Bitcoin's monetary policy is simulated to resemble precious metals, restricted supply without fractional reserve. 21 million is the maximum number of coins that will ever be created. Bitcoin is not a traditional currency, it is programmable money subdivided by 8 decimal points., or one-hundred million smaller units (satoshis) in every bitcoin. That could fit the world economy.
Where supply is restricted, inflation is a problem, deflation is not. "Deflation" is a scary term for economists who now deal with currencies that are fractional reserve; deflation only occurs through the government, which has the authority to create an infinite supply, recession and depression. Therefore you only see it in places where there's catastrophic collapse in demand. In a market where you have deflation that is caused by improvements in efficiency, you get falling prices / cheaper goods. In a world where every other currency is printed to infinity, Bitcoin is interesting because it isn't.
Transcript
[AUDIENCE] You have been talking about the need for a bitcoin, which is the demand side. What are the plans to grow the supply of bitcoin until it satisfies those 80% of people who are unbanked? Because $10 billion in value is less than 1% of 1% of the need. [ANDREAS] Bitcoin's monetary policy is very specific.
It is designed to simulate precious metals. It is a system of restricted supply without fractional reserve; a fully backed currency. 21 million is the maximum [number of bitcoin] that will ever be created. You may hear that and ask, "21 million coins, how can that possibly fit the world economy?" The point is, bitcoin is not a traditional currency.
Bitcoin is a programmable currency that you can... subdivide to eight decimal points, which means there are one hundred million smaller units in every bitcoin. One bitcoin has a hundred million satoshis, which is the smallest unit you can have [on-chain]. We can divide [a bitcoin] even further than that [off-chain], cut it into smaller and smaller pieces.
If you [look at the supply] in terms of twenty-one quadrillion monetary units, that could fit the world economy as it is today, right? With the approximate value of one [hundreth] of a dollar per unit, with twenty-one quadrillion units, that would... that would give you $210 trillion [worth of bitcoin]. [AUDIENCE] But if you just decide to cut it up, it would create [the opposite] of inflation.
[ANDREAS] Well, exactly. If you cut it up, then you will have a deflationary effect. If you have a relatively fixed supply and increasing demand, that drives up the price of the currency. Deflation is a very scary thing if you are an economist because under traditional economics, we have [created] currencies that are fractional reserve.
What are the conditions under which you have deflation in a fractional reserve currency? You have a government that has the ability to [theoretically] create an infinite supply. What does it take for the demand [of a currency] to collapse so far below the supply that... even an infinite supply creates deflation?
The answer is simple: a catastrophic collapse in demand; not just a recession, but a depression. In systems of money where you can just keep printing supply, inflation is a [more common] problem, deflation is not a problem. If you can keep printing money, someone will spend it. That is not the problem.
Why would no one spend it? Because the economy has collapsed completely. The only places in the world [we know of now] where we see deflation as a monetary phenomenon... are places where you have a catastrophic collapse in demand [for the currency].
Japan is a great example of that, now in its 20th year of deflation. In a few other countries, they first dip into a deflationary period before hyperinflation. Everybody keeps their money under their mattress, then there is a slight increase in positive sentiment. The money comes out into the market again, and then it [turns into] Weimar Republic.
[Hundreds of billions of marks] just for a cup of coffee. Deflation as a monetary phenomenon is only bad when you have an infinite supply. But it is not necessarily bad if the supply is restricted. Let me give you an example of deflation we all like.
How many people here have a phone that cost the same as the phone they bought ten years ago? How many here have a phone that is less expensive, for the same capabilities, than the phone they bought ten years ago? We all do, right? Ten times more processing power, ten times more memory, than just two years ago.
Yes? My first cellphone was slightly bigger than this microphone. It had eighteen minutes of talk time before the battery would run out. I had paid almost £1,000 sterling to buy it.
Today, this [phone] runs for about twenty hours. It has more processing than a thousand of the first supercomputers, and cost me about $600. What is that called? Deflation.
That is [price] deflation in action. My money can buy more product and has more value in the market [than before]. Deflation is great. With falling prices for laptops and other products, we love it.
For businesses that are efficient, we love it. When deflation is caused by improvements in efficiency and a constrained supply, not by a collapse in demand, we love it. Deflation is not necessarily a problem. On the other hand, we don't know [the long-term effect].
In cryptocurrencies, there is a lot of competition in monetary models. If you don't like Bitcoin's monetary model, you can find others with different models, such as higher levels of inflation. The monetary policy [of cryptocurrencies] is a very interesting characteristic to me. In a world where every other currency is printed to infinity, [bitcoin] is the only one that isn't.
That is a good thing, or at least it is a different thing. It is counter-correlated. To an investor, something that is counter-correlated is very interesting to have. I can always get...
inflation-based currencies [elsewhere]. When you see things like Brexit happen, or sudden devaluations in the yuan, three things go up [in value]. yen (because it is deflating), gold, and bitcoin. Fancy that!
That is a weird situation in monetary politics. Everything else is moving in the [opposite] direction. The only three things moving [up] are the Japanese yen, gold, and bitcoin. But I am not an economist.
Again I will disclaim that. I hope I [answered your question].