In my previous post The Real Problem of Digital Currencies and Privacy I proposed that there were two, readily observable weak links and one primary problem outside of digital currencies. Namely:
Weak Link #1: The exchange services who convert common currencies into e-currency and vice versa.
Weak Link #2: The e-currency must be defensible and the asset which backs the e-currency must be verifiable (technically this is two more weak links bringing the total to 3; in my haste, I neglected to separate these so I make note of that here).
Primary Problem: The lack of understanding of property rights and individual liberty in a sufficient number of people to enable them to come to each other’s mutual defense.
In conducting further research on Bitcoin it is interesting and encouraging to see how it is addressing these issues. While I am no expert on Bitcoin I will do my best to touch on how it and its users are tackling the issues I describe above.
First let us discuss the qualities of an “ideal money” (see What is Money?):
- Scarcity – limited supply helps maintain value
- Durability – the ability to resist wear and decay
- Fungible – divisible into small amounts
- Portable – a sufficient concentration of value that allows efficient transportation
- Proven – a history of successful use
- Use Value – its usefulness
- Defensibility – the degree that it is capable of being defended
Let us now compare how Gold and Bitcoin stack up against each other in each of these areas:
The supply of gold is regulated by nature. The supply of Bitcoin is limited by its configuration.
Gold does not decay or rot. With proper back-up and storage, neither can Bitcoin.
Both gold and Bitcoin can be divided into very small quantities but Bitcoin is the clear winner here because its cost of division is close to zero.
Due to their concentrated value both gold and Bitcoin are highly portable but Bitcoin is the clear winner since wealth can be transferred across the globe with the click of a mouse.
Gold has a 6,000 year history as a proven form of money but it has also proven its weakness since it has been driven out of the monetary system through many periods of history including the present time. Bitcoin has been in existence only a short time and has yet to prove itself over long periods of time.
Gold has many uses in industry – over and above its usefulness as money. Bitcoin’s primary use value is as a medium of exchange. Time may prove that the degree of Bitcoin’s usefulness as a medium of exchange outweighs it’s lack of usefulness in other areas.
Gold, due to its physical nature, is expensive and difficult to store and defend. Bitcoin is easy and inexpensive to store. The degree to which Bitcoin can be defended will continually be tested but the outlook is hopeful. There is no such thing as 100% protection for any asset but one can take actions to minimize risks. The cost to benefit ratio must always be considered.
The assets created and known as Bitcoin have unique qualities in that:
- They are created electronically and exist in a distributed and decentralized fashion across multiple computers across the internet. With no central storage location they become much less susceptible to confiscation by invading armies. A powerful feature indeed.
- They are created or “mined” by complex computational problems which regulates the rate of their creation and limits the ultimate supply giving them an anti-inflationary nature which is one of the main characteristics of a desirable money.
Overcoming Weak Link #1: If there is a ready market of willing trading partners, there really is no need for Bitcoin to be exchanged for fiat currencies. Since fiat currencies primarily act as a medium of exchange (a means to trade what you have for what you want), Bitcoin can simply be traded directly for the goods and services of willing trading partners bypassing the need for currency conversion. A growing market of willing trading partners strengthens the value of Bitcoin and reduces the dependency on fiat currencies.
Overcoming Weak Links #2 and #3: There is no asset backing Bitcoin. Bitcoin is itself the asset. Its greatest value is as a medium of exchange. The fact that it is decentralized makes it extremely difficult to confiscate. Hence, it is highly defensible.
Bitcoin is a promising tool in the struggle for individual liberty. In order for life-protecting tools like Bitcoin to have continued success there must be a sufficient number of people who have a clear philosophy of what Liberty is and what it means (see My Philosophy of Liberty) and they must act consistently within this philosophy (see A Way To Be Free). They must respect the property rights of others. This is called Autarchy.