Knowing the Value of a Bitcoin

Bitcoins have no intrinsic value”. –Alan Greenspan

It’s true that Bitcoins are just numbers. But then all currencies today are “just numbers”, with no intrinsic value (or in the case of the former Zimbabwe dollar, no value of any kind). But unlike any government currency, there is an absolute, mathematically fixed limit to the quantity of Bitcoins… there are only 21 million possible Bitcoins, and 12 million of those have already been created. In contrast, 85 billion new US dollars have been printed every month just to buy our own government debt. (Now supposedly going down to 75 billion, unless it doesn’t).
The difference between Bitcoins and dollars, pounds, or Euros is not that Bitcoins are “just numbers”. The difference is that Bitcoins can’t be used to rob their owners via inflation, as there is no central office that can print trillions of new Bitcoins. No national fiat currency can make that claim; dollars, pounds, or reminbi, all national currencies are at the mercy of the central banks.

So is Bitcoin the “perfect” money? Of course not. But then, it’s not competing with perfection, it’s competing with the Euro, the dollar, and the reminbi.

In fact, perfection has rarely been an option for users looking for safe monetary systems. Even when money was supposed to be backed by gold and silver, there were constant efforts to game the system. One anachronistic leftover of those manipulations is “fractional reserve banking”, where banks lend out ten or more times their reserves (and then demand bailouts when too many of the loans go bad at one time). Our monetary system is unstable today because of fractional-reserve practices which were originally designed to siphon real gold from bank depositors… even though no gold is left anywhere in the system!

Bitcoins can’t be used by banks to create inflation. If someone loans you a Bitcoin, then they don’t have that Bitcoin anymore… unlike a dollar or Euro, which can be loaned out multiple times by any bank. If national currencies worked like Bitcoin, there would be no inflations or deflations… if a bank “failed”, it would just go out of business like any other bankruptcy. There would be no change in the overall money supply, no change in the value of the money itself, and no change in the overall economy. This would be a major change from today’s situation, where changes in the money supply are a constant threat to every economy.

So will Bitcoin “replace the dollar”? No. The dollar may have no intrinsic value, but as long as the tax man threatens to take your house if you don’t pay him dollars, the dollar will have a built-in demand. The same is true for pounds, yen, renminbi etc. All these currencies already exist in competition with each other, without “replacing” each other.

But while the national currencies will still exist, Bitcoin and other e-money will increasingly protect the family nest egg from rapacious authorities. E-money already limits the amount of wealth that a government can confiscate. For example, when Cyprus confiscated part of every bank account in that country, a Bitcoin holder there could still move their Bitcoins out of Cyprus via Internet.

Where Bitcoin still falls far short of perfection is in stability. An optimum money would be tied to the price of a large number of commodities, making it more stable than any single commodity. Unfortunately such a Utopian money would require a physical location where you could exchange it for the commodities, and an honest banker to do the exchanging. Governments have historically been hostile to e-currencies, and because physical backing requires physical offices, governments were able to wipe out enterprises such as E-gold that offered commodity-backed money.

We will still need dollars and yen for the taxmen, to keep our houses from being confiscated. We will still need stock shares for long-term savings and investment growth. And of course we still need giant circular rocks when we visit the island of Yap. But for electronic shopping, international money transfers, vacation spending, etc., Bitcoin may be the future of money. Unlike Alan Greenspan’s dollar (or any other fiat currency), a Bitcoin’s digits just might have more “value” in the year 2100 than today.