The bitcoin

I wrote this some five years ago trying to argue that money is nothing but an instrument and that we shouldn’t act as if it was a goal.
Meanwhile the bitcoin has outgrown its puppy fat and is now ready to rock. We should join the party and here is why:

The bitcoin is better than both gold and the fiat/paper money we are now using.

First I’m going to recap what I wrote earlier so you won’t have to read all of it:
– Money is an instrument. We use it as a trade facilitator – it is a lot easier to use money instead of bartering – as a storage device – money conserves its value better than almost anything but gold or houses, specially if it’s invested wisely – and as a way to demonstrate our trust  – if we trust a certain company we invest in it and if we trust a certain country we hoard its currency.
– It is us who set the value of money, no matter if we speak of hard money – monetary gold, the one traded on the financial market – or of fiat/paper money.
The value of gold is set on the trading floors and the most important variable is how frightened the investors are – but everybody who buys gold make the assumption that after the crisis is over there will still be people interested in buying gold. This might seem illogic since monetary gold is valuable as a refuge and if the crises is over who would need refuge any more but since people are rarely completely rational the scheme still works.
When it comes to setting the value of paper money – which, as I said earlier, measures how much ‘trust’ the market, actually the people, has in a country or other – things get a little more complicated.
We have the day to day commercial interactions between the economic agents – consumers and companies – that determine the natural oscillations of that value, inflation or deflation.
We have the central banks which set the monetary policy rates which also influence the exchange rates between currencies.
And finally we have the ‘printing mill’, by which the powers that be inject liquidity into the economy, either by actually printing money or by other means.
In the end it’s the way the market ‘digests’ all these inputs and then reacts to them. For example the Fed has pumped money into the economy for the last 5 years or so but nothing happened as yet, the inflation has not yet risen and the the economy hasn’t grown as expected. The only thing that ‘grew’, or more exactly went back to where it once was, is the Dow Jones.

So why do I say that the bitcoin is better than both gold and paper money? Because it has the advantages of both and none of their disadvantages.

– It is in limited supply, just as gold is, and just as easily dividable.
– It is ‘fiat’, just as any regular currency, and this is a good thing. If it had a material value – as gold ultimately has, you can make jewelry or cutlery out of it, not to mention the industrial uses – one could dream of using it outside the social conventions. As such it only has value if both parties of a deal agree to use it to close deals and this will only happen if the party that is going to get payed in bitcoin is convinced that it will be able to use it later. – Despite of being absolutely virtual, it doesn’t depend on any individual authority that might decide to influence its value, either by ‘printing’ more of it or by altering the monetary policy rate.
– By depending exclusively on the people willingness to use it and by being a novelty it offers an opportunity for us to start thinking about how we use money and about how this whole process influences our lives.
– We don’t have to give up the regular currencies. First of all it wouldn’t be practical – who would print the notes and mint the coins needed in the day to day life? Secondly we still need national currencies to cope with trade imbalances, deficits, etc., etc.. If you don’t believe me see what’s happening in Europe after a ‘motley crew’ of states started to use the Euro before reaching the same level of economic prowess and fiscal responsibility. The best way for us to use the bitcoin would be to entrust it with the role gold used to play before Bretton Woods. One might argue that we already have FMI’s ‘Special Drawing Rights’  but they are not even close to being similar to the bitcoin, being too tightly linked to the national currencies already in use.

Update.
Unfortunately it seems that the ‘backstage’ that keeps bitcoin in circulation is rather ‘power intensive’.
“A Single Bitcoin Transaction Takes Thousands of Times More Energy Than a Credit Card Swipe”