Let me preface this by saying Im not new to bitcoin. Ive mined my first bitcoins back in 2011. Ive been advocating for bitcoin and running a node since 2012. Ive given away many dozens, sold and spent and wasted several 100's, but I still own a nice chunk, most likely much more than you. Bitcoin has been good for me. I also absolutely admire the concept and what has been achieved. I love the idea of decentralized, trustless, permissionless and programmable money. Im absolutely fascinated by the ingenuity of things like lightning network.
But what most of you consider its most appealing feature, is actually a fatal flaw that will prevent it from reaching much wider adoption: bitcoins monetary policy. While for now, this makes it a great investment for the individual, the fact it has a hardcap and can not be issued as credit, means it is doomed. If or when it becomes popular enough that it becomes a tangible threat to fiat, it will be shut down by governments. It should be. Hear me out.
Lets start with the hardcap. Imagine a world where bitcoin, or even something based on bitcoin, is our standard currency. Where 21M coins represent all the wealth in the world. Anyone who owns a certain percentage of that money owns a certain percentage of the world's wealth. A fixed percentage. As the economy and population grows, the purchasing power of those coins grows proportionally. The rich get richer doing nothing, even though its the poor, or at least those who still need to work, actually growing the economy (assuming it would, which it wont, see later). This is very much like feudalism, where land owners got rich off the labor of the poor, and as long as they never sold their land, land owners and all the generations coming after them, stayed rich doing nothing. Its inconceivable in a democracy, such a class system would be maintained.
But, you say, the rich would spend, and without being productive or investing, over time their percentage of coins would diminish. Would it though? People need credit. Most people, if they want to buy a house before their retirement, need a mortgage. Students may need a loan to go to college and get a degree. Companies need credit to invest, to build ships or factories, to fund research. Society needs credit to build roads and bridges and power plants. In a bitcoin world, those loans, if they would be made at all, can only come from the rich. Who really dont even need to supply credit in order to stay rich, and would charge fees much larger than the economic growth, otherwise it wouldnt make sense for them to take on any risk. So the rich would over time accumulate more coins. More coins that each represent ever more purchasing power.
Not that many loans will be made. Even without exorbitant fees, who is going to take out a BTC denominated loan to buy a fast depreciating asset like a car? Who can afford a 25 year mortgage denominated in an ever appreciating currency? If you think student debt is bad, imagine your debt is in BTC. What are the odds you can ever pay that off? The rich will get richer, the poor will stay permantently poor and in debt. Inequality, which is not just bad for the poor, but also for the economy, will go up and up and up. And good luck trying to fix that with taxes, when ownership can be so easily concealed.
When we used gold as our accounting unit, gold itself was not the thing of value, it is what we used to represent value and trade for things of value, like food or land or ships. It was our accounting unit. Now gold could be mined, it doesnt have a fixed supply, if the value goes up, more can be mined, but only up to a point. When our economies grew and the need for credit grew, if we couldnt mine or steal or plunder enough yellow rocks, we ran out of credit. That crushed our economies. It even lead to countries to go to war and plunder other continents to get more gold. More of an accounting unit. Think about that, its like going to war because you ran out of black ink or cells in your spreadsheet. As insane as that was, bitcoin is worse, there is no way get more of it.
Almost everyone here loves to hate fiat money. Credit money. Because it can be "printed". Because its "made from thin air". Because central banks. The reality however, is that credit money, the ability to monetize debt, itself is a darn clever solution. You may have issues with monetary policies, with central bank policies, you may object to government spending, but those are not inherent to credit money. Those things are subject to democratic oversight, and if they trouble you, should be remedied through your democratic vote, not by throwing out the baby with bathwater.
Credit money is a fantastic system if you actually understand it. If you have a good businessplan, if you want to improve your future prospects by getting a degree, if you can create economic growth by having a plane or a factory build or nuclear power plant built, you can go to a bank. If you are credit worthy, the bank will assume the risk of you defaulting, and will create the money based on your pledge to repay it from future earnings or profits. A bank will never say: gee, thats a great idea, and we have no concerns about your ability to repay, we would love to lend you the money, but unfortunately, we have no money available, we lent everything out, come back in 5 or 10 years. Credit money lets you borrow from the future. It is not unconstrained, but it is constrained only by future prospects. Not by an arbitrary number someone came up with or how much gold we happened to find that year.
The ability to monetize debt is absolutely crucial for our economy. Bitcoin can not do this. Whats worse, I do not see how it is possible to create a decentralised currency that can. Anyone can issue credit by writing an IOU. Write "good for 1000 satoshis" on a post-it note. That is arguably credit money. And perhaps a bar tender or friend of you will accept that note as payment. But he is not going to be able to purchase groceries with that post-it note. That credit money is not fungible. A post-it note signed by Elon Musk might be widely accepted, a note signed by me or you, wont be accepted anywhere as no one would have any trust that we would honor the debt. It is therefore not money.
Our banking system enables this fungibility, by abstracting the default risk. The same money is issued based on my credit card debt or Elon Musks mortgage. You dont need to worry if your money is created based on one or the other, because in both cases, the bank assumes the credit risk, not you. Presumably, you also want to not have to worry about which bank is issuing the money. A dollar issued by bank X or bank Y has the same value, because our governments guarantee them. Which of course, requires rules and regulations imposed on the institutions that issue the money. How do you decentralise that? This seems impossible to me. Bitcoins main goal is eliminating the need for trust, no middleman, no counterparty risk. But this also by definition makes issuing fungible money as credit, which *is* a counterparty risk, impossible. And this makes a flourishing economy based on it, impossible.
To get back to my original statement; if or when bitcoin becomes a threat to our fiat money, if people start using and saving and demanding bitcoin rather than fiat, governments will have to shut it down. Either because they do understand the need for credit or ultimately because voters wont put up with a new feudal system that enslaves most of them. Now I think bitcoin is virtually unstoppable as a protocol. Its as bullet proof as it gets. But its value is not. Government can easily forbid companies accepting it, from putting it on their balance sheet, they can close down exchanges and all other legal fiat on/off ramps. Bitcoin will probably survive this, but its value wont, as i doubt even drug dealers would be keen to be paid in bitcoin if they can not easily exchange it for dollars or goods.
Consider this before you mortgage your house to buy more bitcoin. Bitcoin is great for hodlers, its poison for our economy and society. And if bitcoin becomes too successful, its failure is guaranteed.