How market demand for Bitcoin might be affected negatively by failed monetary policy ?

Othman Darwish

Although there is a frequent failure in economy monetary policy, digital currency  such as Bitcoin  does not  play a substantial role for money  in society. The inefficient or failure in central banks monitory policy, due to poor financials or policy maker vision  of a nation leads to implementing bad or corrupted financial practices in that country, which push people to tend to seek  out money substitutes or alternative currencies like gold or US dollar. Bitcoin follows pre-determined path towards a fixed eventual supply, which makes it extremely unlikely act as a currency with widespread usage. Thus, it is not a competing alternative currency.

At economic  level, Bitcoin system follows a deflationary model, in which the total supply of Bitcoins - 21 millions by the year 2040 - is fixed and extremely controlled. The monetary policy of Bitcoin is embedded inside the system and  executed by computers  program, and no mean by anyone to change it, this prevents the flexibility of responding to temporary shocks to money demand that will suddenly affect the prices of goods and services;  Earthquakes, terrorist events, technological advances and government stimulus programs are all examples of events that can cause demand shocks. Bitcoins fixed supply would  harm macroeconomy, it would contribute in deflation in prices of goods and services, and in wages too .

Bitcoins - with its inability to flexible money supply -  is limited from responding to money demand, and that would likely cause greater volatility in prices. A volatile exchange rate makes Bitcoin is risky to hold, and the high price volatility limits the Bitcoins from serving as reliable store of value .

The current small size and limited acceptance of the Bitcoins as payments network restricts their ability to be use as efficient  medium of exchanges. Bitcoins  payments exchange  lies in the  ability of making peer-to-peer payments in a decentralized network in the absence of trusted authority  between two  parties, without legal tender status, Bitcoins is accepted only when two parties agree to use it. All of this raises the question of why people need to replace their national currency during  the inflation or hyperinflation circumstances with  globally limited currency like Bitcoin?

So far ,there is no evidence that Bitcoins used as independent unit of account, in other words, rather than being used to measure the value of goods and services directly, they instead represent the value in fiat currency like US dollar based on Bitcoins XBT exchange rate. Retailers who accept payment in Bitcoins will quote prices in fiat currency, with the price in bitcoins based on the exchange rate at a particular point in time. Thus why to use bitcoins as a currency rather than using a measurable currency like US dollar?

Individuals  and  businesses with low confidence in their monetary policy and resulting inflation in prices  tend to seek to more stable, globally accepted fiat currency. This fiat currency should cover up - to an extent - the traditional functions of money; store of value, medium of exchange, and unit of accounts. This currency alternative could not be the Bitcoins as a digital currency, as it is still far away to be efficient at economic level and financially stable widely accepted currency.