With the introduction of Bitcoin in 2009 and later, subsequent altcoins, many people were of the opinion that cryptos can be used as debt instruments. Debt is something that is owed to someone, but this is not the case while dealing with cryptocurrencies.
Bitcoin and other Cryptos aren’t Debt Instruments
You might not notice this initially but Bitcoin and other cryptocurrencies are not debt instruments as – when you hold them, nobody owes them to you or anyone else. This is not the case with regards to fiat money as when you hold a dollar, somebody owes it to someone else. This is because of the fact that cryptocurrencies are assets, and most of the other systems where we use money are actually debt instruments which are created through credit.
The other major difference is – in traditional currencies, lending is done through fractional reserve banking, meaning that banks can create money out of thin air by just lending $9 for every $1 that they have in deposits with them. This mechanism allows them to expand the availability of credit in the economy, i.e. to inflate it by producing more credit. If that credit is properly invested, it might increase productivity and create returns. Otherwise, it creates bubbles and inflation in the underlying currency.
You can’t do Fractional Reserve Banking with Cryptos
In the case of cryptos like bitcoin, you cannot do fractional reserve banking. You can’t give out Bitcoin that doesn’t exist or that which you don’t hold. Basically, you can’t give out more than what already exists. Hence, you cannot issue debt in Bitcoin – not directly at least.
However, with the emergence of other blockchains, which are different in terms of capabilities and features and creating technology and innovation, many are perhaps not doing much apart from creating a pool of currency that they are injecting into the system. This is, in a way, inflating the supply of money.
Increase in Supply doesn’t lead to Inflation
That’s one of the ways in which you effectively can get credit. We see this particularly with something called are airdrops, where you have a fork such as “Bitcoin Gold” – but there might be many others. This fork isn’t aiming to differentiate much on features. The point is that – when a fork like that occurs, it creates a new supply of money.
For every bitcoin you’ve held before, now you have the original bitcoin plus the new forked coin. If the price of bitcoin doesn’t drop much and the price of the new coin is greater than zero, the sum of them is greater than what you had before. They’ve effectively increased the supply of currency.
It’s not necessarily a good thing because that creates inflation. It doesn’t create inflation in Bitcoin’s supply, which continues to be constrained, but it creates inflation in those airdropped currencies.
In conclusion, cryptos are not exactly the debt instruments that can be used to create debt or to lend out. However, in case of forks – they create a new supply of money which increases the supply that doesn’t increase inflation.
This article is a transcription of Andreas Antonopoulos’ explanation on inflation and debt systems.