Bitcoin can be confusing. What role does it play in society now? And, perhaps more importantly, what role will it play in the future of the global economy? Emmanuel Young investigates…
The impression of Bitcoin in the media is a multifaceted one. It was firstly a new technology, secondly a billionaire maker, and thirdly an alternative asset; having been created as a direct result of the 2008 global financial crisis.
The question is, can there be added a fourth and fifth impression of Bitcoin? That of a store of value and potentially a currency respectfully?
I believe, not only can there be, but these are already the case, and this article will explain why. But first, one must define both a currency and a store of value. Luckily, they are in practice, the same thing.
The Ancient World
The precise point in time at which the first currency (as we would recognise it today) was established is disputable. Moreover, humans tend to have good ideas simultaneously which would mean the location is equally as indeterminate.
However, we do know that, in the ancient world, gold was seen as valuable and used as a store of value (some of the earliest coins have been fabricated from the material). Why? Well gold has a number of qualities that make it perfect for storing value.
Defining a Store of Value and a Currency
1. It is scarce, there isn’t much around. If we filled Wimbledon’s Centre Court with all the gold that has been mined in the world, it would only reach 9.8m above ground level if exactly covering Wimbledon Centre Court.
2. Its supply is extremely inelastic. That is to say, the process of producing more gold (mining), is extremely complex and burdensome and therefore, the worldwide stock of it grows at a snail’s pace – quite literally (more on this later). Those are the two qualities a store of value needs, and gold has both.
A currency needs three additional qualities:
1. Fungibility, the ability for it to be divisible (paying for a £3 Tesco meal deal with a gold bar and expecting change might be a bit tricky).
2. Liquidity, there needs to be enough in circulation so that people can spend it easily.
3 The backing of the right authority. As an example, compare the trust in the US dollar to the Zimbabwean dollar.
These qualities were manifest in the gold standard approach in which the majority of countries created currencies backed by gold. This was useful because instead of lumping around tonnes of gold, people could instead transact with claims to the gold stored in safe locations. And paper, well it’s much easier to carry in one’s wallet.
The Case for Bitcoin
But, does Bitcoin satisfy these definitions? Yes, more so than gold. Bitcoin is scarce. According to the stock-to-flow model – which measures scarcity using the ratio of current stock of a material to its supply rate – Bitcoin has the same ratio as gold and silver, with the potential (following The Halvening and once the number of Bitcoins in circulation reaches the magic 21,000,000) to become even more scarce. Bitcoin has inelastic supply.
The procedure of producing Bitcoin (mining) is reliant upon huge amounts of energy which means only the resourceful few have the capability to produce it. Further, its mathematically limited to produce a very small amount each time new Bitcoin is ‘mined’. If one were to calculate the velocity of the supply of Bitcoin and compare it to the pace of a snail, Bitcoin could never beat a snail in a race.
Bitcoin is fungible. Each Bitcoin can be split into 100,000,000 units. One could probably achieve this with gold but good luck using a microscope to count your change.
Bitcoin is liquid. It literally is magic internet money in that there is the potentiality of having as much as you want of it printed onto a screen (this is what the central bankers do with our money anyway). And, finally, it IS backed by authority. What do I mean here? Surely a thing that lacks a centralised commander cannot be backed by authority? Well, that is incorrect.
There is authority in the principles that define the aforementioned qualities of a store of value and currency. And, being unchangeable, surely these are the sources of ultimate authority?
It is my opinion that that will be tested in the not too distant future. The next financial crisis (and yes there will be another as we are definitely more exposed that in 2007; nobody has learnt anything), will provoke a paradigm change in the financial industry, which will lead to a complete shift away from fiat currency and the centralised authority it invokes.
People are smarter now. People are understanding what is necessary for a successful monetary system. The days of central bank control are almost over; the future is a Bitcoin based monetary system.
Image: Singularity Hub Standard