Thinking about money

Money is integral to all of our lives, yet we spend so little time thinking about where money comes from, why it exists and whether its current form is optimal.

In this post, we’ll be exploring the concept of money and how it applies to the world of cryptocurrency.

Where to begin? Lewis Carrol put it very simply in Alice in Wonderland;

“Begin at the beginning,” the King said, very gravely, “and go on till you come to the end: then stop.”

Since time began we have needed a means to transact with each other. We’ve gone from swapping things for other things, to using pieces of paper.

Often in life its healthy to ask why questions. When it comes to money, it makes sense to ask this particular question:

Why should I be willing to accept $100 from someone else for something I find valuable?

The best reason I arrive at is because we believe that (a) someone else will accept that $100 from us, and (b) $100 will have roughly the same value tomorrow as it has today.

Over time, we’ve learned some lessons about what makes money useful:

Money should be divisible — because it needs to be traded for the least valuable object in our world. Being able to split dollars into cents helps.

One unit of money should be transferrable for another unit (fungible) — we don’t want to waste time arguing about whether your $1 is worth the same as my $1, we trust that they are.

Money should be durable — so that it doesn’t break down or disappear when we carry it around.

Money should be portable — so that you can take your money with you.

Money should be scarce — if it’s possible to copy money, then you wouldn’t be willing to accept it for goods and services that cannot be copied.

Money must be acceptable — If you and I aren’t willing to accept something as money it becomes worthless very quickly.

Our existing forms of money are a decent medium for the above, but paper money has a few problems. Most importantly it isn’t truly scarce and as long as the number of dollars increases, we can expect each dollar to become less valuable. Over a long enough timeframe all paper money is worth zero. We fix this problem (or convince ourselves that we have) by trusting our government to guarantee that our money is worth something.

We accept this situation, without thinking about it, because we can’t easily think of a better alternative. There are good reasons for governments to control the supply of money (to control inflation), but there are many terrible implications too (quantitative easing).

Bitcoin was built on the idea that there is an opportunity to make a money system that is better for everyone. To achieve this, its creator developed a mathematical solution that doesn’t require anyone to control the scarcity of money.

There are some good introductions out there. I suggest Tess Rinearson’s simple explanation using emoji’s here (I am going to be borrowing heavily from her in the next few posts).

I won’t rehash the above introduction, but let’s summarise so that we are on the same page. We can gather that bitcoin tries to solve the problem of how I transfer data to you.

• We’ve found it useful to copy information from each other over the internet — great for sharing documents, songs, videos and other things that don’t need to be rare
• Transferring data from me to you is not the same as copying data — copying means we both keep a copy, while a transfer means I no longer have the data I am sending you
• We’ve had to trust 3rd parties to transfer data in the past — for things that should be rare (like money) we trust a middle man (bank) to make sure that when I send you a dollar, I don’t keep a copy of that same dollar
• The idea of a decentralised blockchain *potentially* removes the middle man — When the record of a transfer from me to you is recorded in a blockchain, it can’t be reversed or edited by us or anyone else. We can trust the math instead of the middle man

The implications of the above are that bitcoin can work much more effectively as a form of money. Bitcoin has the potential to fit all of the characteristics of money we enjoy:

Bitcoin is divisible — into 0.00000001 of a bitcoin (a satoshi)

One unit of bitcoin equals another — and if it is adopted by lots of people, it will have the same value everywhere

Bitcoin is durable — the blockchain ensures that it is not possible for bitcoin to be destroyed

Bitcoin is portable — if you have your private key with you (even written on a piece of paper)

Bitcoin is scarce — there will only ever be 21mn bitcoin and no one person or government should ever be able to change that

BUT is bitcoin acceptable? Only if we see widespread adoption, will it be possible for bitcoin to work as a currency. Many people think this will never happen, while some are more optimistic.

To get a sense of the level of adoption of bitcoin right now, take a look at this infographic, which shows all of the world’s money in one graph. There is some way to go before we can begin to call bitcoin a globally relevant money.

So far we have discussed the concept of money and explored whether/how bitcoin could fill the same shoes. In my next post we will explore some of the reasons that I believe we should pay attention, whether bitcoin is used as money or for something else.