One of the main mindset changes that occurs in the financial perspective of people who start studying Bitcoin is to understand that, despite its immense potential for returns over time, the primary characteristic of this asset is the preservation of real purchasing power.
This is because Bitcoin, with a maximum coin supply of 21 million, cannot be inflated – meaning, no more units can be generated beyond the initially programmed quantity. This implies that once all 21 million coins have been mined, the circulating supply will not increase. For it to increase, all network participants would have to agree to increase the coin supply – but why would anyone do that and willingly dilute their own wealth?
On the contrary, the available amount of Bitcoin will only decrease, as losses of this cryptocurrency will always occur (but in smaller quantities than in the early years of its existence). This creates the world’s first truly deflationary currency.
Changes that Bitcoin Will Bring to Business Growth
Bitcoin’s characteristic as a deflationary currency brings about a paradigm shift in the global economy, as noted by prominent figures in the Bitcoin community, such as Michael Saylor, Jeff Booth, and many others.
However, a recent interview with Michael Saylor[1] made me realize a significant change that Bitcoin could bring to the global economy: the gradual reduction of global megacorporations.
I’m not saying that they will be completely eradicated, nor am I saying that this change will be swift. On the contrary, I believe it will happen progressively, in tandem with the gradual adoption of Bitcoin.
But why would Bitcoin be capable of causing such a massive global change?
Inflationary Process vs. Bitcoin
Consider this: we live in an inflationary system, where the value of currencies issued by governments decreases day by day as states around the world print more and more money to pay off their debts.
This results in a situation where, with the same amount of wealth in the economy and more currency circulating, it is natural for money to lose value over time – this is, in essence, the mechanism behind the inflation process, as described by Ludwig von Mises[2].
For example, suppose there is a country with 100 billion coins in circulation in the economy, and its government holds 10 billion of those coins. Overnight, this local government issues 10 billion more coins, resulting in a 10% increase in the monetary base, even if economic activity remains the same.
As a result, the entity issuing the currency (the government) now has 20 billion coins out of a total of 110 billion, increasing its proportional wealth from 10% of the total economy to 18% in a “magic trick” – with this, the purchasing power of other participants in the economy is diluted.
With the government having more money, it can buy more things through its numerous institutions, give money to their “friends”, initiate projects without budgetary concerns (after all, if everything goes wrong, just print more money), among other actions.
Currency Dilution and Entrepreneurship
As the government dilutes its capital more and more, what does the entrepreneur do? They need to become increasingly aggressive to maintain their purchasing power. In a deflationary system based on Bitcoin, where there is no more money printing, and the quantity of coins is constant in the economy, they can keep a portion of their profit in cash and not worry as much about preserving their purchasing power.
But in an economy that dilutes its purchasing power more and more frequently – just look at the skyrocketing levels of monetary printing worldwide since March 2020[3], with social distancing – it’s not enough to simply “keep money,” as it loses value day by day.
This is also considering that real inflation is higher than the reported inflation, with various manipulations in the price index to mitigate official inflation results[4]. As a result, entrepreneurs need to make their money work harder.
This leads them to, for example, invest their cash in financial products, such as fixed-income or variable-income assets. In other words, what was supposed to be an investment, with associated risks and the possibility of losing the invested capital, becomes almost mandatory to avoid losing money.
And in the business world, what can the entrepreneur also do? Instead of leaving a portion of the profit in the company’s cash reserves, they begin to invest in new projects (through mechanisms like Private Equity and Venture Capital), acquire smaller businesses, merge with competitors, among many other measures that lead to the concentration of economic power in the hands of a few individuals.
Just look at the reality around us: how many of us have seen, in recent decades, local food and beverage brands being acquired by larger companies? Large companies need to answer to shareholders and, therefore, often need to make risky investment moves, seeking an increasingly positive return to keep up with inflation.
Bitcoin as a True Store of Value
If it weren’t for inflation, it would be possible to maintain a growing and steady profit without the need for constant operational expansion: just put a portion of the cash in a deflationary currency (such as Bitcoin) and keep your operations.
As mentioned earlier, Bitcoin has a maximum programmed supply of 21 million. Since any change to this can only happen with a consensus among all network nodes, it is practically impossible for there to be more units than initially planned.
After all, if you are a participant in the network and already own bitcoins, why would you choose to generate more units and thereby lose purchasing power? This is a incentive for the quantity of bitcoins in the economy to remain the established limit from the beginning.
In a world where Bitcoin is already seamlessly integrated into the economy, a new business project would need to yield more than this currency’s natural appreciation to be profitable.
Consequently, numerous entrepreneurs would be content to, instead of expanding their businesses, simply keep their cash in a strong currency rather than aiming to become one of the world’s top 500 companies.
This would result in fewer growing businesses impulsively acquiring smaller companies. Consequently, fewer local businesses would be bought by large corporations. In turn, we would have a greater diversity of existing local businesses, with less income and power concentration in the hands of a few. Thus, there would be a natural economic incentive for a less monopolistic capitalism and, so to speak, a fairer one.
Bitcoin and Megacorporations
But all of this only explains one part of the process. What about the megacorporations that already exist? How could they organically shrink in size through Bitcoin? That’s what we’re going to explore. But, for that, we first need to understand two key concepts.
1. Law of Diminishing Returns
The first of all is the law of diminishing returns. This is an economic law that states that as a company grows in size, it becomes increasingly difficult for it to maintain a growing or even stable return. In other words, as the company expands its size and increases its gross revenue, what remains at the end of the day (i.e., its profit margin) decreases as it grows.
For example, Company A may have a profit margin of 20%, but over the years, it has grown so much that it can only maintain a profit margin of 5%. This means that out of everything it produces, only 5% remains in the pocket at the end of the day.
Some may question if this rule applies to big tech companies, and it is debatable since the profit margin of giants like Google and Meta is very high. However, this holds true for the majority of industries.
2. Risk-Free Rate
The second important concept to understand is the risk-free rate. Generally, this rate is given to a very safe rate, through which it is considered that there is no risk in investing. In today’s world, this safest rate is lending money to the American government – in other words, the risk-free rate is the rate earned by investing in US government debt securities.
This means that the entity with the most capacity to honor its debts, the US government, has an interest rate considered the baseline, the asset with zero risk, in such a way that your money is “100% safe in this investment.”
Whether it is indeed entirely secure is not the focus of discussion here, but what matters is that the entire global economy is dependent on the American interest rate scenario. When this interest rate is very low, it is easy for companies to take credit and grow their businesses. However, when the rate is very high, obtaining credit becomes difficult, as it is easier to simply leave money in US government debt securities.
To illustrate this concept of a risk-free rate, consider the following example: if the basic interest rate in the US is 1% per year, my business only needs to yield more than this value for my business to be economically viable. However, if the rate is 10% per year, businesses would need to yield more than 10% per year for the investment to be worthwhile, which is much more challenging.
Bitcoin as Risk-Free Rate
We use the American interest rate as the foundation for the global economy. But what if Bitcoin were to occupy that space? How viable will it be to hold money in Bitcoin as a reserve? It’s possible that it becomes the risk-free rate at some point in the future.
Once all Bitcoin has been mined and is in circulation, what will be the risk-free rate? It will certainly be higher than 1 or 2%, scenarios of very low interest rates that have caused various distortions in the business world, such as the large unicorn companies that have never turned a profit and continue to operate.
I have no idea what the annual appreciation rate of Bitcoin will be once it becomes stable (something that will possibly happen in the future), but given the depreciation of fiat currencies and the natural upward trend of Bitcoin over the years, it’s safe to say that it will be much more worthwhile to hold money in reserve than to invest in unproductive sectors.
But how does this impact the reduction of megacorporations? Simple: as there will be a monetary incentive to hold money in Bitcoin rather than investing in dubious and unprofitable projects, it will be more advantageous for these companies to sell the less profitable portion of their businesses and store the proceeds in Bitcoin.
Thus, smaller companies can buy these businesses and make them more efficient, putting into practice Adam Smith’s principle of the division of labor, which states that it is natural for certain economic entities to specialize in specific activities.
With this, there will be fewer and fewer companies with their hands in multiple areas at the same time, as they will find it more profitable to simply stay within their circle of competence, reducing not only the aggressiveness in business expansion but also reducing their size.
Disclaimers
Indeed, it is still questionable whether the existence of Bitcoin would naturally decrease the size of large corporations whose objectives, beyond financial motivation, involve achieving global power in political and social matters. I believe it can, but more study is needed.
Either way, the adoption of this cryptocurrency can be the most efficient and natural way to decentralize power from the hands of a few.
Refferences
[1] Bitcoin Revolutionizes Corporate Finance | Michael Saylor
[2] Economic Policy: Thoughts for Today and Tomorrow (Ludwig von Mises)
[3] The increase in the money supply during the Covid crisis: analysis and implications
[4] O que é INFLAÇÃO, quais as CAUSAS e como os índices DISTORCEM a realidade e AFETAM o SEU bolso (in Portuguese)