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The problem with the Bitcoin (or any crypto currency)

The economy of Japan abruptly stopped growing in the 90s, meaning their GDP has been the same for the last 30 years. While this is something it shouldn't matter to many as they have one of the strongest economies in the world, the side effects brought should make us think.

Between debt, negative interest rate, aging of the active population and low birth rate, one economic behaviour has hurt the most the economy of Japan: deflation.

While inflation is something we are all used to, deflation is something we can easily understand with Bitcoin rallies. Deflation is the effect in which your money is worth less today than tomorrow. It may sound good at first but if this happens, what would be the motivation for people to go out to buy goods? If someone tells you that for the same money you are going to buy a Toyota this year, you can buy a Lexus next year. The odds you will wait to buy a new car are big. And imagine if this happens not only to expensive goods such as cars or real estate, but to every single item you buy everyday. You will for sure buy the very basic items to get to tomorrow, just to repeat tomorrow the same strategy.

People not using the money bring the economy into a stop, generating more unemployment and quickly making people poorer. This is something called the paradox of thrift (or paradox of saving).

The problem with bitcoin is double. One on the small scale short term, and one on the big scale long term.

  • Small scale - short term:

Imagine you are willing to buy one trendy car: a Tesla. So you wake up one morning and go to your nearest dealership. You have with you your Bitcoins, you have plans to use 3 of them to buy the new car. Taking the current change price of $33k you can buy a very nice Model X Performance (no extra equipment). Well… that would be if the Bitcoin has less volatility… since I started writing this post (only writing, not taking notes or researching) the price has gone from as low as $32k to $34k… meaning that your 3 bitcoins fall short to buy you the Model X, to being capable of buying you the extra 2 seats to make it a 7 seater car. And this happened only during the last 4 hours, probably the time it took from “today is the day we go to order our car” to “please sign here” in the very best case scenario.

But normally people don't just wake up and go buy a car. Normally is a decision made over a longer period of time. You will research, think about the different models possible that could better suit you. Even alone the colour or the equipment could possibly take, in the best case, more than 2 days.

Last time I bought a car it took me about two weeks to find it, including deciding brand, model, color, equipment and going to dealerships to try different options… and all after thinking about a price range I would like to spend in a car. After this it took almost two weeks to sign the contract. A total of one month and for sure it was something done quite fast. From that moment it took another two weeks for the car to be delivered as it was second hand and it was already produced (why on earth would you buy a brand new car?).

In this month of thinking the price of the Bitcoin went from 19k to 33k, meaning that your 3 Bitcoins reserved for buying a new car went from buying you a Model Y Performance to buying a Model X Performance (a 40k price difference). That is deflation, the moment you prefer to wait because your money is going to be worth more if you wait.

So, the more you wait, the more it will be worth, meaning that the speculation of a currency going to be worth more in the future than at the present time will pause your consumer habits: why on earth would you buy a car today if in one year you can buy a house with the same amount? Or a complete building if you wait two years?

A currency meant not to be used should not be named “currency”. It could be named stock, good or investment, but not named currency. And unlike other investments that go up while the amount of it disappears (such as oldtimer cars or whiskey, more worthy as more cars disappears or more whiskey is drank), Bitcoin is only growing as more Bitcoins are mined, something that in stock is called “dilution” and normally bring the stock price down.

  • Big scale - long term:

Imagine now that you are Tesla selling you cars all over the world. Just to adapt the prices for each country and currency is something that takes months to plan, have to be meticulously revised each quarter and planned in advance knowing how the economy will behave in the near future. Car sales are grouped into quarters, showing not only how many units have been sold but the total of revenues the sales have generated.

If based on a volatile currency that could go up as well as could go down this means that your quarter report will not only be dependent on how good the general economy is behaving, and how many customers you are capable of attracting; but on how volatile the currency is.

  • If it only goes up (deflation) your customers will wait more and more, meaning your sales will be low.

  • If it goes down, you are going to present numbers that are going to bring you down.

  • If it goes up and down quickly (volatility) you may be producing and paying your workers when the currency is up, and selling when the currency is doing which could be catastrophic.

  • Best case scenario, you are selling only when the currency is done, getting a lot of it; and paying wages when currency is up, having to pay less of it. To make it easier to understand, let's think in numbers: Bitcoin was as low as $3k during 2020, and high up to $30k. If cars are being sold for $90k and cost to produce $30k the best case would be to sell as much as possible when the Bitcoin is at $3k (30 Bitcoins) and pay to the workers and parts providers when the Bitcoin is at $30k (1 Bitcoin). This will mean that every car is sold for 30 Bitcoins while production only cost 1… what a great deal. Unfortunately, the behaviour is more erratic than this… meaning you can't be sure whether you are going to produce cheap and sell expensive, or sell cheap and produce expensive.

By the way, did you realise how all the time we have been referring the price of the Bitcoin to $? This means that we have to take a reference for it to be used. A fix, stable and reliable currency to reference it.

The moment we fix the price of Bitcoin (exchange rate) will be the moment we can start to rely on it (we killed the volatility) meaning also that the deflation will stop and it will transform into another currency with the advantage that it is free from any government to manipulate it.

The cryptocurrency is a nice way of not depending on governments, meaning a more global and accessible economy for everyone. This means a stronger currency that will not depend on hurricanes destroying a complete country, plagues on another or companies falling. It will mean that we can go all over the world without caring about the currency of the country we are visiting as we know we can pay everywhere with a reliable coin with a fair change. This dream could only be achieved if the price is fixed and not movable, meaning most of the supporters (speculators talking about it going to $100k) should start by demanding the volatility to stop and being the price only dependable on how many people are using it and how many Bitcoins are being created. Until that happens, this will remain a bubble, creating deflation, low rates of use and “only buying” strategies.

Bitcoin price 3.Jan.2021 / Yahoo Finance


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