Bitcoin as a Currency

The US dollar has been the worlds most popular currency for over half a century, but that's starting to change.

Our central banks have been meddling with the value of the dollar and people have been looking to replace it with something better. One currency has been making news lately. Bitcoin. A new digital currency. Lots of things have been used as currency throughout history.

• Gold and Silver

• Wheat

• Sea Shells

• Tobacco

• Salt

• Paper

Some currencies have stuck around. Lots have died off, but why? What makes some currencies better than others? It's not any government decree, its their properties. Certain properties are essential to a healthy currency, and if we keep score, the US dollar doesn't look so great. Especially in comparison to historical favorites, like gold and silver or Bitcoin. A sound currency stays valuable over time, has a limited supply and is easily divisible and portable. If we want to compare currencies head to head, we need to stand the importance of these qualities. Imagine that a currency doesn’t stay valuable over time.

For example, let's use bananas as a currency. Well, bananas have a lifespan. They eventually rot. A large storage of savings in bananas would eventually turn to mush, and nobody wants to trade rotten fruit with each other. The US dollar doesn't rot, but thanks to the central bank, it's lost about 95% of it's purchasing power in the last 100 years. Gold and silver doesn't rot either.

They're durable and have a long history of being valuable. Bitcoin also doesn't degrade over time. The strings of code will be the exact same 50 years from now. It's a decentralized currency, not issued by any one institution which means it's value is independent of a government or central bank. As long as people find it valuable, it will stick around. Next, imagine a currency without a limited supply.

Let's use wooden nickels as a currency. What happens when people start carving their own? If people can easily create more currencies for themselves, economic prices become meaningless. Since the 1970's the US dollar has had anything but a limited supply. The central bank has created trillions of dollars out of thin air, de-valuing everybody else's dollars in the process. In contrast, the supply of gold and silver have been relatively constant for the last few millennia. Bitcoin has a stable supply. In fact, at any given time we know exactly how many exist and at what rate they will be produced in the future.

No more than 21,000,000 Bitcoins will ever be created. It's written straight into the code. Counterfeiting might also increase the supply of currency, by defrauding people. The only difference between counterfeiting and money printing is who's behind it, the result is the same. Fortunately, it's difficult for citizens to counterfeit US dollars, gold or silver, but what about something digital, like Bitcoin?

It uses mathematical cryptography and a public ledger called the blockchain to make it impossible to counterfeit. Picture a currency which does not divide easily. What if cows were used as a currency? How would you pay for something like a loaf of bread? A cow is worth much more than a loaf of bread and it would be very difficult to divide a cow into small enough units to make a fair trade. The dollar divides very easily, down to the penny. Gold and silver are a little bit more difficult to divide into small quantities. Bitcoins easily divide down to .00000001 (one hundred millionths of a Bitcoin). A sound currency must also be portable. Imagine the difficulty of using cinderblocks as currency.

The dollar is easily portable, gold and silver are less portable. On a gold standard, people usually carry around paper, which is redeemable in the metals. Bitcoins can be sent anywhere in the world with internet access, instantly. Regardless of the size of the transaction and at almost no cost. So how do these currencies match up together? You decide for yourself. We can't decide what the best currency is, we discover over time. But if central banks keep inflating the money supply and people are free to choose, the US dollar likely can't stand toe to toe with its competition. 

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