What makes perfect money? The debate around this question has raged on for many years and until recently there have been only two candidates in this race – gold and fiat currencies.
Gold has been a store of value for 3000 years and was always seen as the perfect hedge against all the declining fiat currencies printed by the central banks around the world. But now there is a new kid on the block – Bitcoin!
The supply of fiat currencies is endless and controlled by governments and their central banks. The supply of gold is however very limited and only increases by about 3%-5% per year, so it is a good form of money. But Bitcoin can be considered perfect money because there will never be more than 21 million Bitcoin in existence – so Bitcoin has been called the “hardest” form of money on the planet for good reason.
Current Problem With the Way Money Works
The current problem with all our money is that it depends on trust in a third party for its value. As history has shown, this kind of trust is not ideal.
The discussion of how to form a better, more stable form of money is not new. Individuals have been talking about creating a new form of money long before Satoshi’s whitepaper ever came along.
This article will attempt to distinguish the three current forms of money in society and highlight which is the ideal one.
Fiat (Government) Currency
Fiat money, or currency, is money issued by the government and regulated by a central authority (usually a central bank). It is called “fiat” because a government decree/regulation has declared it as legal tender.
Fiat money is not backed by anything. All currencies in the world were at one time backed by gold, but in 1971 President Nixon took the world off from this “Gold standard.”
While there are many advantages of fiat money for regulators and governments, there are also many disadvantages as well.
All Fiat currencies in the world suffer from inflation to some degree. The government is able to print money as they see fit. This results in a loss of value/purchasing power of a currency over a period of time.
It is also important to note that the average life span of fiat currency is only 27 years. While fiat currencies are the easiest to transact with and hold, they are not an ideal form of money.
Gold has been valued for as long as human civilization has existed. No monetary good has a history as long and storied as gold. What makes gold valuable are its special characteristics.
Gold is also a staple of durability. Most of the gold that has ever been found is still in existence, and will likely remain in existence forever.
While gold has many positive traits, it also has some negative ones. As shown in the graph above, transporting large amounts of gold can be difficult and insecure. It is also difficult to divide gold into small enough quantities for lower value/everyday uses. Lastly, it is also difficult to transmit gold at a distance as governments can impose regulations on such (e.g.: India’s Gold Control Act).
Even with these limitations, gold is still a better form of money than fiat currencies. It has held its purchasing power very well over time. There is also no reason to believe that this will not continue in the future as well.
Bitcoin is a new form of money called cryptocurrency. More importantly, it is sound money, which is defined as “money that has purchasing power determined by markets independent of governments and political parties.”
While those that don’t know much about Bitcoin may scoff at it, they fail to realize that Bitcoin is already among the top 30 currencies by Market Cap. In addition, Bitcoin’s current lifespan of 11 years is almost half that of a typical currency.
Bitcoin is a better form of money than fiat currencies and potentially gold as well. The total supply of Bitcoin is capped at 21 million and its inflation rate is set in stone as well. Bitcoin’s supply rate reduces every 4 years until its full 21 million supply is available to all in society. This feature is new and unique only to Bitcoin; neither gold nor any fiat currency has such predetermined scarcity. While gold is scarce, it is not immune to increases in supply as other methods of mining gold may become available (e.g.: deep see mining).
Almost all of Bitcoin’s traits are superior to any predecessor as well (see chart above). Vijay Boyapati’s article provides one of the most in-depth review of Bitcoin’s traits as money (found here).
The only knock against Bitcoin is its short history. While Bitcoin has only been around for 11 years, it is important to note that it was created as a result of the 2008 financial collapse. The collapse showed society that fiat money could not be trusted long term (which has been shown to be true several times now). There is also no reason to think that Bitcoin cannot survive over time, as no single entity can shut it down (even Government Nations cannot shut it down), and there is no incentive to shut it down.
Why This Is All Important
This all comes back to the short-comings of fiat currencies. History has shown that governments cannot be trusted with full control of their nation’s money supply. Even these governments do not have full trust in their currencies as many countries in the world are stockpiling gold.
Nick Szabo said it best: “All money mankind ever used has been insecure in one way or another. This insecurity has been manifested in a wide variety of ways, from counterfeiting to theft, but the most pernicious has probably been inflation.” Inflation has devastating results for citizens.
While Bitcoin is still early in its life and is rather complicated to understand, it is the first form of money that is resistant to inflation and outside the control of any single entity. It also makes up for the shortcomings of gold as it is highly divisible and is transferable to just about anywhere in the world and without the need of any trusted intermediaries.
Most fiat currencies fail. Considering and having ways to protect yourself from a potential economic collapse/high inflation rates is something every individual should do. Gold and Bitcoin are two excellent ways of doing such.