Macro Economic Proof that Bitcoin won’t Scale
- Is this the ultimate challenge of bitcoin?
- How bitcoin influences the incompatible trinity — monetary policy autonomy, a stable exchange rate, and free capital mobility? Gold like Bitcoin was a fixed stable exchange rate, but countries did not have the other two. Global trade advanced because of free capital mobility since world war two but we are yet to get to monetary policy autonomy that could make everyone in a democracy happy.
- If governments promote bitcoin, won’t that be unhealthy as it would give a push towards the demand for bitcoin and there won’t be any need of govt as they won’t have FX reserves. So, it is safe to assume that govt will never support bitcoin
- For controlling the transaction risk of a firm, bitcoin is good. Translation risk — how subsidies will get calculated in bitcoin’s money supply. Economic risk — risk of future cash flows as govts will keep banning crypto & value of business transaction
2. Country’s GDP into context
- Premise : Monetary theory of exchange rate states that there is an equilibrium between money market and bond market- this requires an exchange rate risk management within countries. This demand-supply battle helps to affect the GDP in a positive way to find an equilibrium state.
Question : If we go on full decentralization mode, won’t that wipe out the whole GDP context? If there is no institution such as the government, how will we be able to sustain critical situations that arrives — we can take the example of COVID-19 — both internal and external context of a country? So will we ever get an approval from the government on using Bitcoin?
3. Hypothetical Bitcoin Win Scenarios
- Question: If all super trade cities such as Mumbai, Singapore, Hongkong, Dubai use bitcoin in high volumes within themselves and there is asymmetric use of it in other part of the countries, won’t the government lose out significant amount of tax money to do equality within a nation — won’t bitcoin promote more income inequality? Won’t that lead to more dystopian chaos in likely scenarios?
- Question : No power of lender of last resort facility as central banks have in general — such as in India if a bank in a state is facing problem it has access to RBI’s lender of last resort facility available. This gives an insurance to its client. With bitcoin, if some more superior technology gets invented, won’t the entire crypto system collapse? Will there ever be an all-in case ?
4. Common Currency Crisis in the past and how bitcoin could have been a very good hedge in terms of decision making in place of central bank
- Greek crisis in 2010 : Social unrest, unemployment, government dysfunctionality — series of new elections — low govt infrastructure spending & low productivity amongst citizens
- China BOP crisis : overheating of asset prices & increase in FX reserves and ultimately using managed float in monetary policy as it has huge current account surplus
- Argentina : it had a pegged policy already, but it did not go well in 1993 — Hyperinflation & GDP de-growth ( stagflation )- Automatic correction within the free market did not happen and there was liquidity crisis resorted to banking failure :
- Mexico : Free capital mobility and had a crawling peg but still had crisis in 1993
- And on a lighter note : In my country it is kind of illegal and if I mention this as a source of income, there is a good chance that I might get a visit of tax officials. Will that go away?