Cryptocurrency markets are awash with new currencies and tokens. Somehow it seems that buyers can’t get enough crypto, and there is always space for more. This somehow shatters the notion that the space that bitcoin still dominates, has a fixed supply of currency. To clarify, looking at Satoshi Nakamoto’s white paper, money supply was not a key concern. Satoshi focused on a peer to peer trustless money system well suited for the internet. Nevertheless, a considerable number of bitcoin users, tend to express their disdain for the inflationary features of fiat currency, and they have a point. Interestingly enough, the world of cryptocurrency produces monetary expansion by other means, which cryptocurrency enthusiasts should consider as a potential threat.
The Bitcoin Cash Case
This monetary expansion doesn’t always come directly from ICOs, which have taken a course of their own and in many cases, create something else other than a cryptocurrency. The expansion is rather coming from airdrops and now forks. The most salient example of this monetary expansion by other means, in this case a fork, is Bitcoin Cash or BCH – BCC has also been used as a ticker symbol. Since bitcoin might fork again in the future, resulting in the creation of a new coin, then the BCH example is one we should consider.
Monetary Expansion by Ways of a Fork
Regardless of the opinions each bitcoin holder has regarding BCH, all of those who split their coins and effectively got “free money”, should recognize that forking is a form of monetary expansion. It might be different than the type of monetary expansion that fiat currencies experience, but the effects can be similar. If bitcoin for example, forks beyond the point at which the markets tolerate the ensuing monetary expansion, its value will be eroded.
The perception of the market is that the supply of bitcoin is 21 million coins, regardless of Satoshi Nakamoto’s focus on the trustless, peer to peer internet money aspect of bitcoin on the white paper. This means that forking and creating some of the closest substitutes possible for bitcoin, may eventually blur the lines for the people coming into the markets. The result may be the loss of value, due to the perception that there are 21 million BTC, but in the future, there will be another 21 or even 42 million similar coins, that are close enough to the original.
Demand High Enough to Mop Up Excess Supply
So far, with the BCH fork, it seems that there was enough demand to mop up excess supply. That coupled with other features, resulted in a cryptocurrency market cap expansion of about 9 billion USD on BTC and an additional 4.9 billion USD on BCH – according to the price at time of press, and despite the price crash a week ago – in just 10 days. That is about half the market cap of Ethereum, and it was created in 10 days! Users must recognize that demand is not guaranteed to mop up excess supply every time. The price of bitcoin following another fork in the future, might not react as it did this time around either. SegWit lock-in and activation will only take place once, and next time the market might not have enough positive prospects to boost the price of bitcoin following a fork.
Moreover, the fact that a considerable part of this new wealth seems to be fabricated out of thin air in a matter of days should also concern those who dislike the fiat monetary system. There are many reasons why bitcoin is a suitable alternative to the fiat system, which is a system that is dominated by middlemen and trust in a central authority. But cryptocurrency enthusiasts should take a deeper look at the excess that these authorities incurred in just about 9 years ago, and understand that monetary expansion by other means, can be as dangerous as inflationary monetary expansion is in the fiat system. That is true even if the airdrops and the forks might create an additional short-term incentive to buy bitcoin. Assuming that demand will always mop up additional cryptocurrencies stemming from forks and airdrops is perilous.