Is Bitcoin money, a commodity, an asset, or just magic internet fun coins? Ask a lot of different people that question and you will get a lot of different answers, but ask intelligent people who have studied money and Bitcoin and you will get one answer - Bitcoin is a superior form of Money. Similar to gold, Bitcoin wears many different hats. It can be classified as an asset and a commodity, but at its core it is money and this is universally agreed upon for the distinct characteristics it possesses. In this article I am going to walk you through the framework for understanding why Bitcoin is the best money around and why having a central entity control the money supply is inherently risky.
The first step in understanding Bitcoin is to understand what money truly is. Money is such a fundamental necessity in life, yet most people do not know what it is. Have you ever thought about what money is? What the balance in your bank account represents? How long the US dollar has been around? If you are like 95% of people the answer to the question was probably a no. Money is not a topic you learn in school nor is it something you are ever forced to think about (although I hope that in light of recent economic events you are), yet it is something you spend your whole life working for. Trading your most valuable asset (time) for something you do not fully understand. To most people money is simply the US dollar or whatever fiat currency (paper money) their government issues that they can use as a medium of exchange. In reality that is just the most popular form and use of money at this point in time. You see, money has come in many different forms over human history and it is crucial to understand why these different monies came and went throughout time. Using that framework, rooting your thinking in the past but also stepping forward to the future you will be able to see the value of Bitcoin and why it is the most superior form of money this world has ever seen.
The History of Money
In the earliest days of human society, barter was the way in which value was exchanged. Trading one good or service for another was the only way we knew how to exchange value. As you can imagine this was a very inefficient way for us to exchange value. As our societies and economies became more complex we required a more advanced way of exchanging value, and preserving said value. This is where using a medium (money) came into play. We realized we could use a physical medium (money) to initiate the transfer of value and even use that medium (money) to store value for later use. This medium (money) has taken many forms over human history such as shells, salt, cattle, rare stones, gold, etc. At the time of their prominence as a form of money, these items fulfilled five distinct characteristics. Some better than others but all of them fulfilled the characteristic of being SCARCE. These items were hard to produce and were not abundant in society, thus they were highly valued. The exception to this framework is fiat currency (paper money). Fiat is not scare but it is able to function as money because the governing bodies around the world make it so.
To better understand how these different monies emerged let’s look at how gold, Bitcoin, and Fiat (US dollars) fulfill the characteristics of money. You can use the chart below to visualize as we go through each characteristic.
Durability — How durable is this good? Can it be used in exchange many times over and still hold its value over many years?
- Gold durability is great. It has been used for thousands and thousands of years while retaining its physical properties.
- Fiat is fairly durable. Sure, they can rip or be taken out of circulation but for the most part it fulfills the characteristic of being durable. Today most transactions are done online so the durability has increased for fiat and will increase even more once central banks issues their own digital currencies. In the grad scheme, unbacked fiat monies like the US dollar have only been around for about 50 years so they have a long way to go in order to match gold durability.
- Bitcoin is infinitely durable as it can be transacted with over and over millions of times without losing any of its value due to its digital nature. Bitcoin has only been around for 11 years so it is hard to give it a definite position in the durability pecking order. The longer Bitcoin is around the more it will become universally agreed upon that it is never going away, similar to how the internet is thought of today.
Divisibility — How divisible is this good? Can it be broken down to facilitate smaller transactions?
- Gold can be broken down to ounces or grams but this is labor intensive and does not compliment a complex economy/society. This was a major reason fiat money was created.
- Fiat is relatively divisible. You can own $100 in many different forms. One hundred $1 bills, five $20 bills, etc… Fiat solved for golds lack of divisibility.
- Bitcoin is divisible down to the hundred millionth. So theoretically you could own and send .00000001 of a Bitcoin and transfer any amount of value, large or small. This makes Bitcoin the most divisible form of money in the world.
Fungibility — How fungible is this good? One unit of the good should be interchangeable with another of equal quantity.
- Gold as long as it is real when melted down holds the same exact elemental properties all across the globe.
- Fiat is relatively fungible. However, counterfeiting has always been a problem with fiat currency. There have also been instances like in India when the government unexpectedly decided to take the 1000 and 500 rupees out of circulation. These fiat bills started trading at a discount as people rushed to get rid of them. Digitizing the currencies will help improve fiat fungibility.
- Bitcoin fungibility is one of its minor downfalls. All bitcoins are created equal however since the general ledger or blockchain of Bitcoin is public and verifiable it can be seen if certain coins are used for illegal or frowned upon transactions. For instance, if someone used 10 Bitcoins for a terrorist activity those coins would become “tainted” in a sense and no one would want to possess those coins anymore. (anyone who tells you Bitcoin is only good for doing illegal stuff on the internet doesn’t actually understand Bitcoin). Privacy is actively being worked on and is a main priority for ₿itcoin development.
Portability — How transportable is this good? The good must be easy to transfer and store.
- Gold is not great at this. You can carry around gold in your pockets but that is cumbersome and transfering gold in our complex global economies is not feasible. This is the other main reason fiat money began being used in society.
- Fiat is easily transportable. It can be taken with you anywhere in the world in a wallet or pocket, however carrying larger sums becomes a problem. Today dollars can be transacted with around the world via the internet banking systems, making it extremely transportable.
- Bitcoin is the most transportable form of money humans have ever seen as it is digitally native and can be sent anywhere in the world with the push of a button. As ₿itcoin continues to develop, it is becoming faster and easier than ever to transact with.
Scarcity — How scarce is this good? Is there unlimited amounts of this good or is there a finite supply? The good must not be abundant or easy to obtain or produce.
- Gold is very scarce. There is a very limited supply of gold and it only increases a small amount every year. This is why Gold has functioned as a premier form of money for thousands of years. It is able to hold its purchasing power over long periods of time and preserve wealth. Gold does not get an A+ in this category because we do not know how much gold is actually on the earth and therefore it is not by the truest definition finite.
- Fiat is the exact opposite of scarce. Since Fiat is controlled by the central government issuing it, its supply base can be expanded infinitely. This is the major downfall of fiat currencies (will discuss this more in the next section)
- Bitcoin is the only truly finite money on the planet. There are only 21 Million ₿itcoin that will ever be mined (created). Currently around 18.5 Million of those are in circulation with the remaining 2.5 million to be mined by the year 2140. This true scarcity separates Bitcoin from any other form of money in human history.
Based on these characteristics we can see that Bitcoin satisfies these characteristics better than any of the other popular forms of money today. Go ahead and try to identify a single other good than can fulfil these characteristics: finite scarcity, divisibility, fungibility, durability, and have the frictionless ability to send value anywhere in the world (transportability). Tough to do right?
Centralized Control of the Money Supply
Scarcity is the defining differentiator when comparing Bitcoin to any other money and it is the key factor for determining the long term success of a form of money. Gold for instance has been around and valued for thousands of years because it extremely scarce. If gold could be produced on a whim by anyone it would not be anymore valuable than the other common metals. Sure it is shiny and extremely durable but so is Platinum. In fact, platinum is actually stronger and more durable than gold. So why isn't platinum valued in the way gold is? It all comes back to scarcity. Gold is the scarcest metal and there is nothing any entity or government can do to increase the amount gold earth has to offer. On the opposite end of the spectrum we have we have hundreds of different currencies all around the world that are simply pieces of paper. Pieces of paper that have an infinite supply which is continuously manipulated by whatever central bank issues it. This constant manipulation leads to currency failures like the ones we saw in Germany and Hungary in the 1900s. As well as the ones we are currently seeing in Venezuela, Sudan, Argentina, Lebanon, Zimbabwe, etc… Take a look at these countries current inflation rate percentages below.
Citizens of these countries have had their purchasing power diminished, at scale. You are consistently punished for saving money in these countries as your balance just gets inflated away. This reality is not understood by most of the developed world where relatively reliable money is taken for granted.
So how did things get so bad in these countries mentioned? At the root of the problem sits the central entity that is controlling and manipulating the supply of the money. We can take a high level look at what happened with Germany, Hungary, and Zimbabwe to see what led them to hyperinflation and currency failure.
Germany
After World War I, Germany suffered severe economic and political conditions due to the Treaty of Versailles and losing the war. Germany was required to pay reparations for the damages caused by the war to the victorious countries. Germany had no choice but to try to print their way out of the debt. The more they printed the greater inflation became, until at its peak Germany reached rates of around 30,000% per month. This effectively doubled prices every few days.
Hungary
Hungary saw a similar fate as Germany. Hungary was required to pay reparations for World War II, so they did the only thing they could do — print money. Hungary’s hyperinflation got so bad that at one point prices were doubling every 15 hours.
Zimbabwe
Political changes in the early 2000s led to the seizure and redistribution of domestic land, which led to large scale foreign capital flight. Coinciding with this tough time, Zimbabwe suffered a terrible drought which shattered its economy. In an attempt to stimulate the economy and get things back on track what do you think the central leaders did? They PRINTED MONEY and lots of it. The country quickly spiraled into hyperinflation with rates exceeding 489billion%.
In all of these examples printing excessive amounts of money in order to pay back debt or stimulate the domestic economy led to the destruction of said money. This is the inherent risk of having a central governing body control the money supply (currency). They can and they will manipulate the currency in order to achieve short term relief/gain. We have seen examples of this time and time again through history and are seeing it play out live today.
Looking at just the US (see monetary base on the left) we can see there has been an unprecedented amount of money printing since the global financial crisis. This year alone the monetary base expanded by over 20%. You can expect that number to continue to increase in the following years. This economic picture is echoed all around the world as the coronavirus has ravaged already weak economies and forced the hand of central banks to do what they do best — print money. While the US dollar is more nuanced and likely won’t fail anytime soon, it is important to understand how the central control of the money supply creates inherent risks that exponentially compound every time that central entity “prints”.
How Bitcoin is different:
First let me provide a scenario: Currency A has an undetermined expandable supply, while currency B has a finite fixed supply. Currency A is controlled by a central entity that can expand the supply when deemed necessary. Currency B is not controlled by any central entity and has a supply that cannot be manipulated. Currency B is continually increasing in value compared to currency A. Holding currency B gives you more purchasing power each year where holding currency A gives you less. Which of these two currencies would you want? Any logical thinker is going to want to hold Currency B. It helps you as a citizen live a better life by incentivizing saving and by giving you more return on your most valuable asset — time.
This scenario provides a framework for understanding why someone should hold Bitcoin over any other form of money (currency) out there. The main take away from this section and the article as a whole is that centralization of a currency creates the need for trust and this puts the supply of any currency at risk. Adding to this extremely compelling argument is the fact that Bitcoin allows the ability to transact with anyone, anywhere in the world in a trustless fashion (meaning you do not need a bank or governing body to verify the transactions).
In this article I have been comparing three major forms of money and have drawn many parallels between gold and Bitcoin. However, doing this takes away from the true eminence of Bitcoin. Bitcoin takes the greatest strengths of gold and combines them with the greatest strengths of the “digital” dollar, without the downfalls of either. This is what makes Bitcoin the most premiere form of money this world has ever seen and is what continues to draw more and more people towards the monetary network. Bitcoin starts to become very valuable when you understand the fundamentals of money and when you realize the inevitability of a centrally controlled currency. It is easy to look at Bitcoin and dismiss it because it has only been around for 11 years, but do that, and you just might miss out on the single greatest monetization event in human history.
WAIT! Before I let you go I want to address a misconception about central bank digital currencies which are currently being created all around the world.
The Digital Dollar
Will Bitcoin become obsolete if central banks digitize their currencies? The answer to this is a resounding NO. Digitizing the US dollar does not actually change the underlying form of money, it is simply putting the fiat (paper) money online, which you can argue it already is. Yes, this increases the portability and durability of the money but it does not solve for the inherent lack of scarcity due to the centralized control of said money. They can still print or create as many dollars as they wish, which is turn devalues the money and takes purchasing power away from you the holder of the money. Bitcoin on the other hand is continuously increasing the holders purchasing power and is not controlled by any central entity, therefore it cannot be manipulated AND people all around the world have the ability to freely transact with it. Do not be fooled by the hype of a digital dollar. It is still just a centralized fiat currency with a shiny bow wrapped around it.
