Year 2008. An unidentifed person, nicknamed as Satoshi Nakamoto, registers the domain bitcoin.org and publishes a paper titled Bitcoin: A Peer-To-Peer Electronic Cash System. Claiming that a system for electronic transactions can be build without relying on trust of a centralised party.
In January 2009, Satoshi Nakamoto releases the bitcoin network, mining the very first block to ever be mined on the chain and embedding an ever-lasting message for all the users to come, before disappearing from public knowledge for good:
Yes, we will not find a solution to political problems in cryptography, but we can win a major battle in the arms race and gain a new territory of freedom.
Since the early ages of humanity, people have loved to interchange every kind of things they have crafted or found. This interest in trading has always been keenly adopted on many different societies, fostering specialisation, cultural flowing, communication and permeability between and within populations. Soon was found that a general mean of exchange (what we understand as currency) made trades far more feasible and efficient. This idea of general mean of exchange has been widely and thoroughtly applied in many socities, and in many different ways. Some funny examples have been sea shells, cows, cigarettes or even noodles packs.
Whenever an item is established as the standard mean of exchange within a society, everybody wants it. Everybody is working, trading and making decisions in order to get as much of that item as possible. This is the power of a currency. It is not just that the item has intrinsic value, it is not that this item can be actually used for something practical, it is that it has the power to convince everyone that has value. You may think that this is a delusion, but it is very powerful delusion.
Same thing happens to present currencies. Euros and dollars have no real intrinsic value. They have value because people think they have value. If I want to possess dollars is because I am very confident everyone is going to accept some acually valuable things in exchange of dollars. And while each one of us feels the same way, all together -collectively- contribute to the increase in the acceptance, usage and value of that currency.
But notwhithstanding, that a currency is well established in a society does not imply that it will last forever.
The whole point of mercantilism and the added value of trade is the efficiency of the market, where the needs and capabilities of many unconnected people can be met by the means of a common desire: their currency. And because of that, the value of a currency can be gauged out of the usage it has on the people. Wealth is not constructed by the interchange of goods between two very rich men, but with the continuous small-scale negotiation of millions of people, balancing the forces of the market.
It can happen, however, that a currency is not capable of fulfilling this usage anymore. And when this happens, make no mistake, new alternatives will be always on the table.
Whenever you are facing the question of the intrinsic value of currencies, first consider their power to convince people of their value. Not the practical usage of the actual item.
In most modern and ancient history, gold has been the most widely used standard currency between societies. And every other currency that has been established, was gauged in its value in gold. The mighty british Pound had value just because it could be exchanged by gold, not by itself. And because the british empire had a lot of gold, they could promise reliable and non-interrupted interchange between pounds and gold; and that made the pound to be valuable. They could not fool foreign invesotrs with passionate promises of futurue wealth, neither print more pounds to increase their apparent wealth; they had to prove their value with gold.
Gold was the standard international measure of wealth until the XX century. In this century, almost the entire planet cut the links between their currencies and gold in one strike - or maybe in two -.
Nowadays, some people are wholeheartedly missing the gold standard.
Some branches of economy have argued that the lack of a gold standard, or any kind of objective and non-manipulable metric of wealth, is leading the worldwide economy into a Ponzi scheme trap of ever-growing debt.
Not-so-academic survivalists and conspiracy theorists loved also the gold standard, because it held for them the promise of an ever-lasting stable currency in a governmental vacuum scenario. And it also prevents an out-of-hand money supply from the government, what could prevent disasters as the recent hyperinflation of Zimbawe.
Despite that, some argue that the Gold Standard would not be the all-saver of todays economic dangers. Today’s world is not the same as the world from a couple centuries ago; and today’s issues can not be so easily addressed with a shiny piece of metal. Gold coins can be very susceptible to scams; have little or no intrinsic value in our current society and it might arrive the day when we will not have enough of that precious metal for sustaining all world’s economy.
And even some survivalists discuss that it lacks of nutritional value, and that in a survavilist nightmare gold should be far down on the list of things to stuff in the bag before fleeing into the wilds.
Considering all of the above, you might be wondering whether some new shiny token is going to become the new gold of our era.
Over the past couple of years, we have witnessed an outstandingly sharp increase cryptocurrencies price, but especially in bitcoin’s. This has sparkled a bunch of discussion upon whether it is a bubble or not, and on its real value.
Unlike most stocks, bitcoin is uncapable of provide returns. It is not uncapable because it is not working properly, it is not because it was never inteded to produce any kind of profit, it was inteded to become a currency. And no currency byproducts profits by itself.
Aknowledging that, we must note that the only value bitcoin has to offer is its usage as a currency. So in order to assess whether it is overrated or not, we need to reckon its value, based on its feasability of becoming a mainstream currency.
In general, a currency needs to fulfill three crucial characteristics: It has to be useful as a means of exchange, it needs to store value and it needs to be a unit of account.
So let’s see whether or not bitcoin satisfies any of these conditions.
Have you ever tried to buy something using bitcoins? Would you accept a payment on bitcoins?
These are the main question to be answered on this matter. It will be a mean of exchange when it proves that it is useful for that, and that it is actually used as a mean of exchange, not before. And bitcoin has a great advantage over physical currencies: Because of its digital origin and nature, bitcoins can be splitted in as tiny pieces as it’s needed; you can always add another 0 to a string of numbers. This might sound trivial, but it is not, and it is a logistic and thecnical problem, and a constraint for physical fiat currencies.
Nowadays, bitcoins are sometimes used to buy and sell goods. Bitcoin is oftenly used as an alternative method of converting currencies, and to avoid the big banks that thend to charge amazingly high fees upon currencies exchange. It is also utilised in a variety of transactions that require some degree of secrecy; which could be awesome for most anarchists.
So yes, you can fairly think that bitcoin could be pretty useful as a mean of exchange.
This point was intended to be the flagship of the bitcoin’s movement. This is the one where a lot of bitcoin’s defenders are putting their hats on.
When greedy governments become too reckless, it is no rare to see them printing money. A lot of money. Printing money has the collateral effect of devaluating the currency, leading to artificial inflation; which could eventually go downhill and trigger hyperinflation. These kind of scenarios jeopardizes the storage of wealth, the savings of the population and thus the confidence in that currency. If people does not belive in the reliability of their money and its value, they don’t save up. If you wouldn’t know how much your money would value tomorrow you’d be better spending anything on more reliable, durable and useful goods; such as houses, lands, livestock or whatever.
The algorithms and technology designed beneath bitcoin intends to put a cap on how many bitcoins can exist and be created. This simple characteristic puts a great fence for those governemtns, difficulting their self-destructive behaviour and stabilizing the value of money. In other words, it could do whta the gold standard was already doing. And so a bitcoin standard could serve as a modern form of gold standard.
This puts bitcoin in an awesome situation, doesn’t it?
The truth is that printing money is not the only way to destabilize the value of a currency. Volatility does it too.
In this plot you can see the computed moving volatility of Bitcoin and some standard currencies. It is computed taking a range of 112 days. If you want more details, you can see the code of this calculations in my github page.
Some argue that even though bitcoin is not at acceptable levels at this moment, it eventually will. Trying to predict whether the volatility will eventually drop at the levels of the other currencies would be difficult and unprecise, but above all: extremely misleading. So we are not going to do that in this article. The point to be extracted from this brief analysis is that bitcoin has much greater volatility than fiat currencies. Moreover, the volatility tends to change drastically over time. So even in periods of apparent calm, you can not be confident that the price would not start to dance wildly again. This implies that saving up money on bitcoins can be extremely risky.
Some argue that huge fluctuacions of price is normal for any young currency with no banking support and no public understanding surrounding its nature. But it is still to be shown whether this fluctuations might dilude over time as those issues are addressed.
The volatility of bitcoin might be a dealbreaker for some, or a solvable misfortune for others. But it is an issue to consider, because it erodes the confidence of people in the bitcoin. Because price stability carries saftey. And nobody will be interested in saving his money in a currency that does not feel safe.
This rises some doubts upon wheter bitcoin can become a mean for storing value. And this alone can prevent it from becoming a new currency standard.
How many bitcoins are required to buy a pizza? How many bitcoins would be worth an hour of your time? How minimum amout of bitcoins would you accept as your salary?
While people remain unable to answer those questions without having to convert it in $US or their local currency, bitcoin will not be a unit of account. Period.
The value of bitcoin is seldom talked about in relation to goods and services, it is always in terms of dollars. So dollars are the Unit of Account in this sense. Not the bitcoin.
Some argue that the Unit of Account vary from region to region or even from person to person. Euro is definitely a unit of account for people in Euro countries, and Yen is the unit of account for people in Japan. But that does not diminishes this point entirely, because nobody in no region on Earth uses Bitcoin as his Unit of Account. They’d always need a local or global currency to know the value of a Bitcoin, not by its own. This may change in some years, but it is not the present situation.
Maybe because people is not using bitcoin so much in their every day lifes, or perhaps because of a lack of price stability; but it is clear that bitcoin is not being used as a Unit of Account yet. And does not look to being used as such in any near future.
It is also true that blockchain decentralized programs have huge potential and people want to use them somehow.
Cryptocurrencies - more broadly - have value in that the technology beneath them happens to be innovative and useful. The nature of their relationship to the users is unique in that it is a hybrid of the anonymity of cash and the ease of credit cards and the security of a vault. Also, in order to become more popular, these currencies need the applications built for them to become easier over time. Allowing the average guy to use them whils feeling safe.)
Written on 03 May 2018 by Alejandro Jiménez Rico