How do financial experts reach vastly different conclusions about bitcoin and its role? The answer lies in a misunderstanding of what money is.

Recently, a popular financial Twitter (or #FinTwit) personality joined the financial TV channel Real Vision and said that “bitcoin is a pretty terrible form of money.” The same day, Fidelity Digital Assets released a report called “Bitcoin First: Why investors need to consider bitcoin separately from other digital assets,” claiming that “Bitcoin is best understood as a monetary good. Bitcoin is likely to be the primary monetary good and another digital asset is not likely to supersede bitcoin in this role.” How can financial experts come to these vastly different conclusions? The answer lies in a misunderstanding of what money is.

What is money, really?

What is money? It’s one of my favorite questions to ask clients. There is no right or wrong answer, and financial advisors rarely ask this question themselves. The key to understanding bitcoin is learning monetary history and gaining knowledge of digital networks. We’ll focus on deconstructing what money is for the first part of this series.

Throughout history, we’ve moved from physical primitive goods, such as money like seashells and wampum, to physical metals like gold and silver to paper receipts backed by physical metals to government-issued fully fiat currencies. “The better the money is at holding its value, the more it incentivizes people to delay consumption and instead dedicate resources for production in the future, leading to capital accumulation and improvement of living standards,” economist Saifedean Ammous wrote in his book “The Bitcoin Standard.” We’ve only known a fiat system during our lifetimes, so it’s not easy to comprehend anything else. Money is what we receive for the economic output we provide to society. Instead of needing a scale to weigh out precious metals, we have a scale in that dollars are our unit of account and our measuring stick on what something costs. Money allows us to specialize and become an expert and pay for expertise from others. Money provides for trade.

Money’s five critical traits

Money does not need to increase in quantity to be effective; it needs to have five critical traits – divisibility, scarcity, portability, recognizability and durability. Gold was money for thousands of years, and an ounce of gold in Roman times bought a tailored tunic, in the 1970s a fitted suit and today a broad array of fine custom suits. Gold, while having scarcity, durability and recognizability, fails miserably at being divisible and portable. Gold receipts and fiat currency solved this issue and allowed global trade to expand.

Fiat currency is outstanding at solving for divisibility, portability and recognizability. The problems lie in scarcity and durability, again missing the mark at being optimal money. Bitcoin has all five properties of money, but, like any money in existence, the demand needs to be there. In a previous article for this newsletter on bitcoin and inflation, I shared data highlighting the growth of demand for bitcoin. NYDIG recently shared that Bitcoin processed $3.0 trillion worth of payments in 2021, exceeding the transaction volume of American Express ($1.28 trillion) and Discover ($504 billion).

How bitcoin functions as money

The stages of monetization for any object over history has followed a similar cycle: the object being collectible, a storage of value, a medium of exchange and a unit of account. Until fiat currency, part of what gave something value was the difficulty in obtaining it or the time to create it.

Bitcoin solves this value proposition by its mining process, called proof-of-work, and the difficulty adjustment, which allows the mining network to adjust up or down the computing power needed to solve for the next block. The difficulty adjustment goal is to help ensure the supply schedule remains very predictable, which is a new block every 10 minutes. It’s an effective, yet simple, solution to a very complicated computer science problem for distributed consensus networks.

Bitcoin mining is costly and time-consuming, yet the verification of the transactions by nodes on the network located around the globe is effortless and almost free. Bitcoin’s most significant benefit is having a final settlement in a digital world in record time, leveraging the mainchain or the Lighting network, depending on the needs of the parties involved. (When measuring speed, you must include “final” settlement – for example, credit card transactions are not finalized before 24 hours.)

The future of money

Money is what allows individuals and businesses to function and thrive. Money that has all five key traits – divisibility, scarcity, portability, recognizability and durability – helps to enhance trade and economies, as all actors use the same unit of measure. Imagine for a minute we are playing Monopoly, and I am the banker – and in each round, instead of abiding by the rules established at the beginning of the game, I institute a new tweak or change. How do you strategize for your turn? How do you plan for the roll after this one?

Source https://www.coindesk.com/tech/2022/02/10/to-understand-bitcoin-we-need-to-understand-what-money-is/

By block head

Block Head is a blockchain journalist.