Editor’s note: Wences Casares is the founder and CEO of Xapo.
In some discussions about Greece exiting the euro, it has been suggested that Greece should swap the euro for bitcoin. At first glance, bitcoin may appear to be the cure. But if the euro is the problem, switching to Bitcoin would be like trying to cure a headache with a bullet to the brain.
The main problem with the euro is that Greece cannot print more of it; only the European Central Bank can. But at least someone can. In theory, Greece could persuade the European Central Bank to print more euros for them. On the other hand, if Greece were to switch to bitcoin, it would have no ability to control how much of their currency they could issue, and no one could be persuaded to issue more bitcoins (not the European Central Bank, not the U.S. Federal Reserve, not the U.S. Marines, no one).
A defining characteristic of bitcoin is that its supply is fixed and capped. There are 13,882,100 bitcoins today, there will be 20,343,750 bitcoins on January 1, 2025, and there will never be more than 21,000,000 bitcoins.
There are about 10 million people who own bitcoins. If bitcoin is successful, we can expect 1 or 2 billion people to own bitcoins sometime in the next 20 years. The only way 1 or 2 billion people can have 21 million coins is by the price of bitcoin increasing (significantly). An economist would call bitcoin a “deflationary currency.”
Yanis Varoufakis, Greece’s new Finance Minister, agrees that because it is deflationary, bitcoin would be bad for Greece. But he goes on to say that bitcoin is a flawed currency because it is deflationary. This misses the point. Bitcoin is not a currency for a government; it is a global currency for the people. People will generally prefer a currency that goes up in value over time (which is called a deflationary currency, like bitcoin) over one that loses value over time (like all country currencies, which are called inflationary).
It is a bad idea for Greece (or any other country) to renounce their currency and adopt bitcoin. It is akin to adopting gold as a national currency and giving up monetary policy. Monetary policy, used responsibly, has been a step forward for public finances and prosperity. Monetary policy, however, has also been abused by governments that choose to print too much currency.
This has created inflation and devastated the finances of the poorest people in these countries. These people have had no choice but to hold on to their national currency as it loses value, in many cases losing everything.
Bitcoin gives people everywhere an alternative. Anyone with a smartphone can hold bitcoins as a refuge from a currency that is losing value. This sends a message to their governments: “Let’s have our own currency, but manage it responsibly, because now we have a choice.”
If bitcoin is successful, it will not replace any country’s local currency, not even Greece. Bitcoin is poised to become not the currency of any particular country but the global, digital currency of the Internet, by the people and for the people.