipient for the benefits of the newly introduced amounts.

[el kaka22]

There are a lot of reasons why they "can't" be, but they are, and they will continue to be as well. You could always try to make a up a good reason for them to be not that valid but in the end they will always turn out to be great no matter what happens. Sure if you want to be richer then you will not want to spend it, the fact that the pizza guy spent 10k bitcoins which is around 500 million dollars right now is a "sad" fact for him, but it also shows that how easy it was for someone who are far away being able to buy something for them using crypto as payment.

This is why bitcoin will always be a currency, it shows how much it could provide for people who are in need. You may not want to, but at the very worst case you can spend the crypto and then buy more crypto with fiat in return after you are done and you will be back where you started.

[savetheFORUM]

The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.

The part where you said that a lot of people talk about how they want bitcoin to become a currency, but at the same time they are not doing something that shows that they really want that to be the case; that is just the truth.

You will see so many saying that bitcoin is going to replace banks, but instead of them to do according to what they believe and make use of Bitcoin as a steady means of transaction, they would still continue making use of Fiat for transactions, while they keep their bitcoins in their wallets and speculate on prices reaching millions of dollars so they can cash out to the same Fiat lol. When you look at situations like that you would see that we are really heading nowhere with that.

[odolvlobo]

The second big challenge is the cryptocurrency community itself. We often talk about how we’d like to see Bitcoin or Litecoin become a medium of exchange, but we haven’t put our money where our mouths are.

The part where you said that a lot of people talk about how they want bitcoin to become a currency, but at the same time they are not doing something that shows that they really want that to be the case; that is just the truth.

You will see so many saying that bitcoin is going to replace banks, but instead of them to do according to what they believe and make use of Bitcoin as a steady means of transaction, they would still continue making use of Fiat for transactions, while they keep their bitcoins in their wallets and speculate on prices reaching millions of dollars so they can cash out to the same Fiat lol. When you look at situations like that you would see that we are really heading nowhere with that.

The sad truth is that most people here are just speculators. They are in it for the money and they really don't care what happens as long as they can make some money.