What is Bitcoin? The Best Money in Human History

October 25, 2014

When asked to make presentations, our CEO, Wences Casares, focuses not on Xapo, nor even on bitcoin. Instead, he explains the history of money. His point is that, in order to understand bitcoin, you need to understand money and, in order to understand money, you need to understand the history of money.

A few months ago, we produced a video to help people better understand the history of money. I recommend viewing that and also reading three sources that Wences recommended to me: Debt: the First 5,000 Years, by David Graeber, Shelling Out, by Nick Szabo and, Money: The Unauthorized Biography, by Felix Martin. If you don’t have time to read all three, read the book by Felix Martin. If you don’t have time to read it, read it anyway. Martin crystallizes everything you need to know about money into a very readable 273 pages. It’s essential reading for Bitcoiners.

These and other sources make clear that a fundamental comprehension of money requires the ‘unlearning’ of three long-standing myths and the learning of what really comprises “sound money”.  With that grounding, one can begin to appreciate what bitcoin is: the best money human civilization has ever seen.

Myth #1: Money Derives from Government

Skeptics of bitcoin often assert that money derives from government and use this this concept, known as chartalism, to dismiss virtual currencies. Living in the modern world, it is easy to accept the falsehood of chartalism. After all, the money that we hold in our pockets, that we touch and feel everyday, is printed at a government mint. The U.S. dollar even displays the signature of the the Treasury Secretary. The only interaction with money that most of us ever have is with a government-backed currency.

If government is required for successful money, however, why are millions of Kenyans using airtime minutes as currency? Why do cigarette-based currencies thrive at local jails? How did the US, prior to the Civil War, build a massive economy using thousands of non-governmental currencies? With only a slight investigation into these or any of a thousand other examples, it’s clear that money is a social technology that evolves from human need, not from government.

Myth #2: Money Evolved from Barter

Perhaps the most common myth about money is that it evolved from barter. The concept that money evolved from barter has a strong deductive logic to it, logic to which everyone from Aristotle to Adam Smith succumbed. Unfortunately for its proponents, no historical evidence supports the theory.

Instead, overwhelming historical evidence supports a different one: money arose from debt. This theory, when you think about it, also has a strong deductive logic, and has the added benefit of being true.

Remember that daily survival was at stake for most of human history. Our species initially survived via communal, not commercial, practices. Therefore, when tribesman Bob possessed a good – let’s say food – that tribesman Adam needed, Bob did not “sell” the food to Adam, he gave it to him, with the expectation that the loan/favor would be repaid.

Certainly, if Adam and Bob could barter, they would, but the instances in which (1) both had goods that the other wanted (2) at the same moment in time, were rare. Far more frequently, one had a vital commodity when the other had nothing to trade. By necessity, goods were loaned.

Within a small community, keeping track of these loans was manageable. As human communities expanded, however, an objective ledger was necessary to move the tracking of loans from our minds, whose subjectivity invites error and conflict, to a physical ledger, the objectivity of which facilitates accuracy and efficiency.

Anthropological evidence shows that we first accounted for loans using collectibles like shells and beads; later we transitioned to metals (coins) and, eventually, to paper notes.

An interesting side note is that literacy itself arose from this tracking of credits and debits. In Mesopotamia, “the cradle of civilization”, humans moved from collectibles to making small objects symbolizing the lent commodity. Eventually, these objects were simply pressed into tablets and the imprinted tablet, not the object itself, became the ledger. Later, humans stopped imprinting objects and wrote these symbols on the tablets. As accounting symbols evolved to represent amounts greater than one, this led to mathematics and, as our alphanumeric catalogue expanded, to literacy itself.

Due to the need for portability, however, ledgers persisted in the form of physical objects, especially coins. Eventually, gold emerged as the most effective ledger and ascended as the ultimate sound money, a position it has occupied for the last 5,000 years.

In sum, money did not arise to supplement barter but to objectively track credits and debits. Money was, and is, a ledger.

Myth #3: Money Has Intrinsic Value

The myth that money has “intrinsic” value most likely arose from the use of coins as a ledger. Because of the historical propensity to make money out of precious metals, many assume that the unit of currency is itself valuable – the coin because of the metal of which it is made and paper notes because they, until recently, could be redeemed for a “precious” metal.

Adherence to the gold standard perpetuated the intrinsic value myth: until 1971, the US dollar and many other currencies were “pegged” to gold, meaning that holders of these dollar bills could, theoretically, redeem them for gold at any time.

Humans made money from metal, however, not because the metal itself had value but because certain metals had six characteristics that best served money’s function as a ledger: scarcity, divisibility, portability, verifiability, recognizability and fungibility. These are the six characteristics of sound money.

Gold ascended as the universal ledger not because it more valuable than other metals – it is a yellow mineral of limited utility – but because it possesses the six qualities of sound money in a greater amount, in aggregate, than other substances.

So, the value of money derives not from its intrinsic value but from what it represents.

But what, exactly, does money represent?

The Definition of Money

In our previous example, when tribesman Bob received a shell to record his loan/favor of food to tribesman Adam, what did Bob hold in his hand? He held an IOU, a credit.

Now an IOU is not, in and of itself, money. But imagine that Bob could transfer the IOU to Carol in exchange for firewood. Carol could now demand repayment from Adam.

Imagine that Carol in turn could transfer the IOU to David in exchange for clothing, and David with Elaine and so on. Imagine that the whole community was exchanging goods using this system, in which credit could be easily transferred in the form of certain shells. Welcome to money.

Money is transferable credit, and transferable credit is money. It always has been, it always will be.

The Ultimate Money

That brings us to bitcoin. Is it money? The bitcoin network is a ledger, a record of credits and debits; when I own a bitcoin, I own a credit. Is that credit transferable? Of course: I could go to a bitcoin exchange, a bitcoin-accepting merchant or to any one of millions of active bitcoin users to transfer that credit.

So bitcoin is transferable credit — it’s money.

With bitcoin, however, we don’t just have money. We have, for the first time in 5,000 years, a money better than gold.

Remember the six characteristics that define sound money: scarcity, divisibility, portability, verifiability, recognizability and fungibility. Bitcoin surpasses gold in five of those six characteristics. The one exception is fungibility – while one ounce of gold is exactly like another, each bitcoin has its own traceable history. (For some, this may actually be viewed as an improvement on gold.)

In future posts, we’ll delve into bitcoin’s strength in each of the six categories but, by any objective analysis, bitcoin is the ultimate sound money. In fact, it is the best form of money humans have ever invented.

The Future of Money

Although Xapo believes that bitcoin is the best money in human history, the best technologies don’t always win, and much about bitcoin remains uncertain.

For example, the price at which bitcoin can be converted into other currencies is extremely volatile, and bitcoin is used as a method of transaction by only a tiny percentage of the population. This gives ammunition to those who argue that bitcoin is a commodity, not a currency, and to those who believe in blockchain technology but not bitcoin as a currency.

Only time will tell whether bitcoin will gain wide acceptance as a currency. I believe it will because bitcoin possesses all the features, in spades, required for a successful currency and the distribution mechanisms – the internet and wireless networks – to reach over six billion people.

What will be the inflection point for bitcoin as a currency? Probably when it hits 500 million, maybe one billion, users. Maybe this happens in five years, maybe ten, maybe more. But it will happen.

When it does, for the first time in human history, we will have a common economic language, a monetary lingua franca that completes money’s evolution from two tribesmen with a shell to a global currency with which six billion people can transact directly, instantly, at any moment.

Skeptics sometimes dismiss the oft-repeated phrase, “Bitcoin will change the world” as a naive dream offered by uninformed idealists. With the proper knowledge of monetary history, however, we can see that bitcoin is the highest evolution of the social technology known as money and that, to the contrary, “Bitcoin will change the world” is a vast understatement.

Ted Rogers

By Chief Strategy Officer

@tedmrogers

Article published on October 25, 2014

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