What is money?
Money matters. Our favourite FIAT currencies are coming to the end of their lives and we can expect a currency revolution. Not only will this not be the first. It won’t be the last either.
Money in the form of physical and digital FIAT currency (e.g. USD) is a stable good:
- You can use it as a store of value
- You can use it to exchange for the consumption of other goods
- It can be denominated into smaller units to value goods & services
One can evaluate money across 6 properties (scarcity, acceptability, divisibility, durability, portability and fungibility).
Across these properties, although our beloved FIAT currencies are ubiquitous, they are not the best performers in all the above properties. The major currencies like GBP and USD are:
- Not actually that scarce, in fact central banks are printing money like crazy and reducing its value. Since 1971 when the Gold standard was removed, money has been printed excessively which ultimately makes the rich richer and the poor poorer.
- Not actually very portable — to achieve finality of a payment across borders and sometimes even within countries requires money to move through multiple intermediaries which increases costs and introduces credit risk.
Over 500+ previous FIAT currencies have failed throughout history (e.g. German Papiermark, Argentina Peso).
What is bitcoin?
Bitcoin is the first decentralised digital currency. It was created by Satoshi Nakamoto (believed to be a pseudonym for a person or group) in 2008 as a response to the global financial crisis and central bankers excessive money printing.
The blockchain is a list of sequential blocks which contain Bitcoin transactions from wallet to wallet.
Users request transactions which end up in a pool (queue) with a transaction fee attached.
Miners take transactions from the pool and create a new Bitcoin block which they are able to add to the previous block using an identifier to link to the previous block.
The miners are incentivised by transactions fees and Bitcoin rewards for adding blocks to the blockchain.
Nodes are maintained by market participants who retain a copy of the ledger.
Why is Bitcoin sound money?
When assessed against the properties of what makes good money, Bitcoin excels.
Bitcoin is fully transparent, it has a limited supply of 21 million and therefore it is scarce, it is divisible up to 8 decimal places (i.e. satoshis) and highly portable across borders.
Bitcoin is governed by code and its market participants — it is not subject to politics or unelected central bank governors.
Bitcoin has a market cap of $1 trillion dollars and is used by over 100 million users at the time of writing. The Bitcoin network also settled $ 12 trillion dollars in 2021.
Anyone can run a node to verify the Bitcoin blockchain or mine Bitcoin. It does not require multiple intermediaries as in the current financial system to make settle transactions.
Bitcoin does have flaws. It doesn’t have the history of other currencies but is has been around now for 13 years. Bitcoin has relatively higher transaction fees and is considered slow (7 transactions per second) — however this is by design to ensure security.
The world’s monetary policy decisions have been taken to support the economic downturns. While this appears to support employment and GDP, central bankers are not making decisions independently from their political leaders. This is leading to currency devaluation, asset rich economies prospering and the asset poor economies suffering.
Bitcoin provides a level playing field allowing free market economics and transparency to dictate its success.
While undoubtedly centralised governments and policy makers will tax and regulate Bitcoin — it cannot be stopped in the same way the internet cannot be switched off.
Multiple corporate and institutional investors are now seeking exposure to Bitcoin with almost 80% of Bitcoin being held for the long term.
A layer 2 lightening network has been developed to sit on top of the Bitcoin blockchain to allow faster transactions and more countries and corporations are expected to start using Bitcoin as their reserve currency.
Bitcoin won’t last forever, nothing does. However, given money is our technology to transact with each other and old money is being devalued, it makes sense to start experimenting with it. After all, money is not mutually exclusive.