Bitcoin Future Of Money Global Economy

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Saifedean Ammous and Peter St. Onge, in my opinion, are the opinion leaders on the macroeconomic effects of adopting a bitcoin standard. The Austrian School of Economics tends to avoid making specific predictions and instead focuses on theory and big results. Mainstream fiduciary economists, who tend to make these predictions – which are consistently inaccurate – do not understand bitcoin or its value proposition and therefore only produce cringe-worthy opinions like this.

This leaves a shining void of confusion and uncertainty as to what will happen when the world shifts from using fiat currency to adopting bitcoin.

This article will attempt to fill this gap, to paint a picture for the reader of what is possible and probable for our economic future on Earth.

I am not of the opinion that a major depression is looming or that the world economy is going to “collapse” at some point, but rather I envision a long period of transition or realignment. There is already a parallel economy of people living and trading only in bitcoin. This bitcoin economy will grow as the “fiat economy” gets progressively smaller as time goes on and people make the transition.

The adoption of bitcoin will not be driven by the public choosing to pay in bitcoin, but rather by producers and sellers preferring to be paid in bitcoin and thus enticing customers to use it. Expect to see discounts for paying in bitcoin and sellers only accepting bitcoin.

This does not mean that there will be no commotion. The fiduciary system has injected (2008) and re-injected (2020) the world economy with cheap money, causing bad investment. At some point there will be one or more significant corrections, a “stock market crash”. When this will happen is impossible to predict. According to Austrian business cycle theory, the longer the correction takes, the more capital is poorly invested and the more drastic the correction will be.

It won’t immediately pull much of the economy into bitcoin. The price of BTC might even drop early on as everyone panics everything sells. Central banks and governments will not just turn around and suffer defeat. There will be more money printing, stricter laws and higher tax rates, etc.

Hyperinflation will occur in some areas, but remember bitcoin is there to be used as a medium of exchange, store of value, and unit of account. Weimar, Germany and Zimbabwe did not have this luxury. They had to go back to a barter system and that’s what decimated their economy because everything stopped. Venezuela seems to be slowly getting into bitcoin and things seem to have gone better than originally expected. They also didn’t have a working Bitcoin Lightning network, which we already have today.

Some jurisdictions will choose to “ban”, ban or heavily tax bitcoin, which will make it more difficult but not impossible for people in such jurisdiction to transact in it. Productive people will slowly move from these areas to areas that freely accept or adopt bitcoin, and those areas will thrive. Eventually, areas that have chosen to oppose bitcoin adoption will either have to start accepting it or be turned into unproductive wasteland as they are outmatched by the rest of the world. Imagine a region like the USSR finally having to submit to a form of capitalism.

As has happened over the past 10 years, whoever chooses to adopt the bitcoin standard earlier will be richer than later adopters. This will become more evident over time. There will be individuals and institutions that refuse adoption for decades, ultimately living in non-bitcoin enclaves.

The transfer of wealth will be significant, but probably not as dramatic as many bitcoin maximalists imagine. Real wealth is held in assets, such as goods, machines, knowledge, goods and resources. Adopting Bitcoin will not destroy this wealth; the prices of these will simply be denominated in bitcoin instead of fiat. This includes actions.

Companies and industries that produce value in the real world will thrive, such as mining, manufacturing, technology, distribution, retail, etc. Their stock price will take a hit when the correction (s) occur, but that has nothing to do with bitcoin. At this point, the markets are overvalued compared to historical data and prices are expected to readjust in the future.

Banking

One sector that will undergo massive transformation is banking. It’s worth taking a closer look at what could be happening in this space under a Bbitcoin standard.

It would be fair to claim that the bank will be reduced to what it was under the gold standard. Banking is simply a worthy form of lending money, with the banker having the advantage that the money he lends is not his own but that of others. It was deposited with him for the interest he pays on it. The banker’s business is to lend that money again at higher interest rates than he pays, pocketing the difference as a reward.

Banks play an important and significant role in society. It is through them that capital is transferred from those who cannot or do not want to use it in industry to those who can. In this way, a banker increases not the total amount of existing capital, but the total amount available for production. It is an important service for which the bank deserves to be paid.

Under a bitcoin standard, the income and value of banks will be greatly reduced to what the market is willing to pay for the aforementioned service. Note that under the gold standard, the public paid a royalty to the bank for the “custody” of its capital. Because it is safer for a person to secure their bitcoin on their own rather than handing it over to a third party, banks – or whoever performs the function of distributing capital – will need to encourage depositors to get their bitcoin deposits.

Who knows what new methods of distributing capital the free market will come up with when innovators are allowed to innovate in this space?

Whatever happens, in the long run, bank stocks will inevitably lose value in real terms as the space in which they operate with their regulatory oligarchies shrinks. Some banks can innovate and thrive – the open market might even allow some form of fractional reserve bitcoin banking if the risk appetite exists. But under the bitcoin standard, there will be no free money distributed to the few people online.

Value, interest rate, inflation and deflation

Disclosure: I subscribe to the following Misian view that inflation is the increase of the total money supply in the economy. Deflation would be the decrease in the money supply. If the total money supply in an economy is suddenly reduced from previous levels, I totally agree that it could and probably always will have devastating effects. This phenomenon should not be confused with the increase in the value of a monetary unit in relation to economic goods, also called “deflation”, but which will have many positive effects on the economy and society.

Suppose for a second that this is 2035, and bitcoin is the most widely used currency in the world. What can we expect in terms of inflation and interest rates?

Bitcoin Total Value or Market Cap: I have no doubt that BTC will eventually hit $ 10 million per coin. The problem is that at this point a coffee could cost $ 5,000, as the value of the US dollar would be close to zero in current terms. Thus, calculating the value of bitcoin in terms of future prices in US dollars is a futile exercise. Yes, when measured in US dollars, the potential value of bitcoin is really ∞ / 21m.

Predicting what would be the purchasing power of bitcoin in relation to goods and services, and expressing it in numbers in terms of value in US dollars today, is a much more complex and debatable subject, on which you will rack your brains. several times trying to solve. I will try to discuss this in a future article.

Once the price of bitcoin stabilizes and is widely used as the world’s first unit of account, a period of semi-permanent deflation (in bitcoin terms) will set in. That is, the value of your currency will appreciate against goods and services. . This will happen not because the total amount of currency is reduced, but because the total amount of purchasable goods will increase over the total amount of existing currency, and also because of technological advancements that will make the goods more affordable. It’s important to note that this is and was the natural state of the world, before governments and banks started messing with your money.

Interest rates will be determined by the free market. Whatever rate is agreed upon by the lender and the borrower, it will be the rate paid.

Interest rates can be thought of as the cost of capital. In the free market, this has historically been between 3% and 6% per year. How does it all fit into deflation? Suppose a future entrepreneur wants to borrow bitcoin for a new project. He’ll find a willing lender – likely through DeFi or some form of a bank – and borrow bitcoin at an agreed interest rate. Let’s say it’s 4%. If the entrepreneur expects deflation to occur during the life of the loan, he will simply add the expected deflation to his cost of capital calculation.

Interest rate: 4%

Expected deflation: 2%

Total cost of capital per year: 6%

This will not prevent the economy from growing or entrepreneurs from borrowing. Under the fiduciary standard, we’ve seen interest rates go up to 15% or much more in some places, even after deducting the rate of inflation.

What will be drastically reduced are the fees the intermediary takes to arrange the loan, as previously discussed. This is what we now call the difference between the repo rate and the prime rate. In a free market, whoever offers the lowest “fees” for arranging the transaction will outperform others, and with modern technology these fees should be negligible.

Under a bitcoin standard and with modern innovation, the allocation of capital would be much more efficient, because someone in Africa, for example, could borrow from someone in Europe or the United States at the same rate as everyone else. This will cause global competition for capital and whoever is most efficient in allocating that capital will prosper.

This brings me to what I consider to be the most beneficial aspect that a Bitcoin standard brings to the world. Allow free trade between those who choose to use it. The very fact that two parties choose to trade with each other voluntarily implies that both parties benefit from the transaction. The more such exchanges occur, the better off everyone involved. Being able to pay easily, instantly and cheaply to anyone in the world will increase trading, especially at ground level for people who were previously unbanked.

Hope reading this has opened your mind to the possibility of a successful and peaceful transition to the bitcoin standard. In the long run, the natural laws of society and the economy will come into play. What works and what does not work for society will become increasingly evident.

May the best currency win.

This is a guest article by Handre van Heerden. The opinions expressed are entirely theirs and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

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