Bitcoin Will Catalyze Hyperinflation of the Dollar
Many people have become, are becoming, and will become rich thanks to bitcoin. Most of this wealth is new wealth that did not previously exist but is being produced by bitcoin entrepreneurs. However, some of this wealth comes from other people, especially those that continue to hold US dollars. Since bitcoin is nearly guaranteed to be monetized, it follows that the hyperinflation of the US dollar is also nearly guaranteed, for these reasons:
1) People will realize that bitcoin is superior to the dollar and it’s in their interests to use bitcoin instead of the dollar in all cases (with one exception: the US government can continue to force US citizens to pay their taxes in US dollars, which provides some base value for dollars). This means bitcoin doesn’t just supplement, but actually replaces the dollar in almost all cases where the dollar is being used, especially as a liquid store of value and as an international payment mechanism.
2) The international demand for dollars will drop, and combined with the ever increasing supply, this implies that the price of dollars will drop (which means prices of things in terms of dollars will increase - that is inflation). This is rapidly happening before our eyes as the software infrastructure for bitcoin gets developed and rolled out (the hardware infrastructure is already in place), enabling people to switch over as soon as they realize it’s in their interests to do so.
3) As people continue to adopt bitcoin, further price-increase manias will occur, like the one in 2011 and the one in 2013, where people buy bitcoin out of euphoria because the price is going up. Eventually the total dollar valuation of bitcoins will become a substantial fraction of the total dollar valuation of dollars. When this happens, the dropping demand for dollars will actually start to become noticeable to ordinary people, and people will want to minimize their holdings of dollars specifically because their price is decreasing. People will sell dollars out of panic, and buy bitcoins out of euphoria. This is hyperinflation of the dollar (and the complementaryhypermonetization of bitcoin).
This argument assumes that the Federal Reserve will not or cannot take steps to prevent hyperinflation. Since the Fed controls the supply of dollars, it is possible, in principle, for them to scale back the supply rapidly to account for the decreasing demand exactly such that the price of dollars remains stable. I doubt this will occur since the basic nature of the Fed always has been highly inflationary, and the interests that control the Fed (the US government and big banks) prefer inflation to deflation since they do not want to risk having to pay back more real value on their debt. Further, the Fed does not control the market, and even if the Fed had the capability to control the value of the dollar under hyperinflationary pressure, they could not prevent the market from adopting bitcoin over the dollar.
When the price of bitcoin is $10,000, the total dollar valuation of bitcoin will be more than $100 billion, which is about three percent of the dollar M0 value (the amount of cash plus bank reserves). A huge fraction of that value will come from people adopting bitcoin over the dollar. That would be a good time to exchange any dollars you have for something else.
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