Bitcoin, what is it and what’s it good for?

It’s the same old story as the evolution from commodity money (gold) to credit money (credit denominated in gold weight units). As a virtual commodity, Bitcoin better serves the store of value function, especially since its quantity will ultimately reach a fixed maximum. Was Bitcoin (and the blockchain technology) not invented to serve as a medium of exchange that would be independent of banks and governments? If it is not a medium of exchange, Bitcoin becomes purely a medium for speculation on an artificial commodity that has no real use value. What then is the basis for its value? It is only the hope that there is a “greater fool” who will pay more for it than what you paid to the previous fool.

There are many ways to store value. Some of these involve collections or stores of real objects or commodities; some involve ownership of land and buildings (“real estate”); but most stores of value, or savings media, consist of contractual claims against someone or something. These claims fall under the rubric of “financial assets.”

The world does not need another way to save, but it does need another way to exchange, to transact business using some medium that is independent of banks, governments, and conventional fiat currencies.

The reason why credit money displaced commodity money is that the amount credit money in circulation is able to expand and contract in step with the amount of desired goods and services going to market and ready to be sold. Thus, credit money, whether it manifests as physical tokens, currency notes, ledger balances or digits on a smart card or phone, serves as a place holder representing the value upon which it was issued, and which enables the holder of money to claim that value from the market.

The control of credit money has been overly centralized and its issuance has been badly abused by banks and governments. That is why we need a new medium of exchange that is independent of banks, governments and conventional fiat currencies.

So, the future of money lies, not in reverting to commodity money, be it gold or “virtual gold” like Bitcoin and its ilk, but in a creating a decentralized network of credit allocation and control that provides credit money that is locally controlled but globally useful. Prototypical networks of this sort already exist and have been operating at modest scale for quite some time around the world in the form of hundreds of commercial trade exchanges (often called “barter” exchanges). Each of these exchanges uses a conventional central ledger to account for the trading and account balances of their members. This works quite well in practice but requires a considerable amount of trust in the trade exchange management and the process by which they assess creditworthiness and allocate credit lines to their members. As attempts are made to expand the scale and scope of exchange based on direct credit clearing among buyers and sellers, one big question that remains is how to create a credit money system that is private, secure, and resilient against official interference? The speed and scale limitations that are inherent in blockchain ledgers would suggest that some other means must be found to provide that.