BitMEX Releases Third Report on Bitcoin’s Economy, Including How Bitcoin’s Deflation Could Change the Global Economy
BitMEX has released the third report in a three-part series on bitcoin’s economy. The first two pieces were published in October 2017, while the third and final piece was published this past week.
The third piece examines the deflationary nature of bitcoin and considers why deflation may be necessary to overcome some of bitcoin’s weaknesses. The report also examines how bitcoin could become more resilient to some of the traditional economic disadvantages of deflation – including disadvantages proposed by traditional economists.
The first report, meanwhile, looked at common misconceptions with respect to how banks make loans and the ability of a bank to expand the level of credit in the economy. The second report looked at why bitcoin has unique characteristics over traditional forms of money.
Here’s a brief overview of what BitMEX found in all three of its reports on bitcoin’s economy.
Report 1: The Dynamics of Credit Expansion
BitMEX explored the idea of credit expansion in the traditional economy. In the traditional economy, institutions like banks can expand the level of credit (debt) in the economy without necessarily increasing its cash reserves.
BitMEX explained concepts like credit expansion and fractional reserve banking. In straightforward terms, these concepts refer to the idea that banks can expand the economy without necessarily having the hard cash to justify that expansion. They can lend money – or create money – they don’t necessarily have.
“With the advent of the internet,” explains the BitMEX report, “Often people on the far left politics, the far right of politics or conspiracy theorists are becoming partially aware of this dynamic, perhaps in an incomplete way. With the banks ‘create money from nothing’ or ‘fractional reserve banking’ narratives gaining some traction. The question that arises, is why does the financial system work this way? This underyling reasons for this [sic], are poorly understood, in our view.”
Report 2: The Unique Properties of Bitcoin
The second report explored the unique properties of bitcoin, including how electronic cash could potentially disrupt the traditional banking system and change the way we expand the economy.
“Bitcoin shares many of the advantages of physical cash over electronic bank deposits…The key unique feature of bitcoin, is that it has both some of the advantages of physical cash and the ability to be used electronically.”
With bitcoin, for example, your funds are protected even when the bank becomes insolvent or inaccessible. Electronic cash transfers can also be anonymous, irreversible, and hidden from authorities. Basically, electronic cash transfers carry many of the advantages of cash – but few of the downsides.
Despite these advantages, bitcoin has its own limitations.
“For example, bitcoin may never have the throughput of traditional electronic payment systems or the ability to use without electricity such as with physical cash. Although as technology improves, bitcoin may slowly develop more strengths and gradually improve its capabilities, to narrow the gap.”
Ultimately, BitMEX explains that if bitcoin was used for the majority of transactions within the economy, then it would have serious effects on the economy’s inflationary cycle. Banks could no longer practice fractional reserve banking and create “money out of nothing”, for example. However, BitMEX explains that it’s unlikely for bitcoin to become the dominant transaction method in the near future – and that we’ll have bigger issues to worry about if that ever becomes the case.
Report 3: Bitcoin’s Deflation Problem
The third and final report, released in May 2018, explored the unique deflationary property of bitcoin. There’s a fixed total supply of 21 million bitcoins and rising demand. This creates deflation, causing the price to increase.
In this report, BitMEX explains that “too much inflation could have negative consequences not applicable to traditional forms of money,” and that deflation could be the best way forward – despite what conventional economists seem to think.
“Many economics have been debating the advantages and disadvantages of inflation for decades. Nevertheless, the primary point of contention is one of theory: economists, from differing schools of thought have a variety of views on the topic. It is fair to say that the current economic consensus is that deflation is an undesirable economic phenomenon, while moderate inflation of around 2% per annum is desired. Those with Austrian school learnings, who oppose centrally managing inflation towards a certain positive target, tend disproportionately to support bitcoin and gold’s somewhat deflationary nature.”
In other words, bitcoin might be the currency that makes deflation “good” for the economy.
The report identifies several disadvantages of inflation unique to bitcoin, including:
- Arbitrary environmental damage. Mining bitcoin is a resource-intensive process that is consuming more energy year after year.
- Aligning the interests of miners and users. Miners are incentivized by block rewards – not transaction fees. This can cause the interests of miners and users to be misaligned.
- Inability to generate coin value. The supply cap is considered a key selling point of bitcoin for investors. “If a perpetual inflationary policy was chosen,” explains the official report, “Bitcoin may not have been able to succeed to the extent it has, even if the deflationary policy is inferior from an economic perspective.”
BitMEX concludes its report by explaining the importance of the debate on bitcoin, deflation, and inflation. Essentially, today’s “bank deposit”-dominated economy has led to tremendous growth. Bitcoin, if it’s adopted on a widespread scale, could change the economy by altering this growth. Bitcoin could create real value behind the economy due to its deflationary principle – although this can also lead to serious problems.
“Ironically, if one thinks these economic problems associated with deflation have a remote chance of being relevant, like the critics indirectly imply, that would mean bitcoin has a significant chance of becoming widely adopted and hugely successful. In that case, perhaps, the sensible thing to do is buy and ‘HODL’.”
You can lead the full BitMEX report, published online on May 30, 2018, here.
Managed to get my hands on the @BitMEXResearch report for Bitmex VIP clients on #Bitcoin economics. BitMEX Research always has good content. Dropbox download link: https://t.co/Q2ToUewP7O Enjoy. pic.twitter.com/5xbJQqvmXg
— WhalePanda (@WhalePanda) May 30, 2018