Is Bitcoin Scarcity Handicap or Advantage?
Relatedly, Bitcoin is not designed to behave as money in a standard economic system. As such, Bitcoin's fixed supply is a major disadvantage. The money supply must expand with economic activity, so prices stay steady. The pace at which money is transferred from one owner to another (its "velocity") also affects this connection. Thus, it is not linear. To keep up with inflation, the money supply must either increase in velocity indefinitely or prices must fall more fundamentally. When consumers anticipate a long-term price reduction, money's velocity tends to fall rather than grow. Because of this, the economy can collapse. The gold standard collapsed because of these and other issues. Consequently, fiduciary money like debased currency, bank notes, and fiat money was extensively used in the latter decades of the gold standard.
Commentators were eager to point out Bitcoin's fundamentally deflationary characteristics upon its release. As Bitcoin's popularity keeps increasing, investors will benefit from the currency's artificial scarcity. As demand increases, the price of Bitcoin will rise since the supply is inelastic. Bitcoin is similar to gold in this regard. From a monetary standpoint, however, this drastically limits Bitcoin's possibilities. To keep prices stable, the money supply has to be flexible enough to expand as the economy does. There was good cause for the gold standard's failure. Fiduciary money gained prominence once the economy "outgrew" the gold supply.
Cryptocurrencies aren't immune to the same fate. Many additional digital currencies have emerged after Bitcoin's debut. As Bitcoin's deflationary nature becomes a greater hindrance to its ability to perform the payment function of money, other cryptocurrencies may fill this void. This occurred when precious metals were phased out as a form of currency and paper money, and then fiat money took their place. It's plausible that Bitcoin may develop into a new kind of investment vehicle if this were to occur. Precious metals may serve as a historical analogue. While Bitcoin's supply has been predetermined, the supply of certain newer cryptocurrencies has not been, making the crypto market anymore or less inflationary than the traditional money market.
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