Impossible Finance — Bitcoin and Pizza
There are many things that fill Bitcoin fans with pride. One is the recent spike in its value, which clearly reflects the world (apparently including institutional investors) coming to its senses and recognising the genius of Satoshi Nakamoto. Another is the fixed supply that apparently makes the cryptocurrency immune to the evil inflationary ways of governments and central banks. A third is the Pizza story.
The Pizza story tells of the first time anyone used Bitcoin to buy anything tangible. On the 23rd of May 2010 Laszlo Hanyecz bought a couple of Dominos pizzas with Bitcoins. The price in nasty real-world fiat money was $43 or in nice financially inclusive cryptocurrency 50,000 bitcoins (BTC). Now Laszlo did not actually buy the pizzas from Dominos, another Bitcoin fan bought the pizzas for dollars and then sold them to Lazlo. In fact you still cannot buy pizzas from Dominos for bitcoins, but that is not the point of the story. The pizza transaction set a value for the Bitcoins people had been mining since January the previous year of, of slightly less than one tenth of a cent. At today’s price for bitcoin the 50,000 bitcoins are worth $1.35 Billion, the moral of the story, like all bitcoin stories, is that bitcoin is amazing. If you still think Bitcoin is bad just look at Zimbabwe… friendly, well educated people, amazing scenery, terrible economy and sufferer from the worst hyperinflation in recent memory. Bitcoin fans love to bring up Zimbabwe at every opportunity.
If the Pizza story proves how great Bitcoin is, Zimbabwe’s hyperinflation proved fiat money is bad or does it? Using the wonders of mathematics and the story of two pizzerias I will now demonstrate that both Bitcoin and the Zimbabwe dollar were both equally useless as currencies.
Zimbabwe went through over thirty years of escalating inflation and multiple re-denominations (knocking zeros off the end of their currency) so to avoid confusion I have created a Zimbabwe pizza index for an eleven month period. The $43 dollar pizzas would have started the period at a cost of Z$ 10,528 by the end of the period the pizzas would have cost Z$ 1,260,975. That is assuming the pizza parlour waswilling to sell them to you. The problem with extreme hyperinflation is that by the time the store keeper has sold their goods the value of the money received has declined so much they cannot afford to buy the flour, tomato paste and anchovies to make another one. Hence hyperinflation can lead to complete economic collapse.
Now let’s go to Bitcoinland’s pizzeria. Bitcoinland is special because they have a pizzeria that actually accepts bitcoins. Unfortunately everything else is imported and the outsiders all want to be paid in dollars. Now the people of Bitcoinland believe in price stability, so the price of pizza is fixed, in the only currency that matters bitcoins. The Coinbase website provides excellent data about the value of Bitcoin but only going back to 17th May 2010, so let us fix the price of Pizza on that date. Henceforth in Bitcoinland two pizzas will no longer cost $43 they cost 477.78 BTC. For the first few months the cost of the pizza in dollar terms (for tourists to Bitcoinland or the unfortunate majority who did not work as Bitcoin miners) fluctuated arounds $30 as the Bitcoin dropped in value but then it started appreciating (but sometimes dropping dramatically). After a year a pair of pizzas cost over $6,000 and people stop coming on holiday to Bitcoinland. A few weeks later pizza was only $3,000 but still nobody wants to come to Bitcoinland. By July 2017, pizza costs over a million dollars and even the more successful citizens of Bitcoinland have fled to Zug in Switzerland, a place they really do know how to control inflation. Is the pizzeria still open though? No that closed long ago, the owner could make far more money sitting on his bitcoins than using the then to buy flour, tomato paste and anchovies.
The moral of the story is that a currency subject to real world hyper-deflation is just as useless (as a currency) as a currency subject to hyperinflation. In the contest to create the world’s most useless currency I declare a draw between Bitcoin and the Zimbabwe Dollar.
Orginal version published November 2017
