Bitcoin is a great innovation – well, the blockchain is a great innovation. However, I think there is at least one problem with bitcoin – the number of coins is bounded. There is ever only a set amount of coins in circulation at any given time.
One clear outcome of this set number of coins is it forces the world to make a choice about funding projects. Coins used to fund one project cannot be used to fund another project at the same time – and there is no way to make more bitcoins appear to fund all worthy projects.
Banks are able to create money out-of-thin-air at any time. They are subject to regulatory rules, and settlement rules, and of course are subject to accounting laws. However, if we sum up the effect of banks across the entire economy, banks fund essentially all projects that help our standard of living get better that beat a hurdle rate, even if these projects happen at the same time.
This can’t happen under a bitcoin-style regime. In the bitcoin world, there is no way for banks to create more coins. The number of coins is fixed. All of the banks in a bitcoin world can only lend out as many bitcoins as they have on hand.
This basic fact means there will be a different funding choice in the bitcoin world than there will be in the fiat money world. In the fiat money world, all projects that beat a hurdle rate will get funded. In the bitcoin world, only the *best* projects get funded. Other projects that could improve human welfare but are not as good of a return as the best projects will not get funded.
It is a different choice entirely, and this difference in choice *must* result in lower real human welfare.
The bitcoin world would force us to do less human welfare increasing projects. The fiat money world allows us to do more human welfare increasing projects.
This difference in choice is very clear once you think about funding two projects that happen to be exactly equal in every way AND happen to have the exact current value as the number of bitcoins in circulation right now.
The bitcoin world must choose to fund one project or the other. It cannot fund both projects. The fiat money world can fund both simultaneously . It may choose to only do one of the two projects, but of course it is *possible* to fund both simultaneously as long as both projects will *make money*.
Some bitcoin supporters will say “Great! Projects should compete!”. But what should they compete against? Each other? Yes perhaps a little, but in some deep way the ultimate competition should be against “low living standards”.
A bitcoin world sets up a competition that is different than the one we want to win as a civilization.