Thinking In BitCoin

I actually tried mining in 2011, but the client I downloaded was buggy, and I didn't have the patience to deal with it. But that experience is not the reason I don't mine today. And it's not because it's mathematically so much harder now to find new bitcoins. It is because I expect to acquire bitcoins like most people will acquire them in the future: by buying them with goods and services. But that time will have to wait for something else to happen. We need to start thinking in bitcoin.

Most people fail to realize that money is not wealth. Goods, services and leisure are wealth. Money is a medium of exchange (the buying and selling of different forms of wealth). Money is the essential facilitator of trade in the modern world. Without it, we would live in a subsistence, barter economy. With it, we have infinitely fine-grained global division of labor that makes our amazing modern world possible (read Leonard Read's "I, Pencil" for a visceral explanation of this), and a decentralized, market-regulated price system that allows economic calculation (the essential planning tool of civilization). "Good money" is the magic stuff that makes all this possible. Bitcoin is potentially good money. It's not there yet. It may never get there, but I am hopeful.

Going back to Mises, we see that money was originally some commodity or another. And it remained unquestionably so up through the classical gold standard period. As long as it was some commodity (or paper backed by a commodity), and as long as it was universally (or at least widely) accepted as a medium of exchange, it had value (i.e. it was sought after) as money. The top of the money food-chain turned out to be gold. It turned out to be the best money for various reasons. The market chose it over a very long period of time. Its value was not intrinsic. Its value was not fixed by a central authority. Its value was not measured in terms of some other abstract unit (like the Dollar, Euro or Yen). Its value was measured implicitly in terms of what other commodities it could be exchanged for (i.e. "buy"). Of course, what it could buy was - anything. That's what money does. It can buy any other commodities. So, for example, and ounce of gold could buy a nice men's suit. It might also buy some number of farm animals. And so on. Over the centuries, people subconsciously absorbed the "value" of an ounce of gold in terms of any and all other goods - at the same time.

Quick comment on "hoarding". This applies to all kinds of money. The value of gold was not constant. What it could "buy" depended on the supply of gold in circulation and on how badly people wanted it (and were prepared to actually buy it with goods and services). Remember, people only want money in order to buy stuff now or to increase their "cash holdings" to be able to buy stuff in the future. If people "hoarded" gold (increased their cash holdings), it only made the remaining circulating gold more valuable (causing prices of other things to generally drop). As the hoarders (cash holders) saw the value of gold rising in the market, they had a natural incentive to hold less (to buy the cheaper other stuff). And then prices would rise again as more gold became available. In other words people only "hoarded" enough to make them comfortable that they would have enough in a future of uncertainty. If the future looked bright and/or the value of gold was high, people held less. If the future looked grim and/or the value of gold was low, people held more. Hoarding (holding cash) is not a problem. It is actually a self-regulating natural (and more or less steady-state) economic phenomenon.

Here's a test. How much do the following things cost in terms of "dollars": car, house, cigarettes, TV, dinner out. We can all instantly assign a rough dollar figure to those items. (Of course, if you're Japanese, you think in Yen. You have to translate to dollars). In the old days, people would think in terms of gold weight. If Bitcoin is ever going to be real money, a critical mass of people will have be able to instantly "valuate" it terms of other goods. As long as we "translate to dollars" (or Yen, or Euros, etc) in our heads first, we will forever be held captive by the vagaries of the fiat money of nation-states. It would be like trying to learn a foreign language and never getting past the internal translation phase. We have to start "thinking (and dreaming) in Bitcoin".

Finally, Austrian monetary theory tells us that a fixed (or nearly fixed) money supply is actually ideal. It will cause a gentle and steady general drop in prices. Keynesian screeds notwithstanding, this is a good thing. I'll leave this as a research exercise for the reader. So, as bitcoin mining peaks, and the 21 million bitcoins begin to trickle and diffuse into the world, the holders and exchangers of bitcoins will (hopefully) eventually make the mental shift away from nation state money and toward seeing bitcoins on its own terms in relation to the goods and services of the world. And as more and more real goods and services are produced in the world, everything will slowly get cheaper over time (because the bitcoin money supply will be fixed).

Somewhere along in that process, people will stop saying things like "a bitcoin costs $100", and start saying things like "a house costs 10BTC", "a hamburger costs 3 microBTC", etc. If we're lucky, people will have to look back on the dollar in history texts and first translate what the dollar could have bought in terms BTC before they understand.

If you found that any of this was worthy of the time you spent reading it, please toss me a micro BTC or two at: 1C6XHVQeBV1FYSU7ykWvc79mgNnPdMa1eq