How does the economics community view Bitcoin?

How does the economics community perceive Bitcoin?

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

Before understanding the economics of Bitcoin, let’s listen to a little story that will help us better understand Bitcoin and the concept of deflation.

Little Story: Capitol Hill Daycare Cooperative

Once upon a time, there was a daycare center whose “staff” consisted of 150 couples working on Capitol Hill in the United States. However, this daycare center was not a traditional one, but a cooperative organization where these Capitol Hill workers took care of each other’s children.

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In Washington, D.C., social life is always lively, and couples also want some private time. Therefore, they occasionally need to go out, but that means they need someone else to take care of their children.

To solve this problem, these clever couples came up with a solution: they issued a currency called “babysitting vouchers” among the members of the cooperative organization, with each voucher representing one hour of babysitting service.

Parents who go out must pay the corresponding number of babysitting vouchers when they leave their children, based on the number of hours the other party takes care of the children. The total number of babysitting vouchers is limited, and members can earn extra vouchers by helping take care of other families’ children on idle nights for future use.

At first, this system seemed to work well, but over time, problems began to arise. Some couples found that they could accumulate more babysitting vouchers by working hard for future use. But as more and more people did this, the price of babysitting vouchers began to rise because the supply of vouchers was limited.

Those who could not accumulate enough vouchers began to feel troubled and reduced the number of outings because they were worried about not having enough vouchers to pay for babysitting services. As a result, the number of circulating babysitting vouchers decreased sharply, and babysitting services became increasingly scarce.

This little story reflects a scenario of economic recession caused by deflation, which is a shortage of currency supply. When the currency supply is insufficient, the value of the currency rises, and people are more willing to hold the currency instead of spending it, which leads to a reduction in economic activity and subsequently a recession.

Bitcoin’s Deflationary Feature

The total supply of Bitcoin will reach a limit of 21 million in 2140 and will not increase thereafter. This means that Bitcoin has a deflationary feature, incentivizing people to hold and hoard it. Deflation can lead to a spiral deflation, where the value of the currency rises, and people are more willing to hoard it, further driving up its value.

Unlike the cooperative in the story, Bitcoin is completely decentralized, and there is no management that can alleviate the problem of deflation by providing loans to members. This decentralized nature is part of Bitcoin, but it can also lead to deflationary issues.

Conclusion

The initial purpose of establishing a currency system was to facilitate transactions and benefit the entire economy. Deflation may lead to hoarding of currency, which suppresses economic activity. Currently, Bitcoin is not an ideal medium of exchange, but it remains an asset with investment potential for some people.

The deflationary nature and decentralization of Bitcoin make it similar to the nanny vouchers in the story in some ways, but there are also differences. These characteristics have sparked doubts and discussions about the future of Bitcoin.

References:

1. Busch, “Monetary Theory and the Big Capitol Hill Daycare Crisis”

2. “The World’s Smallest Macroeconomic Model”

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