Imagine you are in a city called Incobit, somewhere within the barren desert of the Orient. You are strolling through the alleys and think of the treasure chest you have at home. Filled with chains, bracelets, and rings, partly made of pure gold they shine through the sun’s rays as soon as you open the chest. In addition to the golden pieces of jewelry, further chains, medallions, and containers, even coins of real silver. You would not be called poor with such a supply of shiny things. The gloss effect of precious metals such as gold and silver have always fascinated people. Not only in the Orient.
But the time takes a toll on the glamor. If you leave the gold and silver in this chest for years, it slowly loses its value. Even physically. It gets less as it slowly erodes, small particles are constantly breaking away from the jewels like elegant dust, and you cannot help but stand by and watch your wealth disappear.
This is called inflation.
Not really a problem in the Orient since gold and silver don’t behave that way. Rather they increase in price. Or to be precise:
Money steadily loses value.
This requires you to pay more money over time to get the same amount of gold. This applies to all areas where we work with money every day. Gold is rising in price, stocks have risen over the years, and food has become more expensive again.
All of them, completely wrong statements.
The only correct statement is: the money has lost value again.
This made everything else more expensive because the money lost buying power.
A loss at the push of a button
The reason for this is quite simple: you can just print more money. Which is exactly what is happening every year. More money gets printed to account for inflation and keep the economy liquid. The US Dollar has lost over 95% in value compared to gold over the years. More details on that here. This is just a simple supply and demand effect. If the money becomes constantly more and more, the supply increases and the existing money is, therefore, less valuable. Inflation is frequently translated incorrectly. It is derived from the Latin word “inflatio” which means “swelling, excess”. The money supply swells constantly. The goods are not becoming more expensive over time, the money supply constantly increases.
Now, technically, Bitcoin is still inflationary to some extent. The maximum amount of coins is set in stone, but right now, new Bitcoins are constantly being created. Which means that the supply will keep increasing until the last Bitcoin is mined. And it is also the reason why the block halvings have such an impact on the price of Bitcoin. Because every time the reward for mining Bitcoin is halved, the inflation rate drops. However, we will be deep into 2100 when the last Bitcoin is mined and the currency is truly deflationary.
To be fair, this is nitpicking. It is already a lot more deflationary than any classic fiat currency we currently use on this planet.
We can use cryptocurrencies just as inflationary as we do now with fiat money. You don’t necessarily have to set a maximum amount of coins for your cryptocurrency. This way you can mine it forever and create new coins all the time. $DOGE is such a currency for example. Unlike Bitcoin which is limited to 21 million Bitcoins, DOGE has no limit. Literally. The result of this is the fact that we technically could use cryptocurrencies just as inflationary. But do we want that?
The inflation rate in Germany, for example, is at about 2% per year. So the money loses 2% of its value annualy. The result of this is that you need to get a 2% pay raise every year. If you don’t get that you do the same work for less money. And if you do get a 2% raise you do didn’t actually get a raise. You just covered the depreciation of the currency. For an actual increase in buying power, you need at least 2,5 – 3%.
That sucks, right?
That is the implication of inflation. This could be different with a deflationary currency. Companies don’t need to grow every year and employees don’t need to get a pay raise every year, only if both of them actually added value.
I remember, back in the days, a new Mercedes for our family did mean to set us back about 70,000 “Deutsche Mark” (the old currency before the Euro was introduced). Since the Euro has double that value, that would be about 140,000 Deutsche Mark today. And a proper family Mercedes these days is about 70,000 EUR. Rising every year. So what that new currency did – apart from uniting the money in Europe – was deflating the numbers.
Because if you think about it, the amounts you pay for big purchases like cars and houses keep going up to insane numbers. A Lamborghini Huracan, the crypto investors dream is currently around $300,000. Three-hundred-thousand! Or 110 Bitcoin. If we didn’t find a way to move the money online, we would need to carry wheelbarrows to the dealer in the future. We had that in Germany after World War I. I don’t think anyone wants that again.
The stock market is inflating like crazy. Apple Inc. hit a one trillion marketcap this year. That is a number with 12 zeroes: 1,000,000,000,000 (At a price for Bitcoin of $4,000 this is 12 times more Bitcoin than there will ever exist). Now, obviously, Bitcoin could remedy this by introducing smaller numbers for big purchases while simultaneously having the possibility to do small payments with satoshis.
But is that really all that Bitcoin can do?
Consume, consume, consume!
We live in a consumer society. The companies thrive on the fact that we buy all sorts of shit we don’t actually need. Companies are forced to sell their products to earn revenue. So if people were to stop buying all sorts of stuff, the companies would starve. Very bad in an inflationary system! They need growth. I also think the reason why our society is like that stems from the inflationary system we live in. Think back into the stone ages. While these people had all sorts of problems, wondering what to buy next to impress their neighbor certainly wasn’t one of them. These days, we always need something new to satisfy ourselves and impress the people around us while they are busy buying new stuff as well.
This means the deflationary system would also need a rethinking of society in terms of their consumerism. But the good thing is since it takes until the year 2100 before Bitcoin truly is deflationary (to be pedantic again) we have a lot of time left to rethink our consumer decisions.
Was satoshi really such a mad genius to look that far into the future and account for a long enough time for humans to change their behavior?
I don’t know. But I would like to believe it. Maybe it is just coincidence through math. Maybe he is an AI. Or from the future.
Whatever it is, Bitcoin might not only get the banks off their high horse, bring money back into people’s hands, and reset the inflated numbers. It might also actually change society and mankind for good. Isn’t that one great technology?
See you soon,
The first paragraph in this blog post is almost 99% directly pulled from my book. If you’ve enjoyed reading that, you will definitely like reading The Bitcoin Saga. I use imaginary places like that to portray the somewhat dry topic of cryptocurrencies a lot in the book.