Bitcoin isn’t money (yet)
Bitcoin is an attempt to create electronic money.
A head of lettuce may be more or less easy to sell than a horse.
Things are easy to sell when lots of people near you want them.
Usually a head of lettuce is easier to sell than a horse.
In many times and places throughout the world a piece of gold was the easiest item to sell.
Money is the word we use for the item that is easiest to sell
Economists call it a “medium of exchange” because an item that is most easy to sell will be accepted in a trade in order to get something else later. Money is also useful because it makes prices easier. A price is the number of items that are accepted in a trade. When people traded sheep, lettuce, gold and horses for one another everyone had to remember that a horse was worth 300 heads of lettuce or 10 sheep or 30 pieces of gold and sheep is worth 3 pieces of gold or 10% of a horse or 30 heads of lettuce. Once it became obvious that everyone would accept gold people could simply remember that a horse is 30 pieces of gold, a sheep is 3 pieces of gold and you can get 30 heads of lettuce for one piece of gold. Economist call this use of money a “unit of account.”
Although gold has been used as money other items such as sea shells, beads, beaver skins and government money have also been used because they worked best at the time. Bitcoin is an attempt to create a new thing that works better than any of these.
Here are some attributes that make an item more likely to become money:
1. Long shelf life — you want to be able to save it until your ready to sell it.
2. Hard to fake — if you are afraid of getting stuck with a fake you won’t want it as much.
3. Easy to divide — it’s easier if you can break it up in case you don’t want the whole thing.
4. Hard to steal — if an item is small enough to hide in your pocket it is harder to steal because on one knows you have it.
5. Easy to move — if an item is easy to move it is more desirable than an item that requires a lot of work.
6. Cheap to store — large or fragile items are harder to sell than small durable items.
Bitcoin will become money because:
1. It never goes bad — its electronic and backed up on millions of computers around the globe.
2. It is impossible to fake. If every atom in the universe was used to make a computer the computer would not be strange enough to make one fake bitcoin.
3. Bitcoin can be divided easily because it’s electronic.
4. It is impossible to steal bitcoin without a secret word that is too big to guess.
5. It can be transported between any two people on the planet in less than a second very easily.
6. It is very cheap to store — it is electronic.
To make this easier to understand imagine that a new material was discovered called Satoshium. Satoshium acts in very strange ways.
It won’t move unless it’s owner speaks a secret word that only he can know.
Satoshium is also rare. Only 21 million kilos of it exists in the universe and it will take a lot of work to find it all. It moves at the speed of light between owners. It is not strong or pretty or useful for anything. At first Satoshium wouldn’t have much value. A few curious scientists would want a little so they might give it to each other for free. Some people would find it interesting because they know it would be really useful as money. Once its usefulness as money became clear many more people would want to buy some because it would be very valuable if it became money in the future. Eventually Satoshuim would become money because it works better than anything else we have found in the universe. Satoshium is exactly like Bitcoin except Bitcoin is real. The only other difference is that bitcoin is digital, but it has the same properties, it behaves in exactly the same ways, as our fictional Satoshium.
Right now it is not easier to buy things for bitcoin than government dollars, but many people are collecting it because bitcoin will be much more valuable when it becomes money.