Bitcoin is an imitation of the gold standard; the supply is strictly limited. Advocates tout this as an advantage as a currency. Hal Finney said in 2009:40
As an amusing thought experiment, imagine that Bitcoin is successful and becomes the dominant payment system in use throughout the world. Then the total value of the currency should be equal to the total value of all the wealth in the world.
Bitcoin advocates then adopted this idle musing as something that would obviously happen.
The problem is that Bitcoin is deflationary. Let’s assume for a moment that Bitcoin economic theories work. As economic value traded in Bitcoins increases, the limited supply means the economic value per bitcoin goes up, which means that the price of things in bitcoins goes down. This means the dollar value of one bitcoin indeed goes up! However, it also means there’s absolutely no incentive to spend your bitcoins if they’ll always be worth more tomorrow. This means economic activity goes down, and if there are alternatives – other cryptocurrencies, or just using existing payment systems – Bitcoin loses users and interest.
In practice, the price of Bitcoin goes up when there is demand for it as a speculative commodity, drops when demand drops and is hugely volatile because trading is so thin. But it’s important to note that this idea wouldn’t work even in hypothetical Bitcoin economics.
