Is Bitcoin The Ideal Money?

In This Article:

· Properties of money

· Difference between Money and Currency

· Bitcoin may be the ideal money

Over the millennia, money has taken many forms.  Obviously, gold and silver have been used as an excellent form of money.  But other things like cattle, wampum, shells, turquoise, spices, grains, iron, animal skins, and weapons have all been historically used as money.  More recently, we have also used government issued paper (i.e. “fiat” currency), debt, derivatives, and other securities as money.

The most recent invention to be used as money is cryptocurrencies, and more specifically Bitcoin.

The more I consider Bitcoin, the more I realize it may be the most ideal form of money in history.

To make this case, let’s consider all the properties of what constitutes a good form of money.  These properties include:

· Medium of Exchange

· Unit of Account

· Portable

· Durable

· Divisible

· Fungible

· Store of Value

A “Unit of Account” means it can be used as a standard for measuring relative value.  For example, just like a ruler is used as a unit of measure and distance, a good money will offer a unit of account to compare relative values.  We can say confidently that $5000 is five times the value of $1000.  In this way, we can measure value against the monetary yardstick if you will.

Money should be “portable”.  You can take it with you, transport it, and carry it.  Real estate or land for instance might be a good unit of measure, but it’s not very portable.  I cannot spend the land under my home to easily buy groceries in England.

Money should be “durable”.  Shells break.  Animal skins can rot with time.  Gold however can be minted into a coin. The coin can be buried underground or thrown in the ocean for thousands of years, and it will look the same as it did when lost to the elements thousands of years earlier.

Money should be “divisible”.  One of the reasons cows are not a good form of money is because if something costs half a cow, I cannot divide the cow in half to pay for the item.  Gold and silver can be broken in half or quarters, and we can make change.

Money should be “fungible”, meaning each unit is valued at exactly the same as the next unit.  If I have a shell, and it is about the same size as the shell you have, they may or may not be the same value.  Maybe yours has better or more desirable coloring.  One ounce of gold in my pocket, though, is worth exactly the same as one ounce of gold in your pocket.

All the above are critical elements of both currency AND money. However, only money has the next property, something currency never has.

Money should be a ‘store of value”.  This means that if I hold value in the form of money and not spend it on something, the value of the money will not change over time.  This is why the dollar is a currency, but NOT a good form of money.  The dollar does not hold it’s value, decreasing in value yearly at the rate of inflation, or on average, about 2-3% annually.  So if you put a $100 bill in a safe at home today, a year later it will only buy about $97 worth of goods.  The dollar is not a good store of value.

Now let’s consider Bitcoin.

Bitcoin is definitely a unit of account.  Relative value can be easily measured in Bitcoins, or fractions of a Bitcoin.  Compared to gold, Bitcoin is equal in this regard.

Unlike gold, Bitcoin is HIGHLY portable.  Since it is entirely electronic, Bitcoin can be transported across the globe in fractions of a second.  Gold however must be shipped, and it can take weeks to move across the globe.  In this regard, Bitcoin is better than gold.

Bitcoin is truly durable.  Since it is a purely electronic form of money, it cannot rot.  That said, it CAN be lost, but so can gold.  However, if there is no electricity, Bitcoin stops working.  Gold can still be used to buy things if the power goes out.  But, we don’t actually carry gold with us, even when on a gold standard, because it is not easily portable.  Instead, we would carry gold certificates, and today those would be in electronic form spendable with a card or digitally transferred, and this creates the same problem.  If the power goes out, how does the bank know the gold in their vault actually belongs to you?  Because of the way we actually use gold, I would rate this criteria to be par with Bitcoin.

Bitcoin is HIGHLY divisible.  A bitcoin can be divided into fractions of a penny, going out 8 decimal places.   A gold ounce is divided into a half ounce, a quarter once, a tenth ounce.  Using silver and copper, we can divide further, but the smallest unit is one cent.  With Bitcoin, I can go smaller or much larger and a nearly infinite number of partial units.  Bitcoin wins in this criteria.

Bitcoin, not being represented by anything physical, is the most fungible of any kind of money.  While gold coins are supposed to be equal in value, they might not be.  Older gold coins in better condition tend to have more value than newer ones in poor condition.  Someone may value a shiny gold coin as more desirable than a dull marked up coin.  Not being a physical item, a Bitcoin in my digital wallet always has the same value as a Bitcoin in your digital wallet.  Bitcoin wins over gold here too.

As a store of value, Bitcoin is less desirable than gold at this point.  Gold has a 6000-year history as a reliable, trusted form of money.  It is accepted across the globe as money, and everyone knows its value.  It cannot be inflated or deflated.  One week of typical labor in Colorado in 1895 cost about $10, or 1/2oz of gold.  Today, 1/2oz of gold is worth about $1540, which is about one week of typical labor.  So the value or purchasing power of gold has not changed in over 100 years.  Indeed, it hasn’t changed in 2000 years going into the Roman Empire.

Bitcoin though still fluctuates in value significantly.  But its history is only 16 years, not 6000 years.  It is also not widely recognized as viable by sovereign entities and countries, who prefer using their own forms of money, like the debt-backed Federal Reserve Notes used in the United States.

Unlike Federal Reserve Notes, and more like gold, Bitcoin cannot be printed from thin air.  It requires a unit of work and value to create or mine one, just like gold.  This is what gives it intrinsic value and causes stability over time, as it becomes more widely accepted and used.

President Trump just gave Bitcoin a huge boost of credibility when he announced the United States government would form a Bitcoin Strategic Reserve fund last week.  Fact Sheet: President Donald J. Trump Establishes the Strategic Bitcoin Reserve and U.S. Digital Asset Stockpile  

A handful of countries now recognize Bitcoin as “legal tender”, essentially declaring it a legal form of money, meaning its change in value is not taxed when you spend it as money.  In the United States, if you acquire a Bitcoin, and it moves in price from say $80,000 to $90,000, and then you buy something with your Bitcoin, the government says you have a $10,000 capital gain that you owe taxes on.  If Bitcoin lost value, you would declare a capital loss on your taxes.  If the dollar loses 10% when you hold it for 5 years, you cannot deduct the loss in value.  Similarly, you don’t pay taxes on the gain a dollar might have (if it ever actually had one).

Countries having declared Bitcoin “legal tender” include Japan, Thailand, Singapore, El Salvador, and Central African Republic.  Several states have introduced bills to make Bitcoin legal tender, including Utah, Arizona, and Montana. Other states, including Florida, Alabama, and Texas, are not far behind, while others are also discussing.

If the United States moved to make Bitcoin legal tender, the rest of the world would soon follow.  And because it appears to be a better form of money than Federal Reserve Notes, or even gold, there is a high probability its success over time would be all but guaranteed.

Bitcoin has survived against all odds and legal challenges, not much unlike President Trump.  This proves its viability and adds credibility.  At this point, resisting and fighting against it is a waste of time.  It is a winner and will continue to grow in status over time.

The most trustworthy aspect of Bitcoin is its limited supply.  Just like gold in the ground has a limited supply, the number of Bitcoin that can ever be mined (electronically) is 21 million.  And when 8 billion to 10 billion people start using it as money, its value and desirability will soar far more than the $84,000 price tag one full Bitcoin has today.  Many speculate Bitcoin could reach a price of $1 million in one to two years, as more countries, states, and people adopt it.

Finally, the best aspect of Bitcoin is it is truly the people’s money.  It’s distributed ledger does not require a banking system.  No banks are necessary.  The entire system is comprised of a gigantic piece of shared software, running all over the world on millions of computers backing each other up.

One previously negative aspect of Bitcoin was the length of time it took to settle a transaction….about 10 minutes.  This is okay if you are buying a car or a home.  It is NOT okay if you are standing in line trying to pay for groceries.  Fortunately, this problem has been completely solved with the latest innovation of the Bitcoin Lightning Network, where transactions clear in a fraction of a second for next to no cost.  Far faster and cheaper than using Visa or Mastercard!

Now that the speed and transaction cost problems of Bitcoin have been resolved, I literally can think of no better form of money.

I should also mention that Bitcoin is NOT the same as other cryptocurrencies.  Many cryptos are designed to have an unlimited supply.  In the long run, such cryptos fail because governments will manipulate them as is done with fiat currencies.  Having a limited supply of a commodity, which requires a unit of work to create, causes the currency to have intrinsic value.  And that value is determined in a large market, as the currency is used daily on millions of transactions.

As its adoption continues to grow, Bitcoin, like its gold predecessor, will stabilize in value.  But until the entire world uses it and recognizes it as money, its value relative to other things can only continue moving higher.

Should you acquire Bitcoin?  Obviously, I cannot answer that question.  All I can say is that I am currently acquiring it, especially since the United States set up the Bitcoin Strategic Reserve.