Let's Clear Up One Confusion About Bitcoin

Authored by Charles Hugh Smith via OfTwoMinds blog,

If bitcoin can be converted into fiat currencies at a lower transaction cost than the fiat-to-fiat conversions made by banks and credit card companies, it's a superior means of exchange.

One of the most common comments I hear from bitcoin skeptics goes something like this: Bitcoin isn't real money until I can buy a cup of coffee with it.

In other words, bitcoin fails the first of the two core tests of "money": that it is a means of exchange and a store of value. If we can't buy a cup of coffee with bitcoin, it obviously doesn't qualify as a means of exchange.

The confusion here is the same one that plagues the conventional understanding of the foreign exchange markets: people confuse exchange and convertibility, which are both flows, i.e. transactions.

Here's an illustration of the difference.

Let's say Hipster Coffee Bar accepts payment in bitcoin (BTC) for a cup of coffee. In the U.S., the coffee bar accepts the BTC as payment, which is then converted into the local currency, the U.S. dollar, to pay rent, employees' wages and so on.

The Hipster Coffee Bar branch in Mexico converts the BTC into pesos, the branch in Thailand converts the BTC into baht, and so on around the world.

Another coffee shop, Most Excellent Coffee, doesn't accept bitcoin in exchange for a cup of coffee. So when I enter Most Excellent Coffee, I convert a sum of BTC into U.S. dollars if I'm in the US, to pesos if I'm in Mexico or into baht if I'm in Thailand, and proceed to buy the cup of coffee.

You see the point: what matters isn't whether the coffee shop accepts bitcoin directly; what matters is whether bitcoin is easily convertible to the local fiat currency. Put another way: convertibility rests on the recognition that the "money" is a reliable store of value that can be converted into a variety of other currencies.

As long as the cost of converting one form of "money" into another form of "money" is fast and low-cost (i.e. nearly frictionless), then it no longer matters whether the "money" in question can be used directly in an exchange or not.

Consider a credit card. Part of the service offered by the issuer isn't just a line of credit to fund purchases; it's convertibility from one's domestic currency into whatever currency is used in the place where you're making the purchase.

This convertibility is certainly fast in the credit card realm, but it's not frictionless; rather, it's costly, as a hefty fee is skimmed for every transaction paid in one currency and converted to the cardholder's domestic currency.

If bitcoin can be converted into fiat currencies at a lower transaction cost than the fiat-to-fiat conversions made by banks and credit card companies, it's a superior means of exchange.

In other words, it doesn't matter what currency the coffee shop accepts; what matters is the friction involved in converting the currency you hold with the one the shop accepts.

If bitcoin can be converted into U.S. dollars at a lower transaction cost that the USD can be converted into (say) Swiss francs, it's superior to fiat currencies as a means of exchange.



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Comments

IH8OBAMA Billy the Poet Sat, 11/04/2017 - 18:44 Permalink

But Bitcon isn't suitable to be treated as a currency.  It is too volatile.  Right now the volitility is up so the Bitconers are happy.  But even if it doesn't find it's intrinsic value of zero at some point the volitlity will go in both directions.   When that starts to happen it will be useless as a currency.  The volitiliy with regard to the Dollar and other currencies will be it's downfall as a means of transaction facilitation. 

In reply to by Billy the Poet

Eager Beaver tmosley Sun, 11/05/2017 - 15:31 Permalink

Do you really think any of these stupid faggots ever learned the trivium? They're shills, pimping either metals, stocks, or fiat, nobody but a shill or an idiot would do that. Hope you bought the $3k dip. I'm betting it corrects hard again at $8k. Can't wait for the next "crash"! One foot out the door, indeed. Actually one of the best articles this retarded author has ever written. It actually has me wondering if I haven't gotten in with the wrong crowd. P.S. I don't like the Elliot wave that's forming here.

In reply to by tmosley

jimmy c korn tmosley Sat, 11/04/2017 - 21:47 Permalink

Isn't that the same ARGUMENT you made about silver & gold just a few years ago? Or do I need to look that up, won't take but a second!You underestimate the power of the government and money and control of the banksters. Nothing to stop them from creating their own crypto's, calling them "legal tender" and calling yours counterfeit. After all they have the means to do it.

In reply to by tmosley

tmosley jimmy c korn Sat, 11/04/2017 - 22:07 Permalink

The volatility was downward as the paper markets were abandoned, exactly as I predicted. I did not anticipate the emergence of a form of money superior to precious metals. They stole the bull case.>Nothing to stop them from creating their own crypto's, calling them "legal tender" and calling yours counterfeit.Appeals to cowardice only work on cowards.>After all they have the means to do it.The king can proclaim that the tide is in when it is out. That does not make it so.

In reply to by jimmy c korn

vega113 jimmy c korn Sun, 11/05/2017 - 02:07 Permalink

You don't understand. Government CC are non sense. What they will do is digital currencies that are just a digital token on some government controlled ledger, those will function as electronic cash - different from regular Digital currency which is debt issued by private banks. Now, those electronic tokens will be freely tradable on exchanges over the world - similar to Bitcoin. What it means - it will just make it a lot easier to swap bitcoin for those digital currencies. The authorities will allow easier access to the markets while still maintaining some kind of control. But, this is mostly a huge win for Bitcoin. Basically the governments realized they can't win and look for a way to join in.

In reply to by jimmy c korn

Mementoil tmosley Sun, 11/05/2017 - 02:58 Permalink

But doesn't that defeat the very purpose of Bitcoin, which is to serve as a medium of exchange?You obviously cannot conduct trade with a currency which is so volatile (I'm talking about paying for your groceries, not financial trade), and if you do not conduct any significant amount of trade in Bitcoin, then why is Bitcoin valuable in the first place? The entire premise of Bitcoin's value rests on the assumption that the entire world will one day conduct trade with it, something which is becoming less and less likely.

In reply to by tmosley

tmosley Mementoil Sun, 11/05/2017 - 06:45 Permalink

Ask yourself the same questions for gold.Gold and bitcoin are both serving the roles of reserves, but bitcoin is doing a much, MUCH better job of gedging inflation, to the extent that it is making savers fabulously wealthy.>The entire premise of Bitcoin's value rests on the assumption that the entire world will one day conduct trade with itThat is not the premise of Bitcoin's value. That is the most bullish case, implying a 2500x run from here. The more reasonable bull case has it acting as reserves, like gold, and thus acheiving a 60x run from here. From there, other coins more suitable for trade can take over for day to day transactions, or some new tech that can be applied to Bitcoin will come along and dramatically decrease the transaction cost and speed.

In reply to by Mementoil

Mementoil tmosley Sun, 11/05/2017 - 07:17 Permalink

But gold was a useful and desirable commodity before it became a store of value.This is what lent it to become one, whereas Bitcoin has no practical use other than to facilitate trade.If the public can decide arbitrarily and without any good reason that Bitcoin is the new store of value, what prevents them from changing their mind sometimes in the future and choosing something else (such as a new and improved crypto-currency, for instance)?

In reply to by tmosley

tmosley Mementoil Sun, 11/05/2017 - 08:15 Permalink

This is sort of like saying that horses were good for food before they were good transportation, therefore you should keep using horses as transportation.>If the public can decide arbitrarily and without any good reason that Bitcoin is the new store of value, what prevents them from changing their mind sometimes in the future and choosing something else (such as a new and improved crypto-currency, for instance)?Nothing! That's the greatest part. If bitcoin fucks up, some other crypto will take its place, and there is a long line of them with far better tech waiting in the wings for that day. I own many of them and will be a very wealthy man if it happens.

In reply to by Mementoil

Mementoil tmosley Mon, 11/06/2017 - 02:02 Permalink

In other words, an average person which doesn't have the resources to follow the entire crypto space cannot simply put his money in Bitcoin and forget about it for a few years, like people used to do with gold. He needs to constantly be on the look out for the next best crypto that may take the lead. That doesn't sound to me like a good recpie for long term reliability.

In reply to by tmosley

artytom IH8OBAMA Sat, 11/04/2017 - 20:09 Permalink

Bitcoin isn't the blockchain. There are a lot of currencies that make tranactions a lot better and faster than Bitcoin. Litecoin and Ripple of instance and Ripple is the least expensive (in terms of transactions costs) and definitely the fastest. It's also very stable. Irritating for investors looking for a return but great for financial organisations looking for a predicible, reliable, fast currency. 

In reply to by IH8OBAMA

Billy the Poet Thinkpad Sat, 11/04/2017 - 22:12 Permalink

I got my degree at Penn State where I learned that there is no point in attempting to refute a video one has not not watched.If you took a class at UCLA which supposedly taught you how to effectively argue against that which you haven't reviewed then you didn't get your money's worth. I'm so retarded I started UCLA at 16 I'm that retarded you did you even get a university degree?I see that UCLA has a fine English department as well.

In reply to by Thinkpad

Thinkpad Billy the Poet Sun, 11/05/2017 - 16:59 Permalink

I'm not refuting your video I have no interest in wasting time watching some video some whacko blogger on ZH believes is worth the time. My major was politcal science theory and finance. I know nothing about their English dept but I can post a video from Utube you must watch that details the English dept at UCLA if you don't than I'm not responding any longer to your mindless dribble. Unless you do watch you don't qualify to respond to my blogs again. LOL

In reply to by Billy the Poet

Bendromeda Strain artytom Sun, 11/05/2017 - 07:32 Permalink

Ripple is the least expensive (in terms of transactions costs) and definitely the fastest. It's also very stable. Irritating for investors looking for a return but great for financial organisations looking for a predicible, reliable, fast currency. So why are these supposedly ubersophisticated investors chasing the bubble of Bitcoin when Ripple is a superior product? Won't evolution make Bitcoin a tar pit dinosaur?Yes - irritating for investors. A hallmark of a currency replacement. Whatever, Beastcoin readies to wrap its blockchain around your neck.

In reply to by artytom

Thinkpad ebworthen Sat, 11/04/2017 - 21:49 Permalink

and yet they are. Google list of merchants accepting bitcoin 200 or so list of entities. So they have "f/x" risk some merchants like that and no you don't run day to day operations in Bitcoin but again flip the coin. amazon gives you a 15% discount if you pay with BTC conversely why would I pay with Bitcoin if I believed the mkt was going up? My entire dscounted amount would become a big premium paid in some cases by the time the transaction cleared.

In reply to by ebworthen