If you don’t understand what Bitcoin is, Do a little bit of research on the internet, and you’ll receive plenty… but the short Story is that Bitcoin was created as a medium of exchange, with no central bank Or bank of difficulty being involved. Furthermore, Bitcoin transactions are assumed To be personal, that is anonymous. Most interestingly, Bitcoins have no real World existence; they exist only in computer software, as a kind of virtual reality.
The general idea is that Bitcoins Are ‘mined’… interesting expression here… by solving a hard mathematical formula -more difficult as more Bitcoins are ‘mined’ into existence; again interesting- to a computer. Once established, the new Bitcoin is set into a digital ‘wallet’. It’s then feasible to trade real goods or Fiat currency for Bitcoins… and vice versa. Additionally, since there’s no central issuer of Bitcoins, it is all highly distributed, hence resistant to being ‘managed’ by jurisdiction.
Naturally proponents of Bitcoin, Those who profit from the development of Bitcoin, insist rather loudly that ‘for certain, Bitcoin is money’… and not only that, but ‘it’s the best money ever, the money of their future’, etc.. . Well, the proponents of Fiat shout as loudly that paper money is cash… and most of us know that Fiat newspaper isn’t cash by any means, as it lacks the most important attributes of genuine money. The question then is does Bitcoin even qualify as cash… not mind that it being the money of their future, or the very best money .
Compared to Fiat, Bitcoin doesn’t Do too badly as a medium of trade. Fiat is only accepted in the geographical domain of its issuer. Dollars are no good in Europe etc.. Bitcoin is accepted internationally. On the other hand, very few retailers currently accept payment in Bitcoin. Unless the approval grows geometrically, Fiat wins… although at the cost of trade between countries.
The primary condition is a lot Tougher; money has to be a stable store of value… now Bitcoins have gone out of a ‘value’ of $3.00 to around $1,000, in just a few years. That is about as far away from being a ‘stable store of value’; as you can buy! Indeed, such gains are a perfect example of a speculative boom… like Dutch tulip bulbs, or real mining companies, or Nortel stocks. The relative effect of Bitcoin Wealth on your situation can be dramatic and cause issues of all kinds. It can be challenging to cover all possible examples simply because there is so much involved. That is really a lot when you think about it, so just the briefest instant to mention something. This is the type of content that people need to know about, and we have no problems stating that. As usual, we typically save the very finest for last.
Of course, Fiat fails as well; For instance, the US Dollar, the ‘primary’ Fiat, has lost over 95% of its worth in a few decades… neither fiat nor Bitcoin qualify in the most important measure of cash; the capacity to store value and conserve value through time. Actual money, that is Gold, has shown the capacity to maintain value not just for centuries, but for eons. Neither Fiat nor Bitcoin has this crucial capacity… both fail as cash.
Ultimately, we return to the next Attribute; this of being the numeraire. Now this is actually interesting, and we can see why the two Bitcoin and Fiat neglect as cash, by looking closely at the question of the ‘numeraire’. Numeraire describes the use of money to not just store worth, but to in a way measure, or compare worth. In Austrian economics, it is deemed impossible to really measure value; after all, significance resides just in human comprehension… and how can anything in understanding actually be quantified? Nevertheless, through the principle of Mengerian market action, that’s interaction between offer and bid, market prices can be established… if only momentarily… and this industry price is expressed in terms of the numeraire, the most marketable good, that is money.
So how do we establish the value of Fiat… ? Through the idea of ‘buying power’… which is, the value of Fiat depends upon what it can be traded for… a so called ‘basket of goods’. However, his clearly suggests that Fiat has no significance of its own, but instead value flows from the value of their goods and services it may be traded for. Causality flows from the merchandise ‘purchased’ into the Fiat number. After all, what difference is there between a 1 Dollar invoice and a trillion Dollar bill, except the number printed on it… and the buying power of this amount?
Gold, on the other hand, is not Measured by what it trades for; instead, uniquely, it’s quantified by a different physical standard; from its weight, or mass. A gram of Gold is a gram of gold, and an ounce of Gold is an ounce of Gold… no matter what number is engraved on its surface, ‘face value’ or otherwise. Causality is the opposite to that of Fiat; Gold is measured by weight, an inherent quality… maybe not by buying power. Now, have you any idea of the value of an ounce of Dollars? No such thing. Fiat is only ‘measured’ with an ephemeral quantity… the number printed on it, the ‘face value’.
Bitcoin is further away from being The numeraire; not only is it a few, much as Fiat… but its value is quantified in Fiat! Even though Bitcoin becomes internationally recognized as a medium of exchange, and even though it succeeds to replace the Dollar as the approved ‘numeraire’, it can never have an intrinsic measure like Gold has. Gold is exceptional in being measured by a real, unchanging physical quantity. Gold is unique in preserving value for centuries. Nothing else in touch of humanity has this exceptional combination of attributes.