Bitcoin… Monetary Nirvana?
If you don’t know what Bitcoin is, do a bit of research on the internet, and you will get plenty… but the brief story is that Bitcoin was created as a medium of exchange, without a central bank or bank of problem being involved. Furthermore, Bitcoin transactions are supposed to be private, that is private. Most interestingly, Bitcoins have no real-world existence; they exist only within computer software, as a kind of virtual reality.
The general idea is that Bitcoins are ‘mined’… interesting term here… by solving an increasingly difficult mathematical formula -more difficult as more Bitcoins are ‘mined’ into existence; again interesting- on the computer. Once created, the new Bitcoin is put into an electronic ‘wallet’. It is then possible to trade actual goods or Fiat currency to get Bitcoins…
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and vice versa. Moreover, as there is no central issuer of Bitcoins, it is all highly dispersed, thus resistant to being ‘managed’ by authority.
Naturally proponents of Bitcoin, those who benefit from the growth of Bitcoin, insist rather loudly that ‘for sure, Bitcoin is money’… instead of only that, but ‘it is the best money ever, the money of the future’, etc … Well, the proponents associated with Fiat shout just as loudly that will paper currency is money… and we all know that Fiat paper is not really money by any means, as it lacks the most crucial attributes of real money. The question after that is does Bitcoin even qualify as money… never mind it being the money of the future, or the greatest money ever.
To find out, let’s go through the attributes that define money, and see when Bitcoin qualifies. The three essential qualities of money are;
1) money is really a stable store of value; probably the most essential attribute, as without stability of value the function associated with numeraire, or unit of measure of value, fails.
2) money is the numeraire, the unit of account.
3) money is a medium of trade… but other things can also fulfill this particular function ie direct barter, the ‘netting out’ of goods exchanged. Furthermore ‘trade goods’ (chits) that keep value temporarily; and finally exchange of mutual credit; ie netting out the value of promises fulfilled by swapping bills or IOU’s.
Compared to Fiat, Bitcoin does not do too badly as a medium of exchange. Fiat is only accepted in the geographic domain name of its issuer. Dollars are not good in Europe etc . Bitcoin can be accepted internationally. On the other hand, very few merchants currently accept payment in Bitcoin. Unless the acceptance grows geometrically, Fiat wins… although at the price of exchange between countries.
The first condition is a lot tougher; money must be a well balanced store of value… now Bitcoins have gone from a ‘value’ of $3. 00 to around $1, 500, in just a few years. This is about as far from being a ‘stable store associated with value’; as you can get! Indeed, such gains are a perfect example of a speculative boom… like Dutch tulip bulbs, or junior mining companies, or Nortel stocks.
Of course , Fiat fails here as well; for example , the US Dollar, the ‘main’ Fiat, has lost over 95% of its worth in a few decades… neither fiat neither Bitcoin qualify in the most important measure of money; the capacity to store value and preserve value through time. Real money, that is Gold, has shown the opportunity to hold value not just for centuries, however for eons. Neither Fiat nor Bitcoin has this crucial capacity… both fail as money.
Finally, we come to the second attribute; that of getting the numeraire. Now this is really fascinating, and we can see why both Bitcoin and Fiat fail as cash, by looking closely at the question from the ‘numeraire’. Numeraire refers to the use of money to not only store value, yet to in a sense measure, or compare value. In Austrian economics, it is considered impossible to actually measure value; after all, value resides only within human consciousness… and how can something in consciousness actually be measured? However, through the principle of Mengerian market action, that is interaction between bid and offer, market prices can be founded… if only momentarily… and this market price can be expressed in terms of the numeraire, the most valuable good, that is money.
So how perform we establish the value of Fiat…? With the concept of ‘purchasing power’… that is, the cost of Fiat is determined by what it can be traded for… a so called ‘basket associated with goods’. But his clearly implies that Fiat has no value of its own, instead value flows from the value of the goods and services it may be traded with regard to. Causality flows from the goods ‘bought’ to the Fiat number. After all, what difference is there between an one Money bill and a hundred Dollar bill, except the number printed on it… as well as the purchasing power of the number?
Gold, on the other hand, is not measured by what this trades for; rather, uniquely, it really is measured by another physical standard; by its weight, or bulk. A gram of Gold is a gram of gold, and an ounce of Gold is an oz of Gold… no matter what number is engraved on its surface, ‘face value’ or otherwise. Causality is the opposite to that of Fiat; Gold is measured by weight, an intrinsic quality… not by purchasing power. Right now, have you any idea of the value of an ounce of Dollars? No this kind of thing. Fiat is only ‘measured’ simply by an ephemeral quantity… the number imprinted on it, the ‘face value’.
Bitcoin is farther away from being the particular numeraire; not only is it simply a number, much as Fiat… but its value is definitely measured in Fiat! Even if Bitcoin becomes internationally accepted as a moderate of exchange, and even if it handles to replace the Dollar as the accepted ‘numeraire’, it can never have an intrinsic measure like Gold has. Precious metal is unique in being measured with a true, unchanging physical quantity. Gold is unique in storing value for hundreds of years. Nothing else in reach of humanity has this unique combination of qualities.
To conclude, while Bitcoin has some advantages more than Fiat, namely anonymity and decentralization, it fails in its claim to becoming money. Its advantages are also doubtful; the intent is to limit the particular ‘mining’ of Bitcoins to 26, 000, 000 units; that is, the particular ‘mining’ algorithm gets harder and harder to solve, then impossible after the 26 mil Bitcoins are mined. Unfortunately, this particular announcement could very well be the death knell of Bitcoin; already, some central banks have announced that Bitcoins can become a ‘reservable’ currency.
Wow, seems like a major step for Bitcoin, would it not? After all, the ‘big banks’ seem to be accepting the true value of the particular Bitcoin, no? What this actually means is banks recognize that they can trade Fiat for Bitcoins… and also to actually buy up the 26 million Bitcoins planned would cost a meagre twenty six Billion Fiat Dollars. Twenty six billion dollars Dollars is not even small alter to the Fiat printers; it is about a week’s worth of printing by US Fed alone. And, after the Bitcoins bought up and locked up in the Fed’s ‘wallet’… what useful purpose could they assist?
There would be no Bitcoins left within circulation; a perfect corner. If you will find no Bitcoins in circulation, just how on Earth could they be used like a medium of exchange? And, what could the issuers of Bitcoin possibly do to defend against such a fate? Change the algorithm and increase the 26 million to… 52 mil? To 104 million? Join the Fiat printing parade? But then, from the quantity theory of money, Bitcoin might start to lose value, just as Fiat supposedly loses value through ‘over-printing’…
We come to the key issue; exactly why search for a ‘new money’ when we already have the very best money, Gold? Fear of Gold confiscation? Lack of anonymity from an intrusive government? Brutal taxation? Fiat money legal tender laws? Every one of the above. The answer is not in a new form of money, but in a new social structure, one without Fiat, without Government spying, without drones and swat teams… without IRS, border guards, TSA thugs… on and on. A world of liberty not tyranny. Once this is accomplished, Gold will resume its ancient and vital role as honest money… rather than a moment before.