Bitcoin may become a global reserve instrument as individuals use it both as a ledger for financial and informational assets.

Although the long term application of bitcoin is still being debated and determined through the software tweaks applied by programmers, in its current state, it does not function well at making global micropayments with little to no fee. Today, bitcoin is about a safehaven for economic and data assets. This technological layer is presenting a new emerging economy, one where the constituents are not bound by judicial legislation and analog forms of exchange.

The bitcoin digital economy may become a global reserve instrument due to factors which are made possible by sound economic principles and the technical excellence brought by blockchain networks and their promises for innovation.

Inelastic Supply May Reduce Business Cycles

The supply issuance of new currency units is governed by a mathematical algorithm rather than central bank monetary policy. No change in demand has an effect of the rate of this issuance, and therefore, makes the supply function of bitcoin inelastic. Fluctuations in demand have no effect on the supply schedule of bitcoin, instead willingness to pay is represented by floating denomination in national currency.

The mining difficulty algorithm is capable of self-adjusting to changes in the competition among mining pools. Interestingly, this represents the core form of self-governance the bitcoin protocol has.

Austrian school of economic thought holds that the bust of a business cycle is inevitable, what should be avoided instead is an artificial and sometimes misleading boom in the market, which does injustice for representing the health of the economy.

One of the major factors of facilitating a boom is credit expansion. Opportunity for credit expansions in bitcoin is limited due to the difficulty of fractional reserve practices and a hard cap on total money supply.

Interdependent (Rather Than Dependant) Market Participants

Bitcoin has the potential to make economic players less dependent upon others in the same or adjacent markets. Systems which are made open benefit tremendously from the network effect and bitcoin only requires a mobile device with internet connectivity. This accessibility requirement is incredibly low and allows users to conduct transactions over the bitcoin network with no need to acquire approval from an external party (read: banking sector, local government).

When users are less dependent on every other participant in the system, productivity flourishes. If an individual can conduct commerce without the approval of an external party, decision making is empowered.

As long as one party does not control entire network, users remain largely independent and in control of their own economic livelihood.

Economies of Scale For Data Security

Encryption has never before enabled economic assets (data assets as well) to be stored so inexpensively with such a high degree of security.

Peter Diamandis describes demonetization in his ‘exponential framework’ as one of the key stages. In regards to bitcoin this describes the demonetization of many aspects of our current financial system (banking fees, ATM fees, remittance fees, bank infrastructure, banking employee salaries). Bitcoin is demonetization of our current financial system because it can mitigate and eliminate these third-party requirements.

The technology of encryption makes, for the very first time, protection of our economic assets both very secure and very inexpensive. In truth, when bitcoin is used as it is designed to be used (as a relationship between you and your money with no requirement of trust), the chance of a successful hack is near 0. Encryption of the blockchain also provides the potential to secure and transmit information assets (as well as monetary), inexpensively with a high degree of security and transparency.

Bitcoin may continue to be increasingly used as a global reserve instrument for both economic and data assets because it potentially mitigates business cycles through an inelastic supply function, makes users less dependent upon adjacent participants in the economy, and allows a high degree of security at low cost due to advances in cryptography.


Travis Patron

Travis Patron is the curator of Diginomics and the author of The Bitcoin Revolution: An Internet Of Money. He was an early adopter of both bitcoin and ethereum technology, and continues to educate audiences on emerging opportunities in the digital economy.

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