Do you ฿elieve ?
Let’s play a little game. It’s very easy and should offer very little surprise.
Below is an excerpt of an online article found on the website of a very well-known global association entitled : “Back to Basics — What Is Money?” We’ll skip the name of the association right now and the intro in order to move straight down to the part titled “Many monies” in which alternative monies that have been known to be used over time are briefly described. Read the following two paragraphs carefully and try to find the two words that we have erased twice. (replaced here by XXX and YYY).
“At first, the value of money was anchored by its alternative uses, and the fact that there were replacement costs. For example, you could eat barley or use peppercorns to flavor food. The value you place on such consumption provides a floor for the value. Anyone could grow more, but it does take time, so if the barley is eaten the supply of money declines. On the other hand, many people may want strawberries and be happy to trade for them, but they make poor money because they are perishable. They are difficult to save for use next month, let alone next year, and almost impossible to use in trade with people far away. There is also the problem of divisibility — not everything of value is easily divided, and standardizing each unit is also tricky; for example, the value of a basket of strawberries measured against different items is not easy to establish and keep constant. Not only do strawberries make for bad money, most things do.
But XXX YYY seemed to serve all three needs: a stable unit of account, a durable store of value, and a convenient medium of exchange. They are hard to obtain. There is a finite supply of them in the world. They stand up to time well. They are easily divisible into standardized coins and do not lose value when made into smaller units. In short, their durability, limited supply, high replacement cost, and portability made XXX YYY more attractive as money than other goods.”
We honestly don’t expect anyone not to find the answer, but if you need a tiny hint, try to think of what this little guy might say.
That’s right, “precious metals” was the correct answer and we have all seen hundreds of examples in our various museums, of how almost every civilization has been able to use precious metals as a form of money. But what if we were to replace those two words by bitcoin?
Bitcoin is still new enough that we believe any kind of definitive judgment on its intrinsic properties as a store of value might be preposterous and laughable in a few decades and we have already touched upon these topics in some of our previous posts (here, here or here). But what about some of its other characteristics?
They are hard to obtain : the only way of obtaining bitcoin other than a straight up purchase (of any kind) is to mine them. Mining requires a lot of computing power, in the form of specialized ASICs, enough technical skills to use them, and a source of cheap electricity. This isn’t an easy feat and all you need to do is take a look at how this difficulty has increased over time to see that mining is getting harder and harder.
There is a finite supply of them in the world: 21M total supply ever. Check.
They stand up to time well: bitcoins are not perishable goods. They inherit two terrific properties of digital objects in that they can theoretically be “stored” indefinitely and the stronger the network effect is, the more secure that “storage” will be.
They are easily divisible into standardized coins and do not lose value when made into smaller units. A cent, a dime, a dollar, a grand are just some of the denominations of the US dollar. There are actually 6 different values for coins and 7 values for US bank notes for a grand total of 12 different denominations as $1 can be held as either a coin or a note. Take a look at your bank account and you’ll see a number with two digits after the decimal ranging from 0.01 to Bill Gates type of numbers. Bitcoin offers the same functionality and more, as you can actually go down to a Satoshi, which corresponds to 0.00000001 bitcoin (today that corresponds to $ 0,00002639).
“In short, their durability, limited supply, high replacement cost, and portability made bitcoin more attractive as money than other goods.” We wish we would have written this, it sounds great. Doesn’t it?
Now unlike barley, peppercorns or strawberries, bitcoin is not consumable and unlike gold or other precious metals, bitcoin cannot be transformed into other objects such as watches, or any type of jewelry.
Metadata & Colored Coins
But bitcoin has one interesting characteristic that would tend to make it fairly unique in the currency space; it can store or hold some data. Imagine you met someone last night and that person left you his or her phone number on a $1 bill. Obviously that bill can be spent and holds exactly the same value as any other $1 bill. However, you might value the bill that holds the phone number more just because it has that little something extra — let’s say a chance at true love. Well bitcoin works in the same way as you can actually use the OP_RETURN script to hold data. Now what could you possibly use that for?
The OP_RETURN in the Genesis Block, the first ever bitcoin block that was mined includes the following text. “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” Now look at the cover of the Times on that same date. Can bitcoin be used to prove that something existed, happened, was owned at a certain point in time while also ensuring that it be held indefinitely? (source - https://en.bitcoin.it/wiki/Genesis_block)
Imagine what value this feature can add to bitcoin and try to see how it instantly differentiates bitcoin from other know currencies.
The original article that we quoted can be found on the International Monetary Fund’s website, here. We’ll leave you with one last sentence of that article to ponder: “Countries that have been down the path of high inflation experienced firsthand how the value of money essentially depends on people believing in it”.
Do you Ƀelieve ?