DISCLAIMER: Please have a glass of water ready as you read my thoughts below. There’s a good chance you’ll need the water to swallow a large, orange pill.
There have been approximately 800 currencies through human antiquity and nearly 80% of them are just a memory. Why are humans so bad at money and why haven’t we found a solution in over 1,200 years? Maybe we need to start with the answer and work backwards.
What makes money excellent?
Excellent money must span both time and space. What do I mean? We want our money to retain and grow in value over years because when we reach the end of our working days, we don’t want money. We want to trade money for things like a house, or an RV, or maybe an adventurous vacation. Holding little pieces of green paper only matters if someone still wants that paper in the future. That’s the test of time.
Here’s a financial history lesson.
What is the oldest currency still in existence today? That honor goes to the Queen and her mighty British Pound. The GBP has been around for over 1,000 years. Although, losing 99% of its spending power during that period isn’t exactly a testament to durability across time. During the Anglo-Saxon period of Great Britain’s history, the British Pound was pegged to the value of sterling silver. One physical pound of silver equaled one British pound.
Looking at the silver conversion below, you’ll notice 1lb. of silver now costs £277 GBP.
There are several economic factors that cause inflation, but most governments only see one way to manage increased costs of goods and services. They print more money. That’s why it now costs £277 GBP to buy a block of silver that hasn’t changed in any way for thousands of years.
Silver is out, let’s talk about gold. The gold standard is a monetary system where paper money can be directly converted to gold at the equivalent value. Good, because it limits the government from manipulating supply (it’s hard, expensive work to physically mine gold). Bad, because sometimes the government needs to step in during a recession or periods of high unemployment to stimulate the economy. That’s hard to do if you’re handcuffed by a fixed money supply.
If gold isn’t used for currency, then what about its propensity to be a store of value?
If people woke up tomorrow morning and realized the price of gold was US$200,000 per ounce, there would be a gold rush like never seen before. Mines all over the world would get to work immediately, thus increasing the gold supply. In a short period of time, the influx of supply will cause the price per ounce to drop. So, to recap, huge surge in price, huge surge in supply, then drop in price.
If people woke up tomorrow morning and realized the price of Bitcoin was US$200,000 per coin, what would happen to the supply? Nothing! Bitcoin’s supply is completely unaffected by demand, forever. That is a very powerful statement. Scarcity is what truly makes Bitcoin valuable because we know there is a fixed supply schedule that is moving to zero. So, to recap, huge surge in price, no change in supply. I’m no economic genius, but when demand stays high with limited supply, price continues to climb. This means Bitcoin is undeniably better than gold because it performs better across time.
We’re halfway to excellent money. We solved time. What about space?
‘Fiat’ is a Bitcoin bro’s way of defining government printed money. Fiat money solved the issue of transportability and divisibility because gold is just too heavy and not easy to fractionalize. The problem with fiat is moving from space to space. If you’re from Europe and go on holiday to Singapore, you won’t find any place that accepts Euros. The solution is to hit a money exchanger or ATM. In both cases you’ll get charged a material fee AND get an unfavorable exchange rate. The process is annoying, but somewhat tolerable. What if someone across the world needs financial help immediately? I’m a world traveler, I know what it’s like to get pickpocketed and robbed while on vacation. I had to wait multiple days for a wire transfer to clear and relied on the kindness of strangers to get me through a few days with no money. Crappy situation, but I wasn’t in any danger. Someone always has it worse.
In February, Russia invaded Ukraine. The act of war shook the whole country including the financial system. Wire transfers to Ukraine took 3-5 days and the availability of operating banks during war is uncertain. Any donations made via wire transfer weren’t going to get people immediate help. Instead, the world immediately supported Ukraine by donating over $100M worth of Bitcoin and other cryptocurrencies. If you read my previous post about the Lightning Network, you’ll recall that transferring Bitcoin via P2P through lightning wallets is instant and free. There is no transaction fee, exchange rate manipulation, or waiting period. In under 10 minutes, I can take USD and buy BTC, then send BTC via Lightning Network anywhere in the world where it can get converted to a local currency. This means Bitcoin is undeniably better than fiat because it performs better across space.
In this game of financial rock, paper, scissors, Bitcoin is the rock, the paper, and the scissors. The technology changes the entire game. Bitcoin may not be perfect, but it unequivocally meets the definition of ‘excellent’ money.
Thanks for reading My 50 SATS.