The other day, I got into a rather prolonged discussion with a fellow an-cap who is generally curious about and positive towards Bitcoin and cryptocurrencies, but still swears by precious metals as the go-to value storage and money for hedging against inflation and politics.
Our discussion revolved around these questions
Is Bitcoin money?
Is Bitcoin FIAT?
What about Gold?
To a long-time Bitcoin-enthusiast, the very idea of calling Bitcoin a FIAT currency seemed preposterous. And I believe it does for most enthusiasts. FIAT is government issued currency backed by guns and controlled by a central bank, right?
Well, taking a glance at the definition over at Wikipedia, it may seem that this definition is not too far off.
“Fiat money is a currency established as money by government regulation or law”
https://en.wikipedia.org/wiki/Fiat_money
However, scrolling further down, to “Treatment in economics”, the following definition seems to be agreed within the field of Economics:
“In monetary economics, fiat money is an intrinsically useless object or record that is widely accepted as a means of payment.”
According to this definition, it’s not as straightforward as i first thought to argue that Bitoin is not FIAT. However, the argument that Bitcoin is a FIAT leads to certain problems. For example, one could argue that “intrinsically useless” is a formulation that warrants further analysis. But first, lets take a look at Gold.
When asking what kind of money is not fiat money, not surprisingly the answer is Gold. I like getting into arguments about Gold, because often, Gold-proponents do not realise that for the most part, Gold is “intrinsically useless”. It gets the biggest part of its value from human appreciation as a store of value.
The general criticism against FIAT currencies are that they’re not “backed by” anything, particularly, currencies are no longer backed by real gold. Fine, let’s roll with that. The problem becomes apparent when turning the focus to Gold:
“What is Gold backed by?”
“Itself.”
“How is that?”
“Gold is real money.”
When digging into the assumption of Gold as “real money”, we eventually ended up with weird logical detours involving that
“Gold is real money, because it is physical and has other uses besides money”
Ok, so Gold is real money, because it has other uses besides money? That argument just doesn’t make sense to me at all. If Gold can be said to back itself, why can’t Bitcoin?
So when challenging the assumption that Bitcoin is FIAT because it’s not backed by anything, the obvious retort is that “Yes, Bitcoin is backed by itself, just like Gold”. For some reason, the notion of a virtual object with intrinsic value can be hard to grasp. Arguments like
“You can’t use Bitcoin without the Internet”
and
“You can’t touch Bitcoin” - fingers making touching motion
are keenly deployed against the blasphemer that dares question the soundness of Gold, and compare it to Bitcoin. Dead End.
I remember very well watching the following video by James DiAngelo for the first time, as it represents one of my early A-HA-moments in the Cryptocurrency space.
It neatly and orderly explains the properties of Gold and why it serves well as money, perhaps the best humanity has used until today. The funny thing is, Bitcoin beats Gold in almost every aspect. It is just like Gold... only digital... and by the way, somewhat better!
Getting back to the notion of intrinsic value. Does Gold have intrinsic value? We already know that a very small portion of the value of Gold actually stems from its qualities as a metal, for example for use in electronics.
But what about the rest, the value that is appreciated into Gold, simply because humanity desires it. In a sense, we have all agreed that it makes good money, right? I believe that the properties listed by DiAngelo in his video actually represent the biggest part of the true value of Gold.
So what is Bitcoin’s intrinsic value? Well, according to the same line of argumentation, Bitcoin performs better than Gold at nearly all of Gold’s winning properties, arguing strongly for the fact that Bitcoin actually has greater intrinsic value than Gold.
In Bitcoin, because of its digital nature, it far easier than with gold to measure an underlying value, using some statistics. For example, the number of transactions, the number of nodes in the system, etc. These are metrics describing the adoption of Bitcoin, and thus the value of the network.
In fact, there is a mathematical law governing the value of networks. It is called Metcalfe’s law, and reads:
“The value of a telecommunications network is proportional to the square of the number of connected users of the system (n2)”
https://en.wikipedia.org/wiki/Metcalfe%27s_law
That’s pretty much the nail in the coffin of the argument that Bitcoin does not have intrinsic value.
So, according to both definitions of FIAT, Bitcoin is not FIAT, because:
It is not issued by a government or law.
It does have intrinsic value.
Now, please proceed carefully. Here is the one will really mess up a sworn gold bug. Judging by all the similarities between Bitcoin and Gold in terms of their properties as money, it would seem that Bitcoin is simply a digital version of Gold. So when a gold bug argues Bitcoin is FIAT, it is certainly tempting to bring out the obvious retort: If Bitcoin is FIAT, then by all sensible reasoning, so is Gold!
Unfortunately, this one seems almost impossible to get through. “Physical, touching, jewellery, electronics”, all the big guns will be employed to protect the holiness, and you will just end up with a headache. According to some, what makes Gold real money, is all of it’s non-monetary properties. Go figure.
As far as I’m concerned, this is no longer up for debate. From Wikipedia on Money
“Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context”
https://en.wikipedia.org/wiki/Money
It is a no-brainer. Bitcoin is generally accepted in a particular “socio-economic context”, to say the least. A good example is that Bitcoin is now the common currency used by all cryptocurrency exchanges as a vehicle for buying hundreds of other cryptocurrencies.
In other socio-economic contexts, it is quickly becoming accepted as a standard, for example in the gaming context, (Steam and Xbox) and in general as a standard payment method for the internet, where you can buy labor, domains, hosting, electronics and much more.
According to the Wikipedia definition, I think it is safe to say that Bitcoin is indeed money.
I’m not even sure if it’s safe to call Gold money anymore. It is certainly not accepted everywhere. I guess there are still socio-economic contexts where it is generally accepted, but I would argue that today, even Bitcoin is more liquid and easy to spend when purchasing goods and services. It's a tough one, but considering the long history of Gold, I would carefully suggest that we can still call it money.
I guess it boils down the following questions:
What can be considered intrinsic value?
Is even such a thing as intrinsically useless money possible?
If so, is the definition of FIAT in monetary economics fundamentally flawed?
Of course, money can become useless if people stop valuing it. But is it really useless when it's useful?
