So as wrong as it might be, this is my take on Bitcoin. Please visit the links in this text so learn more about the fundamental reasoning that I draw upon when writing this.
Proponents say that Bitcoins are a new type of digital money and being curious about it, I did some thinking of my own. First I wanted to know if Bitcoin really is a type of money and then why people would prefer to use it instead of other types of money.
There is a pretty well known and agreed upon definition of what money is
. Money is something that is a a medium of exchange
, unit of account
and store of value
. Is Bitcoins a medium of exange? The answer is that, yes, people are using Bitcoin to buy and sell things. It is also a unit of account because you can divide a Bitcoin and you can count how many of them that you got. Is it a store of value? Well it has been for a few years now, so it depends on how long time it must serve as a store of value to be qualified as such. Keep in mind that currencies throughout history, often dies sooner or later. There are some exceptions to this, like precious metals which are commodity money.
Commodity money has an intrinsic value. There are other types of money as well, like fiat currency. Fiat is something that the central bank prints for free. The value of that kind of money depends on how much of it is printed, interest rates, if the country has a booming economy and so forth and so on.
Electronic fiat money has no intrinsic value, but it is much more efficient to use compared to precious metals. You can not store precious metals at home because someone might rob you and they will probably not accept it at the grocery store (not where I live at least). So, yes gold has value but as money, it really does not work. A debit card is just so much more useful. You can carry it around in your pocket and have access to your money, without really having to worry of someone robbing you.
Now, what I have tried to do here is to squeeze in thousands of years monetary history. Very briefly I have put forth some of the differences between precious metals and fiat money.
So, why do people want to own gold? Well, not all people actually want to do that. I do not own any gold at all, because I have no place to store it (no I do not trust the banks). I do however own precious metals mining stocks, which gives me a exposure to the sector. A lot of people want to have exposure to precious metals, because they know that central banks are printing
and printing more
and more money. Actually we are right now in the middle of a currency war
where the countries of the world are competing with each other to devalue their own currencies. When there is inflation, the money you have loose in value because there is more of the money going around.
Then there is counter party risk. In a time when stocks are manipulated
, big banks can default (Lehman
), when money can be stolen (MF Global
) and the banking cartels can not be trusted (Libor
), some people feel that the gold they have buried in the backyard: can not be stolen by greedy financial institutions, taxed by governments, inflated away by central bank or manipulated by banking cartels. A corporation might go broke and their stock turn worthless, but gold never will. This is how many people think and precious metals have appreciated a lot over the past ten years.
Still, precious metals are cumbersome to use. It is not endorsed by central banks and it is not a producing asset (such as stocks that pay dividends). You can not really carry it around in your pocket and you can not store it at home (well you could, but no-one should do that) and not at the bank (the government could just begin taxing it hard
and then have the banking personal be present when you want to open your bank).
And then we have Bitcoins. Just as gold, it is not easy to inflate the Bitcoin supply at will. Fiat currencies can be created by the click of a mouse button and without any real production costs. There is no institution backing Bitcoin, thus is do not have the risks associated with politicians and central bankers. On the contrary it is still an underground currency technically separated from the banking institutions, sovereign debts and so forth and so on.
So, while it has many of the same properties that lure people into buy gold, it has also many of the characteristics of fiat money in that Bitcoins are easy to use (you just click a little with your mouse) and you do not have to worry as much of it being stolen from you (if you are really paranoid, you can store all your money in you own head by memorizing a pretty long sequence of digits).
An example. Let us say that you live in a country and are expecting a banking holiday where you will be locked out from your bank account, while they devalue the value of the currency that your account is denominated in. What are you going to do? Take out all the money and store it at home? Not very safe. Anyway, thinking that the country is going down the drain, you decide to sell everything you got and take a plane to the other side of the world. Are you planning on exiting the country with all of that money in your pocket
? What if you bought gold and then crossed the border, would you be afraid that they would confiscate it
? You could also buy Bitcoins, get rid of all the evidence, memorize the coin and cross the border without anyone ever finding out. When you arrived at your destination, you would switch back to what ever type of money you wanted.
I am not saying that this is the right thing to do. I am not saying that this is the wroing thing to do either. What I am saying is that it is possible to do and what I wanted to prove, was merely that Bitcoin has some of the pros of gold while it also has some of the pros of electronic money such as fiat money. I know of no other currency which has this combination of features and that attributes to the usefulness of Bitcoin. Even if people are not fleeing from a country, perhaps they could find it useful as a store of wealth anyway
You do not need governments or banks to promote something for it to be used. Google have become a central part of many peoples lives, just be making usefull products. If there continue to be users of Bitcoin, Bitcoin will continue to function as a store of value. It is perhaps not a producing asset and there are risks tied to it (such as 51% attacks and so on and so forth), but then again is the housing market risk free? Is the stock market a safe investment? Is money in the bank safe? Is it risk free to own gold? Those were rhetorical questions. Right now we have financial repression, the game is rigged and you are a target
So, where I end up with is an understanding that Bitcoin is type of money and that it has a set of features that no other currencies that I know of have. Since it is pretty much alone with having this combination of features, it offers something new that nothing else has. I believe that this is a value in itself and that it could be one of the reasons of why people will continue to use it. I would even go so far as to say, that I do not think that the power of this is to be underestimated.- Aramis