What is money? Money is a measurement unit for the purpose of exchange. Money is used for valuation of goods, settling debts, accounting for work performed, and standardizing the measurement of production. Money has to be divisible, portable, stable in value, easy to obtain, durable over time and must be trusted by all parties using it.
Imagine money that is too large to divide into pieces, heavy to carry, spoils after 2 days, gets damaged easily or can be eaten by animals? If these are the characteristics of the currency, it would not be that useful and many business deals would not happen.
The most important element of money is trust. If you work for someone and you are not sure if you will get paid, would you do the work? If you did the work, and you got paid for something that was not accepted in many places, is it a valid payment? The economy and money system are built on trust, and it can be broken by a lack of trust by the majority of people.
A run on a bank is a classic example of people losing trust in a bank and it going bankrupt shortly thereafter. Trust is also the pinnacle of trade and business deals. If you don’t believe the person whom you are doing an exchange with is trustworthy, the deal would not be initiated. Privacy is an element of trust.
If every deal you made was broadcasted in the public realm, a portion of trust would be lost. Someone may undercut (steal) your business deal or rob you of the proceeds after the deal is done. The best security is achieved through privacy. If someone knows you have made a lot of money, they will find a way to steal it from you if that is their intention.
In the case of bitcoin, does it function as money? It is portable, easily divisible, can be used to value assets and settle debts. Is the value stable? Since the price of Bitcoin moves around a lot versus other currencies, the answer is likely no. If you are trying to buy a basket of apples and are paying for them in Bitcoin, those apples can double in price in a week, then go down 30% the next week and then double in price shortly thereafter.
If every transaction was this volatile, you would not be able to buy many goods and know how much you can spend. The same thing would happen with business deals. The price of all of the components would fluctuate wildly and create a lot of issues in making deals because the costs and revenues would vary too much.
Is Bitcoin trustworthy? Trust can be viewed in many ways. In the traditional money systems, the value of a currency is being eroded by inflation. This makes them unstable over the long term because they are losing purchasing power over time. Who is controlling this inflation? One school of thought blames it on higher labor, material and overhead costs over time – production inputs for business.
Another school of thought says that inflation is a monetary phenomenon, which means that whoever issues the money is issuing more money than the goods being produced. Is inflation a legitimate characteristic of money or is it a slow theft over time?
If you don’t trust how the money system works, you may place more trust in Bitcoin since it is decentralized. The problem with decentralized systems is: Who will cover for fraud, scams or bad behavior? The regulator or central authority acts as the referee to keep the game clean.
If the referee is bribed or is biased, however, suddenly the trust is lost and the game might as well be played without a referee if the players themselves are honest. If your bitcoin wallet is lost or your passwords lost, you will not be able to access your bitcoins either.
Other ways trust can be questioned include having limited access to money (capital controls or system malfunction if digital currency), having to give much of your money away to a third party (taxation, organized crime or perhaps coin miners and exchange operators), counterfeit money (physical or digital), identity theft or loss of a confidence in an issuer (bankruptcy).
Have questions? Contact Joe Barbieri.
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