Cryptos are NOT Fiat - a reaction to "The Economist" article that says they are the same.

in crypto •  7 years ago  (edited)

There was an interesting link over at Reddit (I don't want to post a link directly to the original article because I think the article was intended to mislead.) - https://www.reddit.com/r/litecoin/comments/724oyk/article_from_the_economist_equating_bitcoin_to/?st=J7YWE7YS&sh=80de40f2

This is my response to that article:

There are key distinctions that make Kindleberger's observations moot with regard to cryptos. His observations are all predicated on a central organization making a power play.

Cryptos are NOT "fiat too", and here is why:

How Fiat and Cryptos are similar:

They both have an unlimited supply, but that isn't the entire story...

The printing press, central banking, and bureaucracy enable unlimited Fiats (not the cute little cars 🚗 but fiat currency - stay focused).

Individuals forking an open-source blockchain, writing software, and convincing people of the value proposition the new coin has enable unlimited Cryptos.

So yeah they both are potentially unlimited.

Some key things that make them VERY different (and it makes all the difference for an individual):

  1. How they are adopted makes them very different. The adoption of Fiat is mandated by government decree (essentially by force). The adoption of Cryptos is only by choice (essentially by cooperation).

  2. Inherent limits per currency are very different. When a fiat is conjured up it is designed to extract economic power from its users via INFLATION and has no cap so it can grow like a cancer until it collapses under its own weight. When a crypto is created it is designed to distribute economic power to its users via DEFLATION.

Key things to understand about inflation and deflation:

Deflation is not inherently bad when it is occurring because of gained efficiencies. If an organization can become more efficient, that creates a competitive edge that helps to solidify their ability to offer lower prices to customers while maintaining their profit margin. Keeping profit margins high is a critical piece of the "healthy" deflation equation.

Deflation becomes horrible (for everyone) if it happens because contracts are broken. Counter party default is an example if that. Deflation also becomes bad for a business if they can't keep their margins high (usually because of some kind of inefficientcy in the way they do business) but have to lower prices to keep up with companies that are more efficient.

Inflation is an incentive to "spend" making both savers and spenders poorer. Deflation is an incentive to "save" making savers more wealthy, while spenders still become poorer. The main difference is that inflation takes the value of saving away while deflation leaves both choices unchanged.

I could go on and on here but hopefully this makes the point that comparing cryptos to fiats is NOT an apples to apples comparison and the Economist article is very misleading.

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