Can bitcoin become money?
(spoiler alert: bitcoin is money already)
I run into this question from time to time, which is understandable as money or economics are seldom taught in brick and mortar educational institutions, and when they are taught, the lessons pertain to “Modern money mechanics” that has become the accepted official narrative when it comes to money. At times it feels like the presumed experts of fiat-finance themselves have no idea of how this modern monetary system should function apart from “it works because it works, until it doesn’t”. Economic policies are only medicating the symptoms that have root causes too terrible for many to even peek at. Luckily internet affords us better education.
Hard times require hard takes and some of us who have taken a good hard look at the global economic machine have raised their concern about our unsustainable monetary system. More specifically targeted at the fact that the potholes in the monetary infrastructure are being filled with money printing when in fact what we need is to start from scratch and quit trying to fix a broken garbage bag, that is the current world economy, from within using band-aids.
Tuomas Malinen is one of the rare economists that dare to speak up at the eve of perhaps the most devastating economic collapse ever known to man. Or maybe he dares not to speak.
I like his unyielding stance against the mainstream economists and his harsh words hurled towards those who would choose to shut their eyes. However, I do critique his polemic sermons slightly, even though I also think there will be never before witnessed economic calamity around the corner that will surely hurt majority of the global population. The reason for my slight optimism is that this time around we actually have something that centrally planned economic machine rarely presents: an option to opt out.
I speak not of the modern world “options” that are rapidly giving way to the information age options. For example returning to smaller national currencies or even gold standard are unrealistic alternatives in a heavily globalized world where the cost of monopolizing violence is becoming ever more expensive. In other words, thanks to the information age tools such as the internet, cryptography and Bitcoin, the individual can now plausibly protect themselves and their property and do so more efficiently than a nation state. After all, protection was the key reason why nation states survived and thrived during the times when it was still cheap to corner the violence market. It is only logical that geographical borders keep losing their meaning in a world where most interactions between people happen in a borderless space.
What and why is money?
Let’s first define what money is and what are the most important features of a good money. The most important thing to remember is that all value is assigned according to the subjective theory of value. This means that goods and services used by people in their daily lives are produced by human action because they fetch a desired price on the free market because there is demand for them.
Since the dawn of times, favors, objects and food have been traded for whatever was needed in the time and place and whatever was available. The need for a commodity money increases for instance because it is difficult to trade internationally with spoiling goods. Thus is better to utilize beads, furs or even decorated, giant stone slabs.
Bitcoin is money already. It took the leap from cryptographer nerds’ game into digital cash in 2010 when one Laszlo Hanyecz decided to value his 10 000 bitcoins equal to exactly two family size pizzas.
Nothing has intrinsic value, but instead the price of everything is defined according to subjective value theory: the individual decides how much they are willing to pay for a product or a service based on their personal marginal utility in that specific circumstance. The individuals together form a mechanism known as the market, that adjusts the prices based off the balance between ex-ante and ex-post experience of the trade between countless of pairs of individual traders. The individuals choose their money based on the most important monetary qualities: salability, divisibility, durability and portability.
Precious metals fulfill most of these qualities quite well, for which reason they emerged as sovereign money for thousands of years. The era of sovereign money ended when the gold standard was finally ran down to fund the First World War in 1914. Modern fiat currency is a relatively new experiment and represents weak, unsound money in the light of history. The value of fiat currencies may only wither away with time, the most obvious use case for them being to fund eternal war that no-one could afford in the world of sound money.
Bitcoin represents sound money and fulfills the qualities demanded from money better than well; it has become the first absolutely scarce resource. It is easy to store, transfer, divide and it is highly salable through time and space.
Regardless of what any authoritarian claimant might try to pass as the official truth, individual users choose the money that best works in their own life. Bitcoin is free money that anyone may choose to use or not. In any case bitcoin is money already, just not for everyone.
Bitcoin is not a virtual currency like the US dollar
The widely adopted term “virtual currency” is not an accurate depiction of bitcoin, as nothing is more real than mathematics that is a strictly defined language for expressing physical and conceptual relations. “Virtual” is a much more fitting description for fiat currencies whose value may dissolve overnight like a whisper in the wind.
Interestingly enough, even though most of value transfers are nowadays made in virtual currencies such as the US dollar, metal money has never been given up. Moreover the central banks hoard gold in their vaults with ever increasing gusto, using their actions to tell a more compelling story than what “real money” constitutes according to “official” definition.
Fiat currency is a cheap knockoff of real money and the maintenance costs are collected from its users in the form of inflation.
Bitcoin is voluntary money backed by mathematics, whereas fiat currency is forced and backed by promises. Breaking these promises has led for example to the situation in Venezuela that it is not even worth it to pick up the paper notes from the sidewalk. This is called hyperinflation, an integral feature in every money or currency whose production is easy to ramp up based on demand. Gold and bitcoin differ from fiat currencies due to their high stock-to-flow -ratio. This means that to issue a large quantity of new money compared to the existing circulation is difficult, expensive and in the case of bitcoin, outright impossible outside the immutable open issue schedule.
Counterfeited fiat currency or even gold may be difficult to differentiate from authentic, but counterfeit bitcoin can be detected easily and automatically by anyone capable of installing a computer software on their laptop. In the central banking system we rely on bankers to refrain from creating (counterfeiting) too much fiat-currency (that is mostly issued in the form of virtual debt), whereas anyone may verify the terms and schedule of new money issuance from the open source code of Bitcoin. This information is not openly available in the central banking system which has caused distrust and in part expedited bitcoin’s spontaneous emergence as free, global reserve money.
The global fiat currency experiment is ending
The Bretton Woods agreement that was dissolved in 1971 is probably unknown history to most people alive in 2020 and thus its repercussions are probably unknown to them today. Many might have cultivated an understanding that the fairly young and experimental fiat currency peddled by central bankers would somehow be sovereign money just because it is the most widely used. Gold and other metal monies are perceived as difficult and rightly so: the difficulty (hardness) gives them an entirely different value proposition than elaborate stories and the signature of a random boomer do to paper notes (of course the valuation of these paper notes is propped up by the fact that taxes still need to be paid in fiat currency).
Gold is hard to produce, transfer and counterfeit. Fiat currency is more convenient in these cases, but in easy money there always lies the certainty of hyperinflation. There are no money production monopolizers to be found throughout history that could have resisted the urge to first line their own and their friends’ pockets with newly created money. This is known as the Cantillon effect, which means that whoever gets the new money first, benefits for the full face value as the effects of inflating the circulating supply are only felt in consumer prices with a delay.
In the end the ordinary consumer will pay the bill of reckless currency printing as the prices of goods and services rise. It is the greatest heist in human history.
Hyperinflation destabilizes whole nations quickly when people are forced racing to spend their salary on something that even remotely stores value before their purchasing power disappears entirely.
Forced and ill-advised, hysteric consumption can’t be good if the goal is to develop humankind ever stronger and wealthier.
Mainstream pop-economists (Keynesians) see inflation as an important feature to increase money velocity. Without reckless spending the economy would grind to a halt, and should the purchasing power of money increase (as with bitcoin) instead of decreasing (as with fiat currency), people would just save their money and the businesses would go bankrupt. Or so goes the story. There is no denying the consumption would decrease. Then again it is also a popular opinion that we are living in a world dominated by opulent consumerism with multitude of issues ranging from global warming to waste management that might just be easier to solve with lower consumption. People would still not entirely stop spending if reckless money creation would end; the spending would just gravitate from malinvestments towards more sustainable investments that are anticipated to yield greater benefits over time than simply saving the money for later.
In other words, bitcoin makes saving sexy again.
Hyperinflation is not caused only by gross incompetence of self-proclaimed monetary authorities, even though reckless monetary policies surely enough expedite the activation of the hyperinflatory time bomb. It would be naive to take confidence in the lie that in “civilized western countries” there would not be such a problem as hyperinflation or that the issue would be limited only to “developing countries”, as the fact remains that all fiat currencies have failed and will fail eventually with no exceptions.
It may even come to pass that the modern age “developing countries” emerge as super states of the information age or perhaps some sort of gathering places for sovereign individuals as hyperinflated geopolitical regions had to adopt bitcoin before other areas where fiat currency still “works”.
Gold boomers give way to Bitcoin millenials
It is clear that new technological innovations raise suspicion especially in older generations, but on the flip side they are more interesting to younger, more curious individuals that are not prepared to accept the established world views of complacent Kens and Karens.
The whimpers of generations past are simply met with a laconic statement: “OK, boomer.”
The millenials, that is the largest generation in human history, prefer to live in the digital world. While unintuitive for many, the digital world is just as real as the physical world. Millenials prefer investing in bitcoin over gold or real estate and a variety of digital tokens and in-game money are already familiar to them from video games. Once they reach the best earning age, they will likely be interested in free money that can be earned in any way they prefer (like playing video games) and can be transferred without permission to anyone, anywhere in the world, in seconds, affordably. Bitcoin is also not interested in office hours or public holidays like many bankers.
We are living in the information age where it is possible to be our own bank and to produce value to others regardless of physical constraints, earning and spending money that can’t be debased, confiscated or even stopped.
Should you buy bitcoin now?
We can’t begin to imagine what Bitcoin is capable of in the end. Similarly like we couldn’t predict Netflix while downloading music with Napster. This does in no way imply that Bitcoin wouldn’t have immense utility already today.
The capped maximum amount (21 million BTC) and the locked issuance schedule mean that the appreciation of bitcoin is a mathematical fact as long as there is any use no matter how small the user base. It is a common misconception that for bitcoin to succeed or for it to “become money” would require the masses to take interest. Bitcoin has been money for years and it continues to provide that function in the future as well for those who want to use it.
There is no risk-free investment and there is no certainty whatsoever that bitcoin would supersede US dollar as the de-facto global reserve money. Especially investing in technological innovations always involves taking a risk that is either rewarded handsomely or punished ruthlessly by the market. Either way we will have valuable data of the progression of the global money experiment.
One way to think about buying bitcoin is investing in the absolutely scarce monetary infrastructure of the future.
Bitcoin has potential to change human lives and through them the whole world, for better I think: in succeeding bitcoin enables storing and transferring wealth through time and generations without giving any chance for anyone to meddle.
I can justify 1–100% allocation for bitcoin in anyone’s portfolio, but I can’t justify a 0% allocation. That would simply be mad, as the potential upside is practically infinite while the downside is limited to zero. In other words, bitcoin has a high reward/risk -ratio.
I recommend thoroughly studying the Bitcoin-protocol as it is the surefire way to be convinced of the utility bitcoin offers in a world with increasing control and regulation. No value can be assigned objectively, instead the individual defines all their values alone. Everyone is free to choose their own money.
Thank you for reading.
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