What Is Money?
The need for money comes from the idea that we live on a planet with finite resources. Human desire is not limited, yet resources vary by scarcity and availability. Therefore, it is necessary to have a medium to exchange those resources which are not perfectly abundant. A unit of exchange is necessary to allocate resources among a population with theoretically limitless desire. What is money? Money itself is neither good nor evil, but rather a necessary tool in a properly functioning economy.
Currency is a unit which can be used as a medium of exchange; it is something people trust to hold value because it is attributed general acceptance for food, shelter, and other basic necessities. Trust that the currency will be accepted makes up the most important factor when it comes to the survival of a particular money supply. When this trust erodes, the currency is in danger of being debased and people will no longer take it seriously. Currency could then be described as a collective agreement.
When there are enough people who settle on what holds their trust, that which they agree upon becomes secondary. History has provided us of countless examples of this being true. Whether it be cigarettes among a prison society, animals among farmers, precious metals among kings, and now computer code, money remains a collective agreement established by its user base.
Think of money as a token of certification that society owes you some sort of good or service because of the value you have contributed to the marketplace. Money is a redeemable token where you can exchange your labour and intellect for some luxury. The entire money supply, and the financial system it operates within, is a vast database of information on who owns and owes what to whom. This agreement on ownership and debts is necessary in a properly functioning economy.
So how does bitcoin relate to this concept of money? Think of bitcoin in the same line of thought as the vast database of financial information on who owns and owes what to whom. This time however, that database in not controlled by one central party, the integrity of the database is transparent, and the information within that database is not used to fuel war. With bitcoin, no one owns the database, no one party can control it. The database is as secure as the laws of physics will allow, database information is potentially anonymous, and the database is open to being viewed and utilized by anyone in the world.
Aristotle, the Greek philosopher, defined the characteristics of a valid currency comprising of four core aspects:
Money must remain in the same state it was originally created in. It cannot change or be destroyed by the forces which use it. In relation to bitcoin, they are almost perfectly durable. Bitcoin cannot be changed as each coin is based off computer source code. However, bitcoin can be lost quite easily in the event of a forgotten password, mishandled storage, or a fork in the protocol.
Since bitcoin is a digital currency, it has no physical cumbrance and, therefore, is portable to anyone with a wallet address capable of receiving payment. There is no burden in sending bitcoin across borders because it serves as a frictionless and agile transfer of value. You can cross a border with $1 billion in bitcoin using a brainwallet and no number of patrol agents or cash-sniffing dogs would be the wiser.
Bitcoin is made to be infinitely divisible by design. Currently, we use 8 decimal places to represent smaller fractions of an entire bitcoin. The unit of account down to the last of the 8 decimal places is known as a satoshi, in reference to the mysterious founder. If there is ever a need to extend the amount of decimal places, the developers and community can come to an agreement and make necessary changes. Bitcoin is perfectly divisible.
The argument most commonly heard against bitcoin is that it lacks intrinsic value. That is, the currency has no desirable features and no value in and of itself. Outside of the acceptance trust, currency usually holds little or no intrinsic value; there is no value inert to the unit when it is presented simply for what it is. Anything other than trust would be considered a bonus to intrinsic value. The industrial uses of precious metals, however limited, are intrinsically valuable.
Investors are correct in asserting that the bitcoin unit of currency itself has no intrinsic value outside of trust. To make the claim of intrinsic value with bitcoin, we must make the distinction between bitcoin the payment network and bitcoin the unit of account capable of being spent. Both are known as bitcoin, but to not recognize the difference would be a hazardous miscalculation.
The reason bitcoin has “perceived” intrinsic value is because of the technological capabilities of the interconnected network which acts to send payments. The intrinsic value of bitcoin comes from the technological innovations built into the network usability. The bitcoin payment system allows us to do things with money we have never before been able to do, and that is intrinsically desirable. As more people take time to understand the technological advantage of bitcoin, more people will come to accept it as payment. In doing so, the value will grow as trust is engrained. Considering bitcoin is a payment system which is made open to a scarce number of coins, the bitcoin unit of account commands a market price. Because bitcoin is both useful and scarce, it is valuable.
Bitcoin, as is with fiat currencies, reveals the fact that the only thing which assigns currency value is the assurance it will be accepted as payment when the need for exchange arises. With more trust comes more value, and the cycle stabilizes itself. Fiat currency gains its intrinsic value from government laws and regulation. The compliance on these laws rests with the credibility and authority of the governance which issues them. Bitcoin gains its credibility because it is a cryptographic form of money based on mathematical approaches to the problem of trusting third parties.
The term “bit”, as in bitcoin, is a basic unit of information relating to digital communications. ‘Bit’ coin then, is an accurate labelling of what the system represents; a database of binary code 1’s and 0’s to determine who owns and owes what. To use the name “bitcoin” is appropriate branding and a proverbial play on words describing numismatic information.
The term “fiat” is a revealing description as well, this time of paper currency. In Latin it literally means ”let it be.” — a government-created currency which sounds as though the only thing holding it in place is confidence in the authority issuing. Such a currency, which sounds as though it has been buckling under the weight of illusion, is waiting for something more real to come along and relieve it of its temporary purpose. No fiat currency has ever stood the test of time, nor has it been designed to.
In this sense, the concept of decentralization of power also gives bitcoin value. The idea of the money being owned and supported by only the people who use it instead of a central authority makes the currency viable and at the will of those it exists to serve. In a world where circumstances and events are becoming increasingly interdependent, consolidation of power is unfavorable to dispersal of such power. It is no longer necessary to have the state manage, manipulate, and control money.
I would like to build off Aristotle’s concept of a valid currency by proposing a fifth characteristic: originative. Considering bitcoin comprises nothing more than computer software, it is easy to see how a copycat currency could come along at any time, tweaking minor aspects of technical specification in order to make it superior. This we have seen to be a common practice among alternative cryptocurrencies, but very few currently have the infrastructure and competitive advantage necessary to co-exist with bitcoin. Is this infrastructure built around bitcoin enough to give it a lengthy first mover advantage?
For a currency to establish itself, it must have the necessary time and exposure to its user base to establish collective agreement of its acceptance. In order to do so, the currency must be originative, and refrain from being carbon copied in a way that would introduce a similar money supply with slightly altered characteristics.
Much like we see programming languages being created very frequently, yet the ones which catch on are far and few in between, only a select few cryptocurrencies which appeal to a large demographic of users and provide solutions to difficult technical and economic problems will garner the largest market capitalizations. The ability for programming languages to be created is accessible to any developer with the ability to do so, and much the same will be said for cryptocurrencies. However, there will be industry standards in cryptocurrency much the same way Python, C++ and other languages are standards for software engineering, standards for cryptocurrency will be bestowed upon a select few, likely the ones with the largest input from community development behind them. As network effects go, bitcoin is well positioned to be the original and dominant cryptocurrency of the 21st century.
Unless a new money supply is created that has a unique, sustainable use case for the cryptocurrency in circulation, it represents nothing more than a speculative investment. With current competing cryptocurrencies, only those which serve a definite purpose and those with a dedicated community behind them will have long-term outlook. It would make for an interesting debate for which tweaks in bitcoin’s technology make it viable, and which is nothing more than marketing fluff. There is only need for projects being built which introduce a new use-case scenario for cryptocurrency being issued.
Fiat currency does not need to concern itself with being originative because its value is tied to the political, economic, and social decisions a central issuing authority makes. Government issued currency can survive and prosper along with almost identical other supplies of currency because it represents an already established and centralized economy. Digital currencies on the other hand however, have no boundaries, no issuing authority and no established economy which to assess its value against. Fiat currency is tied to a centralized force, bitcoin is without geographical or political limitation. Therefore only one digital currency designed for monetary uses will survive and establish itself in the long run.
The cryptocurrency which establishes itself as the benchmark of the digital domain will be the one with the highest degree of trust and the most innovative technological features. It can be seen in price movements that when bitcoin makes a move, the other cryptocurrencies make a similar, exaggerated move. When bitcoin sneezes, the others catch a cold. The infrastructure and first mover position give bitcoin a temporary but sustained advantage. In the way currency relies on trust, this makes bitcoin king.
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