🖐️ Here's Why Bitcoin Could Become a Worldwide Currency...
🖐️ Here's Why Bitcoin Could Become a Worldwide Currency...
TL;DR: Bitcoin solves many of the problems that are apparent with money today.
Estimated Reading Time: 7 minutes and 25 Seconds.
This is a longer read, so if you don’t wanna learn more about Bitcoin just come back next Friday👍
A problem that has persisted for most of humanity’s existence is how to move economic value across time and space. This problem is what led Satoshi Nakamoto to introduce Bitcoin in 2008. In order to understand bitcoin, we must first understand the history of how economic value has been exchanged in the past.
Why Do Things Have Value?
A key property that leads to something being viewed as valuable is salability. Austrian economist Carl Menger defined salability as “the ease with which a good can be sold on the market, whenever its holder desires, with the least loss in its price”. A salable good should be easily divisible and transportable, as well as maintain its value over time.
For a good to maintain its value, it is necessary that the supply of the good does not increase at a drastic rate which will allow the good to maintain its value.
Now that we have a better understanding of what makes something valuable, we can look at the different ways our ancestors exchanged economic value in the past…
What Did We Use Before Paper Money?
Barter
Before money ever existed, people would use a system of exchange called barter. Barter allowed for goods or services to be traded without the use of money. While this system worked for some scenarios, as communities grew the problem of coincidence of wants aka “I want something that you have, but you don’t necessarily want anything that I have to barter with” became more apparent.
That is how the idea of “Money” came about. Since everyone is constantly seeking to acquire more money, people were able to use it to exchange for goods or services.
Money, as we know it today, is simply a piece of paper or a number in a database, but early money was VERY different. For example, the Inhabitants of Yap Island in Micronesia used Rai Stones as their form of money.
Rai Stones
Understanding how these large circular stones functioned as money on yap island will help us understand the function of bitcoin.
The rai stones were all different sizes and were not native to Yap. The stones were rare since they were difficult to obtain as they had to be quarried elsewhere, before being brought onto Yap in rafts and canoes. The stones would then be placed on the highest hill on the island where everyone could see them.
When the owner of the stone wanted to purchase something, he would publicly announce the new owner of the stone. Because everyone knew who owned the stone, there was effectively no risk of theft.
This system was used successfully for many centuries until 1871 when an Irish American Captain called David O’keith was shipwrecked on the island. O’Keith saw the opportunity to buy the coconuts on the island and sell them to coconut oil manufacturers, but the natives were uninterested in any form of money that O’keith could offer.
So O’keith sailed to Hong Kong where he procured some explosives, before quarrying several large stones in Palau and presenting them to the people of yap.
Because the stones were so easily quarried and transported, the form of money became significantly softer as these stones were not perceived as rare anymore. which resulted in the collapse of the rai stone system.
Metals
Rai stones failed as forms of payment when supply heavily outweighed demand, which caused the stones to lose their scarcity.
We then turned to metals as currency given their scarcity, and the fact that metals had to be extracted from the earth. First, with silver standards, and then later, to gold.
Gold and silver had both market demand and monetary demand.
Gold
Gold had a couple of unique features that allowed the metal to stand out amongst other metals. Those features included:
Virtually impossible to destroy, and can’t be made using other materials
The only place to find gold was to mine it. As more gold was mined, it became much harder to mine more gold, allowing the supply to grow at a slow and predictable rate
Because of these unique features, gold started to become an effective store of value which led to gold becoming incredibly salable as everyone wanted to get their hands on it.
Government Money
Gold’s historical failure is that it could only become more salable through centralization with financial institutions, and those institutions ultimately would lend out more than they had.
This brings us to our final stop of the journey…fiat money.
The value of government money depends on those in charge. If they choose to inflate its supply (as they have throughout its existence), inflation kicks in, and purchasing power is lost as we are currently seeing in our economy.
Despite the problems, Government money remains our prime form of money for several reasons:
Taxes: We pay taxes in the form of government money, increasing its salability.
Regulated: Governments control the use of fiat money in our financial institutions, increasing scalability.
Alternatives are not allowed: Laws do not allow for alternative currencies.
Initially backed: Government money was established as the credible norm backed by gold.
What Is Wrong With Fiat Money?
Inflation
A dollar today is a small percent of what it was 50 years ago. The result of inflation is governments and central banks manipulating interest rates and issuing bonds to easily increase the circulating supply of any currency. This tends to temporarily inject liquidity into markets, but the additional supply dilutes the purchasing power of anyone holding that currency.
Simply check out the chart below which shows the inverse between the purchasing power of a dollar vs. the total dollars in circulation:
Border Constraints
Imagine if every retail store had its own currency, and in order to use the currency in the store next door, you had to forfeit a % of the value. At a macro level, this is comparable to what happens with fiat currencies.
There are 180 currencies recognized by the United Nations, and these people owning different currencies are disincentivized from transacting with each other.
Inefficient Transfer of Payments
Fiat money is inefficient to move around. As a result, we have to rely on various intermediaries, who each take a share of profits in order to relay money to the next person.
High fees and long settlement times have been justified to us by these intermediaries who say they are the “trusted guardians of the walled money system”.
Unlike fiat money, which requires middlemen to move around, digital currencies do not require an intermediary to facilitate transactions. You can directly send hundreds of millions of dollars to someone across the world using Bitcoin in a matter of minutes, thanks to Blockchain technology.
What Makes Bitcoin Special?
Here are several interesting characteristics that make Bitcoin special:
1. Store of value: As previously explained, the stock-to-flow ratio of a good determines its use as a store of value. With the rai stones on yap, their value led to overproduction which lead to a price collapse.
With China’s silver standard, the value of silver lead to overproduction and ultimately a price collapse.
Gold’s success as a store of value can be explained by its chemistry and rarity - it is extremely difficult to destroy, and extremely difficult to mine. So even if the price of gold increases significantly, the amount of gold mined would only increase very slightly.
Bitcoin has this scarcity to an even greater extent - Bitcoins cannot be destroyed, and there will only ever be 21 million bitcoins in the world due to the way the technology was designed.
2. Secure: Credit card fraud costs companies billions of dollars each year. There is also estimated to be $200+ billion worth of counterfeit money currently in circulation worldwide.
Bitcoin has been around for 14 years and has not been hacked yet because it is cryptographic, irreversible, distributed, and public. Paying with “Fake Bitcoin” simply would be impossible, thus limiting fraud and counterfit money.
3. Borderless Currency. This final application is not likely to materialize anytime soon, as there are still issues with volatility and questions to be answered. But Bitcoin’s unique properties mean that a future where bitcoin is used globally as a store of value is not unimaginable, meaning we would no longer have to exchange currency when traveling abroad.
Why Do Some People Believe Bitcoin is Worthless?
Like any asset or thing of value, the price that people are willing to pay for Bitcoin is a socially agreed upon level that is also based on supply and demand. Because Bitcoin is virtual, only existing within computer networks, some people have a hard time grasping that Bitcoins are scarce and that they have a cost of production.
Because of this unwillingness to accept that digital traces can hold value in this way, they remain convinced that Bitcoins are worthless.
Conclusion
There are still several issues that need to be addressed before Bitcoin becomes a global currency like its volatility, but Bitcoin adoption is certainly very interesting to watch as Bitcoin greatly improves on the issues that prior forms of currency have faced.