Bitcoin, Cryptocurrency and the Qualities of Money

Bitcoin has now shattered the Vageta Barrier [1] like Vageta shattered his computer glasses (It's over 9000!!!). It's time to reflect on what has gotten us to this point in the first place. Personally, I first learned about bitcoin in 2012. At first I thought it was a terrible idea. The problem being addressed by bitcoin was to remove arbitrary control over the currency. I thought, why digital? Even if it were to replace the central bank currencies, they would just hack it and take it over, it's destined for failure. However, the trusted economic minds at the dailypaul.com convinced me to at least entertain the idea. It wasn't until March of 2013 that it clicked. The future of the world had changed for me. No longer would the banks be able to oppress the population through manipulation in dishonest money. The people of the world had for the first time a real, honest out. The protection against hacking was cryptography. And though at the time I didn't fully understand cryptography, I did understand the teachings of Murray Rothbard and Ludwig von Mises about sound money. And that's what this is really all about, that's the szechwuan sauce of bitcoin, it needs to eventually perform as sound, uncontrolled currency in order to have any value. We can expect volatility in early stages as cryptocurrency transitions from an idea to an implementation, but without the end goal of operating as a uncontrolled, sound currency, bitcoin is nothing but a tulip craze.

In order to analyze the position of bitcoin and cryptocurrencies, we must first analyze the objective qualities of money. This is extremely important in the cryptocurrency space for coins like bitcoin. There are other cryptocurrencies out there with other functions and utilities other than an operating as a currency, however, I will not delve into them in this analysis, as the aim here is only to look at those cryptocurrencies that intend to operate purely as a currency network. For these networks, it is their ability to conform to the qualities of money that give them their value. So we must ask ourselves, "what is money?" It's a question we've all probably asked as a kid, only to be dismissed with some bullshit to cover up our parents' ignorance (bless their hearts). However, as an adult, I find it tragic that the overwhelming majority of the population has never revisited this question. To understand what money is, we must first get an understanding by looking at the history of money.

"Through the centuries, many commodities have been selected as money on the market. Fish on the Atlantic seacoast of colonial North America, beaver in the Old Northwest, and tobacco in the Southern colonies were chosen as money. In other cultures, salt, sugar, cattle, iron hoes, tea, cowrie shells, and many other commodities have been chosen on the market. Many banks display money museums which exhibit various forms of money over the centuries." - Murray Rothbard [2]

When looking at the past, we can see that many different items have been chosen to be used as money. What gave these items their ability to operate as money was different from time to time, and place to place. In one area, salt may have been valuable enough to operate as a store of value to be traded, however in areas near a salt mine, the supply of salt would be too overwhelming for anyone to attempt to use it as a currency. Why would I trade my eggs for salt if I can just go get some salt over there? On the same note, some things that have been used as currencies may have been too scarce to operate in other areas. In North America, tobacco was in steady supply and was valued and therefore was suitable to operate as a currency. However, in Europe, tobacco was non existent, and what good would it do to price anything in tobacco when you know that no one will have any to trade or how could you trade tobacco to someone that has never seen it? They would not understand the value assigned to it.

From a brief view of history, we can formulate some qualities of money that must be met in order for it to operate efficiently. First, there must be scarcity. Ie. the currency to be used must not exist in boundless supply. Also, there must be a widespread use of the currency already in high demand and recognizability in the economy for which it operates. The currency needs the ability to be accepted by a wide variety of merchants in exchange for goods and services. The next thing to consider when markets choose a money is divisibility. Though cattle can be used as a currency for more highly valued goods, it operates as a poor currency for things like eggs, shoes, or potatoes. I cannot trade a dozen eggs for 1/200th of a cattle. Having the ability to be divided into smaller pieces, while retaining it's fractional value, is necessary for a currency to be productive. Additionally, a sound currency would do no good if it did not have the quality of portability. If a store of value were immovable, it would not have value in trade. The ability to seamlessly transfer the currency from place to place and person to person is required for effective trading in the market. Furthermore, the quality of durability is desirable for money. If the currency to be used did not have the ability to retain it's value over long periods of time, then it's ability to be accepted as a store of wealth would diminish. The only time a trade would make sense is if the non-durable good being traded was to be used immediately. A currency must be able to retain it's value over extended periods of time. And a currency must be durable to the threat of counterfeit. Durability against illegitimate copying is necessary to retain scarcity and keep trust in the currency. Lastly, in order for a currency to have utility in the marketplace, it must have the quality of fungibility. This means that all divisible units of the currency within the economy are homogeneous. It should be so that any person can trade any one unit of the currency for any other equal unit of the currency without losing any value. It is this last value where bitcoin specifically has a fatal flaw, yet cryptocurrency as a whole can overcome.

This leaves us with six objective qualities of money. Namely, scarcity, recognizability, divisibility, portability, durability and fungibility. It is these six qualities that determine a good's viability to be used as a currency in the marketplace. And though this is an analysis of sound money, I would be remiss to speak about bitcoin and it's viability as a currency without comparing it to the Federal Reserve Note. In every one of these six qualities, bitcoin is a SUPERIOR currency to the Federal Reserve Note. The FRN is a demi-currency that is hegemonically forced upon the population. It's desire and ability to be used as a currency is only artificially held up by fear and threats of violence. The FRN deserves no mention in a topic of sound money, other than it's obvious hegemonic monopoly on the current market. This deceitful failure of the FRN, however, does not excuse bitcoin or other cryptocurrencies from being criticized under the principles of sound money.

I mentioned a fatal flaw of bitcoin is that it fails to truly exhibit the quality of fungibility. In fact this flaw of fungibility is going to be inherent in any blockchain that utilizes transparent ledgers. With the ability of the public to trace a bitcoin from place to place and person to person, it creates a condition of non-fungible bitcoins. If a hacker is able to compromise a popular exchange or mining pool, and steal bitcoins, then the network as a whole can track those bitcoins and refuse to service anyone in control of those bitcoins. With enough network consensus of blacklisting the thief, the bitcoins in his addresses would be worthless. Therefore, bitcoin would not have the homogeneous nature that a sound money must possess. Bitcoins belonging to the hacker would not be worth the same value as bitcoins that were never involved in the heist. Hence, the fungibility of bitcoin and other cryptocurrencies break down due to the inherently transparent nature of their blockchains. You might say that this is good, as the thief does not profit from his crime. However, one only need to consider the situation where a person in a position of network trust abuses their position for malicious means and is able to convince the network to blacklist someone for purely personal or petty reasons. Suddenly, the network itself becomes a trusted party to properly blacklist only criminals, and not persons with political differences. This can create market confusion as the participants would be required to know which bitcoins are good, and which to avoid. The confusion has very real market ramifications. It obscures the honesty of the blockchain, which undermines trust in it as a currency. It damages privacy and the ability of people to control their funds themselves. This individual control, this idea to "be your own bank", is what gives bitcoin it's value. Without the promise of sound, honest currency, bitcoin is does not have value. I don't expect it to fail any time soon, and I have not moved all of my personal positions out of bitcoin, and I don't hope to see it fail, but without addressing this flaw of fungibility, bitcoin should be viewed very skeptically for those that have already made their way into the cryptocurrency space. Though this skepticism should be relative as well. As even in this area of fungibility, bitcoin is far superior to currently widespread practices of using central bank currencies.

This flaw of bitcoin's fungibility, however, should not condemn all of cryptocurrency to failure. In fact, there already exist blockchains that have addressed this very issue. One of these coins that I have a position in, is Monero (XMR). Monero is a different blockchain than the others, as it operates on the CryptoNote protocol and ring signatures. This creates the condition of what is know as an opaque blockchain. Transactions are combined from multiple people and, through cryptographic processes, are signed in a way that makes it impossible for an observer to know where the transactions were sent. This makes it impossible for an observer without the wallet's private view key from knowing the balance of a wallet or the transactions it has been involved with. In the case of the hacker thief, the network itself would have no way of knowing which address to blacklist. There would be no way for anyone to know that the Monero that is being traded was involved in a crime. Unfortunately, this may benefit the thief, however, it maintains the far more important quality of fungibility for Monero. Thieves will always exist, and markets will find ways to prevent crime, but sacrificing a required quality of money in order to protect against crime is a fruitless endeavor. I know there are other opaque blockchains in addition to Monero, as Monero is itself a fork of bytecoin, but Monero is currently leading all of the blockchains that address this fungibility issue.

So where does this all leave bitcoin? For the immediate future, I don't see any effect. Bitcoin is a tried and trusted cryptocurrency. It is the one that started it all, it is the one that everybody knows, and it is the entry point to cryptocurrency for the vast majority of people. On the flip side, bitcoin is now the target for the industries it originally conceived to make obsolete. This is where the true genius of bitcoin, Satoshi Nakamoto and cryptocurrencies shine! The powers that be will be forced to eventually to attempt to co-opt bitcoin. They will be forced to control it, as their current power structure relies on control and power of deceit over the currency. Bitcoin is now the center of their attention. While alt-coins are focusing on addressing the more theoretical flaws of cryptocurrency, bankers and power holders are seeing the threat of the outdated technology of bitcoin. What they are too incompetent to comprehend is that blockchain can only work if it is honest. The blockchain networks can only continue to operate if they are honest. And so if the powers that be spend all of their resources to attack the honesty of bitcoin, their fruits will be that bitcoin will collapse. It cannot operate without honesty. This was a security design in blockchain itself. Initially, the idea was that dishonest hackers of bitcoin would be found by design, and the network would trust only the honest nodes. This makes the hacker's entire purpose obsolete, because if he were to successfully hack bitcoin, the result would be that bitcoin would be replaced with some other blockchain that the market saw as honest. So as the current power structure focuses their efforts at hacking the honesty of bitcoin, if they become successful, they would be left holding an empty bag, while the market can easily switch to an honest blockchain. Suddenly, after all of that effort, the power structure would be back to square one and have to start over on the next biggest, honest blockchain. Blockchain has built into it a Hydra defense. You can chop off the head, but that will do nothing but multiply its existence. In this area, the current power structure is certainly to incompetent to successfully survive. They will fight, and as they fight bitcoin and exploit it's inherent flaws, other coins will address those flaws and grow. In my opinion, blockchain is now an unstoppable force, one in which the defeat of the current power structure has already been sealed. The time to successfully stop blockchain has passed, and we are beyond the point of no return. This means a bright future for humanity, one in which honesty and liberty will by necessity reign supreme. So do not fear the flaws of bitcoin, do not deny them, but rather embrace them as a defense mechanism of blockchain to peacefully defeat the most powerful, evil group of people that have controlled humanity for far too long.

[1] -

[2] - "The Mystery of Banking" - Murray Rothbard (1983), https://mises.org/library/money-its-importance-origins-and-operations#I3

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