My initial thought regarding bitcoin is that it represented an inferior form of money relative to gold. Gold was immutable. Bitcoin was not. I didn't think that you could be sure of what bitcoin was going to be in ten years. In fact, bitcoin is a monetary construct created by man, and all manmade monetary constructs have been abused. Gold must be a better form of money than bitcoin.
I was wrong.
The discussion of money generally centers around three properties:
1) It is a unit of account. This means it is an accounting system for value.
2) Store of value (SOV)
3) Medium of Exchange (MOE)
I am going to drop in an excerpt from an email that I sent to some friends regarding an article that tried to make the point that gold was a better form of money than bitcoin because gold is immutable. From the email:
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Down the page we come to a paragraph where the author defines money in the way that just about everyone accepts as truth, but that I now believe is incorrect (I will italicize the author's words):
What is money? Going back to basic economics textbooks, money is a few different things — a medium of exchange, a unit of measure, and a store of value.
The author answers his question:
I would suggest that being a medium of exchange is not the foremost utility value of money, a store of value is.
IMO, this approach is incorrect. Money is a unit of account, an accounting system for value. SOV and MOE are how we use money. The accounting system is the thing and SOV and MOE are uses in the same way that a car is the thing and transportation is how we use it.
This distinction is important.
We all know gold's impressive characteristics:
Inert
Jewelry usage initially
Only product (until bitcoin) produced not to be consumed
Rare
Difficult to debase because of the above two items
These characteristics helped to make gold money. However, the real reason gold became money is that it made the accounting system for value more difficult to defraud and easier to trust. Because gold has the above characteristics, we trusted it as the basis of the accounting system for value more than anything else that we could come up with....until now. The controversial leap that I am going to make here is that money didn't have value because it was backed by gold, but that gold was given great value (beyond its use as ornamentation) because it was chosen as the unit of account.
The author knocks out a couple of more points that most probably agree with, and they are points I have used to rationalize my own investment in gold:
Gold stores energy in a form that is indestructible. That is the key, right there, in a nutshell.
It is the only element with properties that make it completely immune to the forces of entropy. (author's emphasis)
gold is not just good money, it is the only form of money completely resistant to financial entropy. (author's emphasis)
Here is where the author errs. He confuses gold the metal and the accounting system for value that is based on gold. Gold the metal is not subject to entropy and decay, gold the accounting system for value is.
Bitcoin's accounting system for value blows away the accounting system based on gold because it has completely done away with centralization (this is why the recent block size debate was so important) and it is audited real time. We always know where all of the bitcoins are.
Gold is massively centralized and has been since the US accumulated 45% of all of the gold ever mined by 1945. Since that time, the world's central banks have worked overtime to destroy gold as an accounting system for value. They have done this through things like the London Gold Pool, the European central banks disgorging huge amounts of physical gold in the late 1990s through the early 2000s. Today, most gold is still held by banks as custodians (which are regulated and controlled by governments). We also see regular, massive, instantaneous liquidations of paper gold in the futures markets by central banks or their banking agents. This centralization of the gold market and the lack of trustworthiness of those at the center of the gold market has served to make investors fearful of using gold as money.
Gold was important and initially chosen as money because it allowed people to trust the books better than the alternatives of the day. To the extent you trust bitcoin's distributed nature and the cryptography, then bitcoin is a vastly superior accounting system for value and its use as a SOV and MOE will increase based on this superior accounting system. It will become money.
After I wrote the email above, I read the book Digital Gold by Nathanial Popper. It is an account of the early days of bitcoin. In the book, he profiles an Argentine entrepreneur by the name of Wences Casares who is now the CEO of Xapo, a cryptocurrency storage firm. The book recounts Casares' realization that the accounting system for value was the thing:
He saw that bitcoin's lack of any transparent intrinsic value didn't matter when looked at against the history of money. The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money. And it was used as money because it did what all good money did: it served as a sort of physical ledger on which society could keep track of who was owed what. Each piece of gold represented a slot on the ledger of all outstanding gold, which anyone could verify by checking the mass and the volume of the gold....
"What is value?" he would ask. "It is that it is the ledger."
This is the only other explanation that I have seen that frames bitcoin's primacy as money in terms of its superiority as a unit of account.
I think that most people who become bitcoin fans have an aha! moment. The above was mine.
Disclaimer: Nothing here should be construed as investment advice. These are nothing but my rambling thoughts. I do own gold and bitcoin, but do not recommend these assets for others. You have to do your own homework and know what you are getting into. Governments hate these two assets and will try to make sure no one who owns these things wins. You have been warned to stay away!
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