Bitcoin’s Deflation Problem – Deaths Reduce The Number In Circulation

A standard economic finding is that a growing economy needs more money in order to grease that growth and activity. Milton Friedman was known for pointing this out and it’s made quite clear in the first few chapters of Das Kapital. Agreement from Marx to St. Milt is a pretty wide spread there. The analogy could be that of a restaurant which moves from serving 50 lunches to 150 a day. We’ve either got to get those plates washed a great deal more quickly – increase the velocity of circulation – or we need more plates – increase the money supply.

Super. So, Bitcoin has a fixed money supply. Sure, not all is issued yet but it will get there soon enough. That makes the currency inherently deflationary which isn’t a good thing. But it’s worse than this. What currency there is in issue seems to get lost:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Bitcoin’s death problem: how billions of pounds worth of crypto assets are being lost when people die[/perfectpullquote]

In more detail:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] As cryptocurrency ups and downs go, the story of Canadian crypto exchange QuadrigaCX is both sad and disturbing. When the exchange’s boss unexpectedly died last December, he took the passwords for the accounts of 115,000 clients to his grave, and now seemingly no one – absolutely no one – is able to unlock their crypto savings. At stake is a bevy of cryptocurrencies worth CAN$250 million (£145m). But could this really have happened, and what can be done to prevent it from happening again? [/perfectpullquote]

This isn’t an isolated incident. Bitcoin gets lost in wallets, passwords go missing, hard drives fail, get thrown out and so on. It’s not just that the supply is ultimately fixed – something promoters deludedly think is a benefit – it’s that the supply is actually shrinking over time through human error.

It’s entirely possible that something useful will come out of the whole game, perhaps blockchain has a value somewhere or other. But as an actual currency Bitcoin has enough problems to make it not one.