Before we go any further it’s important to recognize the role that money currently plays in society.
First, let’s imagine a world without money – we would need to rely on barter if we wanted to trade goods and services with others. Barter doesn’t scale, however, because the two people involved in a trade rarely have the exact quantities of goods to make a fair trade. Henry David Thoreau wrote about this concept while living in his Walden cabin, after having a conversation with a “simple lumberjack” working in the nearby woods:
“If an ox were [the lumberjack’s] property, and he wished to get needles and thread at the store, he thought it would be inconvenient and impossible soon to go mortgaging some portion of the creature each time to that amount.”
Money solves this problem, known as the “coincidence of wants”, and allows us to store and exchange value through time. The simple lumberjack can sell his ox for money and then use the money to buy his needles and thread, as well as anything else he needs to buy.
For something to be useful as money, it requires the following properties:
- Divisibility: Good money can be used for both very low and very high value transactions.
- Portability: Good money is easy to transport and to transfer.
- Durability: Good money can be easily stored through time without degrading.
- Salability: Good money stays in high demand through time and space.
- Hardness: Good money is hard money, and if a money is hard to produce then it will be inflation resistant.
Money played a huge part in the advancement of civilization. It allowed people to specialize in areas of agriculture, science, technology, philosophy, and more. Our entire society exists as it does today because of the hyperspecialization that money allowed.
Problems with Today’s Money
Originally, gold was probably considered valuable simply because it was a shiny rock. Through time, though, gold became the most commonly used money because of its extreme durability, salability, and difficulty to produce. Gold does have its downsides as money in that it is difficult to transport and to divide, which led to gold’s replacement in the 20th century by government fiat money.
Fiat monies, such as the U.S. Dollar, consist of paper notes and ledger entries, making it trivial to transport and divide as needed. Fiat money worked well for a while, but in the same way that society outgrew the printing press and fax machine, so too have we outgrown fiat money.
The biggest problems with fiat money come from its ease of production – governments can easily create as much as they need out of thin air. The control that governments have over money has always led to abuse, resulting in inflation, wealth inequality, and financial censorship.
Inflation is typically defined as the rate at which prices increase. A root cause of price inflation is inflation of the money supply. By creating more money, governments increase the supply without an equal increase in demand. This causes the purchasing power of the money to drop, diluting the value of people’s cash savings. The ability to inflate the money supply fundamentally breaks one of money’s most important uses: storing value through time.
Inflation is one area where bitcoin is hands down a better money. The bitcoin supply simply cannot be inflated – it’s a well-known fact that there can never be more than 21 million bitcoin. The supply of bitcoin is coded into the bitcoin software running on thousands of computers around the world. Once the last bitcoin is mined, the bitcoin network will reject any further increases to its money supply – making bitcoin the hardest money to ever exist.
Unfair Wealth Distribution
Government’s control over fiat money has led to extreme wealth inequality. Our monetary system is designed in a way that allows only the wealthy to participate, while the rest of us are left sitting on the sidelines, living paycheck to paycheck and watching the value of our savings fade away.
One of the leading causes of unfair wealth distribution is the benefit that an increased money supply has on the wealthy at the cost of the un-wealthy. Wealthy corporations and individuals get first access to new money as it is created. This allows them to make purchases with the new money while market prices still reflect the old money supply, essentially giving the wealthy a discount. Small businesses and working class individuals are the last ones to have access to the new money, and so they are the ones who pay for the discount afforded to the wealthy. This effect is known as the Cantillon Effect.
With bitcoin, the rules are the same for everyone. Bitcoin can’t fix wealth inequality – but it does level the playing field so that anyone can participate without permission.
Our monetary system is very centralized around governments, banks, and payment providers. These central authorities can easily censor transactions as they see fit, including transactions from those trying to move to a more peaceful country, or those with opposing political views.
Bitcoin is a decentralized, peer-to-peer monetary system. Bitcoin transactions can be processed by anyone and everyone, so we no longer need to rely on governments, banks, and payment providers to transfer value.
Bitcoin is Money for the 21st Century
Our monetary system was designed for the physical world, but so much happens online now. The fiat monetary system can’t keep up with the instantaneous nature of the internet. This has led to billions of people being excluded from today’s monetary system because it doesn’t make sense for financial institutions to operate in areas where they can’t operate profitably.
To participate in the bitcoin monetary system, all that is needed is an internet connection, which many of these “unbanked” individuals already have. Anyone with internet access can send money across the world in a matter of minutes – 24 hours a day, 7 days a week, 365 days a year. Bitcoin is a monetary system built for the digital age.