Bitcoin Quantitative Easing
Lately, I've been following a discussion on whether it is just a matter of time before the 21,000,000 bitcoin cap will be lifted/changed. In this article I'll argue that this is not going to happen.
Bitcoin, and the underpinning blockchain technology, is based on majority decision. This majority consists of users, investors, developers and miners. So whenever a proposal is going to be accepted, it requires a majority among all these participants. Each participant is weighing whether a change is good or bad by solely looking at his/her own prospect. With this in mind, what will happen if the 21M cap is raised?
Q: Is it good for users?
Q: Is it good for investors?
Q: Is it good for developers?
Q: Is it good for miners?
What if you have indefinite inflation? Then there's no cap at all. But in that case, most people will compute their bitcoin wealth on a span of a life time or two (in case they want to pass down their assets to their children.) Again, it will push down the (dollar) price based on that. If the desire is to attack wealth spread through inflation, then it would take hundreds of years (if ever.)
As long as there's a stable asset you can swap with, people will swap their bitcoin wealth. Note that this happened when U.S. tried to increase money supply through QE (quantitative easing) which resulted in an increase of gold price. Once U.S. stopped their QE program, they swapped back from gold to USD. Same will happen for bitcoin.
The Keynesian Dream
Then why are central bankers messing with the economy by the use of quantitative easing to begin with? This is because most mainstream economists are Keynesians. Keynesians believe that ex nihilo money creation will lead to more economic activity. In some sense I believe this is true, but only if new money gets into circulation as a stealth operation (i.e. no one knows that new money has been created to begin with.) However, today's central banking is based on transparency. Any decision to increase money supply is communicated to the public, and thus people will just swap their fiat currency to something that is resistant against inflation, whether that is stock, gold or other assets. Minus gold, that's what Keynesians want anyway, so I guess that in their world everything is just fine.
I, unlike Keynesians, don't believe that more economic activity will happen just because you increase the money supply. The best way to ensure sound economic activity is to balance risk with reward. In my world risk & reward have perfect balance when the money supply is fixed. If bitcoin becomes a world reserve currency, then holding bitcoin is the perfect world index fund. If you're an investor you should NOT invest in something that perform less than that.
As I explained in my previous article; the best way of depleting rich peoples wealth is to ensure it shrinks if they don't contribute to risk taking (= real world economy.) Thus a fixed cap on the bitcoin money supply is good to all of us.Datavetaren