Financial Paradise: Bitcoin
If you are unfamiliar with Bitcoin, you can learn a lot by doing a little internet research… but the short story is that Without the involvement of a central bank or issuer bank, Bitcoin was developed as a means of exchange. Additionally, Bitcoin transactions are meant to be secretive and anonymous. What’s most intriguing is that Bitcoins only exist in computer software, kind of like virtual reality, and have no physical counterparts.
The general notion is that Bitcoins are “mined.”.. interesting term here… by solving an increasingly difficult mathematical formula -more difficult as more Once more interestingly, bitcoins are “mined” into existence on a computer. New Bitcoin is created and then stored in an electronic “wallet.” Then, you can exchange real goods or fiat money for bitcoins… and vice versa. Additionally, Bitcoins are widely distributed and cannot be “managed” by authorities because there is no single entity responsible for issuing them.
Of course, those who support Bitcoin and stand to gain financially from its expansion will shout loudly that “for sure, Bitcoin is money.”.. and not only that, but ‘it is the best money ever, the money of the future’, etc… Those who support Fiat, however, also scream with equal fervor that paper money is money… and we all know that Fiat paper lacks the most crucial characteristics of actual money, making it by no means money. The next query is whether Bitcoin even counts as money… never mind it being the money of the future, or the best money ever.
Let’s examine the characteristics of money to find out if Bitcoin satisfies them. The three essential attributes of money are;
1) money is a stable store of value; the most essential attribute, as without stability of value the function of numeraire, or unit of measure of value, fails.
2) money is the numeraire, the unit of account.
3) money is a medium of exchange… but other things can also fulfill this function ie direct barter, the ‘netting out’ of goods exchanged. Additionally, there are “trade goods” (chits) that have short-term value. Finally, there is an exchange of mutual credit, which nets out the value of promises fulfilled by bills or IOUs.
Bitcoin performs reasonably well as a medium of exchange when compared to fiat currency. Only the area where its issuer is located is accepted for Fiat. In Europe and elsewhere, dollars are useless. The use of bitcoin is widespread worldwide. However, not many merchants currently accept Bitcoin as payment. Fiat triumphs unless the acceptance increases geometrically… although at the cost of exchange between countries.
The first requirement is much more demanding; money must be a reliable store of value… now In a matter of years, Bitcoin’s “value” has increased from $3 to roughly $1,000. This is as far away from being a “stable store of value” as you can possibly imagine! Such profits are a prime example of a speculative boom, in fact… like tulip bulbs from the Netherlands, junior mining firms, or Nortel stock.
Fiat obviously fails here as well; for instance, the US Dollar, the “main” Fiat, has lost more than 95% of its value in a few decades… neither fiat nor Bitcoin meets the criteria for the most crucial aspect of money, the ability to hold value over time. Real money, i.e., gold, has demonstrated the ability to maintain value over eons rather than just centuries. This vital capability is absent from both Bitcoin and Fiat… both fail as money.
We now reach the second quality, which is that of being the numeraire. Now, this is really interesting, and by carefully examining the “numeraire” question, we can see why both Bitcoin and Fiat fail as money. The term “numeraire” describes the use of money as a means of both storing and, to some extent, comparing value. Since value only exists in human consciousness, it is believed to be impossible to actually measure value in Austrian economics… and how can anything in consciousness actually be measured? However, market prices can be determined using the Mengerian market action principle, which is the interaction between bid and offer… if only momentarily… and this market price is expressed in terms of the numeraire, the most marketable good, that is money.
So how do we calculate Fiat’s value?.. ? through the idea of “purchasing power.”.. that is, the value of The exchange value of a fiat currency is what defines it… a so called ‘basket of goods’. However, it is implied by this that Fiat has no intrinsic value and derives value instead from the value of the goods and services it may be exchanged for. The Fiat number is caused by the “bought” goods. In the end, the only difference between a one dollar bill and a hundred dollar bill is the number printed on it… and the purchasing power of the number?
Contrarily, gold is unique in that it is measured by a different physical standard; specifically, by its weight or mass, not by what it trades for. A gold gram is a gold gram, and a gold ounce is a gold ounce… no matter what number is engraved on its surface, ‘face value’ or otherwise. In contrast to Fiat, where weight is a measure of causality, gold is an intrinsic quality… not by purchasing power. Do you know how much an ounce of money is worth? Fiat is only’measured’ by a transient quantity, not anything like that… the number printed on it, the ‘face value’.
Unlike Fiat, Bitcoin is not just a number; it is further from being the numeraire… but its value is measured in Fiat! Even if Bitcoin were to succeed in replacing the Dollar as the world’s most widely used “numeraire,” it would never possess the intrinsic value that Gold does. Being measured by a real, constant physical quantity makes gold special. The ability of gold to retain value over a long period of time makes it special. This particular blend of attributes is not found anywhere else within human reach.
In conclusion, despite having some advantages over Fiat, such as anonymity and decentralization, Bitcoin falls short in its attempt to pass as money. The benefits of it are debatable as well; the intention is to limit the “mining” of Bitcoins to 26,000,000 units; as a result, the “mining” algorithm becomes increasingly difficult to solve before becoming impossible once the 26,000,000 Bitcoins have been mined. Since some central banks have already stated that Bitcoins may become a “reservable” currency, it is unfortunate that this announcement could very well spell the end for Bitcoin.
Amazing, doesn’t that sound like a significant step for Bitcoin? After all, it appears that the “big banks” accept the actual value of Bitcoin. In reality, this just means that banks are aware of the possibility of exchanging fiat for bitcoins… and to actually buy up the 26 million The meager 26 billion Fiat dollars would be spent on the planned Bitcoins. 26 billion dollars, or roughly one week’s worth of printing by the US Fed alone, is not even pocket change to the Fiat printers. And after being purchased, the Bitcoins were kept secure in the Fed’s “wallet.”.. what useful purpose could they serve?
A perfect corner would be when there would be no more Bitcoins in circulation. How on earth could they be used as a medium of exchange if there are no Bitcoins in use? What, furthermore, could Bitcoin’s creators do to prevent such a fate? A change in the algorithm and an increase of 26 million are required… 52 million? Participate in the Fiat printing parade to 104 million? But at that point, according to the quantity theory of money, Bitcoin would start to lose value, just as it is said that Fiat loses value as a result of “over-printing.”..
We now reach the crucial question: Why look for “new money” when we already possess the best form of currency, gold? Fear of gold being seized? Inability to remain anonymous from a nosy government? Fiat currency legal tender laws?Brutal taxation? The solution is not in a new type of money but rather in a new social structure free of Fiat, spying by the government, drones, and swat teams… without TSA thugs, border patrol agents, and the IRS… on and on. tyranny-free and a world of liberty. Once this is done, gold will once again play the essential and historic role of being real money… and not a moment before.