From stone tablets to gold, mankind has used money of many kinds throughout history. The adoption of one monetary standard over another is not arbitrary however – money needs to have some unique properties for it to be classed as valuable. The properties of scarcity, divisibility, fungability, durability and recognisability can all be attributed to our current store of value, Gold. But why is this shiny metal so valuable?
Before humans, gold had zero intrinsic value. Value becomes real when that person has a reason or purpose to use that item. Water has an intrinsic value but only to a human that is thirsty. Intrinsic value is the value we associate with an item. Nothing has real intrinsic value unless the majority agree it has – and this is really a subjective viewpoint in the eyes of the valuer. Gold was seen as valuable because it couldn’t be debased or modified by governments or politicians and could be made into jewellery. Today we find gold difficult to transport in large quantities, expensive to produce and potentially at an infinite supply.
With America owning most of the gold after the great depression in 1939, most other countries pegged their currencies to the US Dollar and it has become the global reserve currency we see today. In 1971, Nixon dropped the US Dollar from the gold standard and most currencies are now just promise notes from governments, backed by guns and bombs. This is when the US Dollar became what is known in the financial industry as Fiat money – distributed locally, government backed but not backed by a physical commodity like gold. So, is the US Dollar a good store of value?
Fiat currencies are created out of thin air by banks and central banks with no limit on supply and rarely with the whole supply even being known. Call it currency debasement, inflation or Quantitive Easing – printing money enriches the printer at the expense of the public who holds the previous printed money. It is the debt that runs our current economies and we have accepted it that way for years. Now, we are seeing troubles in Zimbabwe and Venezuela when it comes to hyper-inflation. Fiat also suffers from durability – it only lasts as long as your bank permits and even then, slowly looses its value. Banks can destroy fiat at the click of a button – ask a Cypriot, an Argentinian or an Indian. Try to send an international wire money transfer and you have to do it during banking hours. Even if successful, it will take 5 days with many intermediaries adding your details to their centralised systems. If you send a large amount you will be censored. If you send your hard earned money to your family in Afghanistan, you will be stopped. In our digital world, how is money transfer ever going to compete with Bitcoin in a global open marketplace?
With fiat currencies, you are dependent on a third party for your wealth which is not an attribute of money many find attractive. Requiring trust in politicians seems a poor foundation on which to build a prosperous society. The average lifespan of fiat currencies is 50 years. The US Dollar has lost 96% of it’s value in the 104 years since creation by the Federal Reserve in a process called inflation or currency debasement – how foolish do you have to be to hold it over the next 100 years?
Bitcoin is in another class entirely. It’s totally uncounterfeitable with it’s blockchain security and is provably scarce – I can tell you exactly how the supply of Bitcoin will be in 1 week, 1 month and 1 year from now. It is also highly portable across borders with speed and has no weight, smell or physical body. It can be moved at distance, without trusting a third party. It is the only money that doesn’t require permission from an overseer. Bitcoin cannot be debased no matter how many guns a government wields, propaganda it spews or people it imprisons. Lastly, and perhaps most importantly, it has an attribute that will become an essential part of sound money – it’s programmable.
Either the innovation of owning your own money, deciding how to spend/save it and having a monetary policy based on savings rather than debt has long term value or it doesn’t. If the global economy wants a shot at ‘sound money’, the reality is that Bitcoin can provide that. It was created by someone we don’t know and achieved the traction and security it needed when nobody cared. It’s uncorrelated to the traditional finance system, local economic activity and it’s global. It’s also a-political and based on maths rather than people. Many believe that it’s a pretty good invention and way better than the systems we currently have – and it will become more and more useful to people over time. Erik Voorhees, a long term proponent of Bitcoin and CEO of Shapeshift believes that Bitcoin is not just ‘sound money’ but ‘supremely sound money’. The Cypriots didn’t realise they needed it until the bail-in where people realised they didn’t own their own money. Greece shut down ATMs with many Grecians not being able to access their cash. India made savings illegal and removed higher denomination notes. Brexit has already seen a 20% reduction in purchasing power of the British Pound and with a run on Northern Rock bank back in 2007, even the British are seeing the benefits of new globalised fast money like Bitcoin.
Bitcoin’s intrinsic value is as an unstoppable permanent record of transactions on a secure payments network – a very effective store of value to rival the $7tn market of Gold. It has the ability to send large payments all around the world for minimal fees and is also deflationary and programmable. That IS the intrinsic value of Bitcoin and why many think it could be the world’s new digital store of value, even if the market has a hard time of evaluating that value today.