The 2016 Money Oscars (MOSCARS)
Money is half of every transaction on the planet, and like it or not — it is a uniquely important economic phenomenon.
People commit terrible crimes for it, while other people create amazing things in pursuit of it. We all live within it’s constraints and make decisions around it, and yet, public understanding of money ranges from fair to woeful/non-existent.
Most people haven’t had the monetary equivalent of the ‘birds and the bees’ talk, as our state education system treats money and free markets the same way a Catholic school treats contraception and sex education. The result is the same as all other manifestations of misinformation: bad decisions and their inevitable consequences.
What actually IS money? What types of money are there? What makes one form of money better than another?
What IS money?
Many definitions have been advanced, but I’ll try my own…
“Perfect money is a pure, flexible and efficient store of economic energy that can be easily exchanged between market participants for products and/or services of an agreed equivalent value. Perfect money is: limited in supply, accepted by all market participants, infinitely divisible, completely fungible, a constant store of value, indestructible, incredibly portable.”
To the extent that ‘something’ can meet the requirements of this definition — is to the extent that we can judge this certain ‘something’ a good candidate to be used as money.
The 2016 MOSCARs (Money Oscars)
In order to illustrate the point, welcome to an award ceremony based on the features of perfect money: The MOSCARs!
The 3 contestants in the 2016 MOSCARs are:
- US Dollars (and other fiat, fractional reserve currencies).
- Gold (and other precious metals);
- Bitcoin (and other cryptocurrency);
Welcome to the Oscars, with money as the actors…
Nominations for the most DIVISIBLE form of money.
It’s one of the less significant MOSCARs awarded tonight, but that’s why it’s up first.
This is the category that rules out some of the more primitive forms of historical money like cattle, large boulders, shells, jewels and so on. Gold and Dollars are pretty much neck and neck in this category, as both are excellently divisible for most transactions, but most cash transactions require change, and there are practical limits on the smaller units of account in both cases. Bitcoin however, is insanely divisible, trading down to a single “satoshi” which is 100 millionth of a Bitcoin, or $0.0000067364 per satoshi (where 1 BTC = $677). The concept of ‘change’ is handled behind the scenes automatically in Bitcoin, and so reduces the costs of smaller units of currency and saves on time & errors, matching any wireless Mastercard or Apple Pay touch technology in terms of speed and security.
Joint runners up: Dollars & Gold
Nominations for most FUNGIBLE form of money.
This is another MOSCAR awarded early in the night while we’re all still sober, and it’s quite a close race between our 2 of our 3 nominees. Dollars might appear perfectly fungible at first glance, after all — when would one Dollar ever be of a different value to another?
But what if some dollars are worth more than others because you’re allowed to spend new dollars into the economy before anyone else? This is the privilege that governments and banks have in a typical fiat currency system. One Dollar spent by a bank, government or a even a large corporation with easy access to the capital markets are able to enjoy greater spending power over other because they spend new currency supply into the system first, whereas the smaller market participants (savers, pensioners, low income households, salary earners, people in remote areas etc) are the last in line to use these units of currency, and so Dollars can be considered fungible in their final state, but not in practice. All Dollars are not made equal, they end up equal over time as their value is slowly dispersed throughout the economy. Naughty dollars…
Compare this to Bitcoin, whose supply comes from a type of mining. Bitcoins can be mined by anyone with a computer and while some miners go to great expense or join pooled syndicates to increase their yields, no single participant has a more privileged access to the system than anyone else, and the Bitcoins are almost perfectly interchangeable (although older coins and larger transactions are processed minutely faster).
Pure gold is infinitely fungible, as one pure ounce is indistinguishable from another, but gold-backed derivatives (like a gold-backed note) may have skewed values based on the creditworthiness of the institution issuing the paper. Physical gold coins or bars have value based on their origin, condition and numismatic (historical) value. One Gold US Eagle may have a different real value from say, a Gold UK Britannia coin for tax reasons or based on collector value even though the gold content and purity in each coin is identical. It’s close, but there can be only one winner for fungibility:
Distant last: Dollars; Runner Up: Gold
Nominations for the most PORTABLE form of money
Easy transportation is a huge feature of good money, and with this criteria we really start to see a large gap in the quality of different types of money.
Dollars held as cash are lightweight and as electronic money in bank accounts/credit cards have no physical weight at all, large sums can be moved around using electronic transfers maintained by the traditional banking system. Until you actually try to do it. Fiat currencies all rely on central clearing systems that is vulnerable to fraud or crashes, as well as the excessive fees charged by banks, and lest we forget the capital controls often imposed on individuals trying to move money around in times of economic stress. Want to spend some wonga in a different country? Well there’s the FX fees and limits that go with it, and unless you plan on returning to the same place you’re stuck with a currency you don’t want and can’t use. Obviously Dollars are portable, but only with limitations and cost.
Gold doesn’t do any better when it comes to portability. Yes, you can store a lot of value in a relatively small coin, but large amounts are very difficult and impractical to move. If you try to use their derivatives (such as gold-backed paper etc) their portability goes up but only at the cost of having to trust a third party to be a responsible steward of your actual shiny stuff. “If you can’t hold it — you don’t own it” as the gold bugs say — but “If you have to hold it — it’s a pain in the arse” as everyone else says.
Enter Bitcoin, which perhaps has the ultimate answer to the question of portability. As Bitcoin is a purely digital, decentralised currency, you can effectively travel anywhere with an unlimited amount of purchasing power. You can even memorise a passphrase and travel around with an equivalent amount of millions of dollars (called a “brain wallet”), which you can redeem as soon as you’re back at a computer or smart device.
So there you have it — when it comes to portability, Bitcoin is the Robert De Niro of money, whereas Gold would play the Christmas Tree in the monetary Nativity play…
Distant runners up: Gold and Dollars (for different reasons)
Nominations for money having the BEST STORE OF VALUE
This is a big one. This is like the Best Actor gong in the real Oscars. If money can’t hold it’s value it makes for a very poor currency. Just as the Best Actor winner in the real Oscars depends a great deal on the quality of the film they’re starring in, the Best Store of Value MOSCAR winner depends just as much on context as well.
Also, like in the real Oscars, there’s always a nomination that has zero chance of winning — and in the MOSCARs — that prize goes to fiat Dollars. Whilst their value can appear to be constant in the short term, and even appear to go up in a recession/depression (as Dollars are effectively ‘destroyed’ in periods of deflation and briefly become more scarce), over the long term, their real value has plummeted (in fact, since 1913 the US dollar has retained between 4 and 5 cents of equivalent purchasing power). Dollars are an awful store of value, constantly leaking purchasing power, then occasionally collapsing into deflation, before reflating and losing their value even worse than before, for all but a few structurally advantaged market participants. The Dollar is the Danny Dyer equivalent of a monetary store of value.
Worse still, as far as integrity of money is concerned, there are HUGE beneficiaries of devalued currency, and HUGE losers within the same system. Inflation gradually punishes savers, low income earners, pensioners but it gradually rewards people in large amounts of cheap debt, the currency issuers (banks and governments), and those with large amounts of tangible assets.
Dollars can also be created to infinity by the central banks on a whim to bail out banking/political criminals, or counterfeited fairly easily by more traditional criminals in a way that is harder to do with Gold and nearly impossible in Bitcoin.
For these reasons and more — Inflation is the principal cause of modern wealth inequality. Purchasing power is surreptitiously drained away from a majority of market participants (read: most of the 99%) to a small minority (read: some of the 1%).
The masses in their pain reach out to the taxation system to claw back some of their lost purchasing power — but that stick, more often than not, rebounds back on themselves as much as the people they’re trying to hit in a kind of fiscal Pyrrhic Victory. Like a bad Oscars host — we uncomfortably digress… But Dollars are not a store of value in anything but the short term.
Now the harder question is whether Bitcoin or Gold is a better store of value. Gold certainly has the track record, having maintained it’s purchasing power over millennia, whereas Bitcoin is relatively new and although price volatility is dropping meaningfully as it’s stakeholders grow — volatility of purchasing value is not conducive to a good source money. Naughty Bitcoin.
What if we reframe the question and ask: “What is a good store of value to it’s true owner?”. Does that change the situation? Remember that Gold is easily confiscated and outlawed by government (FDR’s Executive Order 6102 in 1933 did exactly that), and is actually fairly easy to steal Gold from someone and sell on without much trouble. Burglars do it all the time. It could be argued that gold has no ties to it’s owner, it’s indifferent to who’s hands it is in and whether the real owner has given consent to the transfer of ownership. This is an important feature of monetary value, perhaps deserving of it’s own MOSCAR one day!
Bitcoins are far better protected than Gold or Dollars by using encryption, pass phrases, security tactics (multi-signature & hidden wallets etc) and so on. Bitcoin is also decentralised making it nearly as impossible to destroy as Gold, and blockchain technology makes counterfeiting/”double spending” nearly impossible. By expanding the question Bitcoin may have the edge in this MOSCAR if “store of value” is redefined as “preservation of wealth” that accounts for theft, confiscation and legislation, as broader issues affecting value preservation.
Nice try Bitcoin, but as far as stores of value — you might be the Best Upcoming Money of Leonardo Di Caprio in Titanic, but Gold takes the gong as the timeless and immutable talent of Anthony Hopkins’ Hannibal Lecter in Silence of the Lambs. Congratulations — but watch out!
Dead last: Dollars
Close Runner up and one to watch: Bitcoin
Nomination money with a LIMITED SUPPLY
After the climactic battle for Best Store of Value, we take a step down to a more straight forward and predicable MOSCAR, something akin to Best Original Song in the real Oscars: money with a Limited Supply.
While central banks and commercial banks would like us to believe that fiat currency is scarce — the truth is the opposite. Not only are fiat currencies like Dollars capable of being created to infinity, if their supply is not increased parabolically — they collapse into a deflationary spiral. Dollars. Last. Again. Anyone seeing a pattern emerging here?!
Gold mining supply is on average a steady 2% a year give or take a percentage point, as extraction technology roughly compensates for the increasing scarcity of mineable Gold in the Earth’s crust. To all extents and purposes, Gold has a pretty damn limited supply — we’re just not sure exactly what the final number is, and theoretically there could be a lot more than we think. Ultimately, it’s an open ended question.
Bitcoins in circulation at the time of writing is about 15,700,000 coins, which is expected to grow to it’s upper limit of 21,000,000 by the year 2140, after which, no new coins can be mined. Hence: limited.
As such, we can say with some certainty that Bitcoin takes the gong for Limited Supply. Just like in the real Oscars, we have something that is sweeping the board…
Runner Up: Gold
Nomination for most DURABLE form of money.
This is a very similar MOSCAR to Store of Value, as factors affecting one directly affect the other. VALUE is to DURABILITY what Best Actor is to Best Actress in the real Oscars.
Depending on the denomination, physical dollar bills have a life expectancy of between 6 years for a $1 bill, and 15 years for a $100 bill (which also happens to be the most counterfeited note on the planet), but this is just bar room trivia.
Of our three contestants, the Dollar is the only unit of money that can actually be systematically destroyed (no, not by burning the note itself, although of course that is possible, but by paying off your debts). Fiat currency is LENT into existence via the magic of the fractional reserve banking system, and is destroyed by either paying off or defaulting on your debts. Crazy? Yes. Counterintuitive? Absolutely. Proof of Durability? Err, no — the exact opposite.
Gold is a beautifully inert element that can withstand all extremes the planet has to throw at it, and Bitcoin is equally durable in an alternative but impressive way: it is decentralised. You’d have to tear down the whole internet and all of it’s participants to be rid of Bitcoin, and no amount of transactions wear down the usability of the tokens in the system — they are timeless and indestructible.
The only way to effectively destroy bitcoins is to lose the private keys of a wallet containing some currency, making them visible on the blockchain, but impossible to use. All this really does is increase the value of the other coins still in circulation at the expense of personal stupidity but it is an important distinction to make. A very careless mistake could lead to something that is equivalent to destroying your purchasing power. At least with Gold — there is some hope of recovering lost loot, or sunken treasure! So a moron could destroy their wealth in Bitcoin, but might struggle with Gold, and all users of Dollars eventually destroy their currency by either paying off their debt or printing/borrowing it into inflationary oblivion — when burning bank notes is putting them to best use: as fuel.
Runner Up: Bitcoin
Nomination for most ACCEPTED form of money.
No award ceremony is complete with a controversial and undeserving winner that raises some eyebrows and grabs some headlines — in the 2016 MOSCARS that winner is Dollars for Most Accepted form of Money. It’s the Piers Morgan of currency: perennially popular and somehow has become the norm, despite numerous better alternatives, and just like Piers, no matter how bang average it proves itself to be, it just won’t die. It feeds off ignorance and human apathy. It cannot be avoided: Dollars win hands down as the world’s primary currency.
Gold used to have this title up until 1971 at the latest, when the last vestiges of hard currency were snipped out of the world’s monetary system. Nowadays, you’d be very hard pressed to find many places at all that would readily accept Gold or it’s derivatives as payment.
Bitcoin can claim to be making rapid, even viral progress in terms of it’s general use and acceptability — but there is still a very long way to go before cryptocurrency can be said to be more accepted than fiat. The early signs are beyond promising. Transaction volumes & capital inflows into Bitcoin is rising astronomically, more and more merchants are recognising the cheaper, superior alternative to receiving payments for goods in this way. There’s no reason why this trend is not set to grow and even pick up in pace. These phenomenons are rarely linear in nature Bitcoin’s rise the way John Green described falling in love: “slowly, then all at once”.
Summary of the 2016 MOSCAR Award Ceremony
As you can see, between Gold and Bitcoin we have met all the requirements of excellent quality money — and Bitcoin actually excels past other forms of money in 4 of the 7 total criteria making it arguably the best form of money overall.
Thank-you for you kind attention during the 2016 MOSCARs — see you next year!