Can bitcoin replace money?

WELCOME TO our four-part primer on bitcoin, a subject that is very topical, but lacks public awareness as to the totality of its functions. We start with the big question, can bitcoin replace money?

The answer depends on your definition of ‘money’. To most people, money is that paper note or coin you use to transact a trade. Throughout history, this paper note or coin has transformed from salt tablets to gold and silver coins, and now in modern times to paper notes and cheap metals coins. If we agree that is what we speak of when we say ‘money’, then I will suggest to you that bitcoin cannot replace money for the following reasons.

Money as we know it is really just a promissory note/coin, which is accepted in faith, that can be exchanged for goods and services. The issuer of the money (the government) has nothing to give you in return if you decided to give it back to them...what would you ask for? Most likely another promissory note from said government or notes they have on hold from another government. Therefore, the actual paper and coins you hold have no intrinsic value except the faith others have that they can trade it for goods and services.

UTILITY VALUE

Bitcoin, on the other hand, does have utility value when compared to money, like gold which has utility of use as specialised conductive metals in electronics or in a wristwatch for precision movements and, of course, for fashion. This utility is not so obvious with bitcoin but they do exist.

This brings us to what is meant by bitcoin. What is bitcoin? First, the term ‘bitcoin’ commonly refers to a digital representation of a token that is cryptographically created and stored on a computer storage device, meaning it’s a long coded text that represents a token. However, the term also refers to the bitcoin technology, which speaks to the cryptographer and storage technology behind the creation of each bitcoin token. The bitcoin technology employs massive computing power requiring electrical energy equivalent to that used by a small country. The process that creates these tokens is called mining.

The utility of bitcoin lies primarily in the Bitcoin technology. Like gold, bitcoin technology has some utility, such as securing and authenticating transactions and communications. Like gold, bitcoin tokens also have a store of value component due to its scarcity; the technology only allows 21 million of these tokens to be created.

CANNOT REPLACE MONEY

So just like how gold cannot replace money...bitcoin tokens cannot replace money. But, can bitcoin tokens be used like money in the same way gold could be used as money? Yes, of course. Bitcoin tokens have several advantages over gold to represent the value of a transaction. Let’s say a bar of bullion gold has a value of $1,500,000 and a car also values $1,500,000. If I have a bar of gold I could exchange it for the car. Of course, if the car is valued at $1,000,000, there is no easy way for me to exchange the gold for the car. This is because gold is not easily divisible. On the other hand, a distinct feature of bitcoin tokens is its divisibility. One bitcoin token can easily be divided in a million parts, called satoshies, giving me the ability to exchange a fraction of a bitcoin token for the car to the value of $1,000,000.

This divisibility gives bitcoin tokens a unique advantage over all other similar assets that can be exchanged for goods and services.

This feature also gives rise to the possibility of using bitcoin like money. However, given that bitcoin can be a store of value, where the value can be speculated on, this makes its value very volatile and useless in its pure form to be used like money...simply put, you pay me $100 in bitcoin tokens for a product. Literally in minutes, that $100 could become $50 or $150 due to the volatility of its market price. Given that commerce relies on going back to market for new inventory, a business could find itself with a significant shortfall when going back to market.

Does this mean that bitcoin is useless in the world of commerce? Absolutely not. This takes us to what I consider the real value of bitcoin. Earlier we spoke about its ability to authenticate transactions. Well, in fact it’s not the bitcoin token itself that authenticates the transaction, but the unique bitcoin technology that actually facilitates this authentication.

CHAIN OF PREVIOUS OWNERS

To give a simple analogy, let’s look at your land title...not your mortgage document but your land title. If you notice, the original content, and sometimes the document from the day that title was registered, still exist. Each time that there is a new owner, that owner is added to the document, creating a chain of the previous owners right up to the current owner. The previous owner is never removed or altered, except a new link is added for the new owner. The next link up the chain is that of the previous owner, and so on.

In the world of computer technology, we call this a linked list of blocks (owners), or a blockchain. The bitcoin blockchain is not unlike other blockchains except for one feature ­– the bitcoin blockchain has more security guards watching the store than any other. There are close to five million security guards guarding the bitcoin blockchain, compared to hundreds for other blockchains. To translate, the security guards are called miners, utilising this massive computing power, who, by majority agreement, approves all transactions on the blockchain.

This level of authentication can be put to many ancillary uses, including approving financial transactions, authenticating land titles, birth certificates and many other complex transactions that require security and authentication.

Getting back to money, whereas bitcoin cannot replace money, it can provide a platform for payment systems and could be the catalyst for the often heralded cashless society. In every payment system, the critical function is that of authenticating the transaction. When you write a cheque to pay for a service, it takes several days to authenticate because that’s how long it takes to move the paper around for all the security guards to look at it and approve. Similarly, when you use a credit card, even though the settlement seems to be instant, it is not. It actually takes days. This is the reason you can get back your money if the transaction fails the authentication step because someone used your card fraudulently.

The bitcoin technology, when used by a payment system, addresses the issue of speed and cost when compared to the current cheque or credit/debit card system. On a pure bitcoin blockchain network, a final fully authenticated settlement takes place in 10 minutes, on average, versus days. Additionally, the versatility of the technology allows innovative minds to create additional technology that reduces that 10 minutes final settlement time. One such innovation is called the Lighting Network Protocol – a protocol built on top of the bitcoin technology that allows instant settlement. The absolute beauty in all this is that none of this technology is proprietary; it’s all open source and freely available for any innovative person to build their own next dream bitcoin project.

THE TECHNOLOGY BEHIND BITCOIN

In my opinion, bitcoin will not replace money, but it will transform the way we conduct many transactions in our day-to-day lives. Will the government issue bitcoin instead of paper notes? They can’t. Will the Government issue a digital version of money? Many tried but can only be successful if the government stops printing money, which is not possible under current economic dogma. Will government ban bitcoin? Some have tried, but you can’t really ban technology...you can’t ban social media or the Internet. Will you ever really understand the technology behind bitcoin? Maybe not, but you will come to use it every day like you use social media.

Finally, I leave you with a warning. The bitcoin blockchain technology allows the innovation of so many new products, from finance to the electoral process to the legal fraternity. However, the bitcoin token it produces is not immune from bad actors and scammers. There are persons who legitimately invest in bitcoin tokens, just like they do in gold, artwork and other assets that have a store of value. If this is your day job then great, you most likely know what you are doing. If it’s not, then investment in bitcoin tokens is not for you, the volatility may be your undoing. Then they are those who are pure speculators, day traders, I give the same unsolicited advice: If it’s not your day job, stay away. It’s an adventure for the young. Then we have charlatans who will try to introduce you to a bitcoin scheme that is guaranteed to make lots of money, where you pool your money and they hold on to the password – these are scammers; run in the opposite direction!

Michael Ennis, BA, MBA, is an information system consultant. He is not an investor in digital assets, including bitcoin, but is a director of a bitcoin technology company. Email: mail2michaelennis@gmail.com.