Why Bitcoin is the most advanced Form of Money? [Part 1]
100 years ago most people would pay for their house, education, or marriage from their own labor or accumulated savings, such a notion seems ridiculous to people today.
With paper money, it becomes very hard for people to save their money for the future, as the central government controls the money supply, they destroy the incentive for people to save money while increasing spending.
As of June of 2022, the annual inflation rate in the US accelerated to 9.1%, the highest since November of 1981, which means your money has dropped around 9% in only one year.
That leaves the question of whether government money is really money.
To answer this question let’s start from the basics and answer the question of what is money.
What is money?
What we consider “money” evolves over time.
Money has taken different forms throughout history, from stones, gold, silver, and seashell to paper money today, most of these lost their monetary role due to a lack of one of these attributes:
- 1- Lack of coincidence of scales: What you want to exchange is not of the same value as what you want, and divisibility isn’t practical. (you can’t buy a home with tons of Bananas, which makes bananas a bad medium of exchange)
- 2- Lack of coincidence of time frames: You want to sell something today to buy something in the future (solved by goods that don’t ruin & not cheap to produce)
- 3- Lack of coincidence of locations: Good money is valuable per unit of weight & easy to move (Houses are bad as money since you can’t move them across space)
Easy and Hard money?
Money whose supply is hard to increase is known as hard money, while easy money is money whose supply is amenable to large increases.
Government money is easy money, with a click of a button you can print tons of money and increase the money supply while destroying the life saving of tons of people.
Gold continues to be the hardest monetary asset ever made, even with technological advancement, market participants can’t inflate the supply of gold and produce more than 3% of stockpiles, which makes gold a good asset to store the value into the future.
The golden ERA?
The gold standard was the basis for the international monetary system from the 1870s to the early 1971s. In 1974 the united state bans the ownership of gold by citizens and only the use of fiat money (US dollar and other currencies) is allowed for daily transactions. And you can see from the chart below that most of these major currencies lost their value compared to gold due to inflation.
Money and Time Preference
Consider why we do not have many more zero-to-one transformations and innovations under our modern monetary system compared to the golden era. The greatest inventions (Telegraph, airplane, train, …) happened in a society where money is free and sound, individuals have to make the decisions with their capital and choose whatever it’s hard to produce as “money”.
This is the essence of investment: with hard money people drop their time preference and are able to delay immediate gratification, they invest their time and resources in the production of capital goods which will make production more sophisticated or technologically advanced and extend it over a longer time-horizon.
With easy money (paper money), time preference rises, and people prioritize currency consumption, reducing their savings and the pool of capital available for entrepreneurs, raising interest rates.
Bitcoin fixes all this
Bitcoin represents the invention of digital scarcity. It is the most salable and the hardest money we’ve ever had, you can move it across time and space without losing value.
With a fixed supply of 21 Million units, it’s mathematically and cryptographically proven that no one can inflate its supply and produce more than 21M units.
In the next article, we will dive deep into the mechanics of Bitcoin, Proof of work, and difficulty adjustment, …
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