Hard Forks the Equivalent OF Quantitative Easing

[marcelchuo]

I was watching the crypto sniper and he made a valid point. We claim that the benefit of crypto is that there is a limited supply, however when we hard fork bitcoin or major cryptos like ethereum, it is the equivalent of "printing more money".

I understand that forked coins are theoretically not the same, the way bitcoin 2.0 is vastly different in structure to bitcoin core. Like Roger I also believe that bitcoin 2.0 is truer to Satoshi's bitcoin. But even if we consider one forked coin to be an altcoin and the other to be the true bitcoin, crypto sniper does have a fair point. Are we not doing the exact same thing as the federal reserve when they do quantitative easing. Are we just creating more money but calling it something fancy instead?

Just something I've been troubled with lately.

[bitkilo]

I don't really see the connection, a fork in bitcoin in not just like "printing more money"
If the US federal reserve decides to print more money (probably to finance another new war) everyone that owned $1 US dollar before the new print run doesn't end up with one of the new dollars notes also.

Bitcoin Cash is a completely different currency, it runs on it's own chain now using a forked version of the bitcoin code.

Maybe someone who has studied economics will see a closer connection than i can.

[marcelchuo]

When the federal reserve prints more money, it is often in response to an economic downturn and they want to stimulate the economy. The money then has to be injected into the economy through tax rebates, government spending. Then the multiplier effect means that the overall effect of the newly injected money is more than the amount they originally created because the money circulates around the economy.

So yea f the money is given back in the form of a rebate it's very similar to the fork in the sense that people who own bitcoins now have bitcoins and bitcoin 2.0 (cash). Even if it is injected into the economy via govt spending, the population has to work for the money but they still receive new money nonetheless. Alas, it doesn't matter how the money is injected into the economy, increasing the supply always dilutes the value of the dollar.

For the crypto community, the demand for crypto is increasing at a phenomenal rate, so it doesn't really matter that the supply increases when we fork major coins. The demand still greatly outstrips the demand, hence price is increasing.

I think it's fine as long as we don't go down the slippery slope of forking constantly, which may happen. And this fork was necessary because the community couldn't agree between segwit or larger block sizes.

[bitkilo]

Hmm, good point.
To save Australia from the 2008/09 recession the government gave all residents $900 to go out and spend to help grow the economic spending, i am sure that money didn't come from some saving account, it would have all been printed.

[GreyWyvern]

Really, they are not the same. The key is in how they are distributed.

When a crypto fork happens, everyone who holds one unit of the currency receives a unit of the new currency. The market cap of the original currency is split between the original and the new currency. No one is better off, and no one is worse off during a crypto split. Each coin can buy less than the original coin before the split, but the two coins together add up to the same value everyone had before the fork.

In contrast, when governments print money, people who hold the original currency NEVER receive a share of the money that gets printed. Invariably this money goes to banks and big corporations with government contracts. However the market cap still gets split between the existing currency and the new currency. The banks and corporations get first-mover advantage with the printed cash as devaluation of the original currency can't happen until it enters circulation. By the time the new money "trickles down" to the average citizen through wage inflation, everything already costs more. If the wage inflation happened immediately as prices rose, this would be a non-issue, but it doesn't. It always lags behind, and that is why those last to receive a share of the printed money are net losers when it comes to inflation.

Money != Wealth

Fiat money has a "market cap" too, but it's less about a number and more about the wealth of a nation. Wealth can't be created by printing money, it is only created via production and trade. In a very wealthy nation that is producing and trading a lot of things, a fiat currency will be representative of that economy and be worth quite a bit! If, for example, we quantify the production and trade of a nation so that 1 unit of production is worth 1 unit of the currency, you can easily see how printing more money doesn't make anyone more wealthy.

If the nation has an output of 1 million production and has 1 million units of the currency in circulation, everything is fine. If the government then prints another 1 million units of currency, there is STILL only 1 million units of production. Now each unit of the currency is only valued at 0.5 units of production. As a citizen, you would need 2 units of the currency to buy what you needed to buy before with 1 unit. If you get that unit right away (as in a crypto fork) then you are no better or worse off than before*. If someone else (like a bank or company) gets that money first, then as THEY use it, prices will rise for you first and for a period of time dictated by the "velocity of money" you will be paying higher prices for everything with only your original stake of currency to buy it with. You become poorer. By the time the wage inflation arrives your wealth has been eroded.

Hmm, good point.
To save Australia from the 2008/09 recession the government gave all residents $900 to go out and spend to help grow the economic spending, i am sure that money didn't come from some saving account, it would have all been printed.

As you can see from the above, printing and distributing money has no effect on the overall wealth of the nation. It just makes everyone's currency worth a little bit less. The only way to grow an economy and reduce poverty is to increase the production and trade the currency represents. By doing this, without printing money, you make each unit of currency worth MORE. That is how nations and the people in it become wealthy!

* You are actually a bit worse off than before because the government likely used the printed money to pay off debt with reduced-value currency. This means production with a real value of X units was settled for X/2 units of currency, essentially stealing value from the economy.

[marcelchuo]

I don't take issue with any of the points you mentioned above.

With regards the the market capitalization of bitcoin before and after the fork, the combined market was actually more than the market capitalization of bitcoin prior to the fork. I was watching it quite closely because in theory it should have been the same.

Thanks for your replies, it has given me much to consider.

[GreyWyvern]

With regards the the market capitalization of bitcoin before and after the fork, the combined market was actually more than the market capitalization of bitcoin prior to the fork. I was watching it quite closely because in theory it should have been the same.

All things considered, it WAS the same! However, the fork itself can and did affect the market cap of both Bitcoin and Bitcoin Cash. The tension between the small and big blockers was almost certainly keeping the price of Bitcoin artificially low. When the hard fork occurred, MANY investors were put at ease now that the two groups were no longer at each other's throats.

This relaxed sentiment added value to both Bitcoin and Bitcoin cash, giving them a higher combined market cap than before. Had the hard fork been extremely contentious and INCREASED uncertainty surrounding Bitcoin, both coins could have LOST market cap.

Regardless of the resulting sentiment after the split though, the market cap WAS shared by both currencies after the hard fork.

[marcelchuo]

I didn't take snapshots and was just monitoring. Thus, I can neither prove nor disprove my claim about market capitalization.

[estatex]

Really well made points guys. I enjoyed this post.

I agree that QE != forking due to the differences in the distribution of the newly added money.