Why Bitcoin Is Doomed to Fail
One thing that we can be sure of is that nothing is too big to fail. During the past century, humanity has witnessed some of the biggest financial crashes and manias ever recorded. One of the greatest lessons we can draw from history is that things usually get too big before they blow up. As it happened back in the 17th century, with the Tulip Bulb’s frenzy, the dot-com stocks boom in the 90’s or stock market crash of 1929. But, will it be the case of Bitcoin? Are we headed for a Bitcoin crash? It’s imperative to look at the past to see how the future will unfold.
Bitcoin was created in 2009 after the aftermath of the 2008 financial crisis. A technological marvel aimed to avoid the whole banking establishment. A disruptive way to challenge fiat currencies and government’s regulation, centralization and control. But essentially, its creation is fundamentally flawed, with an artificially imposed cap, the supply of Bitcoins is permanently fixed at 21 million which itself is a design devoid of economic sense. An economy needs as much money as transactions and activities occur within it. So if a lot of people want to start paying over the Bitcoin network, the value of Bitcoins will need to rise or at best stay at high levels to accommodate such demand.
If Bitcoins transactions continue to increase but the amount of currency ceases to do so because it has a ceiling, then it will suffer deflationary bias. That is, each Bitcoin will be revalued too much and the prices of the goods nominated in that currency will then fall, which is not at all positive for economic activity.
All money needs to do is provide a stable index of value for any and all goods available on the market. Currencies such as the US dollar are incredibly good at this, they also act as legal tender back up by central banks and treasuries. Bitcoin is completely incapable of competing with well-established fiat currencies mainly because its owners prefer to hoard rather than spend, and this is the primary reason why in the last couple of months its value has soared up almost endlessly. Unfortunately, until goods start to get valued in Bitcoin directly rather than in other currencies then it will never be able to become a currency. And even if its adoption was needed…