Addressing the Ramifications and Divisibility of Cryptocurrencies Like Bitcoin

In the realm of digital currencies, Bitcoin stands as a pioneering example of an infinitely divisible token. However, the question of its divisibility and the ramifications it might have is often a topic of debate. This article delves into why the concept of infinitely divisible currency, such as Bitcoin, is less about solving divisibility problems and more about transaction cost challenges.

Divisibility Isn't the Core Problem

While the divisibility of Bitcoin is a notable feature, it is often misunderstood as a primary issue. The traditional notion of currency divisibility, as seen in fiat money, has been addressed in modern central banking systems with relative ease. For instance, central banks could theoretically add an extra decimal place to bank accounts or mint plastic coins representing smaller denominations. However, such measures do not fundamentally alter the nature of transactional issues.

The True Challenges Behind Transaction Costs

The core problems related to transactions and currency are more accurately characterized as transaction cost issues. These encompass a myriad of expenses and time costs incurred during the exchange of value. Here’s a breakdown of some of these costs:

Intermediary Fees: These include fees charged by banks, credit card companies like Visa and Mastercard. Verification and Matching Costs: The costs associated with ensuring that a payment is accurate and finding the correct counterparty. Recording and Accounting Costs: The expenses related to documenting and maintaining financial records. Invoice and Receipt Costs: The costs involved in generating and managing invoices and receipts. Currency Conversion Costs: The fees involved in converting one form of currency to another. Physical Handover and Authorization Costs: The costs related to physically handing over money or authorizing a payment. Dispute Costs: The costs to resolve any disputes that may arise during transactions.

While these costs are significant, the issue of divisibility is often overemphasized. For example, a user might be willing to accept a fee of 0.5 cents per page view, but not every time they want to view a single page. In practical terms, one might purchase a system of page view credits for a nominal fee to avoid the need for individual sub-cent transactions.

Cryptocurrency and Inflation

The discussion also extends to the topic of inflation in the context of cryptocurrencies. Some argue that making Bitcoin divisible to the point of minimizing transaction costs would solve inflation issues. However, this is a misunderstanding of how inflation works.

The typical approach to combating inflation involves a central bank increasing the supply of money (the numerator) or alternatively, making the monetary units more divisible (increasing the denominator). Both approaches result in more pieces of the same pie, which mathematically maintains the same proportionate share of value.

For example, 2/3, 4/6, and 800/1200 are equivalent fractions with the same value. Making the decimal longer does not fundamentally alter the value distribution.

Inflation can also be influenced by other factors such as economic growth and changes in supply and demand dynamics. While smaller denominations of Bitcoin may have been necessary in the early days to ensure practical use, the current divisibility constraints are sufficient. It is hypothesized that for quite some time, sub-nBTC denominations will not be required because a sufficiently large economy with a corresponding currency supply would likely need to exist first.

Overall, the divisibility of cryptocurrencies, particularly Bitcoin, is a feature more complex than simply solving divisibility issues. Addressing the transactional challenges and understanding the mechanisms of inflation provide a clearer picture of the challenges facing digital currencies today.