A big part of Bitcoin’s claim to fame is its monetary policy.
There will only every be 21 million Bitcoin’s in existence.
This is a welcome relief from traditional currency where issuing banks purposefully devalue our holdings by printing more currency with motives that have nothing to do with our well-being.
At last, we can now store our purchasing power in a medium that is designed to be incorruptible.
Surely having a finite supply is the best monetary policy any currency can have, right?
The problem with Bitcoin’s finite supply
A finite supply is a great way to store value. Something I think Bitcoin is superior to any other asset in its ability to do.
(Yes I know bitcoin is volatile but investing is about forecasting the future not reading the obvious present. Anyone with two eyes can do that. Bitcoin is a new asset that is maturing so of course it’s going to be volatile. Having said this, you can see Bitcoin’s volatility dropping over time and I expect this trend to continue).
Nevertheless, a currency is more than just a store of value; it has to have three things going for it:
- A medium of exchange.
- A store of value.
- A unit of account.
A widely accepted medium of exchange can’t have a limited supply. This is because a limited supply means price appreciation (deflation) is expected and people avoid using things expected to go up in price to make purchases.
The ideal currency is one where the purchasing power is expected to remain stable. That is, neither inflation or deflation is expected.
For this to happen you need a currency with a supply that increases commensurate with the increase in goods and services that the currency will be used as a medium to exchange.
Accordingly, a fixed supply is undesirable. A fixed monetary policy is.
For this reason, I think Dogecoin, yes the “meme coin” which many use as “Exhibit A” when arguing that the top for cryptocurrency is upon us, is better suited to serve as the native currency of the internet than Bitcoin is.
Keep in mind, I’m talking about the mature state of these currencies. Right now, neither are suited for anything but speculation since they are both early in their maturation processes.
Dogecoin’s monetary policy:
Dogecoin started with a supply limit of 100 billion coins. By mid-2015 the 100 billionth Dogecoin had been mined with an additional 5 billion coins put into circulation every year thereafter. Although there is no theoretical supply limit, at this rate, the number of Dogecoins put into circulation will reach 200 billion by 2035.
The fixed number of new coins issued every year means the inflation rate will decrease every year.
The table below shows Dogecoin’s inflation rate through 2030:
|Supply of Dogecoins (billions)||Number of new coins issued over next 12 months (billions)||Inflation over next twelve months|
This moderate inflation rate seems commensurate with what I expect growth in usage to be after Dogecoin has matured.
As a currency, it seems Dogecoin’s monetary policy has the edge over Bitcoin.
As a user, I know more Dogecoins are going to be printed so I am more willing to part with mine in a transaction.
As a holder, I know the number of additional Dogecoins introduced every 12 months is fixed so I feel comfortable keeping my purchasing power in it.
Disclosure 1: Need I say this? Dogecoin and Bitcoin are speculative investments containing risk. This is not financial advice. Invest at your own risk. Never invest money you can’t afford to lose.
Disclosure 2: Author holds long positions in Bitcoin and Dogecoin