What is Money?!$?

New Money: Issue #6

NEW MONEY is a recap of the week in itcoin. Everything you need to know, right to the point. New Money, is published by Adam Pokornicky of DAIM Digital, a Registered Investment Advisor for itcoin and Digital Assets. Twitter: @callmethebear


This weeks issue is going to be a little different: I am only going to talk about one thing: Money. This is inline with my goal to not just provide weekly updates on what is going on with Bitcoin and digital assets but to help educate and provide a foundation for understanding why Bitcoin is so important. I’ve been wanting to talk about Money and describe it in a way that hopefully gives readers a baseline for what money is, how central banks weaken your purchasing power and destroys the value of money over the long term through printing money and easy money policies and how Bitcoin compares as a form of New Money. Hope you enjoy!


Money is a social construct that people in society agree to give importance/value. It has evolved, since forever. Currency and financial accounts might not have any value on their own, but money becomes valuable when everybody agrees to use it.

Let’s look at a brief history of money over time.

Because money is based on an agreement, the actual currency can be anything. It can be any sort of physical item, or it could be entirely electronic. While there's a wide range of possibilities for what currency can be, most forms of money are recognizable by a common set of traits.

A Medium of Exchange

Money must be a medium of exchange. In other words, it must be something you can trade for something else. Both parties in a transaction agree that money has value, so it’s an efficient tool for any trade.

Store of Value

A store of value is anything that can hold value for you until later. If you sell something for money, you can keep those funds in cash or deposit them into a bank account until you want to buy something later. This is as opposed to the barter system, in which items are directly traded.

Most modern money has no inherent value—you can’t eat dollar bills, and a $100 bill is not materially different from a $20 bill. This is true for modern currencies, but historically, some forms of money were useful. For example, metals like gold are valued for their appearance and manufacturing uses.

What makes good money? Bad money?

Properties of good money: 

  • Durable: doesn’t perish

  • Portable: easy to transport

  • Fungible: one is interchangeable with another

  • Verifiable: easy to check authenticity

  • Divisible: support exchange of small amounts

  • Scarce: a monetary good must have “unforgeable costliness”. In other words, the good must not be abundant or easy to either obtain or produce in quantity.

  • Established history: the longer the good is perceived to have been valuable by society, the greater its appeal as a store of value.

  • Censorship-resistant: a new attribute, which has become increasingly important in our modern, digital society with pervasive surveillance, is censorship-resistance. That is, how difficult is it for an external party such as a corporation or state to prevent the owner of the good from keeping and using it.

It is common to find things that have one or some of these properties. It is rare to find something that has them ALL.

How does where you live change your view of money?

Where you live in the world, especially the United States, can skew your view of money.

Imagine needing protection against runaway inflation:

Imagine needing a check against government overreach:

Imagine not having good options to save for the future without risk:

Imagine being powerless to avoid a financial data trail:

As money goes digital, even more Trust is required. When you send money to someone else through Venmo, Paypal, Square/Cashapp, Zelle, Apple Pay, even bank wires, trusted third parties have been required.

Less trust ➝  more privacy ➝ more fairness ➝ more freedom

Main problem with money today: Abuse of trust.

“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” – Satoshi Nakamoto

Monetary Policy

De-linking the dollar from gold allowed the government to manipulate the economy and the value of U.S. currency. This allows the government to respond to economic events such as recessions.

Printing Money

The end of the gold standard meant that the government could create more money without mining more gold and finding a place to physically store it. To do the electronic equivalent of printing more money, the government can flood the markets with money by buying securities from investors to prop up assets.

This process is the meaning behind the “money printing go brrrr” meme that has been circulating around since the Fed announced over $4trillion in asset purchases

AHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH | /r/4chan | Pink ...

More of this can be read in New Money: Issue #2: Unlimited Money Printing: This is Why We Bitcoin

How the Fed Creates Money With QE

The Fed can indeed create money "out of thin air." To be more precise, it does so with keystrokes on a computer. The Fed does not pay with paper money. Instead, the Fed pays the seller’s bank using newly created electronic funds and the bank adds those funds to the seller’s account.”

Easy Money

Governments can also increase the money supply by influencing interest rates or changing bank reserve requirements. For example, the government may lower interest rates to stimulate the economy in times of economic hardship. Low interest rates translate into cheap loans for businesses and individuals. Cheap loans should, in theory, stimulate the economy. Businesses and individuals have an incentive to borrow money, and hopefully, they spend it on goods and services.

Monetary Value Can Fluctuate

Money only has value when everybody thinks it’s valuable. However, perceptions change over time, so the value of money changes, as well. That’s especially likely to happen with fiat currencies, as the value of the money is based entirely on faith in the government that issues it.

When money gets less valuable, it takes more money to buy the same things, and this is known as inflation. This happens when central banks print infinite amounts of it. This process dilutes the purchasing power of individuals as the more money that is added to circulation, makes the money you have in your pocket less valuable. Eventually, money can become worthless. The opposite is also true—money can get more valuable when it’s in high demand or the supply is limited.

How Much Money Exists?

It’s estimated that the total amount of "broad money" in the world in 2017 was more than $80 trillion. By the broadest measurement available, U.S. dollars in circulation totaled roughly $17.1 trillion as of April 2020. For comparison, US Money supply has increased almost 400% over the last 20 years.

Why is Printing Money and Easy Money harmful for most people?

As money becomes plentiful and cheap to borrow, nearly all this is observed through asset-price inflation that is debt-leveraged. When money and credit are not spent on tangible capital investment to produce new means of goods and non-financial services resulting in strong employment and an increase in wages, and instead are leveraged by corporate managers, money managers, funds and the ultra wealthy so that debts rise almost as rapidly as asset valuations for real estate, stocks, and bonds to produce financial returns for themselves, it drives up the cost of living and doing business, while draining the economy to pay bondholders.

US financial assets now 5.6 times GDP
(Financialization is NOT a real economy. An economy based increasingly on rent extraction by the few and debt buildup by the many is a feudal model)

Consumers — especially those who own real estate, stocks, and bonds — have run deeper into debt in order to maintain their living standards. Real wages have fallen a bit, while after-tax costs of living have increased. This type of financialization of the economy makes living standards become debt-fueled, rather than income-supported, reducing the individual purchasing power of a single dollar while widening inequality of wealth as the top “One Percent” widen their lead over the bottom “99 Percent.”

More of this effect and how it trickles through our economy can be read in New Money: Issue #4 - The Cantillon Effect + Bitcoin Halving

Is Bitcoin Money?

In its most basic definition, money exists whenever people agree to treat something as a vehicle for value. Therefore, it may not necessarily matter whether or not an authority (like a government body) defines something as “money.” Cryptocurrencies like Bitcoin can easily be considered money, as long as people accept Bitcoin payments in return for goods and services.

Currency is usable if it is a store of value, or, put differently, if it can reliably be counted on to maintain its relative value over time and without depreciating. In many societies throughout history, commodities or precious metals were used as methods of payment because they were seen as having a relatively stable value. 

Recall above, we talked about what makes good money? Let’s look at how Bitcoin compares to Gold and Fiat Money.

How does Bitcoin grade as an emerging form of NEW MONEY?

Bitcoin Compared Against Fiat Currencies

Scarcity:

  • When Bitcoin was launched in 2009, its developer, Satoshi Nakamoto, stipulated in the protocol that the supply of tokens would be capped at 21 million units. The approach to supply that Bitcoin has adopted is different from most fiat currencies. This makes Bitcoin HARD MONEY. While the supply of dollars can be artificially inflated and infinitely increased, the supply of BTC is fixed and held constant. Because there’s a finite supply, this expectation of scarcity drives a self-fulfilling prophecy where demand is expected to dwarf supply thus ensuring the price goes up

Divisibility:

  • 21 million Bitcoins is vastly smaller than the circulation of most fiat currencies in the world. Fortunately, Bitcoin is divisible up to 8 decimal points. The smallest unit, equal to 0.00000001 Bitcoin, is called a "Satoshi" after the pseudonymous developer behind the cryptocurrency. One bitcoin has a much larger degree of divisibility than the U.S. dollar as well as most other fiat currencies. While the U.S. dollar can be divided into cents, or 1/100 of 1 USD, one "Satoshi" is just 1/100,000,000 of 1 BTC. This allows for quadrillions of individual units of Satoshis to be distributed throughout a global economy.

Transportability:

  • Thanks to cryptocurrency exchanges, wallets, and other tools, Bitcoin is transferable between parties within minutes, regardless of the size of the transaction with very low costs. The process of transferring money in the current system can take days at a time and have fees.

Utility:

  • One of the biggest selling points of Bitcoin has been its use of blockchain technology. Blockchain is a distributed ledger system that is decentralized and trustless, meaning that no parties participating in the Bitcoin market need to establish trust in one another in order for the system to work properly. This is possible thanks to an elaborate system of checks and verifications which is central to the maintenance of the ledger and to the mining of new Bitcoins.

Durability:

  • Durability is a major issue for fiat currencies in their physical form. A dollar bill, while sturdy, can still be torn, burned, or otherwise rendered unusable. Digital forms of payment are not susceptible to these physical harms in the same way. For this reason, bitcoin is tremendously valuable

Censorship Resistant:

  • Bitcoin is often called free speech money. Have you ever had a payment blocked by Paypal or Venmo. Or a CC transaction blocked to a specific retailer? Or an entire industry like cannabis not being able to take credit cards or have proper banking? Censorship is not really considered too much here in the United States at least not yet, goods that are censorship-resistant are ideal to those living under regimes that are trying to enforce capital controls or to outlaw various forms of peaceful trade.

For a type of money to survive, it needs to be competitive on every attribute and be exceptionally better on a few of them. Attributes don’t sum, they multiply. Upon every new iteration of money, each evolves in the following four stages:

  • Collectible

  • Store of Value (SoV)

  • Medium of Exchange (MoE)

  • Unit of Account(UoA)

When applying “The Szaboian Theory of Money Origins” to Bitcoin, it is reasonable to conclude we just barely left the "collectible phase" and are now witnessing it’s first steps into "Proto-money”. This phase, which is characterized by its primordial exploration of the SoV properties of the commodity, can easily take decades to properly mature. Price Volatility is part of this maturing process.

Planting Bitcoin - Dan Held - Medium

The average life expectancy of a fiat currency is 27 years according to DollarDaze. The study also notes the most common causes of any given currencies extinction are hyperinflation, monetary reform, war and independence. In the case of those that become reserve currencies like the USD, most last just under 100 years. (Note: US currency only starts from 1933 because USD was redeemable for gold prior to that). With fiat currencies being so susceptible to failure, gold has long served as an alternative as it is more scarce and durable.

“While Bitcoin is a new invention of the digital age, the problems it purports to solve — namely, providing a form of money that is under the full command of its owner and likely to hold its value in the long run — are as old as human society itself” — Saifedean Ammous

The conditions of the environment in which traditional forms of money compete is in a constant state of change. Looking at centralized monetary failures like Zimbabwe, Argentina, Lebanon and many emerging market currency regimes that are under duress, there is growing belief throughout the world that decentralized trust is possible. When considering all the above attributes and features of money, it’s hard to ignore that Bitcoin possesses the necessary traits over the long term to become the dominant form of money.

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I hope you enjoyed this week’s newsletter on Money. I’ll be back next week with a more standardized cut of news, links and commentary related to Bitcoin. If you’d like to offer any feedback or criticism, you can reach me at adam@daim.io


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