Bitcoin press has gone through the roof in the last few weeks. So has the exchange rate between traditional currencies and bitcoins – a fact that has seen as many different explanations as I’ve seen people wrapping their heads around the Bitcoin concept and writing about it.
One of the explanations is that there’s a cap on the number of bitcoins that will ever be produced – 21 million (divisible to eight decimals). While the rate at which bitcoins are produced right now makes the currency inflationary, speculation on future worth combined with the influx of people wanting to hold or use the currency can be said to have already brought out its deflationary aspects.
Some predict doom and gloom because of that deflation, essentially proclaiming that a currency that cannot expand, inflate, with the economy will cause it to contract instead – putting a stop to investments when they’re deemed necessary.
There’s a different tack to that argument. In an inflationary economy, like the one we all live in, money in the bank becomes less worth over time. The interest rate I’m currently paid on my savings is less than the rise in the consumer purchase index, effectively meaning that there’s pressure on me to spend that money sooner rather than later.
(The argument that I should “invest” my money is a fallacy. Since it’s been statistically proven that financial managers aren’t able to outperform chance the best you can do is to place money in no-fee index funds – which over time should keep up with inflation. Investments more narrow than that carry higher risk – like betting in a casino. But I digress .. )
A Bitcoin economy on the other hand, when it’s large enough for the regular ups and downs to lessen in magnitude, is one where I would expect my savings to grow in value over time. Thus there’s pressure on me to only spend money when I really need to.
That cannot be a bad thing.