I ran across an article on MarketWatch regarding Bitcoin. The title: Stay Away From Bitcoin, It’s Complete Garbage. In the article, the author, Brett Arands, goes on to lay out a fictitious conversation where a supposed elite is asking an adherent why someone should use Bitcoin, but he never gets the question answered. Quickly, you throw in the towel on the article. The fact is, compared to the dollar in your pocket, Bitcoin may be the better form of payment when comparing apples to apples. First, however, you need a simple primer on what money is.
Money is a medium of exchange to avoid having to barter. Nothing more. That crisp piece of paper in your pocket is a form of medium of exchange. Long ago, society realized that the coincidence of want was a difficult hurdle to cross and so money, or the medium of exchange, was quickly adopted to facilitate this. Let me explain.
Suppose there is no money in the world. Instead, we are on the barter system. And, let us suppose you work for ABC Automotive and you manufacture transmissions for the car company. For your 40 hours of effort every week, the ABC Auto company provides you with one transmission as payment. You can use the transmission to barter for whatever you would like in this world.
It is Friday, and you want a beer and a burger because it’s been a long week. You step into a pub that I own and order said burger and beer. But, before that happens you inform me that you have one transmission that is valued at 250 beers. You would like one beer and wish me to trade off the rest the rest of the value of the transmission.
I ride a scooter. I do not want your transmission. Nor, do I want to be involved in trading off portions of the value of a transmission. You and I do not have a coincidence of want. So in theory, while although your transmission is valuable to you, it has no value to me, someone who needs to buy supplies for tomorrow’s restaurant patrons.
That simple story is the same story I was told in economics school at Pasadena City College with Mr McLean some period of time ago. It is easy to carry that story with you because of its simplistic approach of explaining why you have paper in your pocket instead of lugging around transmissions to try and trade for a beer and a burger.
The way fiat currency works is that there is an agreement that $1.00 purchases a certain product, such as a Snickers bar. You and I both agree that a snickers bar is worth $1.00 and so, therefore will make the exchange of $1.00 for a Snickers bar. And that is satisfying.
Bitcoin is nothing more than a medium of exchange. You and I would be able to exchange a Bitcoin for something. While there is technology involved in creating that exchange, the same job can get done.
There is one massive difference between Bitcoin and any other fiat currency in the world: Bitcoin has no central bank that is diluting the purchasing ability of the coin. In fact, just the opposite.
I bet if you asked Mr. Arands if he could buy the exact same amount of Snickers bar today than he could when he was a kid, his response would be the exact same as anyone who has lived more than 1 year on this planet: “Pssshhh… back in my day…”.
And, why is that? Because there is a central bank that “backs” said fiat currency. And, that central bank is moving society forward by wasting away said fiat currency by deflating the currency.
And Bitcoin? Back when Bitcoin first came, all the way back in 2009, 1,000 Bitcoins were needed to buy 1 Snickers bar. Today? 1 Bitcoin can purchase 2,500 Snickers bars.
Hmmm… should I go with the paper in my pocket that has value being destroyed every day? Or, should I go digital, like every other aspect of humanities life, and see my purchasing ability increase?
Bitcoin has a set amount of currency. The US Dollar has an infinite supply and more and more is being created every day, destroying the purchasing value of the currency… because inflation is very healthy for an economy.
In Japan, where the Bank of Japan is desperately trying to decimate its currency to prop up inflation, Bitcoin was recently legalized and the country is rapidly embracing the technology and payment form. Some 100s of thousands of Bitcoin pay stations are being installed around the country. This has created a surge in demand, pushing the currency upward since the April 9th announcement from $900.00 to its recent high of $2,980.00 per coin. Read this paragraph again. Now, read it again. Until that sinks in.
Bitcoin works because individuals agree that it works. You and I can look at an exchange and see the rate of exchange for Bitcoin, whether it be against the USD, EUR, JPY, CNH, or every other currency out there. Then, if we decide to agree to use this form of medium of exchange, we do.
I remember the trust factor I needed to add PayPal as a source to have access to my bank account and then hitting the send button when I wanted to purchase something. That was eery. That was 20 years ago.
I remember telling a friend of mine that when I got back from a vacation, I was going to turn off my home phone because I only needed my cell phone anymore so why pay for two phones. He laughed and scorned me that I would be turning that phone on in no time at all. Again, that was 20 years ago. I have not owned a home line since the late 1990s.
Americans get too stuck in their ways when it comes to currency. When we cross a jurisdiction, we can still use the US Dollar. But, the Japanese, Brits, Europeans, Africans, Asians, South Americans… and on and on, when these individuals cross a jurisdictional boundary, they have to think in terms of another currency.
I guess I was an fairly early adapter to some forms of technology that we now utilize every single day without hesitation. But, I am rarely the first in line. The pioneers, those people tend to get arrows in their backs. But, I try and think things through. I have thought through Bitcoin. It is a viable medium of exchange.
I can use Bitcoin to buy and sell things, if I like. Or, I can use the crusty, germ-ridden, who-knows-who-touched-ti-before-me paper in my pocket. Either way, really. But, as a store of value, Bitcoin has fiat currencies beat all day long and will continue to do so. There are 7,000,000,000 people on the planet that potentially could use Bitcoin. There are only 21,000,000 coins in existence.
That is why the value keeps surging. And, more and more, there are pay stations going up around the world to facilitate this medium of exchange. I guess, however, these pay stations are not going up in Mr, Arand’s neighborhood, though. Too bad.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in COI over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.