Bitcoin [BTC] and the Paradox of Thrift: Why Bitcoin Won’t Shoot Up at Once
There is an underlying economic theory that explains why Bitcoin’s price won’t shoot up to the moon overnight.
We’ve previously established that Bitcoin has a deflationary effect on its’ price.
Since its supply is constant, in a growing economy the price of goods and services must decrease w.r.t. Bitcoin as an asset. As its adoption increases, its price would increase as well. This would maintain the parity between purchasing power and economic growth. And deflation has it’s drawbacks as well.
Nevertheless, that is for the future. Currently, Bitcoin is an investment vehicle with astronomic predictions. While we see instances of extreme bull runs (parabolic phases), it always corrects in the short term. Even in an uptrend, there are visible bull and bear cycles.
Paradox of Thrift
Bitcoin’s main utility is as a store of value. People always carry the desire of attaining more of it. If his/her earnings are constant and given banks don’t provide loans to invest in crypto, he/she would like to trade it for a better price in the future.
However, several traders looking for the same opportunity. Hence, the Bitcoin market gets stuck in a ‘Paradox of Thrift.’
According to this theory by John Maynard Keynes, during an economic crisis, people try to save more. Therefore, the financial system which is already running short of money becomes even further deprived.
A similar thing happens with Bitcoin but in an uptrend. The people trading or ‘hodling.’ desire for more it, they either trade it for FIAT or altcoins to ‘stack sats’ in the future. This leads to a sell of, followed by a period of indecision/accumulation.
Bitcoin moonshot is highly unlikely so is the probability of it dropping dead in the woods. Bitcoin is a deflationary asset that is driven by the people in it. The eternal cycle of fear and greed will continue to bring reversals in the future as well.