Stability Property

Value is subjective and therefore price constancy is an economic fiction. The exchange prices of a money is is determined by its supply and demand which is in turn affected by the demand schedules of all people for all products. The stability of a money is not a tendency toward constant price in all other things, it is a damping relationship between demand for the money and its supply.

We can organize monies into three supply categories:

• Market supply (commodity and early Bitcoin)
• Monopoly supply (monopoly)
• Fixed supply (late bitcoin)

In any money, destruction of units decreases supply and therefore increases the value of those that remain. Given that there is no financial incentive for loss it does not impact stability.

Market money supply increases due to the financial incentive to produce more when price is expected to be at or above production cost (inclusive of capital cost). As shown in Inflation Principle the relationship between supply and demand (price) is stable despite supply not being fixed. Competition ensures that market money production is controlled by demand. The feedback of demand decrease resulting from supply increase reduces the production incentive, ensuring stability.

As a market money, Bitcoin supply increase has no effect on price. Yet because its supply rate is fixed its stability is instead based on changes to demand. Unlike commodity money, the cost of producing Bitcoin rises and falls based on demand for it. Given that price is the relationship between supply and demand, this has the same effect. The purpose of Bitcoin monetary inflation is to rationally distribute units and so is eventually phased out.

Monopoly money supply is increased arbitrarily (or taxed as demurrage) by the sovereign due to the financial reward of seigniorage.

When monopoly monetary inflation is predictable it can be capitalized, which discounts the return on seigniorage. As such changes to supply are often not published. Due to state monopoly protection (i.e. production is the crime of counterfeit), competition cannot effectively limit returns. The resulting sovereign profit (tax) is the reward of seigniorage and the reason for monopoly money. Monopoly protection is the sole economic distinction between commodity and monopoly money. The supply increase caused by seigniorage is mitigated only by political unrest as people resist the consequential value decrease. This unrest initially manifests as capital flight, which is countered by foreign exchange controls.

As a fixed supply money, late Bitcoin remains stable. As fees necessarily rise with demand the utility threshold eliminates demand for transaction of value below the threshold. More generally, the fee level rises to the point where monetary substitutes are more cost-effective for a given value transaction. Stability therefore results from limiting demand directly, in contrast to relying on an increase in supply to do so. Stability implies that price is bounded, yet it can rise with increased effective transaction carrying capacity of the coin, and with increased utility relative to substitutes.