@ChpBstrd there are a few flaws I think in your analysis.
1) Any transition to a bitcoin circular economy (if we are to assume it occurs) would not happen cold turkey nor over night. FWIW I don't feel we'll ever be in a solely bitcoin circular economy and FIAT is here to stay. But for the sake of the scenario, if it were to happen, it would be a transitional event. Merchants that choose to accept bitcoin would accept bitcoin along side fiat currencies much like some are doing today.
2) The other flaw in your analysis is that if merchants were to move to only accepting bitcoin as a form of payment, they would only be doing so under the premise that sales in fiat currency have been completely abandoned. If sales in fiat payments are still being made in any meaningful volume, then I don't see them just abandoning it (barring any hyper-inflationary collapse).
3) This means that if fiat sales have been completely abandoned, it is mostly like because people are being paid in bitcoin. So the idea you're making that you'd need to "will be forced to purchase that currency from people who currently own it" is a false premise. We have exchanges today because we're in a fiat world and we're all paid in fiat currency and so that is how you acquire it today. If we were instead in a bitcoin world, that would not be the case. There would be no need for exchanges because bitcoin is what we earn and bitcoin is what we spend. There is a transitory period for sure, but it is not cold turkey and therefore the scenario you present just simply would not exist.
OK, let's take a look at the halfway point in a hypothetical process that takes decades, a point where half of the transactions that used to be done in USD are now done in a particular cryptocurrency, and the other half still occur in USD. The percentage of transactions in cryptocurrency is growing and the percentage in USD is shrinking, and that's how we've arrived at this 50/50 midpoint.
Let's say the particular cryptocurrency that achieves this widespread adoption has a finite number of coins that can possibly be created. We'll pick 21 million as our number. Meanwhile new USD continue to be minted, and the net effect between bouts of QE and QT is a steady growth of USD money supply, roughly approximating the growth in demand for dollars in the world economy plus a small amount of inflation.
Because USD are growing in supply and the particular cryptocurrency gets more and more rare as more and more people attempt to transact or HODL the currency, the coins per dollar exchange rate is constantly decreasing. The USD slowly loses value to inflation at maybe 3%/year, while the cryptocurrency becomes more and more scarce as more and more people try to transact a finite supply and experiences 10%/year deflation. A loaf of bread that costs either $5 USD or 1/100,000th of a crypto coin on the day when the 50/50 mark occurs would be expected cost $5.15 USD or 1/110,000th of the crypto coin by the end of the year.
On that day, your new employer offers you a choice. You can either be paid your salary as $100k USD per year, or you can be paid your salary as 1/50th of a crypto coin per year. You must decide today. Which do you choose?
Well that's easy. You want your paycheck a year from now to have 10% more purchasing power, not 3% less! Plus, you're locking in 10%/year raises without even asking. You decide to be paid in crypto coin. On your company's books, your salary comes out of the cost of sales made in crypto.
Then a strange thing happens. You are about to take a date out to a restaurant to celebrate your new job, but you realize that by spending part of your new paycheck today, you are giving up 110% of that purchasing power a year from now. In 20 years, today's decision to buy a restaurant meal will have cost you 278% of the purchasing power you spent today. All you have to do to lock in 10% returns forever is cancel your date and stuff the crypto coin into an online wallet.
You realize now that almost no purchase makes financial sense. Additionally, you realize that if you are going to experience 10% gains on anything you save from now on, it makes sense to cut expenses to the bone and save the maximum amount possible. Plus, because the particular crypto coin is going to increase in value at a minimum of 10% forever, you could retire with a safe withdraw rate of 10%, or have a stache 10X your desired level of spending, and never run out of money in perpetuity. You'll go from broke to independently wealthy in about 4-5 years.
You dump your date, sell most of your possessions, and move out of your apartment, renting a bunk bed during night time hours in a slum house bedroom with 10 coworkers who are doing the same thing. You live on the crypto coin equivalent of $300/month, hand washing clothes, eating rice and beans, not having a phone, etc.
The following month, just as swapping an old mattress with your night shift coworker starts to get really old, your company makes an announcement: Sales in crypto coin have plummeted. Apparently, consumers all over the world have made the same choice you made and started to hoard their crypto coins as a surefire investment rather than spend them, and so the company has insufficient revenue in crypto coins that it can use for payroll purposes. They are still profitable in terms of dollar sales, but the forex markets have insufficient supplies of crypto coin (only a couple million total coins still in circulation, and all the rest stored in vaults) so that trading their earnings in USD for crypto coin is prohibitively expensive. The bid/ask spreads are nuts, and for a moment you try to understand the reasoning of any investor trading away a currency that gains 10% a year in exchange for one that loses 3% a year. How much would
you ask?
Your employer is offering you a stark choice: Be paid in USD or be laid off. Your company says this is a lot nicer than what other companies are doing - laying off their entire crypto-salaried workforces without notice. They describe a "depression" in the crypto side of their business, but as far as you can tell your crypto investments are doing great!
You fume with anger. A deal was a deal! You almost rage-quit but decide to do some online skimming first. A quick glance on job websites reveals that there are a lot fewer jobs offering compensation in crypto than there were last month. Some have introduced a clause about payment in crypto being tied to the available exchange rate with USD, which would defeat the whole purpose.
As you research further, the news articles are describing a liquidity crisis in the half of the economy that consists of crypto coin exchanges. Everybody is hoarding and nobody is spending. Banks are defaulting on their crypto coin accounts because they can't find counterparties willing to lend to them at reasonable rates (i.e. rates less than the 10% rate of deflation). The unemployment rate among crypto-compensated workers is approaching 45%, and many are being forced to accept jobs paying USD because that's all anyone is willing to spend.
On the bright side, the purchasing power of the coins you saved in the past month has skyrocketed. Your boss puts a sign on his car that says "0.0001 crypto coin buys this car". However, you wonder if this party can continue. Demand for crypto is high now, but the future looks increasingly like one where employees have to accept payment in USD, crypto banking services and loans are not available, and the 50% of the economy conducted in crypto coin permanently shrinks. You ponder something crazy. Maybe you should trade your crypto coins for USD, stocks, or real property now while their value is peaking, because their future doesn't look like 10% appreciation forever any more. You were one of the first people to think of saving 90% of their crypto coin income, so what if everyone else is worrying about the future utility of crypto coin too?
4) The other flaw in your analysis is that the fiat rich today would suddenly not exist and that simply isn't true. So the idea that we'd all be working for the bitcoin rich suddenly doesn't make sense either. The number of early adopter bitcoiners that will become rich from bitcoin becoming mainstream pales in comparison to the number of fiat rich in the world today. Those who hold the capital resources today will still hold it under a new bitcoin economy. The executives of all the top companies will still be there under a bitcoin economy. A transition of the money being used wouldn't change that. Certainly there will be a few new rich people in the world, but there are new rich people all the time in the world. I've mentioned some of the good that could come from bitcoin being used around the world and I personally believe that good would outweigh a small percentage of new rich people coming about (as if that's a bad thing anyway).
I don't see a problem in terms of staking a claim that appreciates, wealth inequality, loss of value for people holding mattresses full of government fiat currency, or there being enough wealth in the world to buy every circa-2018 cryptocurrency HODLer a lambo. The problem is that the interests of people who are rich in terms of USD do not align with the interests of people who hold some cryptocurrency and want those USD-rich people to give them their USD.
Any scenario where there are enough cryptocurrency units in circulation that they are available for daily transactions necessarily involves the rest of us trading something of value (labor, USD, property?) for cryptocurrency units we do not currently own so that we can have spending money or business working capital.
You might say that such a transfer is zero-net because I'm just converting value between formats, not creating or destroying it. No forex trader would accept this argument. If I trade USD for British Pound, and the USD appreciates against the Pound, the loss for me is very real, and the enrichment of my counterparty is as well.
If a cryptocurrency took off, and business owners were required to pay the price of accepting it or lose business (as happened with credit cards), and consumers were incentivized to use is (as also happened with credit cards), then there would need to be some value-added factor making the cost of change worth it. In the case of credit cards, convenience, safety, and airline miles incentivized customers to use them, and the tendency of credit card users to spend more money than cash users incentivized businesses to use them. The credit card companies were enriched at the expense of businesses who paid higher costs and consumers who paid higher prices.
Compare credit cards to cryptocurrency, and note the incentives are reversed. They're less convenient to transact in, less safe to hold in online wallets, and discourage people from spending.
5) You also talked about how bitcoin could just be copied, but that simply isn't true. How about I run a fiber cable to your house and connect it to a computer I have running that has a website running on it and charge you $70 a month for it and call it the internet. No? Why? Because the internet can't be copied. It is a network effect where people are using the open internet because of everything that has been built up on it (services, websites, economy, etc). The same would be true for bitcoin. There are services, economic activity, software, and the security of the network that simply can't be duplicated. If bitcoin is accepted "everywhere you want to be" and all the trials and tribulations of bitcoin coming into existence and getting to where it is now widely accepted and being earned by workers, those trials and tribulations would be even more cumbersome for any other decentralized digital currency trying to overcome the incumbent. Any reason someone might have for wanting to use another currency could be built onto bitcoin as a secondary layer. It would be extremely difficult to overcome that network effect and duplicate much like it would be difficult (and pointless) to build a new internet when instead you can just build upon the one we have.
Network effects and first-mover advantages are real, but there are also numerous examples of users migrating to a particular format because it was cheaper or better than the incumbent. Microsoft Windows got big because it shipped pre-installed for free on PCs, beating ala carte operating system competitors from IBM, Tandy, etc. Yahoo was the name in search engines until Google came along offering more relevant results. MySpace... Facebook... TikTok. American cars in the 1970s-80s... Asian cars in the 1970s-80s. Large steel mills... mini mills. Encyclopedia Britannica... Wikipedia. The bottom line is that advantages from originality don't last more than a few years in the markets. Inferior products eventually disappear regardless of their brand recognition. The fact that I still can't buy gasoline or hamburgers with Bitcoin over a decade after inception is ominous. That is to say, the "lead" of a currency that is not regularly transacted is nothing.
With that in mind, consider this:
https://www.marketwatch.com/story/move-toward-digital-dollar-gains-steam-as-boston-fed-says-its-prototype-can-handle-1-7-million-transactions-per-second-11643916607The results are promising for the viability of a digital dollar, as the research produced two separate architectures for a potential U.S. CBDC, with one code base capable of handling 1.7 million transactions per second, according to a white paper released Thursday. That’s more than 2.5 times the number of transactions Visa can handle on its network, according statistics cited by Visa CFO Vasant Prabhu in a recent Barron’s interview.
Furthermore, the vast majority of these transactions were settled in less than two seconds, a tantalizing result for users of the U.S. banking system, which can force customers to wait days before a fund transfers are settled.
That performance is also far superior to popular cryptocurrencies, with the bitcoin network capable of handling just 7 transactions per second and ether just 25,
And consider that the government could just suddenly impose this change upon the economy, vs. the narrative of a cryptocurrency slowly gaining acceptance over the course of decades.
