Bitcoin is in many ways a phenomenon. But one of its richest outcomes is the potential of inciting reflection on fundamental aspects of society even in people not accustomed to critical thinking. It takes only a few minutes for the content of a conversation to shift from an investment opportunity to a speculation about the nature of money, - and doesn't take long before considerations about the monetary system emerge, as the creator, Satoshi Nakamoto, foreseed:
“It is very attractive from the libertarian point of view if we can explain it correctly. But I'm better with code than with words."
The problem is that there is still a lot of conceptual confusion in these discussions. Doubt at the theoretical level compromises the understanding of what is happening before the eyes. This helps explain the distance between those who see Bitcoin as an internet joke and those who see it as one of the greatest inventions of all time.
The discussion, then, needs to start from a more objective description of the concepts involved.
THE ORIGIN OF MONEY
The emergence of money in history happened when, for the first time, a commodity was freely and widely used as a medium of exchange. Money solved a practical problem: when individual "A" wants a product of "B" but does not accept a direct exchange because he actually wants a product from "C", "A" has to first exchange products with "C" for then exchange them with "B" and get what he, "A", wants. Instead of a single negotiation, two or more are needed. The adoption of a common-use medium of exchange eliminates this need - whether it be gold bars between countries, cigarettes among detainees, the discovery of money serves the common interest of optimizing exchange relationships and, in addition, facilitating specialization.
Regarding specialization:
If you were really good at something - for example, making nails - you could now make a living by making nails. Without the money, someone who spent all day making nails would have to find (a) someone with excess food who wanted nails, (b) someone with overcoat who wanted nails, (c) someone with excess clothing who also wanted nails in that moment, and so on. "(Peter Schiff)
Money is the universal language that communicates each individual's subjective preferences. It makes economic calculation possible and, through it, entrepreneurship and the satisfaction of social necessities; it generates the conditions for a situation of greater prosperity and material well-being in society. Therefore, any argument that condemns money in itself is foolish and irrational.
Tacitly, people realized the ease of trading and performing economic calculations through a commodity with broad acceptance.
A SIMPLE DEFINITION
"A medium of exchange that is in common use is denominated money." (Ludwig Von Mises)
The key word here is use. This definition makes it useless the debate on whether a given medium of exchange is or is not "real money." Money is anything that is used as such, regardless of any pre-formulated money ideal.
There is no difference in nature between "money" and "goods". The condition of "money" is only a quality attributed to a good at a given moment. It can be seen as the present success of a good in fulfilling a certain purpose - medium of exchange. Given that the criterion is quite simple, nothing prevents more than one good being considered money.
Such a condition is, by definition, fragile, in the sense that it can be revoked at any time by disuse. In practice, the consensus around one or more goods needs to be constantly renewed, and strictly speaking nothing guarantees its subsistence in the next moment. Ultimately, it's a speculation about how other people will behave in the near future: it's expected that they will continue to use "x" as a medium of exchange. Not even a country's law can guarantee this certainty - as we learn from the history of monetary collapses - because economic laws are superior to it and ultimately prevail over any forced legislation. This fragility has enabled a variety of goods to be used as a medium of exchange throughout history.
Of course, although the condition of money can attributed to anything marketable, for obvious reasons, things like refrigerators, automobiles or buildings never acquire this condition broadly in a society. In an intelligent and natural way, humanity always preferred easily divisible and transportable goods, since they optimized exchange and economic calculation.
In essence, all money is a good, and every good is, potentially, money, as long as it is given to it exchange utility - or "exchange value."
Precisely at this point a bifurcation of opinions regarding Bitcoin as money takes place.
A SERVICE AS A "GOOD"
It turns out that economists have always understood the theory in the sense that the "good used as a medium of exchange" referred to something necessarily tangible, as a commodity. For this reason, the Regression Theorem enshrined the reasoning that, for some particular commodity to be considered money, it had to have a non-monetary demand prior to its monetary status. The attraction for gold’s beauty and durability, for example, predates its use as money. Thus, apparently Bitcoin did not fulfill this prerequisite: it had never been used before for something else.
The meaning of this definition is the requirement that the money-commodity has naturally emerged as a medium of exchange, owing to its own utility and by a market choice. Hence a requirement for non-monetary demand that proves its value independently of its monetary function. But the key to incorporating Bitcoin in theory arises from the understanding that this requirement from the theory is, in fact, more logical than temporal.
The purpose
Bitcoin was created as a network that enables unmediated transfers to anywhere in the world, fast, cheaply, uncensored, 24 hours a day, 365 days a year. Its decentralized design makes it unstoppable, an indestructible record. This ease of transfer combined with its incorruptibility is what generates attractiveness.
Forget for a minute the discussion about whether Bitcoin is money or not and consider only the market solution that it offers. Would this service alone have demand? In other words, people would like to enjoy a service like this? The answer is undeniably “yes”. This is the non-monetary value of Bitcoin.
And where does the monetary value come from?
Unlike other payment networks - this is a crucial detail - the Bitcoin network transfers only its own (and limited) units; an exclusivity that generates demand for them and, consequently, value. Access to the Bitcoin network solutions (its non-monetary function) is conditioned on the use of its units (bitcoins) as a means of exchange. Due to the network's own architecture, in Bitcoin, the two forms of demand are intricate, which explains why they emerged at the same time.
Therefore, the Regression Theorem should not motivate opposition to Bitcoin.
All the mechanisms of control and the costs imposed by the current financial system potentiate the adoption of Bitcoin and other cryptocurrencies. They would be less relevant if the world today enjoyed fast, cheap, censor-free, and privacy-free financial solutions. However, individual freedom is not a trend of the current system.
OTHER COMMON OBJECTIONS
Argument of low acceptance
- Bitcoin has low acceptance among merchants. And even among those who accept it, their products are seldom priced in bitcoin; they prefer to advertise the price in dollars or other fiduciary currencies. Therefore, Bitcoin does not fulfill the purpose that brought it to the world.
Answer: Today, only for the merchant who wishes to bet long-term on the price it would make sense to receive payments in bitcoins - logically, I am not referring to the use of the network as a means of payment, but to wanting the currency itself. Otherwise, it would be stupid if he priced the products in a currency that is still highly volatile - he would be taking an unnecessary risk to his purpose, which is just to sell. Commercial activity involves calculations, and this requires predictability.
On the consumer side, the explanation can be provided by Gresham's Law. According to this principle, bad money drives out good. Which means that people prefer to use "bad money" for daily expenses and keep "good money" under their mattress. So, the "good money" goes out of circulation, leaving practically only the "bad money".
Argument of volatility
- The price of Bitcoin varies a lot. This variation creates a risk for sellers who accept it; therefore it is a bad coin.
Answer: Also very common, this argument does not take into account the way a coin is born in the market. It seems that these critics are so accustomed to coins springing up overnight, by decree, that they can not imagine the way a coin is born and gradually evolves into settlement.
Imagine that yesterday you invented the most perfect money that exists and called you P. People close to you, realizing this, would use P and their adoption would start to grow. But with a market capitalization still so small, in what way P, even being "the most perfect money there is" would not be highly susceptible to strong price swings due to large deposits or withdrawals of resources? When the currency is incipient, the price swing, per se, does not say much about its quality. Given that every market value is subjective (a result of the interaction between individual preferences), for the price to be 100% stable, it would be necessary for P to be assigned a constant and unchanging market value, which is impossible if you consider that innovation begins within a small group and spreads little by little; that the mere knowledge of P by more people than the initial group means that the object in question will be valued by more and more people.
State currencies do not face this maturing process. As it is the force of the law that imposes them, and not a process of market, they can already be born with certain stability of value. (The problem is that over time this value will gradually erode through monetary inflation, so that power flows imperceptibly from individuals to government).
If Bitcoin (or another criptocurrency) had a market capitalization totaling the equivalent of a few trillions of dollars today, then too much volatility could be a valid criticism.
Argument that it is not investment
- Bitcoin is not an investment, it does not pay interest, it's pure speculation.
Answer: By definition, every action is speculation. In the economic sphere it is no different. If you sell anything at a more expensive price than you bought it, you are richer. You speculated correctly about how much someone would be willing to pay for that asset in the future.
Unlike the complication that some analysts do, it is not necessary to have regular payments (interest or dividends) to be an investment. The way in which the valuation of the good is paid, whether periodically or at once (at the time of sale), is conceptually irrelevant. Whether it be an Amazon stock, a gold bar or a currency, if the public is willing to pay more now than when you bought it, then done, you made a good investment.
CONCLUSION
For a long time, the discussion about the nature of money was treated as topic of a distant academic universe. The decision to ignore it came at a price, however. As the financial elites kept thinking about it, the last hundred years were the story of ordinary citizens living as hostages of a monetary logic projected above their understanding. And despite the intuition of injustice that many people naturally possess, this was not enough for them to link the points; that the nature of the money that ordinarily passes through our hands is directly related to the material success and psychological well-being of society.
We find the consequence of the passivity that lies at the heart of the behavior of the "ordinary man" described by Mises:
“Common man does not speculate about the great problems. With regard to them he relies upon other people's authority, he behaves as "every decent fellow must behave,'' he is like a sheep in the herd. It is precisely this intellectual inertia that characterizes a man as a common man.”
Now, however, there is Bitcoin with its logic, completely antagonistic to the current system. Ironically, its existence is much more than an invitation to the debate that we have long lacked; it is the change already underway. If it is the will of the world's population, it will continue until the answer to the question of this article becomes self-evident.
Bitcoin is the result of free choices - a world apart from state currencies that are based simply in the fear that its citizens have of being confiscated or arrested if they do not pay taxes. But where those choices will take us, we still do not know. The fact is that this technology is so favorable to the individual that it has the curious ability to make its critics sound as if they were attacking freedom itself.