The dream of Bitcoin as world money has one major drawback

What would happen if Bitcoin (BTC) became the foundation of the global financial system? For many Bitcoin supporters, that's the ultimate goal. But according to the well-known analyst Willy Woo, there is also a major disadvantage to such a future.

The properties that make Bitcoin attractive as money can influence the global economy in unexpected ways.

The discussion began with Saifedean Ammous, economist and author of the well-known book The Bitcoin Standard. In 2019, he asked a question that he recently highlighted again: why should an economy with a fixed money supply not actually be able to function?

Analyst Willy Woo came up with an answer. According to him, the biggest problem is with debt. Bitcoin has a maximum stock of 21 million coins. Unlike traditional currencies, central banks cannot simply create extra Bitcoin to increase the money supply.

That sounds appealing, but it can make borrowing a lot more complicated. Suppose a company today borrows 10 Bitcoin to build a factory. As Bitcoin rises in value in the following years, it becomes increasingly difficult to repay that loan. After all, the company has to return the same amount of Bitcoin, while those coins are now worth much more.

According to Woo, this can make companies less likely to make large investments. Banks are becoming more cautious about providing loans and entrepreneurs are more at risk of not being able to repay their debts.

He points to the huge investments in artificial intelligence (AI). The construction of data centers and other infrastructure for AI is currently largely financed with borrowed money.

Still, Woo doesn't just see drawbacks. According to him, an economy in which Bitcoin is the most important means of payment would probably grow more slowly. On the other hand, there would also be much fewer financial bubbles.

Cheap credit plays an important role in the creation of such bubbles. When companies and investors can easily borrow money, the prices of shares, real estate and other assets can rise sharply.

With Bitcoin as the basis of the financial system, borrowing could potentially become more expensive and difficult. As a result, such bubbles would be less likely to form.

Woo also refers to the historical gold standard. At that time, more paper money was gradually issued compared to the available gold reserves, so that banks could continue to provide sufficient credit.

The discussion therefore revolves around a fundamental question: what is ultimately better for an economy?

A financial system in which debts and investments ensure rapid growth, but also major crises can arise? Or a system with less credit, in which the economy may grow more slowly but more steadily?

According to Woo, a world that runs entirely on Bitcoin would mainly end up with the latter.