Why Bitcoin Will Never Be a Currency
Bitcoin has the expectation of being the next new currency. A currency that will change the way we purchase goods and services forever. This is due to the Blockchain.
There is one big problem with Bitcoin though which will prevent it from ever being a currency.
It is a deflationary currency!
New World
The easiest way to explain why this is a problem is to look at the video game New World by Amazon. New World is an MMORPG but has a different problem with its currency than most other games in that genre. Which is deflation.
Most MMO games have a problem with inflation. The reason for this is that there are so many ways to accrue currency and not enough stuff to spend it on. Thus leading to more and more currency in the game.
Therefore, the game must increase the prices of items to remove the excess money from the game and retain the value of the items. This is what we see in everyday life, an increase in the money supply will increase the price level in order to maintain the proper value of goods and services.
Deflating Prices
So why does New World have deflating prices? Instead of there being more ways to accrue money than ways to spend it, there are few ways to accrue money and a lot of “taxes” to remove currency from the game. Taxes in a video game refers to the required purchases by the player to continue playing the game, like having to pay to repair their player’s sword. This helps with controlling the money supply of the in-game currency.
Since it is more difficult to earn the currency, and it is more valuable because there is less of it, this causes prices of items to decrease in order for them to maintain their value.
The problem is that since we know that prices will decrease over time, why would I spend my money right now? I know that tomorrow I could get the same item for less money.
With deflating prices my money is more valuable the longer I hold on to it. This has led to players holding onto their currency and not spending it on items. Players have actually resorted to the good ol’ trade and barter system. They use other items as currency to purchase, or trade, for the items they want.
The currency created in the game is never used as a currency. It is never spent. All players just hold on to it as they know the value of the currency will increase over time.
Bitcoin
This is why Bitcoin will never be a real currency.
A currency is a form of money used in circulation as a medium of exchange. The critical word in that definition is circulation.
Yes, the currency in New World is still used as a medium of exchange. Yes, Bitcoin has been used as a medium of exchange to purchase goods and services. But, it’s important to note the circulation of these mediums of exchange.
The currency in New World was more valuable to hold on to than to spend. Which led to almost zero circulation. Bitcoin has a maximum money supply, thus leading to the same problem as the currency in New World. Zero circulation. I am approximating here, of course, it will be exactly zero circulation but relative to USD it is close enough to zero.
The conclusion we can come to is that Bitcoin will always be more valuable to hold on to than to spend as a currency since we know that the value of Bitcoin will increase over time.
Why do you own Bitcoin?
Just think about why you own Bitcoin. Is it because it’s an easy way to exchange goods and services? Or is it because you think the value of your Bitcoin will increase in the future?
Most Bitcoin owners will say the latter. Making Bitcoin an awful currency, leading to no circulation.
This doesn’t mean Bitcoin is a bad investment or doesn’t have a place in our world. It entirely could have a different, very beneficial purpose, but just not as a currency.