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Author Topic: Is Bitcoin real money? [Article for newbies]  (Read 2036 times)
Tacticat
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January 21, 2013, 12:16:37 PM
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The following article has been written by me with the purpose to inform newbies, journalists, etc. on the properties of Bitcoin and why it is real money. If you like the article, feel free to link anyone with doubts to this post.


But... is Bitcoin real money?

The short answer is "Yes, because Bitcoin has got all the properties of good money". But in order to understand what money is, we'll first have to take a look at how it works in today's age and how money has worked historically in the past.

If you open your wallet right now, it's probable that you'll find some bills and coins of your local currency. Have you ever asked yourself: Why do people accept these if they're only made of paper, cotton and cheap metal? It is not a strange question if we consider that traditionally money had to be made out of something valuable such as precious metals or people would not accept it.

The reason why we accept such "cheap" items as money in the first place is because of a promise. A promise made by the government that guarantees that those pieces of paper and cheap metal can be used to pay our debts: this is what we call "legal tender". The government promises to us that if we have a debt, we will be able to pay it off with his money and that the other party is forced to accept it.

With that promise in mind and knowing that, in most cases, the government has the power to enforce this rule, people lend their faith to the government issued currency, despite its lack of intrinsic value. That is what we call "Fiat money" or "Money based on a promise".

While the concept is fairly simple, fiat money does have some problems. For example, it's usually only valid inside the borders of a certain country because that promise does not extent to a land in which the government does not have power. The value of the money is often influenced by the current economical situation of the country and the government can decide to print as much of that money as they need which in turn devalues the currency and causes inflation.

In the USA, while the promise is still mantained by the government, the power to control the currency has been waived to a private bank called "The Federal Reserve".

But it has not been always like that. In ages past, over the course of history, money has been used in a very different way. To begin with, metal coins were actually made out of precious metals and when paper bills were introduced, they could be exchanged for the amount of precious metals they represented. This was certainly necessary as, otherwise, people would not accept it as a means of payment.

The process of accepting something valuable as a means of payment is certainly natural and has persisted over millenia without the need of promises or artificial state intervention. Furthermore, people knew that their savings would still have value even during economical difficulties or state collapse.

But, what turned gold and other precious metals into money? A house is valuable as well... why don't we just pay with houses? This brings us to the first and most obvious property that money must have: It must be portable!

People are probably not going to accept something as payment that they cannot control or take with them, and because of that, trees, houses or statues would certainly not make good money in day to day life.

What about food? Food is certainly useful and people need it all the time. Food has also been used to barter before the invention of money. Could food be good money? Well, most food is portable and people do certainly need it... but what about when it rots? It's probably not useful to keep your savings in "Fish" if you know that two days later the fish will be rotten. Money must be durable and be able to store that value over a long period of time.

Ok. So let's think about something that we can all carry and that will probably last for a long time: Stones!
But would people really start to accept stones for their hard work? Why would they do that if they can just grab stones from the ground? This introduces us to the next property of money: it must be relatively scarce.

What about diamonds then? Diamonds are after all relatively rare and need effort to be mined.
Yes diamonds are rare, but they come in different sizes and shapes and it might be difficult to use them because they can't be broken down into smaller pieces. Also, will two equally sized diamonds have always the same value? What if one is more polished than the other?

Good money must be divisible and fungible. This means that we must be able to divide it into smaller pieces and that each of those equal pieces must have the same value. With precious metals this can be done by smelting them and ensuring that they have the same value if they weigh the same.

As you can see, precious metals such as gold and silver are a really good candidate for money, and that is exactly the reason why they have been used as money throughout history. Not because they were shiny or sparkly, but because they fulfilled the properties that good money needs to have. There are many other shiny and sparkly things in this world that cannot be used as money because they do not fulfill these basic properties.

Now that we know the properties that money must have... what about digital money? Could there ever be a digital currency that has these same properties? The answer is "Yes, Bitcoin".

Bitcoin is a digital currency that has all of the above properties and is thus an excellent medium of payment. People quickly noticed this and started exchanging bitcoins for goods and services or other types of currency. It turned out that in the digital world bitcoins are extremely useful because they also offer several advantages that physical money does not have and which make Bitcoin useful and desirable.. For example, bitcoins can be transfered instantly all over the world! 

There is no one that controls Bitcoin just like no one can create precious metals out of thin air, and together with the fact that Bitcoin is impossible to forge or duplicate thanks to certain mathematical functions that make each Bitcoin unique, it is an excellent digital currency. Bitcoin is excellent real money.

Paper and cheap metal coins might need laws in order to be used as money, but not Bitcoin which is real money by definition.

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FlipPro
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January 21, 2013, 02:49:51 PM
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Can I post this article on UpTweet for you?

It would be better if you did it (so you could earn Bitcoin) , but if you don't want to I'll do it for you.

Really good stuff...

LEASE THIS SIGNATURE OUT WEEKLY/MONTHLY.

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January 21, 2013, 03:13:40 PM
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Good article, could not find any error here.
Tacticat
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January 21, 2013, 04:20:07 PM
 #4

Can I post this article on UpTweet for you?

It would be better if you did it (so you could earn Bitcoin) , but if you don't want to I'll do it for you.

Really good stuff...

If you don't mind I'll use this opportunity to learn about Uptweet as I had no previous knowledge about it until now. Thank you and thank you xxjs as well!

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January 21, 2013, 04:49:22 PM
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Can I post this article on UpTweet for you?

It would be better if you did it (so you could earn Bitcoin) , but if you don't want to I'll do it for you.

Really good stuff...

If you don't mind I'll use this opportunity to learn about Uptweet as I had no previous knowledge about it until now. Thank you and thank you xxjs as well!
Please check this out:

http://bitcoinmagazine.com/uptweet-social-media-and-bitcoin-meet-again/

If you have any questions let me know... Smiley

LEASE THIS SIGNATURE OUT WEEKLY/MONTHLY.

PM ME FOR DETAILS
Tacticat
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January 21, 2013, 08:29:08 PM
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Can I post this article on UpTweet for you?

It would be better if you did it (so you could earn Bitcoin) , but if you don't want to I'll do it for you.

Really good stuff...

If you don't mind I'll use this opportunity to learn about Uptweet as I had no previous knowledge about it until now. Thank you and thank you xxjs as well!
Please check this out:

http://bitcoinmagazine.com/uptweet-social-media-and-bitcoin-meet-again/

If you have any questions let me know... Smiley

If it's not too much to ask, how much bitcoins can be made per uptweet?

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FlipPro
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January 21, 2013, 08:53:46 PM
 #7

Can I post this article on UpTweet for you?

It would be better if you did it (so you could earn Bitcoin) , but if you don't want to I'll do it for you.

Really good stuff...

If you don't mind I'll use this opportunity to learn about Uptweet as I had no previous knowledge about it until now. Thank you and thank you xxjs as well!
Please check this out:

http://bitcoinmagazine.com/uptweet-social-media-and-bitcoin-meet-again/

If you have any questions let me know... Smiley

If it's not too much to ask, how much bitcoins can be made per uptweet?
If you login (need a Twitter account) and press the account button (top right) you will see your wallet.

In there the daily retweet rate is displayed. Currently the ReTweet rate is 0.0001 BTC.

Earning potential is unlimited.

LEASE THIS SIGNATURE OUT WEEKLY/MONTHLY.

PM ME FOR DETAILS
Tacticat
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January 21, 2013, 09:32:14 PM
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Can I post this article on UpTweet for you?

It would be better if you did it (so you could earn Bitcoin) , but if you don't want to I'll do it for you.

Really good stuff...

If you don't mind I'll use this opportunity to learn about Uptweet as I had no previous knowledge about it until now. Thank you and thank you xxjs as well!
Please check this out:

http://bitcoinmagazine.com/uptweet-social-media-and-bitcoin-meet-again/

If you have any questions let me know... Smiley

If it's not too much to ask, how much bitcoins can be made per uptweet?
If you login (need a Twitter account) and press the account button (top right) you will see your wallet.

In there the daily retweet rate is displayed. Currently the ReTweet rate is 0.0001 BTC.

Earning potential is unlimited.

Oh dear. While the idea sounds excellent, I will have to ask to submit it yourself because I do not have a twitter account and even if I created one, retweets would be very limited.

Please feel free to submit it. Just make sure to invite me to the party if you become a millionaire thanks to it Tongue

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marcus_of_augustus
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January 21, 2013, 09:39:21 PM
 #9

This is an excellent article, monetary economics for the masses. Something that should be taught in grade school before "finance".

Few typos,
Quote
... and that the other party is forced to accept it.

Quote
as they need which in turn devalues the currency and causes inflation

Quote
but what about when it rots?

Quote
the same value if they weigh the same.

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January 21, 2013, 11:10:04 PM
 #10

Excelent! Very clear and concise. A must for all newbies!

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January 22, 2013, 02:19:40 PM
 #11

Excellent article: I will disagree only on one item.
Scarcity is not a necessary attribute of money, usefulness is (your article missed that one).

The article is clear at demonstrating that the value of money comes from a set of attributes, each attribute being insufficient if taken individually.

About usefulness.
For instance, gold is useful in industrial applications like electronics or jewelry.
Bitcoins are useful in services like internet payment processing.
Fiat money is usefull to extinguish a fiscal debt (usefulness enforced by law, not natural).

About scarcity.
Scarcity can even prevent something from being used as money.
I believe there is confusion in the article between scarcity and limited, auditable quantity.
Gold has been around and has been mined for a long enough time to convince everyone there is a limited quantity of it on earth and that quantity is audited and published (mining operations report). Likewise for bitcoins. If we would have had a hundred times more gold or more bitcoins, that would have not impacted the possibility to use gold or bitcoin as money. Conversely, if no one had a precise idea about the quantity of bitcoin or gold, that would be a show stopper.

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January 22, 2013, 04:50:28 PM
 #12

Excellent article: I will disagree only on one item.
Scarcity is not a necessary attribute of money, usefulness is (your article missed that one).

The article is clear at demonstrating that the value of money comes from a set of attributes, each attribute being insufficient if taken individually.

About usefulness.
For instance, gold is useful in industrial applications like electronics or jewelry.
Bitcoins are useful in services like internet payment processing.
Fiat money is usefull to extinguish a fiscal debt (usefulness enforced by law, not natural).

About scarcity.
Scarcity can even prevent something from being used as money.
I believe there is confusion in the article between scarcity and limited, auditable quantity.
Gold has been around and has been mined for a long enough time to convince everyone there is a limited quantity of it on earth and that quantity is audited and published (mining operations report). Likewise for bitcoins. If we would have had a hundred times more gold or more bitcoins, that would have not impacted the possibility to use gold or bitcoin as money. Conversely, if no one had a precise idea about the quantity of bitcoin or gold, that would be a show stopper.

I think scarcity is often and correctly used to mean known or roughly known amount and not arbitrarily expandable.

I think a usefulness discussion could be interesting. Arguable bitcoin was not useful in the beginning and that did not stop it from becoming a money. And saying 'potentially useful' is no good because it's wholly circular, anything that has the other properties could become a money and thus become useful so that attribute would be completely wrapped up in the others.

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January 22, 2013, 05:21:43 PM
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Really great piece, Tacticat. Simple, easy, and accurate. I wonder if gradeschool children read that essay once a year if many of today's economic problems may have been avoided? Perhaps kids are too busy saluting flags.

I do have one suggestion, remove this part completely:

Also, the problem with food is that we eat it and thus destroy it. Good money must be non-consumable as it would cause a certain amount of problems otherwise. The constant destruction of money would have a serious effect on the economy.

I don't think money needs to be "non-consumable." Indeed gold is consumable (utilized in many industrial processes, or when placed in jewelry it is removed from the money supply). I don't think the ability to consume a good makes that good less useful as money, so long as it satisfies the other requirements you mentioned. You should remove that section as it's the weakest out of your very strong whole.

Great job!
Tacticat
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January 27, 2013, 01:48:14 PM
 #14

Hello everbody!

After a long absence I've been able to update the post and remove the sentence about consumable money and added a line about usefulness. I've also received some other suggestions which are much more difficult to implement as it would require to extend the article beyond it's intended purpose and probably make it too complicated.

I'm sorry for the long delay. Cheers!

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January 27, 2013, 04:13:10 PM
 #15

Excellent article: I will disagree only on one item.
Scarcity is not a necessary attribute of money, usefulness is (your article missed that one).

The article is clear at demonstrating that the value of money comes from a set of attributes, each attribute being insufficient if taken individually.

About usefulness.
For instance, gold is useful in industrial applications like electronics or jewelry.
Bitcoins are useful in services like internet payment processing.
Fiat money is usefull to extinguish a fiscal debt (usefulness enforced by law, not natural).

About scarcity.
Scarcity can even prevent something from being used as money.
I believe there is confusion in the article between scarcity and limited, auditable quantity.
Gold has been around and has been mined for a long enough time to convince everyone there is a limited quantity of it on earth and that quantity is audited and published (mining operations report). Likewise for bitcoins. If we would have had a hundred times more gold or more bitcoins, that would have not impacted the possibility to use gold or bitcoin as money. Conversely, if no one had a precise idea about the quantity of bitcoin or gold, that would be a show stopper.

Very good.   I've argued this for a long time.   

Think about it.   What makes us all upset about fiat is that they keep devaluing it by making more of it.   It doesn't matter if it starts off as scarce or plentiful. It's the relative change that counts.
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