reason #3
bitcoin IS THE BEST MONEY
What exactly is money today? It is a medium of exchange. It is the means by which we can buy goods and services, and is crucial in a complex economy. When we lived in small tribes and roamed the countryside hunting and gathering, there was no need for money. Jack and John would hunt the antelope, Freddie would pick the berries, Martha would cook and everyone else would contribute towards the welfare of the clan. Tribes may barter amongst themselves. When we discovered agriculture, our lifestyles became less nomadic and we settled in villages and towns. Jack would now grow apples. If he wanted a new pair of shoes he had to find a shoemaker who wanted apples. As we specialized our labour, so too did the need for a universal medium of exchange increase. Maybe in one village, everyone loved bananas. If the shoemaker was not a fan of apples, Jack could exchange his apples for bananas and use those bananas to pay the shoemaker. The problem, however, with bananas is that they rot easily and they are not scarce.
Some villages started to use rare sea shells, but then it was discovered that with time they became brittle. This meant if you delayed consumption and stored it, you never knew if it would still be worth something in the future. This moved us onto metals and metal coins made mostly of gold and silver. These coins were both durable and scarce, but they were heavy and complicated to transport in large volumes. Paper notes were then introduced that were backed by gold and silver. You could in theory exchange paper notes for the equivalent value in gold or silver. The US dollar was the last major currency to move off a precious metal standard because the government wanted more money are were too lazy to mine more gold. This happened in 1971.
So what is money today? Yuval Noah Harari says money is the only trust system created by humans that can bridge almost any cultural gap and that does not discriminate on the basis of religion, gender, race, age, or sexual orientation. The key word in this definition is trust. When you presented your sea shell as a method of payment, you trusted that your counterparty would accept it. When you held that $100 bill before 1971, you trusted that the government would honor its commitment to exchange that bill for $100 of gold. Today, the need for trust has never been stronger because paper money is backed by nothing. You trust that in 5 years, the money you are saving will hold its value. With this, we come the most important part of money - it needs to be a store of value for the future
For an asset to qualify as a store of value, it needs to boast eight characteristics:
1) Durability - it must not be perishable or easily destroyed. This means that an agricultural commodity is not as good a store of value as a precious metal
2) Portability - it should be easy to transport and store. A diamond ring is therefore better than a herd of cattle.
3) Fungibility - one specimen should be interchangeable with another. This means that gold is better than diamonds. An ounce of gold is generally the same throughout the world. Diamonds, on the other hand, are all different and their value is based on size, clarity, cut, and colour.
4) Verifiability- it must be easy to verify the authenticity of the good. It is more difficult to verify a Picasso painting than a share in Amazon.
5) Divisibility - it must be easy to subdivide the good. In the old days, when trade was relatively infrequent, this did not really matter. Today, however, as trade has flourished it has become far more important. It is easier to divide a barrel of oil than it is to divide a house.
6) Scarcity - as Nick Szabo termed it, monetary goods must have "unforgeable costliness". In other words, the good must not be abundant or easy to obtain or produce in quantity. Scarcity is possibly the most important attribute of a store of value as it taps into the innate human desire to collect that which is rare.
7) Established history - the longer the good is perceived to have been valuable to society, the greater its appeal as a store of value. Gold has a longer history than oil.
8) Storability. How difficult is it to store it safely? It is easier to store $1 million worth of gold than $1 million worth of wheat.
Gold and the US Dollar versus Bitcoin
Now that we understand the eight tenets of a store of value, let us see how two of the most established stores of value (the dollar and gold) stand up against the incumbent - the new young rebel on the block - Bitcoin.
1) Durability
Gold is durable - it will not rust or corrode. It can literally last forever. It cannot be destroyed on a molecular level with any naturally occurring substance on earth. Not even fire can destroy it. Cash notes on the other hand are less durable. The Colombian drug lord Pablo Escobar stashed his billions of dollars in warehouses and buried it in the ground in farms surrounding Medellin. Rats gnawed into those dollar bills and the moisture from the soil destroyed the bills.
Let's now assess the durability of Bitcoin. What could happen to Bitcoin? Let's start with the most extreme threat. If all sources of electricity, internet, and data communications were shut down across the entire planet, Bitcoin nodes would not be able to contact each other. That would be the end of Bitcoin and the end of humanity. Another possibility is a critical bug. In September 2018, a bug rocked the Bitcoin world that could have shut down a chunk of the network, and could have been used to create new Bitcoin above the 21 million hard ceiling. Such a perversion of the rules would have destroyed the trust in Bitcoin. Due to the disastrous implications of the bug, developers decided to keep it a secret, buying themselves time to fix it and urge miners to upgrade their software. But what if the bug had already been exploited? Experts say they would have detected the suspicious activity. When downloaded for the first time, full nodes double-check every transaction made in Bitcoins history. A node running the new software would detect the problem immediately. Another possibility is a government crackdown. Governments cannot destroy Bitcoin itself because of its decentralized nature. They can however control and restrict its use in their jurisdiction. They can freeze the bank accounts of crypto companies. But all countries would need to do this in unison because businesses will simply move to friendlier jurisdictions. We are already seeing the emergence of crypto-friendly countries. El Salvador stands out as the global leader in crypto friendliness when it passed a law in 2021 that implemented Bitcoin as legal tender, and no income or capital gains tax is levied on Bitcoin. Singapore and Portugal apply similar tax treatment. Malta recognizes crypto as a unit of account, a medium of exchange, or a store of value. In Puerto Rico, there is no federal income tax and no capital gains for residents. Switzerland, Slovenia, and Germany round off the top ten friendliest crypto countries. The final threat to the durability of Bitcoin is the possibility of a major hack. A total of 51 percent of the network would need to band together with the common goal of destroying their own source of profit. As the size of the Bitcoin network grows, the probability of the majority joining in this self-destructive act is relatively low.
2) Portability
Try to move a billion dollars of gold or cash notes through an airport and you will quickly realize portability is not the strong suit of these two stores of value. Gold is heavy and bulky, and hundreds of suitcases with dollar bills will raise uncomfortable questions. I understand that 90 percent of money these days is in digital form. But even this does facilitate frictionless movement. There is an old joke in finance about the quickest way to send $10,000 from Singapore to Los Angeles. The answer is in an airplane. How is it possible that in this modern age where you can order a cab off your phone and connect hundreds of people from hundreds of countries into one video meeting it takes two to three days to move money across borders? The system used for cross-border money transfers is SWIFT and is fifty years old. It is owned by the banks and it makes them rich - they have had no incentive to improve this system until now. Crypto is set to eat SWIFT's lunch. Bitcoin is the most portable monetary asset in the world. In April 2020, $1.1 billion was moved in a Bitcoin transaction in a matter of minutes and cost 68 cents. This transaction was done cheaply and efficiently without having to ask the permission of a bank, reveal their identities, trust anyone with their information, or give anyone control over it. No other payment system in the world can move that amount of value, for that price, in that amount, in that amount of time, and completely anonymously.
3) Fungibility
Gold is generally fungible - an ounce of gold generally holds the same value as an ounce of pure gold anywhere. Money is also fungible as is Bitcoin so on this point it is a wash.
4) Verifiability
Not all gold is 100 percent pure. Alloy metals are added to gold to increase the hardness and durability of coins and jewelry made from it. The most common additive is copper. White gold is achieved by adding palladium or nickel. There is a long history of gold-selling shops that have misled buyers with less than 100 percent pure products. Wuhan, the Chinese city that was put on the map for being the center of the spread of the coronavirus, was also the epicenter of a gold counterfeit scandal in late 2020. Over 80 tons of gold pledged as collateral for a loan are now being investigated for counterfeiting. It is rumored that 4 percent of China's gold reserves could be fake.
When it comes to cash money, counterfeiting has been called the world's second-oldest profession after prostitution. The most common was mixing base metals like copper and gold and silver coins. In America, colonial paper money printed by Benjamin Franklin bore the phrase to counterfeit is death. It was believed that someone who had the ability to counterfeit money was a threat to state security - this shows just how important it is for governments to control the printing of money. Today you have the super dollar which is a very high-quality counterfeit of the US $100 bill. The US government believes that North Korean officials have passed off super dollars in various countries and accuses North Korea of printing them. There has been rapid growth in the counterfeiting of euro banknotes since the launch of the currency in 2002. Governments are wising up and making bills more difficult to counterfeit through the introduction of holograms, multi-coloured bills, embedded devices such as strips, raised printing, microprinting, watermarks, and colour shifting inks whose colour changes depending on the angle of the light.
Can Bitcoin be counterfeited? It is almost impossible to counterfeit Bitcoin. All transactions are validated collectively and coordinated by the miners. This is known as decentralized trust because trust is distributed amongst all the nodes of the network. Therefore, if you try to spend a fake Bitcoin, it will be verified that the previous entries in the chain do not contain this transaction, which would indicate a duplication or a fraudulent operation.
In 2010, Bitcoin experienced what became known as the "value overflow incident" when 187 billion Bitcoins were "created" out of thin air but were quickly destroyed. Again we need to go back to the 51 percent majority rule - it would require the consensus of the majority of the Bitcoin network to falsify or fraudulently manipulate a Bitcoin. It was easier to do that in its infancy. Today there are over 10,000 nodes. The bad actor would need to summon the power of millions of computers, which is practically impossible. In addition, if this were to happen, the network would know and would abandon the network because its decentralization would be compromised. The price would fall to zero and the bad actor would have spent billions of dollars to hijack an asset that was now worthless.
5) Divisibility
The smallest unit of gold is one gram. One troy ounce of gold is approximately 31 grams. At the time of writing this, 1 ounce of gold was trading at $1775 which means that one gram would have a street value of 57 dollars. That would be the smallest unit of gold you could use. Most vendors in the United States would require you to spend at least 10 dollars if you want change for 57 dollars. This means that paying for your 3-dollar latte at Starbucks with a 57 dollar piece of gold may not be well received. So gold is not infinitely divisible. The smallest coin in the United States is 1 cent which is pretty small. The smallest unit of Bitcoin is 1 Satoshi, which is approximately 1/20th of a United States cent. This means that Bitcoin is 20 times more divisible that the US dollar, and 114 thousand more times divisible than a gram of gold.
6) Scarcity
Let's start with gold. Approximately 190,000 tonnes of gold has been mined in total, although estimates do vary. Based on these rough figures, there is about 20% still to be mined. But this is a moving target. It is getting harder and more expensive to mine gold. Today, around 60% of the world's mining operations are surface mines, while the remainder is underground mines. There are relatively few unexplored regions left for gold mining, although possibly the most promising are in some of the more unstable parts of the world, such as West Africa. We can therefore come to the conclusion that gold is relatively scarce. Money on the other hand is many things, but scarce is not one of them. There is a rumor that one-third of all dollars in circulation in 2022 were printed in the past 12 months. Governments are printing money at unprecedented rates as they seek to prop up their fragile economies.
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Bitcoin is exceptionally scarce. Its supply is capped at 21 million. You can find more information on its scarcity in Reason #7.
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7) Established History
The earliest recorded metal employed by humans appears to be gold, which can be found free or "native". Small amounts of natural gold have been found in Spanish caves used during the late Paleolithic period, c. 40,000 BC. The United States dollar was established in 1792 with the Coinage Act. The first Bitcoin was mined on January 3rd, 2009 which means it is fourteen years old. Bitcoin is the clear loser on this store of value metric, which makes it an almost perfect (and not entirely perfect) store of value.
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8) Storability
You have two options to store your gold. You can either take delivery of the bullion and look after it yourself, or you can entrust a professional to store or vault it for you. The former option is complicated. You can bury it at the bottom of the garden and run the risk that Rufus may dig it up. You can hide it under the bed, but then there is the risk of the cleaning lady finding it and disappearing to Monaco. You can buy a safe, but you need to find a way to attach it to the floor so that it cannot easily be spirited away by bad actors. You also need to consider whether your safe is waterproof, fireproof, and bombproof. Wherever you hide your stash of billion, you need to tell no one - not even friends and family, and you better not forget yourself. If you chose not to self custody your gold and place it in the hands of a third party, you need to trust they don't run off to Vegas with your gold and marry a stripper. The same is true with cash notes, You can self-custody in your garden, shoe box, or safe, or you can deposit in the bank. The same risks apply. With Bitcoin, you have the same two options - self-custody and third-party custody. The latter also requires trust and permission, but self-custody is inordinately less complicated. Bitcoin is a digital asset recorded on the blockchain. Your wallet does not hold the Bitcoins - it holds the private keys to your Bitcoins. You can store these in a cold hardware wallet which is completely offline, and if you lose that hardware wallet, all you need to recover your assets is the 12 or 24 recovery (or seed) phrase. At the end of the day, all you need to do is remember these words!
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Conclusion
Civilization rises through channeling energy. We invented fire, then we build cities near rivers, and we used gravity to move water and create energy and electric systems. We then invented batteries as a means of storing energy. If we want to advance we need to be able to capture, store and channel energy. Money is energy. It is the store of value and also a technology that allows us to trade that energy over time and space. If we look at the history of money, we have gone from commodity money, to coinage, to notes to fiat currency and now we have cryptography as a basis for money. Sometimes it is said that gold is ideal money. If God came down from heaven to create ideal money it would be based on Luca Pacioli's system of double-entry system of accounting. He would create 21 million units that were infinitely divisible. There are 100 million Satoshis in one bitcoin which means that one Satoshi is worth less than 1/20th of a US cent which is about 1 South African cent - this shows how almost infinitely divisible Bitcoin is for commercial transactions. The perfect money would be able to settle transactions between parties located anywhere on the planet instantly. That would be good money and that could be called God coin because transactions are instant and never lose any information in the process. Bitcoin comes pretty close to this. Bitcoin is the most efficient monetary system we have ever seen. 21 quadrillion Satoshis, 350 thousand transactions per day, it costs about 10 basis points of the monetary network to clear those transactions and secure that network.
