How does the economics community view Bitcoin?

Author: 0xUnicorn Source: X (original Twitter) @0xUnicorn

Before understanding the economic aspects of Bitcoin, let us first listen to a short story that will help us better understand Bitcoin and the concept of deflation.

Short Story: The Great Capitol Hill Childcare Cooperative

Once upon a time there was a daycare whose "staff" was made up of 150 couples who worked on Capitol Hill. However, this day care is not actually a day care in the traditional sense, but a cooperative organization where these Capitol Hill staffers care for each other's children.

In Washington, D.C., social life is always full of lights, and couples want some private time, too. So, they need to go out from time to time, but that means someone else needs to babysit them.

To solve this problem, these smart couples came up with a way: they issued a currency called "nanny vouchers" among members of the cooperative organization. Each voucher represents one hour of childcare services.

Parents who go out must pay a corresponding number of nanny coupons when they leave their children, and the payment is based on the number of hours the other party takes care of the children. The total number of nanny vouchers is limited, and members can earn additional nanny vouchers by helping care for other families' children on their free nights in case of emergency.

At first, the system seemed to work well, but over time, problems began to surface. Some couples find that they can work hard and accumulate more nanny vouchers for future use. But as more people do this, the price of nanny vouchers starts to rise because the supply of vouchers is limited.

Those who couldn't accumulate enough vouchers became distressed and started going out less often because they feared they wouldn't have enough vouchers to pay for childcare services. As a result, the number of nanny coupons in circulation has plummeted, and child-sitting services have become increasingly scarce.

This little story reflects a scenario of a recession that is caused by deflation, the lack of money supply. When the money supply is insufficient, the value of the currency rises and people prefer to hold the currency rather than spend it, which leads to a reduction in economic activity and, in turn, a recession.

Bitcoin’s Deflationary Characteristics

The total supply of Bitcoin will reach a cap of 21 million in 2140 and will not increase after that. This means that Bitcoin has deflationary properties that incentivize people to hold and hoard it. Deflation can lead to a deflationary spiral, where the value of a currency rises and people are more willing to hoard, pushing the value even higher.

Unlike the co-op in the story, Bitcoin is completely decentralized, with no management that can mitigate deflation by extending loans to members. This decentralized nature is part of Bitcoin, but can also lead to deflationary issues.

in conclusion

Monetary systems were originally established to make transactions easier and benefit the entire economy. Deflation can cause people to hoard money, suppressing economic activity. At present, Bitcoin is not an ideal currency, but for some people, it is still an asset with investment potential.

The deflationary and decentralized nature of Bitcoin makes it similar in some ways to the nanny coupons in the story, but there are also differences. These characteristics make people full of doubts and discussions about the future of Bitcoin.

References:

1. Busch, “Monetary Theory and the Crisis of the Capitol Hill Child Care Co-op.”

2. "The World's Smallest Macroeconomic Model"