How would a bitcoin economy react to coronavirus? For now, we don’t know. However, we can turn to a proxy for insight: gold.
Bitcoin’s “digital gold” narrative has stuck well, namely because of the cryptocurrency’s low issuance supply schedule and a hard cap of 21 million bitcoins. In turn, theory on how a gold-based economy would react to an external shock such as the current global pandemic lends itself into a look at a future bitcoin economy.
As CoinDesk reported Monday, both bitcoin and gold rose on news of the U.S. Federal Reserve extending an indeterminate amount of aid to the private market. From a supply perspective, both assets sit still while the Fed feverishly tries to outpace COVID-19.
“The Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions,” the central bank said Monday.
With such a policy’s incumbent inflation concerns – where infinite supply depresses the value of the U.S. dollar – what would an alternative world look like? What would the macroeconomic story be in a world where bitcoin or gold was dominant as a means of exchange?
Gold during down times
For one, the value of a gold-based money would not artificially inflate, Mark Thornton, Austrian economist at the Ludwig von Mises Institute, told CoinDesk. (However, mainstream economists hold concerns that central bankers would have far fewer levers to pull in times of financial collapse.)
Like any market, gold’s value is determined jointly by supply and demand but has natural limits to the amount supplied in a given year. On average, the amount of gold mined per year hovers around 2 percent of gold’s total known supply.
Indeed, the price of gold has gone up in recent years mostly because gold is priced in dollar terms, Thornton said. As the amount of dollars on the market increases, so does gold’s…