Is Bitcoin Money?

Tyler Durden's picture

Authored by James Rickards via The Daily Reckoning,

At various times in history, feathers have been money. Shells have been money. Dollars and euros are money. Gold and silver are certainly money. Bitcoin and other cryptocurrencies can also be money.

People say some forms of money, such as Bitcoin or U.S. dollars, are not backed by anything.

But that’s not true.

They are backed by one thing: confidence.

If you and I have confidence that something is money and we agree that it’s money, then it’s money. I can call something money, but if nobody else in the world wants it, then it’s not money. The same applies to gold, dollars and cryptocurrencies.

Governments have an edge here, because they make you pay taxes in their money. Put another way, governments essentially create an artificial use case for their own forms of paper money by threatening people with punishment if they do not pay taxes denominated in the government’s own fiat currency.

And the dollar has a monopoly as legal tender for the payment of U.S. taxes. According to John Maynard Keynes and many other economists, it is that ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value. This theory of money boils down to saying we value dollars only because we must use them to pay our taxes — otherwise, we go to jail.

So-called cryptocurrencies such as Bitcoin have two main features in common.

The first is that they are not issued or regulated by any central bank or single regulatory authority. They are created in accordance with certain computer algorithms and are issued and transferred through a distributed processing network using open source code.

Any particular computer server hosting a cryptocurrency ledger or register could be destroyed, but the existence of the currency would continue to reside on other servers all over the world and could quickly be replicated. It is impossible to destroy a cryptocurrency by attacking any single node or group of nodes.

The second feature in common is encryption, which gives rise to the “crypto” part of the name. It is possible to observe transactions taking place in the so-called block chain, which is a master register of all currency units and transactions.

But the identity of the transacting parties is hidden behind what is believed to be an unbreakable code. Only the transacting parties have the keys needed to decode the information in the block chain in such a way as to obtain use and possession of the currency.

This does not mean that cryptocurrencies are fail-safe. But on the whole, the system works reasonably well and is growing rapidly for both legitimate and illegitimate transactions.

It’s worth pointing out that the U.S. dollar is also a digital cryptocurrency for all intents and purposes. It’s just that dollars are issued by a central bank, the Federal Reserve, while Bitcoin is issued privately. While we may keep a few paper dollars in our wallets from time to time, the vast majority of dollar-denominated transactions, whether in currency or securities form, are conducted digitally.

We pay bills online, pay for purchases via credit card and receive direct deposits to our bank accounts all digitally. These transactions are all encrypted using the same coding techniques as Bitcoin.

The difference is that ownership of our digital dollars is known to certain trusted counterparties such as our banks, brokers and credit card companies, whereas ownership of Bitcoin is known only to the user and is hidden behind the block chain code.

Bitcoin and other cryptocurrencies present certain challenges to the existing system. One problem is that the value of a bitcoin is not constant in terms of U.S. dollars. In fact, that value has been quite volatile, fluctuating between $100 and its present high above $3,400 over the past few years. It’s currently around $3,467.

It’s true that dollars fluctuate in value relative to other currencies such as the euro. But those changes are typically measured in fractions of pennies, not jumps of $100 per day.

One potential solution to the Bitcoin volatility problem I find interesting is to link Bitcoin to gold at a fixed rate. This would require consensus in the Bitcoin community and a sponsor willing to make a market in physical gold at the agreed value in Bitcoin. This kind of gold-backed Bitcoin might even give the dollar a run for its money as a reserve currency, especially if it supported by gold powers such as Russia and China.

Both are looking for ways out of the current system of dollar hegemony, which will only take on added urgency now that the U.S. has imposed harsh sanctions against Russia and is signaling a trade war against China.

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Doom Porn Star's picture

"Is BitCoin money?"

 

IF I can buy ass, gas, or grass with it: the answer is YES.

-ThroxxOfVron

Doom Porn Star's picture

Tell it to the man on the corner.

BaBaBouy's picture

Digital Keynesian Fiats Bitcoinz...

InjectTheVenom's picture

 

>>>>    bitcoin

>>>>    shitcoin

SILVERGEDDON's picture

Fuck you, tmosley. 

" I'm a pumper who don't know when to dump her. "

And, your response is not an argument.  

The_Juggernaut's picture

Beaniecoins have zero intrinsic value.  If nothing else, shiny gold will always butter some honey's muffin and get you laid.

Prisoners_dilemna's picture

Bitcoin is money in ways that gold isn't; Bitcoin price reflects the debasement of fiat currencies.

https://news.bitcoin.com/bitcoin-booms-may-positively-effect-stock-prices/

"There are not any clear indicators why bitcoin is a driver for the stock price. The correlation is unknown."

 

Bitcoin is the new benchmark, bitchez.

 

To your point about Bitcoin lacking intrinsic value; "According to John Maynard Keynes and many other economists, it is that ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value."

 

Sam.Spade's picture

Thieves Emporium has an excellent analysis of what money is and how making it anonymous will kill the state and bring on anarchy.

You might even call it a primer on fiscal rebellion.

One of the directors of The Bitcoin Foundation said of it:  "I recommend reading this book", agreeing with French programmer Nocolas Dorier, founder of NBitcoin, who also said  "I recommend you to read it."

The editors of The Daily Bell must have agreed as they ran it as a serial on their site.  And it's still there, if you want to start it for free:  http://www.thedailybell.com/editorials/max-hernandez-introducing-thieves...

Or you can just download it from Amazon (4.6 rating in 125 reviews), Smashwords (same rating, fewer reviews), Nook (ditto), or iBooks.

But, whatever you do, get your hands on a copy and start reading.  Because it shows, in graphic detail, how the uber-rich use money printing to own us and how we can use alternate forms of money to take back our freedom.

https://www.amazon.com/Thieves-Emporium-Max-Hernandez-ebook/dp/B00CWWWRK0

Prisoners_dilemna's picture

I just want buttered muffins...   how many dozens make a harem??

buyingsterling's picture

Value of Bitcoin if backed by nothing: ???? (tens of thousands?)

Value of Bitcoin if 1 Bitcoin is backed by 3 oz of gold: approx $3800

 

In other words, it's likely worth more if backed by NOTHING. All other elements (security, anonymity, blockchain) would remain the same. So with the current system, nothing is worth more than something.

That puts the lie to the Bitcoin charade.

King of Ruperts Land's picture

Bitcoin is backed by Bitcoin

(if it worked and didn't have the fork attack flaw and was immutable like gold, then that statement would mean something.)

Just like gold is backed by gold.

Gold has proved immutable for thousands of years and scientists tell us it has been than way for most of time as far as they can tell.

If gold starts to become as valuable as plutonium or enriched uranium then I would be cautious as gold can be generated by nuclear fiddling.

mmanvil74's picture

A crypto backed by gold is not only possible, it is technologically trivial to implement, and versions of it are already circulating.  There are also cryptos in existence that are pegged to USD, EUR and other fiat currencies.   Soon, nearly every asset will be represented as a token on a blockchain and be easily tradable without using centralized stock and commodity exchanges.

The problem with a "gold-backed" crypto is someone has to store and guard the trove(s) of gold that is supposedly "backing" the crypto, which is subject to all kinds of risks, not least of which is its seizure by a state actor.  Bitcoin cannot be seized by a state actor because it lives on thousands of computers around the world, therefore, Bitcoin is "safer" than anything backed by gold.

Bitcoin itself will never be "backed by gold" because those who hold Bitcoin do not view its volatility as a negative characteristic but rather a positive one.  Most of us believe that it is not Bitcoin rising in value against dollars and gold (and every asset known to man) but dollars and gold that are falling against Bitcoin.  The reason is simple, Bitcoin's attributes as a store of value and means of exchange are superior to gold, dollars, sea shells, and other archaic forms of money in every way. 

Buckaroo Banzai's picture

What is money? Money has three defining characterists: (1) a store of value (2) a medium of exchange (3) a unit of account. Anything that has at least one of these can be called "money". Something that has all three is a superior form of money.

Is BitCoin money?

BitCoin has proven beyond a shadow of a doubt that it is a store of value. If you have bought BitCoin at any point since it was created, it has increased in value, if you held it for any length of time. It is also a medium of exchange--in fact, in online black markets, it is the definitive medium of exchange. Many above-board online vendors and contractors are also happy to accept BitCoin. It is also a unit of account, albeit in a fairly limited capacity, in that other cryptocoins are valued and indexed against BitCoin.

Is the fiat dollar money?

It is a store of value only in the third world. In the developed world, it is a terrible store of value, truly awful. It is definitely a medium of exchange, you can buy anything anywhere in the world with dollars. It is also the definitive unit of account worldwide.

Is gold money?

It is a decent store of value, although it's value is profoundly manipulated with respect to the fiat dollar. This means that if you buy and hold for a time period less than twenty or thirty years, there is a reasonable chance that if you are forced to exchange it for dollars, you may actually lose value. It is not a useful medium of exchange in the developed world, and in the third world it is probably too valuable to be of use for anything except extremely large purchases, or in an emergency. It is not a unit of account.

Is silver money? See "gold".

Conclusion: As the dollar enters its final stage of value collapse in a world increasingly driven by internet commerce, BitCoin is the leading candidate to replace it. In this future world of ongoing dollar collapse, gold has a role to play as a secondary store of value; as the gold price manipulation infrastructure collapses along with the dollar, gold will be revalued upwards, and will reach a proper level of stable valuation against BitCoin.

dumbhandle's picture

Pretty pretty good analysis until you get to the point where Bitcoin is the logical successor to the dollar. The only that Bitcoin has going for it are its secure network, it's longevity, its installed base, and its market cap. Bitcoin is slow and not developing. Bitcoin is relatively not programmable. And it is not fungible, it is not private. Other coins that have these qualities are evolving and catching Bitcoin in market cap. It is only a matter of time till Bitcoin is surpassed by one of these other coins. So, if you replaced Bitcoin with cryptocurrency in your analysis it would be much more accurate.

J S Bach's picture

"At various times in history, feathers have been money. Shells have been money. Dollars and euros are money. Gold and silver are certainly money."

Correction:

"At various times in history, feather have been currency.  Shells have been currency.  Paper dollars & euros are currency.  Gold and silver are certainly money."

There... that's more like the truth.  Feathers, shells and paper do not carry any intrinsic value in their essence.  Gold and silver do.  Thus, the latter are real money.  End of economics lesson 101.

crazytechnician's picture

There is no such thing as intrinsic value. That is a myth , all value is simply subjective and only exists in the human mind as a perception like a colour or a sound. Offer a monkey a pallet load of gold bricks or a banana and you may get the idea.

Gold...Bitches's picture

The problem no bitcoin pusher will consider is that even if blockchain tech becomes the backbone of our monetary system... what makes you think that Bitcoin is the one that will be allowed to win by the govt?  Govts will either start their own blockchain coin or adapt one that is created by one of their favorite banks.   Govts will oppose it until the end and then they will roll out their own that you have to use when they are really on the ropes with the fiat.  And bitcoiners also all seem to think that people aren't sheep and that the majority of people arent going to go along with it.  Good luck with that idea.

crazytechnician's picture

Governement will have to compete if they want to create a superior crypto. No problem. The marketplace is wide open to competition , they are welcome , only trouble is government's and bank's don't really have a very good reputation when it comes to money and currency creation , so I don't think the market will buy into goverment or bank created crypto currencies and they will be very short lived. If they don't gain value through the market the only way to enforce their value will be done through the barrel of a gun which again cannot be done for very long and almost impossible to do cross-border without war which is extremely expensive. Crypto could mark the beginning of the end for war.

Blue Steel 309's picture

That is false. You are being rational. Humans are not rational creatures. There is intrinsic value and fiat and abstracted fiat (blockchain) don't have any. They have only faith, which is also a feature of human psychology.

crazytechnician's picture

define intrinsic value... all value is subjective. Once on ZH somebody told me that gold actually has intrinsic value because it can also make teeth. Well much better teeth can be made with modern porcelain alloys which are harder , last longer and look better , plus they cost almost nothing. Is that really the best argument there is for 'intrinsic' value ?

Stuck on Zero's picture

Bitcoin has a huge uphill battle before it can be considered money. It is all mostly owned by a few people. That's not fair. It's highly volatile and will be until trillions are exchanged monthly and it settles out. That won't be achieved because it's so volatile. It's hackable. Anything written in computer code and executed on computers is hackable. It can be outlawed by governments.

 

tmosley's picture

Five seconds in the search engine of your choice would prove that argument factually inaccurate.

But to save you the effort, here is the number one result for "richest bitcoin addresses". Keep in mind that this includes exchanges and institutional holders.

https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html

dumbhandle's picture

People are already using it on the darknet markets. You are back in 2008.

Mr T's picture

Very cognizant comment Buckeroo, so touching or seeing it is not a prerequisite I guess?

Sam.Spade's picture

You confuse a definition with a wish list.

Ask almost anyone anywhere in the world and he will say "What, you some kinda fool??  Money is what I buy stuff with!"

And he would have given you a great definition.

In the past, the marketplace has selected gold to be used for money.  And, in the future, it might do so again.

But, at the moment, at least in the United States, if you try to buy something with it, you will get a strange look and no sale.  Because, right now, in the US, you can only buy stuff with dollars.

tmosley's picture

Acting like a 5th grader is not an argument.

SILVERGEDDON's picture

Bitcoin hype reminds me of the way zero interest rate credit cards, Facebook, Twitter, UTube, and Google were rolled out. 

Happy face flowers and share your bunghole with the world - free exploitation database for those companies to sell to any corporate entity, or give over to the alphabet spook " Intelligence " government minions to use against you whenever they see fit.

" Convenience " usually walks in lockstep with Control.

If you buy into convenience, you relinquish control.

Be careful what you wish for.  

Raffie's picture

'Be careful what you wish for.'

We been telling you haters that for a very long time.

Just wait till they can make all PM at the atomic scale then mass produce it all. Wonder how valuable it will be.

 

malek's picture

Didn't you forget to mention the energy required to do so?

We could mass-produce real Death Stars or whatever else you want, if we have or can afford the needed energy.

Raffie's picture

Once we convert the muzzies and progressive liberls into clean burning energy thing will be better. LOL

Also as time goes on energy use can drop due to tech and energy gathering can increase. Orbital satellites that reflect the sun to a area to gather the energy. 

They got energy tech that we will not hear about for years down the road.

SILVERGEDDON's picture

Raffie, when technology gets to the point of transmutation, the " They " crowd will concentrate on creating more rainbow skittle shitting unicorn farts instead of gold, because that is all it takes to entertain most people these days. Why build real value, when the plebes will pay for nothingburgers instead ?

crazytechnician's picture

Don't fret too much about bitcoin , PM's will hold some residual value because of higher demand for bitcoin mining chips , at least for a while anyway until better materials come along like graphene etc.

Byte Me's picture

Of course silver.

Bitcoin is a medium of exchange.

...Inherently dependent upon a computer network..

Or - an algorithm that may be used as ameans of exchange.

 

Raffie's picture

Without all the high tech stuff cryptos use, how would we tell the value of PM?

TeamDepends's picture

Silver will blow past gold because of its necessity in tech devices, and many will be crying like pussies.

Raffie's picture

I like silver very much. Silver will have the greatest % gain over gold without even trying.

$400-$600 silver has been called out for a while now. Just gotta wait for the pop.

tmosley's picture

Declining cost of production will probably belie that prediction.

SILVERGEDDON's picture

Yeah, mosley - " It only takes five dollars to dig it out of the ground. " I guess you were ghosting Robot Trader back in the day too. 

dumbhandle's picture

People have been losing their asses trading silver for a very long time.

Raffie's picture

Yup, why I have it in hand and not paper.

SeuMadruga's picture

But there's gonna be a silver lining...  ;-)

Unknown User's picture

While anything could be used for money, there is a big difference between let’s say a US dollar, gold and bitcoin.  US dollar has value because it is legal tender, i.e., it is a contract that states "this note is legal tender for all debts, public and private" and courts enforce it.  Payment in gold or bitcoin is not enforceable in US court.  Because gold is a commodity and bitcoin is property.  You are free to use these any way you like but courts would not help you if you have problems.

 

The Cooler King's picture

lol ~ at this point, probably the thing the "courts" would be most interested in are all these bitcoin clowns who are not paying capital gaines taxes.

Sam.Spade's picture

"US dollar has value because it is legal tender"

Actually, no.  The dollar has value because you can buy lots of different things with it.  And those who sell you their stuff do so because they can replace it from other people all over the world for the same dollar.  And so on and so on.

Money has value because of this network.  And, the bigger that network is, the more value it has because the more things you can buy with it.

That's the problem with gold.  Sure, if it ever becomes money, you can walk down to your local baker and buy a loaf of bread with it.  But you can't buy a radio from China because they are too far away to just reach out and give it to someone there.  You need an intermediary.

Which is, right now, why the dollar is money and gold is not.  Because such institutions (called 'banks') exist to perform this middle-man service and they only accept fiat because it's what they can print.  If they could print gold, they would take that, too, but then it wouldn't be gold, would it?

That's why Bitcoin (and other cryptocurrencies) are so significant.  For the first time EVER in the history of mankind, it is now possible to pay someone remotely without going through a third party or travelling to a common meeting place.

In other words, Bitcoin wins and banks lose.

What could be better?