This image has been making its way around the Internet to recruit fresh blood into the BitCoin pyramid scheme. Its prey: those that aren’t thinking for themselves and are looking for a way to get rich quick with no effort. It targets people easily persuaded by news of others making easy money, and a meme like this gives them comforting rationalization that their choice of “investment” is sound, regardless of how late they enter the cryptocurrency bubble.
It’s typical bubble behaviour exacerbated with social media mob mentality. Social media is definitely playing a huge role in making this the biggest bubble of all time, well past Beanie Babies, tulip bulbs, and dot-com companies of the early 2000’s.
So how does this graphic mislead the late-joining casual investors?
I don’t disagree with how inflation is being used as a tool by central banks to siphon purchasing power surreptitiously. In fact, I’ve written enough articles about faulty Keynesian theory being spread in academia and higher institutions of power, to be deployed as rationale for bad economic policy.
The problem is the bottom part of the picture.
Deflation would be appropriate word choice if the world’s economy was centered around BitCoin and the bottom part accurately reflected the economic climate within that hypothetical scenario. Even if you hold BitCoin, there is no actual deflation.
In general, money is a temporary placeholder for the goods and services you produce at a certain period of time. Your purchasing power is considered the fair market trade of your work for someone else’s work at that same period of time. Holding on to money means you simply plan to make that trade at a later time. The longer you wait, the more it may fluctuate. In the past several decades, it will be frequently worth less because of artificial increases in money supply. Keynesian theory argues that inflation is necessary to encourage spending so that money circulates faster to stimulate demand.
If you increase the value of saved labour by shrinking the money supply, there would be deflation (modern Keynesian theory conveniently leaves out how lower prices can also encourage spending, and simultaneously encourage more productivity and accumulation of wealth, but I digress).
While it is true some products are priced in BitCoin, more often than not, that price fluctuates proportionally with the USD market rate (or other base currency depending on the location of sold goods). That is, normalized to USD, the product doesn’t become any cheaper and deflation is not happening — you still have to produce relatively the same amount of goods and services on your own to buy that good priced in BitCoin.
People aren’t paid in BitCoin, and people aren’t measuring the value of goods and services in terms of BitCoin. BitCoin goes up in value because people are merely exchanging their labour for progressively more of someone else’s labour. The market equated one BitCoin with $3,000 USD worth of labour a few months ago. Now, people are now offering $18,000 USD worth of labour for one BitCoin. At no point in time was the baseline for the labour priced in BitCoin. People literally have to work six times as hard for the equivalent amount of BitCoin.
In the graphic, the real benchmark cost (i.e. productivity) for the mansion, the luxury car, the shopping cart didn’t change. People aren’t exchanging less of their previous labour and productivity for those assets at their current value. It is the same price and requires the same amount of your time and effort to earn it. But if you happen to have entered at the bottom of the BitCoin pyramid, you are getting that unearned extra productivity from the late-comers of the pyramid scheme to pay for the mansion and fancy car.
BitCoin’s value priced in USD is rapidly going up, but employee wages and product costs priced in BitCoin are rapidly going down. In other words, net purchasing power stays the same regardless of BitCoin market activity. The purchasing power gained for selling BitCoin is taken from the buyer in a zero-sum fashion. Identifying this zero-sum game as deflation is pure deception.
Unless the world’s economy starts revolving around cryptocurrencies and people’s work and productivity are priced with cryptocurrencies as a benchmark, these market fluctuations in cryptocurrencies are nothing but the result of speculation and gambling.
You should recognize that even if work and productivity become lock step with cryptocurrencies, there wouldn’t be a sharp rise in their value relative to other assets as we are witnessing today. In this hypothetical scenario, the pricing of the mansion and fancy car will head towards a fair price, as the free market would approach an “equilibrium”.
Will we ever reach the cryptocurrency utopia? What employer or producer in their right mind is going to use BitCoin as their baseline? If an employer paid a worker 0.1 BTC/hour 5 years ago, the employer would be insane to pay that same wage now as his business would immediately go bankrupt. Similarly, just say you sold a piece of software a couple of years ago at the fair price of 1 BTC. In today’s market, are you ever going to make a sale if you kept the same price tag of 1 BTC (roughly equal to $18,000 USD)? You will likely have to slash the price of your product too unless you are fine with selling nothing.
It’s safe to say that cryptocurrencies won’t approach the stability necessary to fulfill their main selling point: the ability to act as money.
Unless the world’s economy revolves around BitCoin, this meme makes no sense. Even if the world’s economy did revolve around BitCoin, the meme is a theoretical impossibility and still makes no sense.
The meme makes the most sense when you realize that its sole purpose is to serve as a piece of propaganda: persuasion to fool the unthinking masses to go all-in and keep the high-stakes game of hot potato going.
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You can still participate in the bubble frenzy at no risk by mining Monero using your computer’s idle time. Check out my guide. Within the zero-sum equation, you will be indirectly exchanging money via your electricity bill for Monero, which you will ideally trade eventually for some sucker’s productivity at a much higher cost to them.