Bitcoin vs The US Dollar
The Characteristics of Money, Compared — Post #16
Bitcoin was first articulated by Satoshi Nakamoto in 2008 via a whitepaper, followed by software in 2009. Some have speculated that he created bitcoin as a response to fractional reserve banking (Post 7), but has never been explicitly stated.
The key problem Nakamoto solved was that of double spending, without the need of a 3rd party. You can’t double spend a physical dollar because you can’t duplicate it (easily), but with digital assets, it becomes easier to duplicate and copy. This problem is solved by using a third party to verify the transactions, like a bank or a credit card company. Bitcoin aimed to replicated cash transactions digitally without the use of a 3rd party.
Nakamoto made 3rd parties unnecessary with the blockchain. (Post 11) This allowed a currency to be digital, peer-to-peer, and distributed/decentralized (Post 10), the resulting currency is called ‘bitcoin’.
Note: Often ‘Capital B’ Bitcoin refers to the protocol or the system. ‘Lowercase b” bitcoin refers to the currency unit.
Feel free to re-read my posts for the characteristics of money to date. The rest of this post will outline the functions and characteristics of bitcoin (BTC) as money while comparing it to the US dollar (USD). At this time, I don’t think it is the best form of money, but it does offer solutions to many flaws in current fiat money.
Functions of Money
Store of Value — BTC
Since bitcoin’s beginning, there has not been a better place to store value. This claim holds true as long as the owner of the coins didn’t panic sell. Whether it will retain that value in the future is speculation, but so is every prediction. People have lost value in bitcoin but bitcoin has regained that value back over time. You can see the price relative to dollars in the graph below (the graph is logarithmic, not linear).
One of the major arguments about bitcoin is that it’s too volatile (fluctuations in price) for a currency that stores value. This is absolutely true. The risk of using a highly volatile currency is that while it may increase in value, you also risk losing value. While this is problematic, bitcoin is trending towards less volatile, as shown below.
The dollar is also inflationary. This means that the dollar loses value as time goes on because more are added to circulation (see post 7 and post 8). Bitcoin has a decreasing inflation schedule meaning that there are less added to circulation as time goes on. This implies that (if adoption continues) 1 BTC will be more valuable in the future. The argument against any deflationary currency is it promotes saving instead of spending, which could hinder economic growth.
Unit of Account
- Divisibility — BTC— Bitcoin is digital and can be divided into as many decimal places as needed. Currently, 1 bitcoin can be divided into 8 decimal places. The smallest unit is called a satoshi, 1 satoshi = 0.000,000,01 BTC. This is superior to current money as creating units smaller than a penny would be a costly undertaking and not realistic with an inflationary currency.
- Fungible — TIE— Fungibility is the interchangeability of a currency. (5) $1 bills are worth the same as (1) $5 bill. Same is true with bitcoin.
- Uniform —BTC — All bitcoins on the same blockchain are uniform, but there are different blockchains. I will expand in a later post. However, on the same blockchain, all bitcoins are created equal.
Medium of Exchange
- Valuation of common assets — USD — Hands down. Due to the volatility of bitcoin’s price nothing is ‘pegged’ to bitcoin (except for other cryptocurrencies).
- Low cost of preservation —TIE— Bitcoin uses a lot of electricity. It is the nature of the beast, and a brewing problem (more info here). I don’t know if it is possible to quantify how much money has been put toward preserving the dollar. Gold would be the ideal winner in this category because there is no maintenance involved, aside from keeping it off the ocean floor.
- Transportable/Portable — BTC — Apart from needing to transmit money through a computer eventually, bitcoin is highly portable. The private key needed to spend the bitcoins can be 12 memorable words. They are numbers or letters, so anywhere that you can take a series of numbers or letters you can take your bitcoins. If they are memorized, USB, on paper, or tattooed, they can be transported.
- Recognizable /Acceptable— USD— Hands down. There aren’t many people who will turn down a US $100 bill. The Bitcoin network is growing but is nowhere near the quantity of USD.
- Verifiable /Counterfeit Resistant — Debatable — Counterfeiting bitcoin isn’t really possible aside from guessing a private key. See (Post 13). On the other side, the USD has numerous security features.
- Durability —BTC — How do you destroy a number? Bitcoins are as durable as the owner makes the keys. If the only copy of the key is on a computer and you throw out the computer, the bitcoins die with the hard drive. If the proper precautions are taken, the keys are as durable as the medium. In order to destroy the network, you would need to eliminate all computers running the software. This includes the computer running in space. It is possible but unlikely.
Wild Cards
- Regulation — Debatable —Bitcoin is regulated by the programming, The programming cannot change unless all users (miners) agree. If users do not agree then the blockchain splits and creates an additional blockchain. This is called a ‘hard-fork’. The US dollar is the result of an enormously complex regulatory system which is both a blessing and a curse.
- Trust —Debatable— I’ve gone over the importance of trust in previous posts, but the root characteristic of all money is trust. There are reasons to trust USD and reasons to trust BTC.
There are a number of factors that go into the ideal qualities and characteristic of money. Paired with deep philosophical and political monetary policies, deciding which currency is better is an everlasting speculative debate. In my opinion, the USD is currently the best currency due to the amount of collective trust among users, but bitcoin is gaining trust quickly.
This is post #16. The others are located here.
Want to be emailed these posts (or weekly/monthly summaries)? Sign up here.
