Tuesday, October 7, 2014

Bitcoin


Bitcoin is a full on fiat currency supported only by the user’s faith that someone else will accept it at what they paid for it. Looked at one way it is a fraud since there it has no intrinsic value supporting it.

In another sense it has exactly the same value as an ounce of gold. The trust that someone else will accept the value and exchange it for something we both agree is an equal value.

I remember once when I was about 13 (1958) and traveling with my parents, we stopped for gas in a small town in western Pennsylvania where my father tried to use an American Express Traveler’s Check. That was a matter of trust - this small town gas station had never seen one and didn’t know if he could trust it or not. He did know and expect that he could trust a 5 or 10 or 20 dollar bill!

Back to that ounce of gold you trust so much. In the depths of antiquity certain types of sea shells drilled and strung like beads were a medium of exchange. They were rare and hard to get, at least far from the coast, and people accepted them in return for goods and services. As travel became easier and the shells lost their rarity they were supplanted by other mediums. Iron, copper, silver and gold coins for a long time were the standard and later were replaced by paper that could be exchanged for set amounts of the actual metal.

Gold, silver or any other metal has only the value we give it. Each of these has a use in manufacturing. You can build things from iron and steel or even copper. Gold and silver have industrial uses beyond their use in jewelry. But if you are in the wilderness, and need a meal, that ounce of gold will not feed you unless someone else has food AND is willing to exchange that food for the gold.

So why might they give up an immediately useful thing like a meal for an immediately useless thing like an ounce of gold? Because they trust that someone else, somewhere else will want to trade what they have for that ounce of gold. So in a very real sense, that gold relies on exactly the same “value” that a Bitcoin does - trust!

For good or ill, Bitcoin is now a permanent part of the financial landscape and will be a permanent part in some form or another from now on. So before you start wailing and moaning about Bitcoin being worthless and the ultimate fiat currency; remember that it rests on the same foundation as gold, US dollars or a can of soup. We expect that someone else will accept gold or soup as unit of storage of value. And that they will be willing trade whatever they have for that gold, US dollar or can of soup.


If you think this is a new concept think about this, approximately 800 years ago St. Thomas Aquinas said “Men could not live with one another if there were not mutual confidence that they were being truthful to one another”.

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