Bitcoin : The evolution of money

I recently attended an academic conference where I spoke about Bitcoin and blockchain to a group of distinguished academics. The general feedback was that they all could not believe that bitcoin could be classified as money and that it would not last. These were all highly intelligent men, most with doctorates and great experience in their respective careers. It struck me that there was huge opportunity in explaining how money has evolved to cryptocurrencies in this generation. I needed to use sound reasoning and build a very solid case for the value of bitcoin in the monetary system. This is the reason for writing this article, it is my explanation of how money has evolved into cryptocurrency and particularly directed at the people that are scripted in the current banking paradigm.

Money is used for two purposes:

  • A medium of exchange:  This means that money can be used in exchange for goods and services. Paper money was a huge convenience as it could be easily carried and was accepted as legal in the purchase of goods. Electronic banking and the credit card was also a step in the evolution of money as people did not have to carry large amounts of cash which was not very safe. It can be seen that credit cards and electronic transfers play a large part in purchases and the idea of money not being physical but digital had already gained acceptance before the invention of Bitcoin.
  • A store of value:  People also want their money to retain their value over a long period of time so that they can retain their buying power and wealth. Gold was a good example of a good store of value. Over the years it has retained its buying power and is recognized in any country in the world.
 
There is nothing which stipulates what can be used for money. The important thing is that people are willing to use it and that it satisfies some basic properties:  
  • It must be divisible into smaller units and still retain its value when divided
  • It must be transportable across distances so that people can travel with it.
  • It must hold its value into the future, allowing the holder to store wealth.
 
The ability to hold value into the future is the most difficult to achieve. The difficulty of producing new monetary units determines how well it retains its value. Most money has an existing supply consisting of everything that has been produced in the past minus anything that has been destroyed. New money also needs to be created into the system. If the supply of new money has a high ratio compared to the existing stock of money then this leads to the money being a poor store of value. However if the supplier of new money has a low ratio to the existing stock then that money is much better as a store of value.

The success of bitcoin lies in the fact that it  has a strictly limited supply. No matter how much people use the network there can only be 21 million bitcoins in existence. The last bitcoin is scheduled to be minted in 2140. If more people want to hold bitcoin, the only way to meet the demand is through the appreciation of the value of bitcoin. In human history some physical object was always used as a store of value. Bitcoin does not have a physical presence but a digital one and is able to achieve scarcity. The digital scarcity combines the best elements of physical money without any of the physical drawbacks to moving and transporting it.

Any person that owns bitcoin has economic freedom which was not possible before its invention. Bitcoin holders can send large amounts of value across borders without having to ask permission. Individuals now have a clear solution to escaping the financial shackles of the governments that they live under. Modern individuals can transact with others they meet online via systems of identity built on consent and mutual respect without a need for government or banks.

Bitcoin can be see as the new emerging reserve currency for online transactions where bitcoin backed tokens will be used for day to day transactions while the bitcoins are kept on the blockchain. This would allow many micro-transactions to be carried out online without high transaction fees for on-chain transactions.  Bitcoins advantage is that it has created the fastest method for final settlement of large payments across long distances and national borders. In only a few years of existence bitcoin has achieved a degree of global liquidity, allowing for international payments in prices that are lower than existing international transfers.

In summary bitcoin is a credible form of money because it can be used both as a store of value and a medium of exchange. It is as a store of value that is far superior to paper money as it will retain its value far better as it has digital scarcity. In the end it is the willingness of people to trust and use bitcoin that makes it successful and it has grown in stature as a method of payment and an asset because of this. Nobody can predict the future but I can say with certainty that Crypto has been invented and it is here to stay. The level of adoption is yet to be seen but it will have significant impact on future generations.  

Bitcoin : The evolution of money

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