Is Bitcoin Money?

August 9th 2017

It doesn’t matter if Bitcoin is money or not. What matters is its utility, not its definition. It’s like asking whether or not emails are “letters” or webpages are “newspapers”. It is of no consequence at all in either case. This is a line by line rebuttal of an article by Jim Rickards, notorious nocoiner.

At various times in history, feathers have been money. Shells have been money. Dollars and euros are money. Gold and silver are certainly money. Bitcoin and other cryptocurrencies can also be money.

This is not relevant, and arguments over what money is and is not are also not relevant and have been going on for years with reference to Bitcoin. The only thing that matters is what you can do with Bitcoin, not any definition of it. It doesn’t matter that you call email “letters”, as long as email works. The same is true with Bitcoin. If you can use it as you use money, then you can use it. What economists and other think is not relevant to the big picture, and is a distraction.

People say some forms of money, such as Bitcoin or U.S. dollars, are not backed by anything.
But that’s not true.
They are backed by one thing: confidence.

This is an incorrect use of the word “backing”. Federal Reserve Notes used to be backed by gold. That means you could redeem them for physical gold. “Backing” in this context means “redeemable”. When you redeem you dollars with the government, what do they give you in return? They don’t store “confidence” at Fort Knox or the New York Fed, and the Germans wanted their gold returned to them, not “confidence”.

You can’t just change the meaning of words to make an argument, and have the argument remain sound. Confidence is meaningless as a measure of integrity in the money context, and we can see this is true in fiat. All fiat currencies have gone to hyperinflation without exception, and yet all the governments that issued them had the full confidence of the public.

If you and I have confidence that something is money and we agree that it’s money, then it’s money. I can call something money, but if nobody else in the world wants it, then it’s not money. The same applies to gold, dollars and cryptocurrencies.

This is absolutely false. People in the USA will not take Euros for purchases not because they have no “confidence” that the Euro is money, but because they can’t spend it locally. And putting up the standard that no one else in the world wants it excluding it as money is absurd. Once again, this is a total distraction to the important issues swirling around Bitcoin, and failing to grasp this is what makes people fail to understand exactly what Bitcoin is offering.

Governments have an edge here, because they make you pay taxes in their money. Put another way, governments essentially create an artificial use case for their own forms of paper money by threatening people with punishment if they do not pay taxes denominated in the government’s own fiat currency.

By this argument, pieces of wood, like the Tally Stick are money. This does not require collusion of many people, just force. So is money the result of compulsion or collective delusion?

And the dollar has a monopoly as legal tender for the payment of U.S. taxes. According to John Maynard Keynes and many other economists, it is that ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value. This theory of money boils down to saying we value dollars only because we must use them to pay our taxes — otherwise, we go to jail.

Citing Keynes…unbelievable. The ability to force someone to do something can’t turn an object into money. If that were true, literally anything could be money, including kidnapped people, and not even Keynesians would claim that “people are money”.

So-called cryptocurrencies such as Bitcoin have two main features in common. The first is that they are not issued or regulated by any central bank or single regulatory authority. They are created in accordance with certain computer algorithms and are issued and transferred through a distributed processing network using open source code.

This is a very poor description of how Bitcoin works, but it doesn’t matter that no one understands the workings underneath it. People make posts on Blogs like this one, which is behind SSL, and have no idea about any of the complex software that powers their writing. Trying to explain Bitcoin’s workings is a fools errand for computer illiterates, who must try and find some other means of addressing and explaining how it works. They invariably fail.

The second feature in common is encryption, which gives rise to the “crypto” part of the name. It is possible to observe transactions taking place in the so-called block chain, which is a master register of all currency units and transactions.

Once again, this shows that Rickard’s understanding of how Bitcoin works is not complete. It would be much better for him to actually use it himself and then talk about his user experience, rather than trying to delve into the low level details. I’m sure he could explain how to write a blog; he wouldn’t add how SSL works as part of his description. How SSL (or Apache or Browsers) work under the hood is immaterial to blogging.

But the identity of the transacting parties is hidden behind what is believed to be an unbreakable code. Only the transacting parties have the keys needed to decode the information in the block chain in such a way as to obtain use and possession of the currency.

This is nonsense, and it is not how Bitcoin works at all. Not even close. You never posses or receive Bitcoin in a transaction. It’s hard to believe, but that is in fact an accurate description.

This does not mean that cryptocurrencies are fail-safe. But on the whole, the system works reasonably well and is growing rapidly for both legitimate and illegitimate transactions.

This is not true. The system works perfectly and has an unrivalled uptime record. There are no illegitimate transactions on Bitcoin. All transactions are simple messages sent and received by software clients, and that is all. Any attribute you place on them is purely one of your own incorrect perspective, and not of fact. Its like saying there are “illegitimate phone calls”. No one in their right mind thinks that, and Bitcoin is no different to a phone call or a text message, save in the way the message is handled. Its just data, from end to end, all the time, without exception.

It’s worth pointing out that the U.S. dollar is also a digital cryptocurrency for all intents and purposes. It’s just that dollars are issued by a central bank, the Federal Reserve, while Bitcoin is issued privately. While we may keep a few paper dollars in our wallets from time to time, the vast majority of dollar-denominated transactions, whether in currency or securities form, are conducted digitally.

This is false. The dollar is in no way shape or form a “digital cryptocurrency”. Anyone who thinks this clearly doesn’t understand what Bitcoin is and why it is special. Bitcoin is fundamentally different to the dollar at every level, and this is why it’s so interesting. If you don’t understand why the dollar is not a cryptocurrency, then you will not be able to understand why Bitcoin is so important and why it is so revolutionary.

We pay bills online, pay for purchases via credit card and receive direct deposits to our bank accounts all digitally. These transactions are all encrypted using the same coding techniques as Bitcoin.

This is not true. The same software is used to do many things, but in the unique arrangement that is Bitcoin, it stands completely alone. Its like saying, “ink is used to print different newspapers, so newspapers are like paper dollars because both use ink and paper”.

The difference is that ownership of our digital dollars is known to certain trusted counterparties such as our banks, brokers and credit card companies, whereas ownership of Bitcoin is known only to the user and is hidden behind the block chain code.

The difference is way, WAY beyond a simple knowledge of ownership. In Bitcoin, there are no trusted counterparties; it is peer to peer. The ownership of Bitcoin is known to everyone on Earth. All you need to do is look on the block chain to see who controls what Bitcoin. And there is no such thing as “block chain code”.

Bitcoin and other cryptocurrencies present certain challenges to the existing system. One problem is that the value of a bitcoin is not constant in terms of U.S. dollars. In fact, that value has been quite volatile, fluctuating between $100 and its present high above $3,400 over the past few years. It’s currently around $3,467.

The fact that Bitcoin’s price goes up and down is not a challenge to the existing system. It is a result of an immature on ramp and price discovery system that is getting better every day. A chart of the volatility of Bitcoin shows a steady downward trend. Bitcoin’s volatility is one of the many arguments against it we have read over and over for years now. It is not novel, interesting or insightful.

One potential solution to the Bitcoin volatility problem I find interesting is to link Bitcoin to gold at a fixed rate. This would require consensus in the Bitcoin community and a sponsor willing to make a market in physical gold at the agreed value in Bitcoin. This kind of gold-backed Bitcoin might even give the dollar a run for its money as a reserve currency, especially if it supported by gold powers such as Russia and China.

The idea of linking Bitcoin to gold is an old one, and some companies have tried it and failed. There is no reason to link Bitcoin to gold; it offers no extra utility or security or value, and in fact, introduces friction and risk. Bitcoin backed by gold will never happen. It is a bad idea that has been rejected by the market. Bitcoin alone is enough to change the entire world exactly as it is. Backing Bitcoin by gold is like saying, “Email will be more useful and acceptable if it is used to scan hand written letters that are then sent to the recipient”. Totally ridiculous, obviously, but that is what is being suggested here.

Clearly Rickard’s has not had any real exposure to Bitcoin, and yet, he persists in writing about it in a way that exposes this. The question is, “Why?”. Why does he not ask someone to help him understand Bitcoin , rather than double down every time he get pulled up on the matter?

His experience in business, currencies and markets could be invaluable to the Bitcoin community, but it will be lost if he stubbornly refuses to accept the facts and embrace Bitcoin. I’m sure someone out there would be more than willing to help Jim!

While the price is low and the fees are cheap, send Bitcoin here, so we can eat!

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