What Gives Bitcoin Value (Pt. 3) — “Good Money”
Can Bitcoin Be Considered “Good Money”?
This is part 3 in a series on what gives Bitcoin value. Part 1 was on what gives a currency value, while Part 2 was on how “need” and “trust” factor into a currency’s usefulness. In this third and final part, I will go over what the generally understood characteristics of “good money” are and how Bitcoin stacks up against gold and fiat. For context, this started as an email exchange with a friend skeptical about cryptocurrencies, which I turned into this series of posts (the first two parts have some of the original questions).
What makes good money?
To close out the discussion, I wanted to go a bit deeper into something that I start off my Hack Reactor talk with as I think it goes to the heart of your misgivings: the characteristics of what makes good money.
As both historically and academically understood, money should be:
1) Fungible
2) Non-counterfeitable
3) Portable
4) Divisible
5) Durable
Less important but still vital are:
6) Widely accepted (or have a history of acceptance)
7) Limited in quantity
Historically speaking, holding a monopoly over a medium of exchange, which is how I would characterize the distrust in it being duplicatable (note that the system can be duplicated but a unit of Bitcoin itself is harder than almost anything in existence to duplicate, i.e. counterfeit), is not one of the primary characteristics of making good money. In reality, I think it’s more accurate that that virtual or perceived monopoly (which not even the USD fully has) comes about over time, earned through its relative strengths in the above 7 characteristics.
How does Bitcoin stack up then?
Compared to fiat, Bitcoin is either equal to or superior to fiat currency in the first 5, far behind in #6, which naturally must be earned over time anyway (and continues to gain with each day it survives), and far superior at #7.
Compared to Gold/precious metals, Bitcoin is behind in 6 (as is fiat), equal in 1, 5, and 7, and superior in 2, 3, and 4.
As I see it, the two biggest obstacles for future global adoption of Bitcoin specifically are either another superior crypto system coming in and taking its place or just the factor of time (i.e. it has to earn #6). Technologically speaking though, digital currencies backed by cryptographically secure and auditable code is a far superior system to paper money as it is cheaper, safer, and more efficient to use than what we have today. Just as publishing, music, movies, and even politics had to come to terms with “the democratization of information” as I called the effects of the Internet in my talk, so will the financial institutions, markets, and governments have to learn how to co-exist with the “democratization of value”.
Frankly, with new ETFs being proposed every week, governments like Japan and Australia now officially recognizing Bitcoin as a currency, banks integrating crypto holdings into their legacy accounts, and crypto-backed IRAs coming onto the market, I think we’re a lot closer to that happening than many might think.
Gold backed systems took hundreds of years (and militaries) to earn trust. USD fiat took a couple hundred years of stable politics and a few false starts to earn the trust it has today, with full fiat USD having a continuous track record now of around 50 years.
It’s true that Bitcoin is young, still just less than 10 years old. It was a completely novel kind of currency hypothesized by a pseudonymous identity going by the name of Satoshi Nakamoto, presented as a white paper on online Cypherpunk forums in 2008. In January 2009, the Bitcoin Genesis Block was mined kicking off the Bitcoin network and launching what will likely be seen as one of the greatest financial experiments in history, but at the time was just a few servers in someone’s garage. New users joined the network voluntarily, contributing computing power, adding to its security and decentralization and becoming increasingly more distributed due to its reliance on decades old computer science research and proven cryptography. On May 22, 2010, Bitcoin was attributed a dollar value for the first time ever when a user on the forum Bitcointalk.org, developer Laszlo Hanyecz, paid 10,000 BTC to another user for two large Papa Johns pizzas worth $25, giving it a value of about a quarter of one cent per Bitcoin (May 22nd is now celebrated as “Pizza Day” by many Bitcoiners).
Today, Bitcoin has grown into one of the most widely distributed currencies in the world, with a market cap of over $75bn at an exchnage of ~$4,500/1BTC and an M1 money supply (as denominated in USD) ranking in the top 50 by value of all global currencies (sitting around #43–45 with Vietnam, Morocco, and Israel as of August, 2017). You can purchase it and exchange it in most major countries around the world, buy anything on Amazon with it, and even spend it with a Visa backed debit card!
Overall, I’d say the trend is looking pretty positive.
