Bitcoin Is Artificial Money — and for Some That’s a Problem
Why do some people cite Bitcoin’s design strength as its weakness?
Occasionally, usually when speaking to new people about Bitcoin, I get comments along the lines of “The problem with it is that it’s entirely artificial.”
I’ll be honest — even when this comment, or a close approximation thereof, is raised as an an “objection” by someone, it’s never really registered with me. By that I mean I have literally skipped over it as if it was never stated in the first place because, well, of course it is.
However, having had the comment come up once again today, I finally — and quite unexpectedly — connected the dots about what this objection really means.
You see, this, as it turns out, is probably not a slight against Bitcoin itself. It’s more likely that this is an attempt to try and compare it to something like gold.
Bitcoin vs gold … yawn
We’ve been here before of course. I have written on this subject many times, endlessly comparing the two as a means of hedging against inflation, storing value and a medium of exchange.
My conclusion (spoiler alert) has always been that gold may be tried and tested over thousands of years, but Bitcoin is superior in almost every category in practical terms.
Of course, I am often accused of being biased, and while I do agree that it’s probably impossible for any human to write anything entirely unbiased no matter how hard you try, I still maintain that the world is ready and the time is right for Bitcoin to not only flourish, but to a be real, hard money alternative going forward. And, while there are still detractors and risks, I am certainly not alone in that school of thought.
However, now that I have fully acknowledged the statement and am dealing with it head on, it raises two interesting points:
- Is it significantly relevant that Bitcoin is immediately compared to gold rather than fiat currency in these cases?
- Since all modern money systems are entirely man-made and a product of the technology of the time of its creation, why is Bitcoin being singled out as being different because it is also “artificial?”
Of course it’s also possible that this is just a lazy objection thrown out randomly by people who haven’t really thought about it, but since it’s not uncommon, it’s surely worth a look.
Why gold and not fiat?
This really interested me, especially as this comment always comes from people very new to the concept or people who think they know what it is, but have not yet really grasped what they’re dealing with.
Bitcoin was, first and foremost, designed as a currency. At the moment and in its current form, the digital currency’s detractors gleefully point out that it doesn’t work terribly well in fulfilling that task, and it’s a point I concede, at least for now.
The fact is that when the Bitcoin network gets very busy, it simply can’t cope. Fees and confirmation times go through the roof and it just isn’t sustainable should more than, for example, a few tens of thousands of people try and use it simultaneously.
This, theoretically, will be solved by the Lightning Network in due course, but full deployment is still some time off and there a number of security concerns that need to be fixed, or at least mitigated, before that can happen.
Despite this element of Bitcoin being a work in progress, the store of value element of it is working very well, at least in my view. As “digital gold,” Bitcoin’s performance is nothing less than spectacular and carries all the advantages of a truly scarce asset without any of the disadvantages.
But it takes someone who has been in Bitcoin a while to understand this fully, so the fact that this objection about it being artificial is being compared to the supply of gold rather than the supply of fiat is curious. And yet it appears that this is the case.
But why? After all, gold’s dis-inflationary supply curve is actually very close to Bitcoin’s, but with one important difference: we don’t actually know how much gold there is, only that it’s a finite amount.
Why, therefore, would a “natural” asset like gold, with all the uncertainty that comes with that supply line, be seen as a preference over Bitcoin whose supply is fixed and known absolutely for the next 120 years? Why, in this case, is “non-artificial” perceived as better?
I’m guessing the answer is simply buried in human psychology somewhere. After all, Bitcoin is not usually something you “get” immediately, it takes a little time.
So, until that happens, your brain will try and associate it with something it knows that seems similar and, since money is too big a stretch to start with, gold seems a natural and logical compromise.
It’s just a theory, but it seems to fit the facts.
Money, like society itself, is always evolving.
In fact, all the forms of money that have ever existed have been a product of the technology available at the time it was created.
So, for thousands of years, simple, but scarce, items were used as a medium of exchange, such as sea shells, some grains, beads and similar. All of these things, however, had significant limitations and, like everything that has a limitation, we humans find a way to make it better.
And we have always done it with technology.
As an example of this, consider the first minted coins. Once the process of how to do this was known, coins were minted in large numbers and became commonplace around the world.
Eventually, early forms of promissory notes emerged when it was understood that it was more convenient to store whatever backed the those notes (usually gold) in one place and transfer ownership without have to move it.
Technology also shaped the financial processes outside of physical money itself. For example, by the mid-to-late 1800s, the proliferation of the telegraph and the train network meant that communication between banks was much faster.
Therefore, it was possible for banks to speak to each other and debit or credit accounts with each other via paper records rather than physically moving coins, notes or bullion between them.
Later, when the gold standard ended fully in 1971 and all currencies became pure fiat currencies for good, technology made it easier to trade between them and increase levels of fractional banking.
In fact, when more money is required by governments (such as we have seen recently) it no longer even needs to be physically printed, instead having an entry on a computer screen amended to show a new number.
Make no mistake, all currencies used in the industrialized world today are definitely not natural — they are 100% artificial — and entirely backed by no more than the word of the government issuing them.
Every financial instrument we use is entirely artificial and there is no one alive (in an industrialized society) who has ever known anything different.
Bitcoin is simply the next logical application of the available technology. And, arguably for the first time since the original gold standard was in widespread use, it is a real, hard money alternative.
In that context and with that understanding, it seems odd that some people would reject Bitcoin purely on the basis it is “artificial,” and yet it happens. There must, therefore, be more to it.
Who says … ?
I believe this is fundamentally less about being “artificial” and more about “trust” and some of the follow up questions thrown out by the same objectors give us some clues along those lines:
- Who says only 21,000,000 coins exist?
- Who says that can’t be changed?
- Who says I’ll definitely get my money if I send it to you?
- Who says ….
The list goes on — but you get the picture.
In my view, the idea of being artificial is being confused with the idea of control. It’s clear who controls our fiat money and, as flawed as it is, it’s more or less working as it should, at least for now.
But it’s not immediately clear where these entirely —and apparently arbitrary — numbers and behind-the-scenes processes are coming from in terms of Bitcoin.
It’s almost as if someone made up the whole thing from scratch without a shred of reference to what already exists in the world … which is, of course, exactly what happened and exactly what it was designed to do.
That means Bitcoin is an entirely “designed” currency, thereby bringing us full circle back to the original objection. But does that help us in any way?
The Bottom Line
Now that I have properly acknowledged that the objection even exists and, hopefully, have some understanding why it’s here, I’m hopeful it’s one that can be easily dealt with.
Money evolves as we, technology and society evolve. It would be ludicrous, for example, for our modern society to still be using sea shells as a medium of exchange and such a thought is unfathomable.
But, at a time when we are already used to using money that primarily exists in digital form — Apple Pay, PayPal, even gift cards and online bill payments — using Bitcoin is hardly a stretch.
The subtle difference, I suppose, is that all these services evolved based around the money we used before and are just more efficient ways of moving the same stuff around.
But like anything that reaches a natural limit of efficiency, it is usually replaced by a step-change technology. Bitcoin provides the solution to both the systems required and the unit of currency itself.
In other words, Bitcoin is a complete solution for the modern, digital world.
And let’s face it, that was never going to happen “naturally.”
Want articles and up to the minute analysis and opinion in your inbox? Why not subscribe to the ‘Bitcoin and Global Finance’ newsletter? Receive special offers and insider info, unsubscribe at any time.
If you found this article helpful, you may also like these:
Written at the very start of 2020 — how am I doing so far?
What if everyone got together and spent their second stimulus check on Bitcoin — Is it even possible? Is there even enough Bitcoin? Would it be a good thing or a bad thing?
What Would Happen If the Second Round of Stimulus Checks Were Spent on Bitcoin?
A fascinating & entirely theoretical study into the effects of a coordinated mass movement
Why this is getting harder to do as each day goes by … and why it’s more important than ever:
Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics. This story originally appeared in Voice.com
Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.