A bitcoin question.
What gives bitcoin its value.
...
A Euro or USD represents a claim on the output of the Eurozone or US economy. What does a bitcoin represent.
To make the case for whether bitcoin can be considered money, I need to go into the fundamentals of the concept of money itself and its history, and what could be more appropriate on a site called askaboutmoney.com
Defining Money
Money is defined by its function, not its form. From wikipedia: "The main functions of money are distinguished as: a
medium of exchange; a
unit of account; a
store of value.... Any item or verifiable record that fulfills these functions can be considered as money.
Also via wikipedia: "Money is historically an
emergent market phenomenon establishing a
commodity money, but nearly all contemporary money systems are based on
fiat money." So for much of human history, what was money was not necessarily dictated from a position of power, but instead emerged from ground up.
Even just considering gold and euros as two types of money, we can say some things about money:
1) Money does not need to have physical form (most euros exist as entries in a digital database)
2) Money does not need to be endorsed or backed by a government (gold)
3) If something can fulfill the functions of money, that is enough to use it as money, it does not need to serve any other purpose (basically the intrinsic value argument, euros are only useful as money)
What properties are useful for fulfilling the functions of money, why did gold win?
So the history of money is that various civilisations used all sorts of things, some where commodity moneys, things used as money that also had other utility other than being money such as bronze, salt and gold. Other things didn't have much or any commodity value such as cowry shells, rai stones, tally sticks.
Why did gold emerge as the clear winner over everything else that people tried? The first answer you usually get is 'because it has intrinsic value, it has industrial uses, and it's desirable for jewelry". Fine, but lots of things have intrinsic value, and many are more useful and important than gold, like food. Diamonds are arguably more desirable in jewelry and also have industrial uses, but they are not used as money to the extent that gold is.
The reason I propose is that gold, of all naturally occurring things in the world has the best combination of properties that help make something fulfill the functions of money:
- portablity
- fungiblity
- robustness
- verifiablity
- scarcity
- divisibilty
Do you agree that the better something is in terms of all of those properties, the better it can work as both a store of value and medium of exchange? Can you find any other element in the periodic table that has a better combination? Can you think of anything else in the natural world that does? If not, do you think this is a coincidence?
Thought experiment: Is it possible that gold became used as money purely because it was the best thing to use as money and that the industrial and decorative uses are coincidental?
Why did gold get mostly replaced by fiat?
Horses were the main mode of transport for 1000s of years, the best naturally occurring thing that people could use for the function of transport. Then people eventually figured out how to create a a purpose-built technology that fundamentally improved on it and that was pretty much the end of horses.
Eventually people figured out purpose-built technologies for money too. Fiat, and especially digital fiat drastically improves the portability, verifiabilty and divisibility aspects of gold, making it way more practical to use as a medium of exchange. The trade offs are that fiat is not as robust (your digital accounts have counter-party risk) and more importantly fiat does not have absolute scarcity, meaning that fiat is worse as a store of value.
Bootstrapping and confidence
Whenever you accept money as payment or use money to store value you do so with the expectation that at a future date someone else will accept it as payment from you i.e. you never accept money to consume it (or we would consider it barter not money). That means you need to have enough confidence that there will be continued widespread demand for the money.
When all monetary systems start they face a bootstrapping problem, why would the first person accept something as money when they don't know if anyone else will in future? While something might actually be capable of fulfilling the functions of money, if it cannot reach a critical mass of users it may never actually be used as money.
I think for gold it makes sense that the intrinsic value helped bootstrap it. It's less risky to accept something as money when you know it will always at least have industrial uses in future. For fiat it can be bootstrapped by the government endorsing it as legal tender, coercing the population to use it by forbidding other money and forcing payment of taxes in it.
The conclusions drawn from the above lengthy post are:
1) Money is anything which can function as money
2) Something with the combination of properties that mean it can best fulfill the functions of money will emerge as money and eventually succeed over worse forms of money.
3) Gold became the main global money because it had the properties which made it better than anything else at being money (intrinsic value is coincidental, but helped bootstrap it).
The Bitcoin thought experiment
Then we arrive at Satoshi's proposal:
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties: - boring grey in colour - not a good conductor of electricity - not particularly strong, but not ductile or easily malleable either - not useful for any practical or ornamental purpose and one special, magical property: - can be transported over a communications channel If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it. Maybe it could get an initial value circularly as you've suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it. I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something. (I'm using the word scarce here to only mean limited potential supply)
And that is what bitcoin ultimately is, putting the above thought experiment into practice in real life and seeing how it plays out.
I think there's more to discuss here, we can go further into the properties and abilities of our various different money systems and make a comparison of which one is best at what. I think each has it's own set of positives and negatives and the choice of what is the best money is different depending on the circumstances.