How to Make Bitcoin Inflationary 101

Bitcoin as a Foreign Currency

One of the strongest arguments in favor of Bitcoin is that no single authority can arbitrarily print more coins. Or, can they? There are two ways of printing more coins. One if to issue the order, and the factory mints coins and prints bills. The second one is a virtual version of this: own such a large portion of the market that selling behaves like printing.

We know that central governments or organizations can’t change the Bitcoin protocol at will, but they do own the currency with the most traded volume against Bitcoin: dollars. While the Fed is the only bank that can print dollars, almost every country owns dollar reserves. Needless to say, countries have way, way more money than your average whale. Moreover, we need to focus on circulating supply. Average whales have so much Bitcoin that their part of the supply is effectively out of circulation, for now. If they want to move part of their holdings into fiat, their best bet is to trade OTC, since the market depth has nowhere near the required volume. As time goes on, before Bitcoin is used on a daily basis, major players have a rising reason to keep buying OTC beyond speculation: they can control the circulating supply.

A Billion Dollar Bet

A maximalist is likely to believe that Bitcoin will outlast his lifetime, and the next generation’s, and the next’s. Others familiar with the philosophy might see the potential, yet not believe in it enough to march under the “1BTC = 1BTC” flag. Finally, there are people who see Bitcoin just as a speculative asset. It is difficult to know where most governments stand on this Bitcoinism, but in any scenario they have to do one thing to not lose future relevance: soak up the supply.

Some governments will buy only a few hundred or thousand Bitcoin. Other governments might try to go up to the millions of Bitcoin, depending on how strongly they believe in the future political power that it may represent. A central bank that owns 1 million Bitcoin controls almost 5% of the absolute total supply. In terms of gold, 5% of the total world reserves would add up to 1700 metric tonnes. That is approximately the percentage of gold that China owns of the total world reserve. If Japan already bought up 1 million BTC and have it sitting in their reserves, they’ve basically already reached endgame reserves of the crypto.

We could see governments that lagged behind in gold reserves bet today on Bitcoin, like Japan did, to boost their reserves. Japan sits at barely 2% in gold reserves, but could now be up to an endgame amount. Furthermore, if Japan’s legalization boosts their domestic reserves, their could overall be looking to control up to 10% in the near future, between the BOJ and private investors.

While 10% doesn’t sound like much in everyday life, it should be more than enough to apply some Keynesian economics on the market. Selling their reserves would certainly move the circulating supply up, which in reality is what matters. Furthermore, Bitcoin would most probably start trading as paper Bitcoin, much like silver and gold do. The manipulation stemming from the BTC futures added recently are just a glimpse of what’s to come.

The bottomline is that we could reach a point where Bitcoin becomes so centrally owned by governments that paper Bitcoin becomes the closest we will be to owning Bitcoin, which would in turn mean that holders could be diluted via paper Bitcoin “splitting”. This wouldn’t be as bad as pure quantitative easing, but it would no longer make Bitcoin what Bitcoin maximalists love about it. Perhaps we could be looking into Bitcoin bonds, where instead of being paid the final price, investors get a proportional amount of Bitcoin based on the amount of bonds they’ve bought.