Much has been said about Bitcoin as a medium of exchange, money, and store of value. Here are just a few of the cliched talking points spouted by many in legacy finance:
Bitcoin is based on nothing and has no value.
Bitcoin is a modern day tulip bulb bubble.
Bitcoin is only for criminals.
Bitcoin is a ponzi scheme.
“Bitcoin is rat poison squared.” – Warren Buffett
That last one is my favorite for a few reasons. Why?
1. Warren freaking Buffett said it. He’s old school, and there’s nothing wrong with that. I believe this is a generational divide as more and more young people prefer Bitcoin to other currencies (fiat), assets (bonds, specifically), or stores of value (gold). Warren Buffett is an elite investor of equities…and 90 years old. Younger people are drawn to technological efficiencies and aren’t afraid to question legacy systems.
2. This line is also the reason I resisted Bitcoin for 4 years and wrote it off as a scam without reading more about it. Once I revisited the topic and went a little deeper down the rabbit hole my questions and concerns were answered. In the words of a favorite Bitcoiner, “Once you see Bitcoin for what it is, you can’t unsee it”. – Plan B.
The purpose of this post is to discuss what characteristics make something hard money, and to showcase Bitcoin for what it is: the hardest money ever conceived.
Let’s get it.
Money as a Technology
Money has taken many forms in the history of human transacting. We’ve used seashells, colored stones, tulip bulbs, bits of human bones, precious metals, paper, and numerous other mediums to use as a standard unit of account in exchange for something a human finds to be more valuable.
The important concept here is that money has always been technology – always. It has always been a socially agreed upon conduit to trade what you have for what you want. That’s it. The question becomes: “What makes society collectively recognize something as a good conduit for exchange?” That’s what we’re going to cover in this post.
Principles of Money
As I wrote earlier, money has taken many forms in our history, but they all have a similar set of characteristics that make them the most effective medium exchange. They’re all different, but share certain qualities that qualify them for efficient exchange. What are these qualities? So glad you asked!
Fungible goods are completely interchangeable and undifferentiated from each other. Is there any difference in one pure, unaltered piece of gold to another pure, unaltered piece of gold? No! They are the same and they are only valued by how much they weigh. Bitcoin is highly fungible as it can not be diluted or edited. 1 Bitcoin will always equal 1 Bitcoin – and all Bitcoin are the same.
If something is consumable it decays, rots, or has a separate purpose other than as a unit of account. It’s purpose is to be used up – usually in the short term. Bitcoin can not be consumed, used up, or destroyed and is meant to stand the test of time. Digital assets last infinitely longer than physical assets if stored properly.
You need to be able to access your money to transact, move, or protect. Real estate is a great asset, but a horrible money for this reason. Bitcoin can be moved or settled anywhere in the world faster than any currency in our history. It also lives on the web so it’s always active and accessible as long as you have internet access.
Good money can’t be easily destroyed or broken down or it is no longer considered desirable. It needs to be resilient (like gold) so it can preserve your wealth for long periods of time or else it is not trustworthy and will be replaced by a more durable money.
Bitcoin is one of the most durable, resilient ideas ever conceived. It is decentralized to protect it from governments. It is mined to protect it from hackers. Nodes make sure everyone is playing by the rules. It does not rely on the success or failure of any one group of people.
Gold was a popular currency for many reasons. One of them was that it was a soft metal that could be easily clipped or shaved to divide a large piece into many smaller pieces. This divisibility made exchange simpler and more flexible.
One common misconception is that Bitcoin is indivisible – that you must buy or sell one full Bitcoin. This can’t be farther from the truth! Bitcoin is divisible down to 100,000,000 sub-units affectionately called ‘Satoshis’. You don’t have to buy a full Bitcoin. You can buy 0.00000001 of a Bitcoin – or one Satoshi.
This one is pretty obvious. You have to be able to make sure your money is able to be secured AND that it is real. If something is easy to counterfeit it is not secure. If you can’t immediately identify that it is real the currency is not secure. If you can not protect it it is not secure. If it can be seized or someone else has to hold it for you it is not completely secure. If your money can immediately be inflated it’s long term value is not secure.
Bitcoin can’t be counterfeited. Only Bitcoin works on the Bitcoin network. There are many, many steps you can take that allows YOU to completely secure your Bitcoin without any help or 3rd parties. You can also run a simple query to see exactly how many Bitcoin there are to verify (buzzword alert!) that the inflation schedule is working properly. This provides debasement security.
Security and recognizability are 2 of the greatest strengths of Bitcoin.
This means the ability to settle the sending or receiving of a currency is fast, secure, and simple. Handing someone a $5 bill is simple. Sending someone $5 on Venmo is simple (unless they freeze your account).
Sending Bitcoin (or Satoshis!) to a friend through a QR code or public key is pretty simple, and getting simpler every day. Since it is a digital currency that can be programmed it can also change its shape depending on how the recipient wants to receive it. Don’t believe us? Check this out!
Jack Mallers is doing CRAZY stuff with Bitcoin’s layer 2 scaling solution – the Lightning Network. Keep an eye on them. They’re changing the world – FAST.
Scarcity means that there is not an infinite or overly abundant amount of a good available. For something to be scarce it means there also needs to be demand for it. Gold was a very scarce and desirable money. However, as the price of gold increases more money will be spent on mining MORE gold – which floods the market and lowers the price. Other examples of scarce items are: real estate in Tokyo, ancient artifacts, and equity in the best companies. The demand for all of these items is great and the supply restrained. The items also disproportionately increase in price from inflation.
Bitcoin has a fixed supply of 21 million coins. There will never be more than that. Ever. Period. Final. It is digital scarcity – a really powerful concept to consider. The inflation rate for Bitcoin is also fixed, transparent, and decreases every 4 years during an event called ‘The Halving’. Every 4 years Bitcoin becomes a little more scarce from its distribution to the miners.
Due to this scarcity, Bitcoin is the apex predator of money. Bitcoin’s nature is to consume more and more printed fiat currency making the price go up.
Sovereign means there is an authority distributing and recognizing the currency. Gold is not sovereign. State sponsored fiat (paper money) is VERY sovereign. Gold and Bitcoin are opt-in currencies that are agreed upon by a network of people. Fiat currencies are forced on the citizens of a nation.
Let’s be clear – the world is becoming more globalized and national currencies will likely become less important. What do you think will replace them?
Fiat money supply is controlled completely by central bankers and governments. They have complete control over your purchasing power – and they always choose to debase it. This shows the problem when a few politicians or unelected central bankers have complete power over your wealth – which is a product of your time and energy.
Decentralized currencies or assets are always voluntary. A great characteristic of Bitcoin is that it has a constitution (Bitcoin Whitepaper) that clearly defines how it works and what you are signing up for. No one can change it. No one can debase it.
This also means that it is a good hedge against inflation, government failings, and transacting across borders.
The decentralized nature means the Bitcoin network won’t go down. There are Bitcoin nodes running on satellites orbiting Earth right now. So, if the entire planet lost power for 10 minutes there would still be functioning Bitcoin nodes!
Earlier we talked about Strike Global – an awesome app built on top of the Bitcoin Lightning Network. This ability, built on Bitcoin payment rails, allows anyone on Earth to send money in any currency to anyone else on Earth in their native currency. This is truly amazing tech made possible by Bitcoin.
In the future many great financial tools will be built on top of Bitcoin, but the user will have no idea. They will be using the payment rail and liquidity proof from Bitcoin Lightning, but only see the funds in their preferred currency. This is something that only programmable money can do.
Medium of Exchange
Bonus Section! Hurray!
A question frequently posed about Bitcoin is: “Why doesn’t anyone buy coffee with Bitcoin if it’s a currency?!”
- You can if you use the Lightning Network.
- Many don’t because it creates a taxable event.
- Gresham’s Law (first cited in 1558): “Bad money drives out good money”. This concept, apparent even in 1558, means that society likes to hold (HODL) money that is more valuable, scarce, and desirable and spend money that has worse monetary traits.
Bitcoin has all the qualities present in history’s hardest monies – and many more that we’ve never seen before. It is a modern day finance startup combined with old world, hard money qualities.
Many will tell you that Bitcoin has nothing backing it. The irony is that many of these people will happily use and save a fiat currency that is debased every year with eroding purchasing power.
Bitcoin is backed by hundreds of millions of dollars worth of hash power that constantly protects your money from governments, hackers, and banks. It is the standard as a medium of exchange to accountants and can be secured by merely a thought (memorized private keys / seed phrases).
Bitcoin is the evolution of money. Get off zero and join the (r)evolution.
Don’t believe us? Watch the below video from one of the greatest economic minds in modern history (published in1999):