The quest of Bitcoin to became Money

in #bitcoin2 years ago

At this point, few are those who have not yet heard of Bitcoin, the new digital currency on the support of the still incipient but very promising blockchain technology. With the great rise in its price this year, more than 2,000%, there have been thousands of voices warning about whether or not bitcoin is a bubble. The truth is that the discussion about what is the value of bitcoin and, therefore, whether its price is adjusted to reality or not, is an impossibility​ given the premature circumstances surrounding bitcoin. In this sense, it is convenient to be cautious when making categorical claims about its price that divert attention from its possible value and evolution as a solution in the difficult task of protecting savings in the future.

To evaluate to what extend bitcoin can fulfill its promises, two things are needed: on the one hand, to understand what blockchain technology is, and the challenges it faces; on the other hand, to have a sound monetary theory.

What is Bitcoin?

Bitcoin was born with the aspiration to become a new form of money. A very particular form of money, with limited, transparent and impossible to manipulate supply, fixed in an algorithm written by the most famous anonymous person in the world, Satoshi Nakamoto.

That is, the opposite of the nationalized money with which we are forced to operate every day (fiat inflationary currencies): a form of money constantly debased by politicians and central bankers, either via discretionary spending or debt monetization (public and private); an unfair scheme in which some benefit from being able to settle their debts with debased currency while a large majority see how the purchasing power of their savings and wages is reduced inexorable.

What is money?

If bitcoin aspires to become a new form of digital money, next step is to understand what is money. The most perfect definition of money is given by Carl Menger, founder of the Vienna School, in On The Origins of Money (1892). Menger establishes how any good, under the circumstances, can become money. Money, continues Menger, is a spontaneous institution that allows overcoming the limitations of a barter economy.

According to this classic definition of money (which also coincides with the properties that he arrogates from the messy John Law to the libertarian Murray Rothbard), money is a good capable of fulfilling three basic functions: unit of account, means of payment, and, more important by far, deposit of value. In short, money is what allows us to articulate saving, everything that we generate and do not consume and that allows us to accumulate reserves to face the unpredictable eventualities of life and to undertake investment projects in increasingly sophisticated capital goods. That's why its function is so important.

When this function of depositing value is eliminated due to the effects of inflation (printing of currency over the amount of real saving, as in the current financial repression scenario), economic agents are forced to increase their profile of risk, to speculate, if you do not want, irremediably, lose the purchasing power of your savings.

For centuries, gold has been the most genuine form of money. It was a relatively scarce good, with a stable and limited supply, relatively easy to transport, unalterable (despite the many alchemical attempts), fungible and almost impossible to manipulate. As economies became more sophisticated, and so did the credit and banking markets, paper money, backed by gold, became the most effective form of money until the arrival of the first wave of computer revolution, where credit and debit cards took up a significant part of the money, although (and despite the fact that it is hard to believe) the most usual payment in the whole world is still in cash.

While these changes were happening with respect to the means of payment, the money also changed, and much, with respect to its value reserve function: since the early twentieth century and, especially after the creation of the Fed in 1913 and the end of the Great War, the former anchor with the gold standard was discredited and, little by little, the central banks, and not the metallic anchor, were in charge of determining the money supply. In this way, before any financial eventuality, the printing of currency was seen as an easy exit, apparently painless (without political cost), with the consequent generalized devaluation of the currency due to the general rise in prices at all levels.

Fiat money vs. Bitcoin

This inflationary context is important to understand the possible perspectives of bitcoin and its unstoppable boom in the last 2-3 years. The offer of bitcoin, unlike the offer of dollars or euros, is strictly limited: exactly to 21 million bitcoins, as happens with gold. The algorithm initially designed by Nakamoto in 2009 today is distributed network among hundreds of thousands of nodes that operate and maintain the blockchain in a decentralized manner regulate the offer. Any change that you want to impose should be approved by a large majority of these nodes.

Small pause on the road for those who hear the word blockchain for the first time. A blockchain, very summarized, is a database, open book, distributed and dynamic, changing with each block of information that joins the chain. Each blockchain has its rules and is designed for a specific purpose: in the case of bitcoin, the exchange of value of a currency with limited supply. In this way, within the bitcoin blockchain each user can send a unit of value to another user, such as a cash payment, privately and directly, without the need of any intermediary (neither Chase, nor Visa, nor even PayPal).

Each blockchain has a consensus, the set of rules that regulate its operation and that include (also in the case of bitcoin) a series of incentives for the hundreds of thousands of nodes that dedicate time and (above all) energy to operate and maintain the network in a decentralized manner for the benefit of all. The blockchain is like an open accounting book: a record where all the members of the network have access. In this way, a bitcoin cannot be stolen or altered, cannot be copied and you cannot increase your offer at pleasure.

Bitcoin has some very unique properties that place it in a very advantageous position to become a kind of digital gold in the future; hence the growing interest of many and its so dizzying rise. It is, to a certain extent, an improved gold; with lower transportation costs and a safer and cheaper custody. Therefore, and regardless of its price, bitcoin is for many a very important and interesting thing, since it is a form of money outside the public powers, a form of money denationalized in happy expression of F.A. Hayek.

That's why it seems premature to limit the analysis of bitcoin solely to its price and simply say that it is a bubble; as equally reckless it turns out to be unaware of the challenges and obstacles that it still has to overcome.

In any case, it is therefore incorrect to compare the value of bitcoin with the market capitalization of Wal Mart or it is wrong to talk about investing in bitcoin, when, only, today we can speculate and not even with its price (which is the least), but on whether bitcoin will become a new form of "sound money", what is really interesting.

If bitcoin goes down to 1,000 USD tomorrow, it would still seem like an interesting topic to follow. In the end, buying bitcoins is betting on decentralization, privacy and freedom, a bet that in my case does not depend on the price.