Why Bitcoin is Money

Jonathan M. Hazell

 

Bitcoin has only been in existence for seven years. It has grown from a novelty to an outright economic force that is challenging the world's monetary system. Today a single Bitcoin is worth nearly $700.00. Why is Bitcoin such a powerful force? The construction of Bitcoin makes is what makes the digital currency so powerful. It has the balance of being a store of value and an accounting system. This balance is in step with the traditional definition of money.

Only 21 million Bitcoins will be made available. These Bitcoins are allocated in "blocks" in a limited number. Currently 25 Bitcoin are given out for each block created approximately every ten minutes. The Bitcoin platform is scheduled to allocate all 21 million Bitcoin by 2040. http://historyofbitcoin.org/ These Bitcoin units are allocated to "miners", as they are known. The miners are simply computers, loaded with the Bitcoin protocol, which solve computation problems to produce the accounting ledger of transactions known as the Blockchain.

This allocation system of units creates a value similar to that of producing a commodity. It takes resources; computers and utilities to mine the Bitcoins. As time progresses, the system makes the mathematical computations more difficult and the Bitcoins more scarce. This model is a digital replication of the mining process for commodities like gold or oil. Bitcoins are numerically divisible down eight decimal places, so it can be used for micropayments as the value of a Bitcoin itself rises. Bitcoin, therefore has the structural component similar to traditional money like gold or silver coins or paper currency that represented metal amounts. A dollar bill represented so much weight in gold. In 1944, for example, The Bretton Woods agreement, established a rate of $35.00 for each ounce of gold. https://en.wikipedia.org/wiki/Nixon_shock.

Bitcoin's other unique feature, many call it the revolutionary feature, the Blockchain, records all Bitcoin transactions on a decentralized ledger. This can be defined as an objective, open- source, accounting platform. This method also avoids double spending as the units get locked into the "block" of transactions and not stored individually by the users themselves. This type of ledger truly makes the transactions peer to peer. The transactions do not have to be accounted for by a third party's ledger. They just get stored in computers across the world making them always available for auditing. This feature of Bitcoin replicates current banking ledgers that handle national currencies. The Federal Reserve numbers all bills. 

https://www.stlouisfed.org/in-plain-english/the-federal-reserve-banks-and-currency. A bank or credit card customer will receive a statement listing all transactions. Our modern money therefore can be accounted for to various degrees. Bitcoin can be accounted for to an even higher degree. This fact differentiates bitcoin from other commodities such as gold or silver. Metals, of course, can have serial numbers engraved on them, but they are mutable by nature. This fact is partly what gives metals its value. They can be melted down and made into many different forms. This fact can negative impact upon the marketplace as well. The rehypothecation of gold or silver is a real concern. Nations store gold and other commodities as a national resource theoretically to bolster their national credit rating or standing. The question often is how much gold, silver, etc actually is being stored? Metals can easily be melted down or combined with less valuable strains such as lead. It is not often easy to gain access to reserves, let alone give adequate, metallurgical tests. The auditing process of metals therefore is simply difficult. Other resources have similar issues; land has to be carefully surveyed, oil and other fuels have to be tested for purity, stocks have to be researched, etc.

Bitcoin's platform does not have to be tested or be researched to have value. It is not produced by a singular company or reliant upon a resource. Bitcoin's decentralized platform separates itself from an insular private bank's ledger. This fact gives it a value. It also offers a transparent auditing system that allows transactions to be essentially stored indefinitely. President Nixon removed the U.S. Dollar from the gold standard in 1973. Now the U.S. currency, like the rest of the world's currencies,"float" in value versus one another. The currencies' value is pegged to the strength of national economies as well as the strength of the governments and even national defenses. These arbitrary values are based not upon metal or resource reserves but highly speculative, national perceptions, economic forecasts and trends. The "fear index" is an example of this. http://www.cnbc.com/2016/06/13/the-fear-index-is-making-it-look-like-the-august-swoon-all-over-again.html

Bitcoin's value appears to move like a commodity. It rises and falls in large chunks, unlike currencies which generally move in small increments against one another. Bitcoin ironically though, being purely a digital platform, is in many ways more of a natural system than our own current economic system. Money should not simply be based upon force and perception. It should have a base value. Gold and silver used to provide that for the U.S. dollar and other world currencies. Today these currencies do not have a stable store of value attached to them. This is why it appears as if one world event will unhinge the entire financial system. Today we are hearing that about the "Brexit" issue, the impending vote by Great Britain to leave the EU. http://www.todayonline.com/business/lew-warns-negative-world-economic-impact-if-uk-exits-eu

Bitcoin, therefore has large value fluctuations because the global monetary system it is measured by is so unstable. Bitcoin itself is actually a stable platform that has the balance of both a storage of value and an accounting system. It can and is used as a unit of exchange for goods and services. It is divisible to a high degree; it is fungible, and accessible really to the whole world. These facts make bitcoin a true world money that can supercede the intertwined, nationalistic, fiat currency system now in place. Bitcoin is a better form of money than we have now. The world's current monetary system just has to get out of the way.