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Gold, Currency, Bitcoin

The diagram below shows some important attributes of a good “currency of exchange” and “store of value“; in other words, a good “money“. The most important characteristic is that people perceive the artifact that represents money as valuable. The second most important attribute, but not independent of the first, is scarcity. When fiat currencies collapse and lose their value, it’s because governments have printed too much of it (to finance wars and massive, unsustainable social programs). It ceases to be scarce and its holders lose faith in its value.

CurrencyChars

Gold and other precious metals serve as a good store of value and a hedge against volatile currencies because it is scarce. However, gold is not a very good, practical, currency of exchange because it’s not very portable in large amounts (armed guards, armored vehicles) or accurately divisible. That’s why you don’t see Amazon.com or Target accepting gold for their products, or governments accepting gold bars/nuggets as payment for taxes.

Physical, difficult-to-counterfeit, paper dollars and coins serve as a good medium of exchange because of their increased portability, fungibility, and divisibility relative to gold. Dollars can also serve as a good store of  value as long as their issuer doesn’t go wild and turn the dials up to 10 on their mints – which is ominously becoming more common nowadays.

Theoretically, secure virtual currencies like Bitcoin trump gold and cash in all categories except for one.

  • BTC is guaranteed to be scarce since there is no way to mint more than 21M BTC – this limit was baked into the system since day one by system designer Satoshi Nakamoto.
  • BTC is portable because it weighs nothing – a BTC is simply a number in a disk file that can be transferred securely and speedily over the internet at will by its owner (with no middle parties taking a cut or delaying the transfer).
  • BTC is fungible because it can’t be counterfeited. The huge amount of crypto computing power underlying the system ensures that double-spending is astronomically impossible.
  • BTC is divisible down to .00000001 of 1 BTC, or 1 “satoshi”. When the BTC mint shuts down sometime in 2140, 1 X 10**14 satoshis will be in circulation and virtual vaults throughout the world.

The sole category where Bitcoin doesn’t trump gold/cash is in social consensus of perceived value. The vast majority of the 7 billion people in the world perceive the value of BTC to be zero.

As I write this post, the handful of millions of people who transact in Bitcoin (i.e. the market) “perceive” 1 BTC to be  worth $200+ in cash issued by the most financially viable country on the globe – the USA. But alas, if the market turns, Bitcoin’s value might revert back to the value it was born with: zero.

GoldCashBitcoin

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