Summary

• Fiat money is a failing experiment. It has no fixed rules governing supply and the money printer can only go on suppressing failures for so long.
• Currencies need to be pegged to something with value. Value is defined by scarcity and demand.
• Gold is a metal mined from the ground. This was an appropriate store of value for the pre-digital age.
• Bitcoin (BTC) is a cryptocurrency mined using high-performance computers to verify transactions and protect the network. This is an appropriate store of value for the digital age.
• The fact BTC 'has nothing physical backing it' (i.e. it is a purely digital commodity) is not a weakness as it means no third party verification of holdings is required. BTC is part of a unique new asset class for which you can verify holdings instantly and trustlessly anywhere in the world.
• BTC is currently considered too volatile to act as a store of value but this will change over time. We believe its stable value, once its true potential is accepted, will be far higher than its price at time of writing (<$10k) as there will only ever be 21 million BTC. This means the discussion will generally become about sats (100 million per 1 BTC) than Bitcoins.

Introduction

This is our first article talking about why we think the BTC Standard will eventually be introduced as the de facto replacement to the gold standard for the digital age.

Please let us know your thoughts and suggestions in the comments section below!

Benjamin Franklin ponders BTC and its potential impact on USD (courtesy of bermixstudio)

The Purpose of Money

Throughout human history, we have wrestled with how best to exchange value between each other. The efficient exchange of value enables cooperation and cooperation enables us to flourish as a species.

Bartering

The most basic system is bartering - e.g. I'll fix your roof if you make me some shoes. This has some pretty obvious shortcomings as it relies on a double coincidence of wants - not only do you have to have something the other person wants, those things have to be of a similar value.

I actually wanted some comfy trainers... (courtesy of Raoul Ortega)

Show me the Money

That is where money comes in. It acts as a medium of exchange and eliminates the need for a double coincidence of wants. I can fix a roof and get money, I can then use that money to buy shoes. There is no need for the two things to be required at the same time or for them to be of similar value.

In order for money to function it needs to be a store of value and hold its value over time. People will not be happy being paid in something if its value then degrades over time.

The fact that money is used as the medium of exchange and as a store of value means it also becomes the common unit of account, providing a common measure of value and allowing informed decisions to be made on supply and purchase of both goods and services.

Types of Money

For the purposes of this article we are just going to focus on the three overall types of money:

1. Commodity Money - the value of the money is defined by the commodity itself. The value of the commodity is driven by demand and scarcity. Examples include gold coins, shells and spices.
2. Representative Money- notes or coins that can be redeemed for a fixed quantity of a commodity. The obvious example of this was the Gold Standard where USD or GBP could be exchanged for a fixed amount of gold.
3. Fiat Money - the government declares the currency legal tender and makes it illegal not to accept it. The value is not linked to or backed by any physical commodity.

(Fun as it would be to get into the insanity of things like Commercial Bank Money / fractional reserve banking we will avoid that here and just consider it a subset oddity of the fiat money printing machine.)

Live footage of the money printing machine in action from https://moneyprintergobrrr.com/

The World's Failing Fiat Experiment

We are currently in the midst of a failing experiment with Fiat Money. Fiat money is a government issued currency that is not backed by anything physical. This means:

1. There are no transparent or enforceable rules behind its supply. It is completely trust based. They can print as much as they want whenever they want.
2. The positive is it gives central banks better control over the economy because they can control how much is printed.

All current major currencies are fiat currencies - they are backed by nothing except the government that issues them (even thoughup to up to a third of Americans believe the USD is backed by gold.)

Governments can and do print money as and when they feel it is necessary. If you hold your life savings in Great British Pounds (GBP) and the UK Government decides to print £100 billion more to fund bond buying (as they announced they would do two days ago) they are devaluing your savings.

This is all most of us have ever known but it is an experiment that was only globally adopted in 1971 when President Nixon formally left the gold standard

Fiat in some forms has been around for a long time but our de facto current reliance on it for powering the economy is a 40 year experiment.

We at Million Fiat Homepage believe that the experiment is failing. The US Government is now even buying junk bonds with printed USD and the supply of major currencies continues to rise with each new crisis. The current COVID-19 crisis comes before the system has recovered from the previous sub-prime mortgage collapse ten years ago.

The value of money is being degraded and natural cycles of 'boom and bust' are not being allowed to occur. Failing companies are propped up, bad debt is bought out and the general public bears the cost.

Interest rates remain at record lows and money continues to get printed. Central banks are running out of ways to prop things up, even as they consider things like negative interest rates (yes, charging you for having saved money)

Loss of Confidence

When confidence is lost in a currency it tends to be lost fast. There is a run on cash as people realise it is losing its position as a reliable store of value.

Hyperinflation occurs. The value of life savings are lost. Economies collapse and barter or commodity systems take hold.

If a collapse has been artificially delayed and systems have been propped up the collapse can be more sudden and more aggressive.

Hyperinflation in Berlin 1923

What Next?

Increasingly it is recognised the current fiat system is broken and even the President of the US is known to be an advocate of rejoining the gold standard.

This seems to have its merits but gold is an imperfect store of value in a lot of ways:

1. It is bulky and cannot be held/carried in any great quantity by individuals. This means it is centrally held at secure locations.
2. If an individual does carry it in any significant quantity they are vulnerable to theft as someone can literally grab it and run away.
3. Centrally held holdings cannot be trustlessly verified.
4. It is, in essence, just a metal we dug up from the ground and decided was valuable. It has no practical use beyond signaling wealth.
5. It is scarce only because of our difficulty in accessing or mining more.

There is talk of moving onto a new gold standard using cryptocurrencies in some way but the cryptocurrency representation of the physical asset would still rely on trust that the gold behind it is held somewhere centrally.

Gold was a reliable commodity for pegging currencies because of scarcity and demand. People wanted gold and universally accepted its value as a scarce resource.

The difference with Bitcoin is that it is a scarce digital resource rather than a physical one. Detractors paint this as a negative because there is nothing physical you can hold in your hand but in reality this is its greatest strength.

A physical asset requires trust to verify its existence and is ill-suited to being a globally recognised store of value in a digital age. BTC holdings can be verified trustlessly by an individual at any time. It is transparent and less open to abuse. Even gold's role as 'wealth signaller' is more reliably done with BTC.

Digital gold (courtesy of Dimitry Demidko)

The Argument Against BTC

There are a couple of primary arguments against BTC taking the role of 'digital gold':

1. It is not backed by anything physical- as covered above this is a strength not a weakness as it means holdings can be trustlessly verified anywhere in the world.
2. It is too volatile - this is currently true but only because it is a new asset type and the world is just figuring out what it is going to be. The volatility continues to take the price upwards and once you start figuring out its real value, based on it being the new standard underpinning global currencies, you'll recognise the 'stable' value of the asset is far above its current levels. There will be volatility born of excitement and uncertainty but the trend has been and will continue to be, upwards.
3. Other cryptocurrencies do X, Y or Z better - absolutely true, there are now thousands of cryptocurrencies and a lot of them do a lot of things better than Bitcoin. In reality, though Bitcoin has the unique advantage of being the first and the best known. Its scarcity means it fulfills the required role and there is no reason for some other cryptocurrency to be used in its place (Note: we are crypto maximalists at Million Fiat and we see huge potential for a huge number of altcoins in all sorts of things but BTC is by far and away best placed to become digital gold).
4. There are too few BTC for it to be practically used globally - it is a scarce resource. There are only 21 million for the whole of the global population. There are however 100,000,000 sats per BTC and we expect to see the conversation increasingly focus on 'sats' rather than 'bitcoins' as holding a full BTC quickly moves out of the grasp of normal people earning average wages.

Conclusion

The BTC Standard is more logical than a return to the Gold Standard. Its perceived weakness as a purely digital commodity is actually its greatest strength as it removed the need for trusted third parties to verify holdings.

Bitcoins volatility is because it is a new asset class and we are only just realising what it will become. The price will stabilise enough for it to be used as standard underpinning currencies but not until it has stabilised at a level far above its current price.

Discussion

Over to you!

Open mic courtesy of Matt Botsford

Let us know below what you think - tell us what we've missed, why we're wrong, why we're right and what we need to add / expand on in future versions of this article!

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