Is Bitcoin money?
The arguments from both sides of the aisle are passionate and vociferous. But as I trudge through the morass of opinions, I can’t help but notice people are missing some crucial details about private cryptocurrencies — and how they are changing our world. One thing seems certain, however: Bitcoin is more than a currency.
If you are trying to define Bitcoin the same way you define traditional currencies, you are making a vital mistake. It’s like trying to define a personal computer by comparing it to a typewriter. Bitcoin is both an expression of value and a completely new way of transferring assets. It brings together all the best qualities of existing technologies and media in a single, unified instrument. Bitcoin is so much more than money… it is a disruptive, innovative method of anonymous wealth transfer and storage — never before seen on this planet.
We should start by asking: what is the definition of money? And then: why does Bitcoin have value? Its opponents claim it has no worth — for which they list many reasons. And yet — at any given instant — Bitcoin is exchanged for traditional currencies all over the world. Clearly its critics haven’t thought out their arguments very well… if Bitcoin has no value, then why is it so valuable?
Bitcoin’s opponents have a clear flaw in their positions — in that most of them seem to believe in fixed, universal definitions for “currencies” and “money.” The simple fact is, “money” can only be defined by actors in a single transaction — at the moment of the exchange. It doesn’t really matter if millions of parties are simultaneously defining the same asset as “money.” The fact remains that each transaction is initiated and perpetuated by those actors, at a single point in time.
And so the assets being exchanged have value in each particular instant — and only in that instant. Money is not defined at a single moment by academics or politicians; it is perpetually defined by markets, in isolated micro-transactions — billions of times, every single day.
But even accepting the true definition of money gives rise to yet another problem: people cling to the illusion that value is actually created at the time of an exchange. But that’s simply not true; value is merely perceived at the instant of an exchange. This is why prices fluctuate — as perceived values change instant by instant.
Once a transaction is complete, it exists only as history for our collective scrutiny. But the abundance (or lack thereof) of these trades does not change their core nature: each transaction exists only as a record — a beacon by which we can gauge our decisions. No individual trade — in and of itself — perpetually defines value for an entire asset-class. The value of anything changes constantly, based on the perceptions of supply and demand (current and future), by every actor in a given market.
In other words, markets do not create aggregate value; they are collections of transactions that come together to offer snapshots of perceived value — each building on the last.
Bitcoin facilitates trade and stores value. In fact it does so at least as efficiently as any other form of exchange in history. Bitcoin is valued by individual actors — every single time it is traded. It has a precisely defined supply, and its value is driven by the demand individual actors place on it — every minute, of every day.
Bitcoin most certainly is money.
Some people like Paul Krugman argue that Bitcoin won’t work as a currency because it is deflationary — that is, consumers will postpone purchases today, waiting for lower prices in the future. But this is simply academic nonsense; the entire computer industry has been deflationary for decades, and yet companies like Apple, Microsoft, and Dell have had no trouble enticing consumers to spend money on technology that is guaranteed to be far less valuable in the future.
Some detractors have also argued that Bitcoin is more akin to credit cards. And it is true that credit cards are not money, per se; while they facilitate exchange, they do not hold value beyond the currencies they represent. Further, the supply — and potential supply — of credit cards is infinite — issuers can always create more.
So even if you load a card up with cash (in the case of a pre-paid credit card, or a debit card), its value is limited to the amount of money it represents; the supply of these cards is potentially infinite, so people will never assign them value above and beyond the currencies they control. In other words, if you empty a card (or spend to its limit), it is worth nothing more than its plastic. The “supply” component to credit and debit cards has nothing to do with the cards themselves, but rather with the underlying assets they represent.
But Bitcoins are much different. First, they are not typically “charged” with specific amounts of money (although Bitcoin wallet addresses do accommodate such usage). Nor are Bitcoins a form of credit (debt). Bitcoins are assets with a limited supply, and because of this, people assign them intrinsic value. In this way, they are much more like gold.
Bitcoins offer humanity more than any other form of money ever has. They can be transferred anywhere on earth, instantly, while hiding the identities of all parties to the transaction. This is a brand new development. It is the quality that gives Bitcoin its clear advantage, and this is almost certainly where it has derived most of its value.
People will always bristle at new ideas, and the most ignorant of our species will criticize anything that threatens the status quo. But Bitcoin is here to stay. Indeed, even if isn’t here to stay, its algorithm is a proof-of-concept that will be improved upon to the point that any attack can be easily thwarted. So its progeny will thrive.
Doubting Bitcoin’s value is an ignorant exercise for people who simply cannot (or will not) take heed of the transactions occurring all around us every day. It most certainly is valuable. Labeling it a “Ponzi scheme” or “Monopoly money” does not diminish the value market participants are assigning it. Such names only serve to endorse the myopia of their owners. Even the U.S. Department of Homeland Security can’t seem to squash Bitcoin’s popularity.
Once you make the decision to accept Bitcoin’s value as real, the only question that remains is why Bitcoin is valuable. The answer is clear to many of us, and it will only become more obvious as digital currencies continue to proliferate. We must finally accept that people desperately want instant, anonymous, safe transactions.
As Bitcoin enters its fifth year of existence, its role as money is no longer debatable. Indeed, saying Bitcoin isn’t a currency is like saying a jet isn’t an airplane. But we should ask ourselves: is it really surprising (or even offensive) that people want anonymity in their financial transactions? Likewise, is it surprising they would pay a premium for it?
The traditionalists argue that all of this is a fluke — a bubble. But is it? And if not, how much more are people willing to invest in private currencies in order to remove their financial lives from public scrutiny?
My guess is, a lot.