I did a lot of research into Bitcoin, and one of the things that struck me as crazy, but that I should have accounted for is the fact that Bitcoin works on a permanent deflationary principle. In other words, the cryptocurrency is set up with a finite amount of coins and a mining algorithm that is supposed to make it exponentially more difficult to mine coins as time progresses, with the difficulty set to increase (this is not so much based on ‘time’ but rather coded into the software to occur at certain ‘blocks’, but we’ll get into all of that later).
This is when I came to the conclusion that Bitcoin could never be used as a currency. Despite the fact that people hate the Federal Reserve and other centralized banking agencies, their monetary policy is what allows the value of the dollar to remain ‘stagnant’ and is a big part of what gives people their faith in the dollar despite a lack of a finite standard. Bitcoin, on the other hand, is a currency that is created to be devoid of such. Therefore, the price of Bitcoin is something that, by nature, must be volatile. Thus, it can only be considered a store-of-value like gold.
That’s not a problem, though. Gold is worth trillions and has been regarded as the most precious metal on planet earth for decades at this point. So, being compared to gold or modeled after its existence is never a bad thing. This is when I decided to expand my research into gold and gold comparisons.
History of Gold
For those that don’t know, gold has held inherent value for tens of thousands of years in human history. The first recorded use of gold as a currency came from the Lydian empire (wa y back, do your own research for fun). Fast forward to modern times. The U.S. decides to adopt gold as a standard and currency was either issued in solid gold or silver during the 1700’s. Following the Civil War in the mid to late 1800’s, the United States was forced to issue a fiat currency in order to cover its debts to other nations because they were essentially bankrupt from the war. This fiat currency (which hardcore Bitcoiners claim to DESPISE) was based on the idea that each dollar would be ‘pegged’ to gold that the U.S. had in reserve (sound familiar? *cough* USDT *cough*).
Following WW2, the powers that be in the world decided unanimously to create the ‘almighty dollar’ by agreeing to peg the value of gold to the dollar. This worked until the golden standard was declared a no-go by Nixon (what a dumbass) in the late 60’s/early 70’s following the Vietnam War. From that point on, all fiat currencies eventually left the golden standard. Countries do still claim to have reserves of gold and most do (Google it if you’re curious). However, the value isn’t pegged to it anymore (make your own conclusions as to what that means).
Basically, the currencies of the world’s financial systems are predicated on two things:
- The premise that one’s currency relates to the issuer’s wealth (usually determined by the resources — particularly gold — that they hold). So, the dollar being as valuable as it is, is *supposed* to indicate that the United States possesses a significant amount of wealth.
- Gold has an intrinsic value that will always and forever exist no matter what.
Yes, this does mean that gold has no more intrinsic value than what us human beings have placed on it. However, us human beings have placed such a value on gold for a LONG time. In fact, so long that it’s virtually inconceivable, if not impossible, that gold will ever not be worth a lot.
So, let’s say an ounce of gold is trading for $100 today and tomorrow it’s trading for $150. That doesn’t mean that the gold is more valuable, it means that the currency is worth less (in theory — but I won’t dive too much into that here).
Gold is not a currency, but it is something highly valuable that currencies are based upon. However, despite the wildly fluctuating price of gold over the years, currencies in the ‘powerful’ countries have remained relatively stagnant (i.e., the price of a cappuccino at Starbucks does not fluctuate by up to 25% in a given calendar year). Gold, however, has experienced gains and losses in the realm of 50%+ in the last decade only. Sometimes these movements take even less time than that.
Countries/individuals/banks/institutions treat gold like a safe haven to hedge from political instability and the potential collapse of the dollar one day (yes, seriously).
So, how does this relate to Bitcoin?
If you’ve continued reading thus far, great. Basically, as I established a bit earlier, Bitcoin cannot be used a cryptocurrency given its setup. It has to be a store-of-value because it’s deflationary nature renders it impossible to be a currency. If I didn’t outline the reasons before, I’ll do it again here:
- Bitcoin’s deflationary structure removes incentive for individuals to spend it. Think about it: If you know or believe that the value of Bitcoin is going to double in the next week/month/year — the chances that you’ll actually exchanges it for something that you don’t believe will also at least double its price in the same time span are relatively low. I mean why would you? What’s the community’s motto? Hodl. You can directly translate this as “horde”. It doesn’t take a rocket scientist to figure out that something that is merely ‘held’ by people with the hopes of appreciating in value can never be used as a currency. Think about fiat money (dollars, yen, pounds, euros, etc.) — people don’t ‘hold’ those things like that. Banks exist, of course and tons of people invest, yes. But no one simply obtains a $100 dollar bill and stuffs it under the mattress with the hopes that it will double in purchasing power.
2. The value of Bitcoin is designed to inherently always be volatile. Let’s assume everything goes perfect and mass adoption does occur at some point. Given the fact that there are only 21 billion coins that will ever be made and more than likely 20–40% of those coins are in someone’s metaphorical ‘wallet’ coupled with the fact that the algorithm/code that miners must crack to ‘mine’ Bitcoin will become exponentially more difficult in the future, Bitcoin will always rise in price infinitely, or at least be volatile in nature. Because of this, it just can’t be used as a currency. No one is going to want to make any expensive purchases with Bitcoin with the knowledge in their head that the Bitcoin could be worth significantly more or less in the near future. That would just be stupid. Fiat currency simply does not work this way.