Bitcoin: an alternative to fiat money? A post-Keynesian perspective
DOI:
https://doi.org/10.24136/cxy.2024.002Keywords:
Bitcoin, fiat currency, MMT, endogenous money supply, El SalvadorAbstract
Motivation: This paper addresses the ongoing debate surrounding Bitcoin’s potential to function as an alternative to state-issued fiat currencies. With the advent of Bitcoin and its increasing global prominence, it is essential to explore its viability, particularly in light of its formal adoption in El Salvador as legal tender. The limited supply and decentralized nature of Bitcoin present a significant departure from traditional monetary systems, which raises questions regarding its capacity to fulfill the roles of money under Modern Monetary Theory (MMT).
Aim: The primary goal of this paper is to critically examine whether Bitcoin can serve as a functional replacement for fiat money. Using a post-Keynesian analytical framework, this study investigates Bitcoin’s ability to meet the requirements of sovereign money, particularly within the theoretical framework of MMT. The analysis focuses on Bitcoin’s decentralized issuance, limited supply, and its role in fiscal policy and credit creation.
Materials and methods: This research employs a critical literature review and a case study analysis, using the framework of MMT and post-Keynesian endogenous money theory to assess Bitcoin’s economic implications and its real-world application in El Salvador’s Bitcoin Law. The study analyzes Bitcoin’s economic implications based on the endogenous money supply model and evaluates its impact on government fiscal policy, credit markets, and economic stability in both theoretical and practical contexts, with a special focus on El Salvador’s Bitcoin Law.
Results: The analysis reveals significant limitations in Bitcoin’s ability to function as a fiat currency. Its rigid supply and speculative nature hinder its capacity to serve as a medium of exchange, store of value, and unit of account, as envisaged by MMT. The study concludes that Bitcoin’s decentralized nature and deflationary design pose challenges for its broader adoption as state money, particularly in managing aggregate demand and economic crises.
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