Suppose you have a bunch of bitcoins, let's say 50 of 'em. As you're leafing through your copy of Yachting Magazine, thinking about the day when 1 bitcoin will be worth 1 million dollars, you see an ad for a impressive $50,000,000 yacht and think to yourself: That's what I will buy once bitcoin hits a million!
The problem here is that you are actually overestimating how wealthy you will be once bitcoin hits a million. Of course there's taxes and what not and these will take chunks from your wealth, but that's not what I have in mind here. My point is that once 1 bitcoin is worth 1 million dollars, 50 million dollars simply won't mean the same as it does now, in that it won't buy you as much as it does in 2013 dollars.
Bitcoin monetization = dollar demonetization
To understand why, let's imagine a very simple model of an economy, one that has 10 million bitcoins, 10 trillion dollars, and 5 trillion goods. Let's suppose, moreover, that the number of bitcoins, dollars and goods in the economy does not change over time. The only thing that changes is the dollar price of bitcoins.[1]
Initially, when Bitcoin was created the price per bitcoin was $0.00. You could buy zero dollars and zero goods with 1 bitcoin, while $2 would buy you 1 good. The total amount of dollars (10 trillion) buys you the total number of goods (5 trillion).
Now suppose that over time as people start to invest in bitcoins and in the Bitcoin economy, bitcoins become more valuable and on January 1, 2015 Bitcoin hits a million dollars. This means that the total supply of bitcoins would then be worth as much as the total supply of dollars (10 million (bitcoins) x 1 million dollars (the price per bitcoin) = 10 trillion dollars), so that the total supply of bitcoins and the total supply of dollars now each would buy you half the number of all goods in the economy: 10 million bitcoins would now buy you 2.5 trillion goods, 1 bitcoin would buy you 250,000 goods, while 10 trillion dollars would buy you 2.5 trillion goods and two dollars would now buy you 0.5 goods.
This means that now in 2015 your dollar is worth only half as much as it was in 2009 as it only buys you half of the goods it used to buy you. So when in 2015 1 bitcoin will be worth 1 million dollars, those 1 million dollars will only buy you half as much as they did in 2009, so it is only worth $500,000 in 2009 dollars. The increase in the purchasing power of bitcoins has come at the expense of the purchasing power of dollars.
This becomes even clearer when we imagine a situation in which Bitcoin has completely replaced the dollar. Suppose this happens in 2020. So in 2020 there would still be 10 million bitcoins, 10 trillion dollars and 5 trillion goods. 1 bitcoin is now worth 500,000 goods and 2 dollars or 10 trillion dollars buy you exactly zero goods. The price of dollars in bitcoin is 0. The price of bitcoin in dollars is infinite. Obviously that could not be the case if dollars still had the same purchasing power they did in 2009, since that would require an infinite number of goods.[2]
To understand why, let's imagine a very simple model of an economy, one that has 10 million bitcoins, 10 trillion dollars, and 5 trillion goods. Let's suppose, moreover, that the number of bitcoins, dollars and goods in the economy does not change over time. The only thing that changes is the dollar price of bitcoins.[1]
Initially, when Bitcoin was created the price per bitcoin was $0.00. You could buy zero dollars and zero goods with 1 bitcoin, while $2 would buy you 1 good. The total amount of dollars (10 trillion) buys you the total number of goods (5 trillion).
Now suppose that over time as people start to invest in bitcoins and in the Bitcoin economy, bitcoins become more valuable and on January 1, 2015 Bitcoin hits a million dollars. This means that the total supply of bitcoins would then be worth as much as the total supply of dollars (10 million (bitcoins) x 1 million dollars (the price per bitcoin) = 10 trillion dollars), so that the total supply of bitcoins and the total supply of dollars now each would buy you half the number of all goods in the economy: 10 million bitcoins would now buy you 2.5 trillion goods, 1 bitcoin would buy you 250,000 goods, while 10 trillion dollars would buy you 2.5 trillion goods and two dollars would now buy you 0.5 goods.
This means that now in 2015 your dollar is worth only half as much as it was in 2009 as it only buys you half of the goods it used to buy you. So when in 2015 1 bitcoin will be worth 1 million dollars, those 1 million dollars will only buy you half as much as they did in 2009, so it is only worth $500,000 in 2009 dollars. The increase in the purchasing power of bitcoins has come at the expense of the purchasing power of dollars.
This becomes even clearer when we imagine a situation in which Bitcoin has completely replaced the dollar. Suppose this happens in 2020. So in 2020 there would still be 10 million bitcoins, 10 trillion dollars and 5 trillion goods. 1 bitcoin is now worth 500,000 goods and 2 dollars or 10 trillion dollars buy you exactly zero goods. The price of dollars in bitcoin is 0. The price of bitcoin in dollars is infinite. Obviously that could not be the case if dollars still had the same purchasing power they did in 2009, since that would require an infinite number of goods.[2]
Not quite yet...
Not worth as much
So that $50,000,000 yacht you've had your mind set on now that 1 bitcoin is worth about a thousand dollars will actually be much more expensive in dollar terms once 1 bitcoin is worth 1 million dollars, because the increase in the purchasing power of bitcoins comes at the expense of the purchasing power of dollars. In the simple economy sketched above, if the yacht was $50,000,000 when 1 bitcoin was worth $0.00 it would actually cost $100,000,000 when the price of 1 bitcoin hits 1 million dollars.
So if you're currently holding a bunch of bitcoins and you're making plans on how to spend your fortunes once 1 bitcoin will be worth $1,000,000 keep in mind that even though at that point you'll still be rich, you won't be quite as rich as you might have thought.
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Notes
[1] Of course in the real world the number of bitcoins, the number of dollars and the number of goods will very likely increase rather than remain constant. This doesn't invalidate the general point that an any increase in the purchasing power of bitcoins will come at the expense of the purchasing power of dollars, and so that one can't simply assume that even when corrected for these increases or decreases in the number of bitcoins, dollars and/or goods, $50,000,000 will buy as much once 1 bitcoin is worth $1,000,000 as it did back when 1 bitcoin was worh $1,000.
[2] Also, in the real world we don't just have dollars and bitcoins, but also for example gold and silver. Now it may very well be the case that Bitcoin's monetization takes place primarily, mostly or solely at the expense not of the dollar's purchasing power, but that of for example gold. In that case the same principle holds but it would now apply to gold: the monetization and increase in the purchasing power of Bitcoin comes at the expense of gold which loses purchasing power as it experiences demonetization, so that if in 2009 the yacht cost for example 1,000 kg of gold, in 2015 the same yacht would cost 2,000 kg of gold (while its dollar price stays the same, and the Bitcoin price goes down).
So that $50,000,000 yacht you've had your mind set on now that 1 bitcoin is worth about a thousand dollars will actually be much more expensive in dollar terms once 1 bitcoin is worth 1 million dollars, because the increase in the purchasing power of bitcoins comes at the expense of the purchasing power of dollars. In the simple economy sketched above, if the yacht was $50,000,000 when 1 bitcoin was worth $0.00 it would actually cost $100,000,000 when the price of 1 bitcoin hits 1 million dollars.
So if you're currently holding a bunch of bitcoins and you're making plans on how to spend your fortunes once 1 bitcoin will be worth $1,000,000 keep in mind that even though at that point you'll still be rich, you won't be quite as rich as you might have thought.
---
Notes
[1] Of course in the real world the number of bitcoins, the number of dollars and the number of goods will very likely increase rather than remain constant. This doesn't invalidate the general point that an any increase in the purchasing power of bitcoins will come at the expense of the purchasing power of dollars, and so that one can't simply assume that even when corrected for these increases or decreases in the number of bitcoins, dollars and/or goods, $50,000,000 will buy as much once 1 bitcoin is worth $1,000,000 as it did back when 1 bitcoin was worh $1,000.
[2] Also, in the real world we don't just have dollars and bitcoins, but also for example gold and silver. Now it may very well be the case that Bitcoin's monetization takes place primarily, mostly or solely at the expense not of the dollar's purchasing power, but that of for example gold. In that case the same principle holds but it would now apply to gold: the monetization and increase in the purchasing power of Bitcoin comes at the expense of gold which loses purchasing power as it experiences demonetization, so that if in 2009 the yacht cost for example 1,000 kg of gold, in 2015 the same yacht would cost 2,000 kg of gold (while its dollar price stays the same, and the Bitcoin price goes down).
This is totally irrelevant. People 'exchange' the potential future value of bitcoin to fiat currency because it's the only real way to conceptualise it. Once bitcoin reaches mainstream adoption the majority of prices will be fixed in bitcoin, not USD. Purchasing power will be fixed by the amount of bitcoin that you own, not how many devalued USD your bitcoin will now buy.
ReplyDeleteAgreed. The question is NOT HOW MUCH BITCOIN WILL BE WORTH IN DEVALUED DOLLARS BUT HOW MUCH IT WILL BE WORTH IN UNDEVALUED DOLLARS WHICH YOU DO NOT ANSWER.
ReplyDeleteAGREED. YOU ARE CHANGING THE MEANING OF THE QUESTION. YOU ARE DISHONEST AND I HOPE YOU DIE IN A FIRE.
ReplyDelete