A Competitive Market for Money Ensures No Inflation

There is a narrative that persists especially within the Bitcoin Maximalist Community that the introduction of new monies in the market creates inflation. The logic behind this idea is that the entire world could be priced in one chain, e.g. BTC, and therefore if another chain is introduced, this is inflationary because the value of BTC will be diluted.

I think the majority of the population will agree with this logic, and it’s because they forget about the supply/demand relationship that exists in the market for BTC blockspace.

In any competitive market profits margins are driven towards the cost of production by profit seeking indviduals. This is no different in bitcoin mining. As BTC price rises, so does the incentive to mine because although inflation subsidy is fixed, market price drives up profit margins for existing miners which attracts new miners. Profits are realized by the people with the cheapest access to energy and lowest mining hardware costs, and they will add hashrate up until the point that no marginal profit can be extracted. Since eventually we reach the point where cost of producing BTC = the market price of BTC, there is no inflation. Miners destroy as much capital in producing new BTC as they receive in newly mined BTC. This means the money relation (the relationship between supply of money and goods demanded in the money) remains the same!

Ultimately, the people transacting on the network have to pay miners to provide this security. Since people have to voluntarily choose to use BTC over something else, that means it’s profitable for an individual to use it over other options. Without the demand to settle on the BTC network, there would be no mining, and no security, and BTC would cease to exist because the costs would outweigh the benefits.

Since we know that bitcoin transactions are limited, we should also understand that the cost/transaction has to rise as demand and security spend increase. https://github.com/libbitcoin/libbitcoin-system/wiki/Scalability-Principle. This scalability principle means that even with layering, fee pressure builds to the point that users will seek substitutes.

Maximalists argue that substitute networks inflate BTC and that they have no reason to exist, but if that were true individuals wouldn’t be paying to use substitute networks! They may argue that BTC can scale through layering, but often don’t speak of the trade-offs an individual makes in accepting credit receipts and they fail to view these trade-offs between credit receipts and substitute chains from the POV of a new user. If there is profit for users in using substitutes over btc measured against the trade-offs of using higher layers, profit-seeking individuals will settle on alt-chains, and profit seeking miners will provide the security.

The main point of this article is that when there is a free market in money production, the profit in producing any money demanded in the market reduces to 0 to the point new money produced = cost of producing new money, resulting in no change in the money relation.