Bitcoin’s Fundamental Value is That it is The Most Excellent Money That Exists
(This article is likely to find its way into debates between bitcoiners and the advocates of gold or central bank currencies who hold that bitcoins fail a test of having ‘fundamental’ value.)
Intro: Money, it turns out, is a confusing topic.
People are confused about what money is. That’s partly because they’ve never had to think about it before. However, with world events being what they are we now do need to think about what money is.
When asking the question of what money is, we discover that few other people have thought about it either — even fewer since the digital revolution transformed our world. As a result we see debates and disputes about what money is and what can serve as money, especially now that Bitcoin exists.
This Paper: The ‘Fundamental’ Case for Bitcoin as The Most Excellent Money Ever
Here, I go beyond making the case for why Bitcoin is great money. I make the argument that Bitcoin is the greatest money mankind has ever seen and likely will ever see. I do it through formal logic and reference to actual reality.
Although many aspects of this argument have been made before, there is, I believe, a novel reasoning here. There are also conclusions along the way that I point out explicitly, which have only been implicit in other presentations of the case for Bitcoin.
The format of this article is as follows: I begin by laying out the argument and its logic, step by step. I clearly state each premise, each conclusion and each corollary. Then, I go through each of the premises and conclusions in the argument to defend them. You can read only the first part, which is very quick, and if you don’t need to hear the defences of each you can finish there. I do recommend you read the whole thing because it is always important to ‘check your premises’ or one risks falling into the trap of rationalism — deductions that follow from false premises.
My goal is to lay out the logic of the whole thing and then subject each part of it to thorough, honest criticism. The reader can judge if I’ve missed anything.
I’ve labelled and numbered every part of the argument so that it is easy to refer to it.
Part 1. The formal, logical case for bitcoins being the most excellent money ever known.
Premise 1: Let’s begin with a solid definition of money: Money is a good that people value for the mere prospect of later exchanging without having consumed it, or, in other words, for its exchange-value.
Corollary 1: For something to be money, it is NOT actually necessary that it can be consumed.
Premise 2: Bitcoin can only be exchanged, not consumed.
Conclusion 1:Bitcoins, because they can be exchanged, even though they cannot be consumed, are a candidate for being money.
Premise 3: Bitcoins are exceptionally good for exchanging. This premise is itself composed of nine (9) sub-premises, each of which is a different attribute of exchangeability that bitcoins possess:
- Storage for future use — The ability to store bitcoins is superior to any other good. Bitcoins can be stored for future exchange indefinitely and inexpensively, and in multiple ways and locations simultaneously. (Try storing an actual consumable good in two places at the same time — it can’t be done.);
- Protection from thievery and seizure — Bitcoins, when stored in one’s own self-custody with appropriate safety considerations cannot be stolen or seized, either by physical force, through the application of ‘hacking’ skills, or by brute force computing power. They can only be surrendered. This is different from any other monetary good in existence, any of which can be taken by force without being surrendered by its rightful owner;
- Divisibility, Purity & Authenticity — Bitcoins’ digital nature makes their divisibility easier than any good that could actually be consumed. When dividing and recombining bitcoins, no dilution or impurity occurs. Bitcoins are always 100% pure bitcoin;
- Transportability — Bitcoins’ digital nature means they can be exchanged across any two physical points connected to the digital network, which is currently practically every point on Earth. (Yes there’s also offline ways to exchange bitcoins, but they’re irrelevant to this argument);
- Speed of exchange — Bitcoins’ digital nature means they can be exchanged quickly, even instantly through 2nd layers;
- Indisputability of an exchange — Bitcoins’ cryptographic ownership nature makes exchanges of bitcoin indisputable and final (eliminating the cost and risk of legal disputes);
- Indisputability of provenance (historic record of exchange) — Bitcoin’s decentralized blockchain also means that its whole history of all exchanges of bitcoins is indisputable; and finally
- Scarcity — Bitcoin’s digital nature and enforced supply cap ensures bitcoins’ exchangeability is never diluted.
Conclusion 2: Bitcoin resolves many of the age-old problems of exchange with all previous forms of money, those being:
2.1) Bitcoins cannot be counterfeited (based on Premise 3 points 3, 6 and 7);
2.2) Bitcoins cannot be stolen. (Based on premise 3 point 2);
2.3) The supply of bitcoins cannot be inflated. (Based on premise 3 point 8);
2–4) Bitcoins can be transported anywhere and settled quickly (based on Premise 3 point 5, 6 and 7); and
2–5) Bitcoins will never lose their ability to be exchanged. (based on premise 3 point 1 and 8)
Conclusion 3: It follows that bitcoins, being better goods to exchange than anything that has ever come before (premise 3), while also resolving the weaknesses of all other monies that came before before (conclusion 2), are therefore the most excellent good for exchange known. Bitcoins are thus the most excellent money known according to Premise 1’s definition of money being “a good that people value for the mere prospect of later exchanging without having consumed it, or, in other words, for its exchange-value.”
Thus, Bitcoin is not just money, it is the most excellent money there is.
Part 2: Testing the Formal Argument
I now look at each point made and test its validity by testing its consistency and looking at the real world to see if contradictions exist. I also ask if I haven’t left out something important that might cause me to miss something that diminishes or destroys the case put forward.
The Definition of Money — Does It Stand Up?
Is the definition of money I provide accurate? I said “Money is a good that people value for the mere prospect of later exchanging without having consumed it, or, in other words, for its exchange-value.”
Many critics of Bitcoin argue that bitcoins have no previous industrial value and that this is necessary for something to be money. Their arguments are based on one of two objections:
The first is that if the good ceases to be used as money and loses its ‘monetary premium’ it will lose all of its value instead of falling to its ‘industrial use’ value. While that may be true about what would happen if the good stopped being money, we are not talking about what something that isn’t money is worth when it stops being money. We are talking about a good’s use as money. So talking about its worth not as money is actually irrelevant.
The second and more interesting objection is that without an actual industrial value of bitcoins, we cannot figure out what they are worth independently of being money, so we have no starting point for figuring out the worth of bitcoins. This argument is actually very similar to the first one, because all it does is suggest a minimum, non-zero value for another good being used as money — its industrial value. But this objection can’t escape the fact that the actual monetary value of some other good is therefore somewhere in the infinitely wide range between its industrial use value and a maximum of, well, infinity. Goods that act as money trade at a value significantly above their industrial use and are therefore subject to all the theoretical volatility in prices that bitcoins are currently subject to, with the only exception that bitcoins’ minimum value is zero. Mathematically speaking though, there is still an infinite possible price range for the monetary premium of any good that is to act as money — it’s just that the floor price is itself not zero.
Let’s look to reality. People who invest in gold coins don’t do so thinking “Well, if the price drops below x, I’ll just sell these as scrap to companies putting trace amounts of it in electronics.” Even if they did think this, it wouldn’t make their good any less volatile unless the monetary premium was negligible. However, if the premium were very small, the thing they’re trying to use as money, gold coins in this case, would have major supply problems since they would be getting consumed all the time and not available to be used as money. The monetary premium actually serves the useful purpose of preventing the money commodity from being consumed for some other purpose, because, exactly as my definition suggests, we want money to be exchanged, not consumed.
Let’s give the critics more benefit of the doubt about this volatility issue at least. They too say “Look to reality — gold doesn’t have the price volatility of Bitcoin, and we can look to hundreds or more years of history.” My rebuttal to that is twofold:
First, that argument isn’t actually true. Gold has had very significant and often instant price shocks — especially in the last hundred years. Like bitcoins’ price shocks, most of gold’s have been favourable. Gold went instantly from $20 an ounce to $35 and ounce in 1934. That’s 75% in a single day. Not exactly stable. It went from $100 to $800 in the 7 year period from 1973 to 1980. That’s a 700% change in 7 years. It crashed back down to about $300 by 1982, that’s a loss of more than 50%. From 2006 to 2012 it rose from about $500 to over $1800, more than tripling in 6 years. Then it crashed back to $1100 in 2016. It turns out gold is not free from volatility itself. It should also be noted that while gold’s price has some correlation with inflation metrics it is by no means a ‘perfect inflation hedge’.
So what about bitcoins’ price volatility right now? Allen Farrington has an article called “Wittgenstein’s Money” that addresses this. My summary of it is that Bitcoin is new. It started at zero and is racing to become the world’s reserve currency. What else could we expect this rise to look like other than tremendous volatility as billions of people first hear about it, then try to comprehend it, then speculate on it, then become terrified, then confident, then dabble, and ultimately adopt it?
Next, let’s talk about “fiat” money, which is what just about everyone on Earth uses for money. As a reminder to the reader, we’re still testing the definition of money I offered. Well, we can see that fiat money actually fully complies with the definition we used. It can be used for nothing other than exchange. (Perhaps there is a small exception to the previous statement. In countries that experience hyperinflation, the paper bills used for money have been used as combustible material for fires to keep people warm and in some countries they are folded and weaved in elaborate structures to make cheap baskets. But I’m certain that Americans are not hoarding dollar bills with the goal of burning them someday or making baskets out of them as their “fundamental” value.)
So our definition of money is itself sound.
Money doesn’t actually have to be consumable.
Now let’s address the corollary which follows from the definition — that for something to be money, it is NOT actually necessary that it can be consumed. This is a very short point.
If money is purely that which you do not need to consume for it to be money, it follows that you do not need to be able to consume it for it to be used as money. As previously discussed, the fiat money system provides real world proof of this. In fact, so too does gold coinage. While defenders of gold say it can be melted down into cufflinks, jewellery and industrial uses — i.e. consumed — there are actually no events I can find a record of in history where people actually did that. I also spoke to several jewellers and they have never themselves bought gold coins to melt them down, nor have they ever had someone bring in a gold coin and ask that it be melted into jewellery.
This Corollary is actually very important, because all the objections against Bitcoin from gold advocates that rely on its industrial application are destroyed by it. This point might have seemed like a stretch to begin with, but when you realize that you don’t need to consume something whose purpose is specifically not to be consumed, the whole jewellery or industrial use argument as a foundation for ‘fundamental’ value becomes moot. “Fundamentality” of money is that it has all or most of the “exchangeability” attributes of Premise 3 — that’s all!
Bitcoin Can Only Be Exchanged. It Can’t Be Consumed.
I don’t really have to say much to defend this. It is easily provable by thousands of on-chain transactions in every block and the millions of off-chain transactions at exchanges and over the Lightning Network that it can be exchanged. There’s clearly no case of where anyone has ever ‘consumed’ a bitcoin. But even if someone could consume some bitcoin, it wouldn’t affect the logic of our argument which only requires that bitcoins can be exchanged.
But Bitcoins Can’t Be Consumed — Well, So What?
Conclusion 1 follows from our previous points and says “Bitcoins, because they can be exchanged, even though they cannot be consumed, are a candidate for being money.”
This conclusion simply is a response to someone who objects to bitcoins being money on the grounds that they can’t be consumed, with the reply “So what? Money does not need to be consumed.”
That’s the argument. Really, saying that bitcoins can’t be money because they can’t be consumed is like saying that salt can’t be used to season steak because it doesn’t recite poetry. You don’t need to recite poetry to be steak seasoning and you don’t need to be consumable to be money.
And sure enough, look at all the people in the world who have begun accepting bitcoins knowing full well they couldn’t make cufflinks out of them, season their steak with them or even have the bitcoins read poetry to them.
Great Exchangeability Features.
Now we look at Premise 3 and all of its sub-premises.
There is not much original stuff I say here. These features of exchangeability are perhaps a slightly unique take on the labels and names of the attributes, but monetary theorists have talked about these attributes since the early theories of money were posed and bitcoiners have explained how they each apply in Bitcoin.
I’ll quickly elaborate on them a little here to make the basic case so this paper is self-contained, but I’m not trying to re-write everything that has been already written about so extensively elsewhere and is easy to find for free.
Storage for future use
This is normally called by the theorists ‘exchangeability across time’. So my label is maybe unique in that it is clearer about the fact that you can only go forward in time, through my use of the word ‘future’ rather than ‘time’, but I don’t think anyone has mistaken other writers’ efforts as suggesting that you can actually spend money in the past. (Well, actually, I do know one person who said this. Me. I’ve accused past governments of stealing money from the present by saddling us with debts they incurred in the past. It’s in my article “Why Bitcoin Will End The Worst Heist in History” available at Swan Bitcoin’s blog).
So is it true that bitcoins can be stored for future use? Of course it is. Further, I point out in my statement of this premise that you can even keep copies of the private keys for bitcoins in multiple places. You can’t store a bar of gold in two places. If the building your gold is in becomes off limits to you, you can’t get your gold back later, but if the building you keep one copy of your private keys in becomes off limits, you can probably still access one of the backups you’ve kept somewhere else.
Protection from thievery and seizure
I want to be clear here: I’m not saying someone can’t kidnap a bitcoiner or threaten them with a gun to surrender their coins. But a thief can’t actually take the bitcoins by force. If you’ve got cash on you and someone shoots you dead, or knocks you out with a blow to the head, or drugs you, they can take that cash by force. They can fight you for your money if they’re stronger than you. They can’t with bitcoins. You have to surrender them by giving a would-be thief your private key or signing a transaction sending the bitcoin to them. (Negotiation strategies with would-be bitcoin thieves are not discussed here, but it is best you not let people know you have bitcoin in the first place.)
Divisibility, Purity & Authenticity
Divisibility: At its best, fiat money, when in digital form, is as divisible as bitcoin. You just type in the amount of what you have that you want to send. Online payment is great this way. Bitcoin is just as divisible. Not so with gold or any physical good. Try splitting a gold coin into 227/1000s of that coin and let me know how that goes for you.
Purity and Authenticity: When it comes to the actual authenticity of a dollar or the purity of gold, there’s no way to know for sure for an ordinary person. Gold requires special equipment and fiat money is all based on trusting institutions. Bitcoins on the other hand are impossible to counterfeit. Verifying them is trivial: you can run your own node, or just check a transaction or balance online on one of many public block explorers.
All bitcoins are everywhere that the blockchain is and when you ‘send’ bitcoins you’re not really ‘sending’ them anywhere in space. You’re just making a new entry in the ledger. So they don’t have to physically move anywhere. That’s a lot easier than moving any kind of money across borders. Being everywhere at once really solves the problem of transportability in an extraordinary way.
Speed of exchange
The Lightning network makes irreversible exchanges instant. Otherwise you may have to wait up to an hour for an on-chain transaction to have final settlement. That’s always anywhere in the world (and also irreversible). Physical money, of course is only as fast as whatever transportation method is used to send it. No other money’s exchanges are irreversible, because they lack the seizure-resistance capability that only Bitcoin has. This means that no matter how fast some other money moves you can’t really say its movement is complete if that movement is reversible. (I think this is what gauge theory is actually about and what bitcoin critic Eric Weinstein is talking about, but this is why his criticism of Bitcoin is wrong.)
Indisputability of exchanges
Bitcoin doesn’t care what anybody says. There are no disputes. What’s in the blockchain is the truth. If you disagree with this point, Bitcoin doesn’t care and you’re wrong.
Indisputability of provenance
This is really just another way of showing how you can always know an amount of bitcoin is authentic, because you can trace the history of transactions and see that they are all valid, real and in the blockchain.
Notwithstanding the fact that there are 2.1 quadrillion satoshis, which may seem like a big number, there are ONLY and will EVER ONLY be 2.1 quadrillion satoshis. That finite and known quantity makes bitcoin unique even against gold, whose final supply is not yet known and whose ‘above ground’ supply increases more rapidly when gold’s price increases because it becomes profitable at those higher prices to mine gold which was previously unprofitable to mine. As for fiat money, there’s literally infinite dollars the federal reserve can print.
Thus all of the premises blanketed by premise 3 are valid.
Bitcoin’s exchangeability properties solve problems other monies have.
Our next conclusion says that Bitcoin fixes the problems other monies have of counterfeiting, theft, inflation, transportability, settlement delay and being hard to access after time passes. I have already addressed each of these earlier. They simply follow logically from the properties described in the premises. There are no exceptions. Every one of these problems are problems faced by all other monies known to man.
Again, a reality check for bitcoin against each of these premises demonstrates that: there are no successful counterfeit attempts at bitcoins; there are no cases of it having been stolen (as defined by a private key being guessed or calculated from an address); the supply cap and issuance schedule remains fully in force making inflation impossible; it is transportable because it is everywhere and doesn’t actually ‘move’; it is settled quickly and finally (as we can see since there have been no roll-backs or orphaning of more than a couple of blocks); and its spendability in the future only requires that the blockchain remain in existence (which is easy to do with a digital file like the blockchain, and hundreds of thousands of such copies exist scattered throughout the globe, each one provably authentic!!!).
The Coup De Grace
Well, there we have it. Conclusion three logically follows that because bitcoins are a candidate for money and because they are better at being money than any other good we’ve ever known before, bitcoins are the best money we’ve ever known.
But hold on. Here we can certainly look to reality and say something about the argument seems to be off, because just about everybody in the world is not using bitcoins over these other allegedly inferior forms of money.
What We Can’t Prove
Aaah, but let’s look carefully. What I have shown is that bitcoins are better money than everything else we know of. What I have shown are the reasons people ought to use it as money. But just because something ought to be does not necessarily mean that it is. People ought not to steal, they ought not counterfeit, they ought not inflate the money supply. But they do. Things also take time. It took time for people to realize that they shouldn’t dump their sewage into the same river they drew drinking water from. We have all these prestigious ‘fiat economists’ still basically using their authority and reputation telling us the equivalent of ‘potable water is unproven and fundamentally worthless’ and it will take time for everybody to figure out they’re wrong.
So the real question is “WILL people use bitcoins, because bitcoins are better money than fiat or gold, or WON’T they?”. A proof of what people will do in the future is not possible. People have free will — their future is not determined. So I have to conclude here, leaving you to your speculations. But not before making one final point related to this:
Bitcoin represents the opportunity for us to have great money and all the benefits individuals and civilization accrue from that. It is up to each of us to adopt bitcoin now that we have it as a choice. It is a choice that must be made by countless people, for themselves and by themselves. The more that they choose it, the easier the choice becomes for others. Humanity ought to have the best of everything that it can. It ought to use the best money we’ve ever come across. It ought to use Bitcoin. You ought to. So choose it.