How can Bitcoin be Money?
The Six Case for Bitcoin as A Global Currency
Wait, What is Bitcoin?
Bitcoin is the world most noteworthy and most popular cryptocurrency. Released in 2009 by the pseudonymous Satotshi Nakamoto — no one is sure of his/ her/ they’er identity, Bitcoin has been at the nexus of technology and currency for the past decade. Seen by some as a seminal means to a global currency, Bitcoin has its equal share of detractors. Opponents of Bitcoin have labeled it from everything from a Ponzi-scheme and the latest version of snake oil, to the digital equivalent to the black market economy that facilitates the most unscrupulous of activities.
Proponents of Bitcoin view Bitcoin as a liberation of money and accept this freedom of finances, (almost) free of transaction — and absolutely free of boarders — as both the future of money and a means of transaction that could revive fair trade and a resurgence of the parter system as we once knew it, way back when….
Cryptocurrency ?
A Cryptocurrency is a digital asset, or currency, whose existence and transactions are secured by cryptography. This powerful security tool makes it possible to make trustless ;no needed to rely on trust, transactions of these digital assets over the internet. You are probably reading this book because of your interest in the cryptocurrency, bitcoin, which is the most popular as of the time of this writing.
A good starting place to understand cryptocurrencies is by comparing it to something that we are all familiar with, money. Money, in its many distinct forms, possesses unique characteristics that are agreed upon and recognized by the masses that makes it an accepted medium of transfer. It has been common place for hundreds of years now to acquire goods and services with the value backed physical instrument, no matter what form it was in. Just as technology has had its hand on changing, for better or worse, most things in our lives, the way we transact has not eluded technology’s influence.
The idea of transferring value, via a digital medium, is not a new one. Digital currencies have tried and failed in the past, but have gained monumental traction with the 2009 release of Bitcoin. Since then a plethora of other cryptocurrencies, or Alt-coins, have come on the scene. These Alt-coins are akin to bitcoin in that they use the blockchain technology as an integral component of their architecture, but are quite different in structure and function .
Is Bitcoin currency?
Taking a quick look at the headlines it is not easy to tell. If you read the headlines that taut bitcoins incredible growth and the speculation around it, it would appear to be a traded commodity. But flipping the pages to the international business section of that same publication might change your mind.
Where do cryptocurrencies like bitcoin derive their value? Money’s value was linked directly to gold (The Gold Standard) until the 1970s. Its current valuation is complicated, but a large part of it is trust. What backing or trust is there for cryptocurrencies, even the most popular, bitcoin?
This book will go into a brief history of money, bitcoin, and the common and distinct components that give both their value. It will also give us ideas about their value, use cases and how the technology that underly them have the power to drastically change how we do things.
1. Fungibility
For something to be fungible it has to be recognizable for its overall value and have not more value, individually, than an item of the same composition. So, for example, all US notes/bills, regardless of their denomination, are fungible; a $20 bill from Bill Gates will not buy you any more groceries than a $20 bill out of a random ATM. Equally, one piece of gold of the same weight and percent purity has equal value of any other piece of gold of the same weight and purity, regardless of where each piece was minded. Without fungibility, you cannot have a viable and stable currency.
2. Divisibility
Imagine grocery shopping with a brick of gold. Not only would it be back breaking lugging that heavy piece of metal around the store, but how would the cashier make change of it after she rang up your $100 of goods? Even if we used another item of value, lets say a shell, as Joshua Seims points out in ‘What Drives the Value of Crypto Currencies? ‘ , ” What if you want to buy something that costs less than one shell? They don’t divide easily.”
In America, the USD is only has a five fold range of divisibility; our greatest denomination is the $100 bill and our lowest is $0.01. This may not seem like a small range because most everyday purchases can be handled with a manageable amount of tangible currency, but try buying something in the five-figure range with cash… Pretty inconvenient.
Bitcoin, on the other hand, because of its significant price and eight fold divisibility, called a “Satoshi” (0.00000001 BTC) , just a few bitcoin can be used to make substantial purchase
Being able to have identical, producible, yet non-manipulatable denominations of a greater currency that is appropriate for the purchase of / can withstand high volumes of trade, is characteristic that is paramount in a would-be viable currency.
3. Record of account
Having a basic unit to be able to establish market value for goods and services is what a record of value does. For us to agree on how much a tomato or bag of rice should cost, we first have to agree on the value within the proposed unit of value. If I do not believe in the dollar bill and it value as 100 pennies, we will have no basis on which to find and determine value within an ecosystem. The bitcoin community and its rate of adoption is evidence that, along with the markets its used in, of its fidelity as a secure record of account. As long as the community remains stable and the price grows less volatile, I think the the case for Bitcoin as a good record of account remains strong.
4. Store of value
There was a time when every piece of currency in circulation represented an equal part of gold that was stored in the national treasury. The dollar bills that were being passed around through commerce were back by the value that was stored in its gold representative. A gold bar would buy a common or luxury good 200 years ago just as it would, more indirectly, today. Therefore the value store is not just wide adoption and belief about also in the instruments temporal, long term, or generational weigh in value. Vacating the Gold Standard in 1976 under president Nixon, the US dollar and subsequent currencies that are based off of it, were primed for inflation; as an infinite supply of currency can be printed.
Bitcoin, with its finite supply of 21 million “coins” is by nature deflationary. This allows for a secure store of value, and relative to inflationary assets, appreciation absent of any direct market influences. This fact, amongst others have cause some Bitcoin enthusiasts to refer to it as “Digital Gold”.
5. Durability
I have had some US notes that have seen better days. I have even been passed bills that had a ripped corner or were marked up a bit. Although paper is not the first material you think of when you think of a tough material, there are bills, the $100 for instance, that has the durability to stay in circulation for up to 15 years*.
As stated above, passing pieces of chipped shells around in an economy would not prove prudent. A case for the durability of a currency is not hard to make. Although this is probably the least compelling case on this list as fiat currency is slowly but sure being replaced by digital transactions, I have gotten my fair share of ripped, taped, and partial bills to realize that the issues with fiat durability is not one to be completely ignored. Bitcoin, as a digital asset, obvious evades these issues completely.
6. Portability
For a value to be transferred physically, the instrument of transfer has to be , not only durable, but manageable. The US dollar weighs approximately one gram, so passing it is effortless, for even a small child. Bottom line is: the negotiations of the transaction should be the focus, being limited by the physical passing of the instrument should not be a barrier for trade. Bitcoin is recognized world wide and can be exchanged into most local currencies without a massive reduction/adjustment in conversion amounts.
So, is Bitcoin “Money” ? Many who take advantage of access to digital transitions and recognize the fiat nature of the USD are still reluctant to fully commit to the idea of fully converting to a digital currency. Those who embrace the ways technology has democratized the way that many things are done, find adopting a digital currency as “the” national, or even global, currency a natural consequence of progress. So, is Bitcoin fit enough to be a currency? Does it have the backing to be the worlds first global currency? We will have to wait to see what the world decides.
