Could Bitcoin Replace Fiat Currencies?
Don’t Believe the Hype
Currency theory has become very popular in recent months. Due to the inflated level of interest, it has been thoroughly debased.
Jokes aside, I have noticed a lot of views expressed online and in the news that are based on a catastrophic lack of logical reasoning regarding currencies, namely our old friend Bitcoin. I am talking about statements like:
Bitcoin is digital gold
In 1988 , a wise man by the name of Flava Flave said, “Don’t Believe The Hype”. The massive clock hanging boldly from his neck clearly indicated to the uninitiated that he was a man who ‘knows what time it is’.
Over 30 years later, those wise words ring ever more true. Bitcoin is not backed by gold. Bitcoin is a fiat currency. How so much time is spent analysing whether Bitcoin will replace fiat currencies is totally, mind-bogglingly, insane. I repeat:
BITCOIN IS A FIAT CURRENCY.
All ‘fiat’ means is that you can not trade the currency in for any real asset. Bitcoin is just as guilty of this “sin” as the US Dollar, Euro, Pound or any other of the fiat currencies.
A Bitcoin is basically just a line in a database. People like to use the word blockchain, but that is just a fancy word for a type of database. So I am going to call it a database.
This database has no real-life qualities in common with gold. Bitcoin enthusiasts say it was designed to mimic gold. The database can not be freely edited, so records in it are permanent, like gold. The total number of database lines and hence BTCs is limited, like the global gold supply.
On the surface the comparison appears true, but it is very easily disproven, because unlike gold, Bitcoin is 100% replicable. The technology exists today to create new cryptocurrencies that are indistinguishable from Bitcoin (or even superior to it), at will, at any time. The same can not be said for the world supply of gold. So Bitcoin is, in fact, nothing like gold at all.
Bitcoin also does not exhibit any of the kinds of qualities that led gold to be so widely used as money. Gold is eternal, not because some dusty old professor says so, but because of a real unique physical quality that gives it practical utility. That quality is that gold is the most non-reactive of all metals.
Unlike wheat, sheep or even silver, you can safely leave your stash of gold in your secret cave or vault for as long as you need without worrying about coming back to find it rusted, tarnished or otherwise spoiled. The historical reasons for using gold are practical and relate to real life utility. Bitcoin has no such practical advantages compared to other currencies. It is generally cumbersome and expensive to use relative to modern alternatives.
So with that we have established that Bitcoin is not like digital gold. Still, articles that talk about Bitcoin attract eyeballs and ad dollars and people who own it , or profit from selling it, will always want to talk up the price with arguments like:
Bitcoin has a higher long term value than Dollars because money printer go brrr
Money printer does indeed go brrr and this is leading to a range of mainly longer term issues that policy makers will need to confront. Inflation, however, is not one of them. Indeed, if it were, and if Bitcoin was being used as a hedge against inflation, we would see the gold price and Bitcoin price rising more or less in sync with one another. They do not.
In spite all of the monetary jiggery pokery going on, the US Dollar and other currencies have something backing them that Bitcoin lacks. That is, big ole’ governments with big ole’ armies, police and guns.
The bottom line is, you can’t pay the US tax authorities in Bitcoin, just like you can’t pay them in Euros, Pesos or Exotic Options Contracts on Corn Futures. If you want to pay that tax bill and stay out of Federal Prison for another year, well, you better get yourself some US Dollars.
This system forms the base of a number of mechanisms that create consistent , large scale demand for all government-issued currencies. For example, international trade. Knowing that they will have to pay their taxes (as well as, consequently many suppliers) in US Dollars, US exporters and US owned foreign entities convert any earnings from foreign sources back into US Dollars, or require their customers to do so and pay them in US Dollars.
There is a natural, systemic demand for US Dollars in the world, underpinned by the US Government sanctioning the US Dollar as its currency of choice. So whilst Dollars are fiat currency and backed only by belief, that belief is itself backed by a massive and heavily entrenched global system, underpinned by the raw power of the US Government and the US economic powerhouse it controls.
Bitcoin, on the other hand, is pure belief. The fiattest of fiats, the price of that line in that database rises and falls on pure, unadulterated speculation of what a greater fool might pay for it in the future. So remember the wise words of Flava Flave when the marketers come around comparing Bitcoin and fiat money. BTC is not just fiat money it is the purest form of fiat money, with nothing to back the belief that underpins it.
Disclaimer: This article is not financial advice. I do not currently hold any long or short positions in gold, currencies or any cryptos.
