The general idea is that Bitcoins ‘ are ‘mined’… interesting term here… by solving a hard mathematical formula -harder as more Bitcoins are ‘mined’ into existence; again interesting- to a computer. Once created, the new Bitcoin is put into an electronic ‘wallet’. It’s then possible to trade actual goods or Fiat currency for Bitcoins… and vice versa. Additionally, as there’s no central issuer of Bitcoins, it’s all highly dispersed, hence resistant to being ‘handled’ by authority.
Naturally proponents of Bitcoin, Those who benefit from the growth of Bitcoin, insist rather loudly that ‘for sure, Bitcoin is cash’… and not only that, but ‘it is the best money , the money of the future’, etc.. . Well, the proponents of Fiat shout as loudly that paper currency is money… and most of us know that Fiat paper is not money by any means, as it lacks the most important attributes of genuine cash. The question then is does Bitcoin even qualify as cash… not mind it being the cash 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 flip side, not many retailers currently accept payment in Bitcoin. Until the acceptance grows , Fiat wins… although at the cost of exchange between nations.
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 about $1,000, in just a couple years. That is about as far from being a ‘stable store of value’; as you can get! Truly, such gains are an ideal example of a speculative boom… such as Dutch tulip bulbs, or junior mining companies, or Nortel stocks. The relative impact of bitcoin revolution on your situation can be remarkable and cause issues of all kinds. It can be challenging to cover all possible scenarios simply because there is so much concerned. But I wanted to pause for a moment so you can reflect on the value of what you have just read. After all we have read, this is timely and powerful information that should be regarded. As usual, we typically save the very best for last.
Of course, Fiat fails here as well; As an example, the US Dollar, the ‘primary’ Fiat, has dropped over 95% of its value in a few decades… neither fiat nor Bitcoin qualify at the most important measure of money; the capacity to store value and conserve value through time. Actual money, that is Gold, has shown the ability to maintain value not only for centuries, but for eons. Neither Fiat nor Bitcoin has this critical capacity… both fail as money.
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 refers to the use of money to not only save value, but to in a way step, or compare value. In Austrian economics, it’s deemed impossible to actually quantify value; after all, significance resides only in human consciousness… and how can anything else in understanding really be quantified? But through the principle of Mengerian market action, that is interaction between offer and bid, market prices can be established… if just momentarily… and this industry price is expressed concerning the numeraire, the most marketable good, that is money.
So how do we establish the value of Fiat… ? Through the concept of ‘buying power’… that is, the worth of Fiat depends upon what it can be exchanged for… a so called ‘basket of goods’. But his clearly suggests that Fiat has no value of its own, but rather value flows from the value of the goods and services it may be exchanged for. Causality flows from the goods ‘purchased’ to the Fiat number. After all, what difference is there between a one Dollar invoice and a trillion Dollar invoice, except the amount printed on it… along with the purchasing power of this number?
Gold, on the other hand, isn’t Quantified by what it deals for; instead, uniquely, it is measured by another physical standard; from its own weight, or mass. A g of Gold is a gram of gold, and an ounce of Gold is an ounce of Gold… no matter what amount 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… not by purchasing electricity. Now, have you any notion of the worth of an ounce of Dollars? No such thing. Fiat is only ‘measured’ by an ephemeral quantity… the number printed on it, ‘ the ‘face value’.
Bitcoin is farther away from being The numeraire; not only can it be a few, much as Fiat… but its worth is measured 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 not have an intrinsic measure like Gold has. Gold is unique in being quantified by a true, unchanging physical quantity. Gold is unique in storing value for centuries. Nothing else in reach of humanity has this exceptional blend of qualities.