Is Bitcoin Real Money?

All throughout history human civilization has used commodities for money. Shells have been money, tulip bulbs and feathers have been money, silver and gold have been money, and now today, paper is money in the form of Euros and Dollars. All of these examples have a tangible aspect to them. However, a new asset class that has no tangible form is increasingly influential. This virtual asset, cryptocurrency, can also be considered money.

Many people maintain that Bitcoins have no hard assets back them up and so can not be considered real money. This is exactly the same as the US dollar and so that doesn’t seem to be a very sensible argument. Confidence is what given currencies their value not asset backing.

If enough people in the marketplace state that they believe something is money, then it is money. The converse is also true. This is as it has been with all forms of money since the beginning of time. Our collective belief determines the value of a currency. This article from Brad Feld says it brilliantly.

Until recently Governments have really had a monopoly on currencies. The fact that they collect taxes in their decreed fiat (not asset backed) currency forces the entire adult population of their country to use their currency.

The mighty U.S Dollar, or Federal Reserve Note, is the king of modern fiat currencies. The U.S Dollar has a monopoly as legal tender for all debts public and private, as well as the medium of exchange for payment of taxes by U.S. citizens.

The famed economist and founding father of Keynesian economics, John Maynard Keynes, stated that it is this exact situation of a government essentially forcing it citizens to pay tax in a fiat currently that gives it its intrinsic value.

Cryptocurrencies may seem like a monetary experiment but they have two key differences with existing currencies.

#1 Cryptocurrencies are not issued by central banks in the same manner that the Federal Reserve creates U.S Dollars. Instead, they are mined by massive server farms that complete algorithms in reward for blocks of cryptocurrency which is distributed through an open-source code. This makes the currency entirely decentralized so that it is not dependent on the monetary policies of any central banks.

It is also impossible to destroy cryptocurrency. Hacking a server farm or ledger system has no impact as the code (and so ledger) remains open on all other servers connected to the network. This unique characteristic means that an EMP attack in one section of the world would not completely destroy a widely distributed cryptocurrency. For more details see this video.

#2 Encryption used in the design of cryptocurrency allows total transparency of the ledger system known as the Blockchain. You can view the Blockchain at any time, and all transactions and currency units are completely transparent.

The identity of the asset holders is confidential, and the only way to distinguish the asset is with its unique private keycode. This system gives the owner of the cryptocurrency complete anonymity, with their identity hidden behind an unhackable code.

Every day increasing numbers of consumers and merchants are joining the party and accepting payment for goods and services in cryptocurrency. The advent of private virtual wallets linked to a MasterCard has allowed private wallet holders to convert their cryptocurrency into fiat currency instantly and pay for goods and services directly or with crypto holdings.

The Truth To The Fiat Dollar Insanity

An interesting fact to take note of is that U.S Dollars are also a form of digital currency. Over 95% of the world's money supply is in digital format, with less than 5% taking the shape of paper money that we stuff in our wallets.

Principles of the banking system transfer digital Dollars and most of it is simply just virtual ones and zeroes found in a never ending virtual system controlled by the world's central banks such as the Fed, PBoC, BoE, BoJ, and ECB.

We transact in currency using credit cards and EFT payments, pay our taxes, rent, and utilities with direct deposits and receive virtual deposits into our accounts without ever laying an eye on the physical Dollars.

We just assume they are there and that the banking system knows what they are doing. All of these systems and their encrypted transactions feature similar coding used for the Blockchain technology.

Bitcoin does come with a unique set of challenges. The first being the price volatility. Since its inception in 2009, when a Bitcoin launched at the cost of 0.06 cents, it has risen to the current price that is just shy of $3,500.

Along the way, Bitcoin has already experienced two hyperbolic pricing spikes that have seen the Price of Bitcoin reach all-time highs, only to crash to records lows a few months later. This volatility leads to Bitcoin viewed as a speculative asset rather than a real currency that has a store of value. Dollars experience value fluctuations, however, they are in the range of a few cents, not hundreds of Dollars in every move.

One thing is sure; the overburdened current monetary system has rising global debt levels that are slowly spiraling out of control. When central banks finally do lose control, the flood on non-confidence will cause a global conflagration and the death of the reserve currencies. While it is impossible to say what new money system will come to power, cryptos like Bitcoin and Ethereum seem like the next logical monetary solution. The world will need a decentralized global currency used for trade between nations. Blockchain technology just may have that answer in its code.