TD₿: Can Bitcoin and Fiat Co-Exist? (a podcast) by Saifedean Ammous
TL;DR There's the possibility of a peaceful transition to a Bitcoin Standard as its adoption could reduce both fiat demand and supply at the same time.
Hey Bitcoiners,
These days I focus a lot of my attention on how we can facilitate a more peaceful transition from the current fiat system to the Bitcoin system.
In the past, I thought that a peaceful transition was more of a pipedream. Bitcoin is a disruptive technology that takes power away from those that have been in control for decades. It challenges the State’s monopoly on the creation of money, arguably the most important source of their power.
As such, it is pragmatic to expect the powers that be to attack Bitcoin as more market participants choose to hold it instead of the fiat currencies they control. Not only that, but the risk is that these central planners will destroy the value of their currencies so rapidly that we get a hyperinflationary episode, which would be a painful experience for the majority of people even if Bitcoin is there to help rebuild a new system.
However, Dr. Saifedean Ammous recently offered some thoughts on how the Bitcoin transition could be peaceful in the future, which has changed my thinking around this topic.
He argues that the main reason hyperinflation occurs in fiat currencies is that the supply of the currency rises rapidly, not because demand for the currency plummets.
In the current credit-based monetary system, money is created at the banking layer when new loans are issued. When people borrow money, new fiat is created, and the total supply of money increases in the economy.
Bitcoin could help prevent a disastrous hyperinflationary episode by reducing the demand for fiat and the incentive to create more supply of fiat through borrowing at the same time. Bitcoin reduces the incentive for the creation of fiat because it allows individuals to save money and stop borrowing (create more fiat).
If more people don’t want to hold debt but rather choose to save in bitcoin, that means less creation of fiat units. This makes a nasty hyperinflationary episode less likely to occur because Bitcoin’s adoption reduces the creation of new fiat currency units, thus acting as a constraint on money supply expansion. In other words, the growth of Bitcoin could, in theory, directly help prevent a hyperinflationary event in fiat. Who would have thought!?
Therefore, if governments and central banks don’t change a thing and allow for credit and money creation to happen naturally in the economy, then as people increasingly choose to save in bitcoin, it would shrink the importance and size of the fiat economy in relation to the Bitcoin economy gradually over time in a way where we could avoid a major crash.
Saifedean explores this idea and more in this amazing podcast, where he pontificates on the idea of whether or not Bitcoin and fiat can co-exist. (12/26/22)
No one knows for sure how Bitcoin’s global adoption will play out, but I am pretty positive that it will occur in stages, and I believe we are entering the stage where fiat and Bitcoin will co-exist as parallel, widely-adopted systems.
It’s theories like Saifedean’s above that give me hope that the transition to a Bitcoin Standard can be more orderly, gradual, and peaceful than many Bitcoiners expect.
That is the outcome that we should all be striving for.
Tick tock next block,
Sam Callahan
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(h/t @GhostofWhitman)
Saifedean’s pod was incredible