Elon Musk is still in the “Crypto game”, but his approach of being a “shill” for Dogecoin has often been criticized, rightfully too.
Back in May, Musk claimed environmental concerns and announced Tesla was going to stop accepting BTC as a means of payment, and this created turbulence in the market while BTC was right at the top.
A crash followed the Chinese government’s announcement of banning cryptocurrency mining. The market recovered since then, but not a lot changed. Probably, the interest from retail investors is even lower today in cryptocurrencies, but most are looking into ways to make a profit fast in a matter of days, so they are investing in anything that is the current hype.
This is the current state of a market on its ATH, although we are not discussing the principal features of cryptocurrencies as often as we should. The freedom to transact without third-party supervision, the fact that no central authority exists to control our funds, or the decentralized nature of cryptocurrency that allows them to operate uninterruptible with no one having able to shut them down, are barely at the center of discussions.
The currency features of cryptocurrencies are not on the front page in what today is a massive marketing campaign.
In my previous article: The Value of Money - Inflation, Hyperinflation, Fiat, and Bitcoin Cash as a Store Of Value, I explored the terms inflation, hyperinflation and explained how economies, governments, and central banks, react to fears of a recession by printing more money, which in turn creates inflation fears.
There is one point, though, that I find equally important and should be discussed in length. A certain percentage of annual inflation (price appreciation) is a requirement in our economies.
Inflation is Required in an Economy
The supply of money is not the only reason for inflation. Typically inflation is measured using the CPI index.
The Consumer Price Index (CPI), produced by the Bureau of Labor Statistics (BLS), is the most widely used measure of inflation. The primary CPI (CPI-U) is designed to measure price changes faced by urban consumers, who represent 93% of the U.S. population.
Inflation at a low level (2-5%) is helping economies and incentivizes investors and businesses in a progressive wealth management approach.
This gets to a philosophical point often, but this is the consensus in the two last decades. Higher than 5% inflation creates concerns to consumers and sometimes just the fear of higher inflation is driving prices higher.
Hyperinflation
Source: Twitter
Hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.
Source: Investopedia
Jack Dorsey announced on Twitter that hyperinflation is happening. He didn’t write this tweet to warn the US consumers; it was a message written to create fear.
Hyperinflation is not coming, and it is ridiculous to manipulate sending such an irresponsible and false message.
Jack either wants to help the economy rapidly increase its spending today, or just wants to push more Twitter users in buying Bitcoin.
I’d go for the latter, since he mentions hyperinflation, which was something Bitcoiners truly believed was going to happen in the American economy, since March 2020, and still think it is coming with 5% inflation levels.
Either way, it was not wise and Musk tried to support the argument, mentioning “high” inflation levels, which is a wider term that makes more sense.
Since the founding of the United States in 1776, the highest year-over-year inflation rate observed was 29.78 percent in 1778.
Source: Investopedia
Just wanted to mention this again, since 29,78% annual inflation is way too far from 50% monthly, and this only happened once in US history, two and a half centuries ago.
Deflation is equally Destructive to an economy as Hyperinflation
The opposite which is deflation is worse for economies and we have examples in the history of economics.
"Money" that appreciates creates terms for everyone to cut spending and "just hodl" mentality, waiting for better prices.
There is a negative spiral of events that follows negative inflation (deflation).
Production decreases, unemployment rises, the economy enters a negative growth cycle, and the social foundations are crumbling (violence, riots, a massive exodus of part of the population and the productive units out of the country, brain-drain, living conditions deteriorate, etc).
Deflation is a result of an economy entering a destructive recession. A recession begins that follows an excessive and significant bubble that popped.
Liquidity is pulled out of a county, banks go bankrupt, lending stops, and economic progress is stalled, sometimes for decades.
However, there is another issue that could create even worse conditions. Stagflation. A recession with high unemployment and extremely high inflation too.
There has been economic consensus on low inflation 2-3% and it worked for a while, although part of the investment banking got greedy and speculative.
In 2008 we witnessed the collapse of the real-estate bubble.
Bitcoin was created in the same year, but after examining closely the early communications of those involved (Satoshi, Hal, and others) there was always an excessive enthusiasm and discussion about the price potential of Bitcoin.
The halving and the fixed supply, together with the vast amount of "lost" Bitcoins, are factors that make Bitcoin reach deflation status.
Musk and Dogecoin
Musk explained previously that the fixed supply of BTC wasn't helping it to take over fiat. He understands the universal consensus on this matter. Hoarding, which is the approach of BTC "hodlers", is not helping progress. But, this is how the BTC network operates today.
What matters most to Musk is a coin:
Offering inflation (issuance of new coins) at a 5% rate
Having vast issuance in hundreds of billions of units
Having low concentration by whales
Ability to scale (low fees, fast transactions)
Musk bought BTC for investing purposes (gambled). Tesla investors didn't like that too much, and the stock price of Tesla was crashing, an event that pushed Musk later to mention environmental concerns and stop accepting BTC as a payments method.
Musk was also flirting with Dogecoin before investing in BTC. Doge was supposed to have 2 Doge as a fixed fee, although as the price reached higher, Dogecoin lost any advantage since currently fees are more than $0.60. Compared to Bitcoin Cash it is a worse choice for microtransactions for any reason applied.
It is highly unlikely anybody uses BTC anymore as a currency. The case with Bitcoin Cash and other cryptocurrencies offering low fees and instant transactions is different.
It would make sense to create vending machines accepting Bitcoin Cash but nobody would want to pay $5 extra for fees. Moreover, nobody would prefer to pay fees to open and close LN channels. I've explained why LN is inherently flawed and bound to fail in the previous article: The Value of Money - Inflation, Hyperinflation, Fiat, and Bitcoin Cash as a Store Of Value.
In Conclusion
This is how the system works and I tried to generally explain why inflation is a requirement and hoarding mass amounts of currencies is not helping any economy.
Some cryptocurrencies with low and fixed supply offer an alternative, and in my opinion, in the beginning, there will be a combination of the two systems to help economies sustain economic progress and at the same time reduce inflation levels and concerns to acceptable levels.
Bitcoin Cash has a supply inflation (new coins mined yearly)at about 2% today, although it will keep getting lower as more halvings approach. This, however, doesn't mean prices will follow the same level of inflation.
Cryptocurrencies contain store value, although they are highly susceptible to excessive variance in price terms. This high volatility is a deterrent for wide adoption and acceptance by the business world. With some services that instantly liquidate crypto in fiat, more merchants are getting involved, but this doesn't represent a shift to a crypto economy.
However, this volatility and the frequent dips create problems to consumer adoption as well. Those that want to use cryptocurrencies in commerce, also feel the heat, and it becomes a problem when arranging purchases. We have to wait for better prices or spend and replace. It becomes a mathematical problem this way, and this confuses the retail sector.
I'm not advocating the destruction of the economy as modern BTC maximalists do, to see their bags pumping. Although, I'm also against the manipulation of our wealth by governments and Central Banks.
A parallel system of payments is viable today, with the use of decentralized cryptocurrencies as a method for payments. This of course is up to the world's population to decide and Bitcoin Cash is there as the best option to select.
Images:
Lead Image from: Unsplash, by Vlad Busuioc
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I think they are trying to keep BTC at the top for a long term.