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- Unit of Account
- The Asset vs The Network
In the previous section, we delved into the unique functionality of Bitcoin that sets it apart from traditional currencies and how Bitcoin achieve the coveted badge of being decentralised. Now, let's shift our focus and explore how Bitcoin differs from fiat in terms of the characteristics that make a currency great. Only by examining these key characteristics can we gain a deeper understanding of why Bitcoin is unique and in a world of its own when it comes to money.
If you recall from Module One, we took a look at both the functions and characteristics of money, these being:
Store of Value: Retains purchasing power over time.
- Durable: Resistant to wear and tear.
- Scarce: Limited in quantity.
- Immutable: Cannot be changed or altered.
Medium of Exchange: Used as a means to trade goods and services.
- Portable: Easily carried or transported.
- Divisible: Can be divided into smaller units.
- Accepted: Widely recognized and accepted as a form of payment.
Unit of Account: Used to measure value.
- Fungible: Interchangeable with other units of the same type.
Let's now analyse fiat and Bitcoin through the lens of these functions and characteristics to better understand how they differ.
Store of Value
While fiat currencies are subject to inflation and have historically proven to lose value over time due to government policies, bitcoin's finite supply and decentralised nature make it a strong store of value that is not subject to manipulation by any central authority. What makes bitcoin a powerful store of value is that it is:
- Durable: Bitcoin is digital and, therefore, not subject to physical damage or decay like paper or metal currencies. Additionally, its decentralised nature ensures that it has no single point of failure for an attack.
- Scarce: The supply of bitcoin is strictly limited to 21 million coins, making it inherently scarce compared to fiat currencies, which governments can print endlessly. This limited supply means that bitcoin's value is not subject to the same inflationary pressures as fiat currencies.
- Immutable: Bitcoin's blockchain technology ensures that once a transaction is recorded on the network, it cannot be changed or tampered with. This level of immutability is not possible with fiat currencies, which see much greater fraud, counterfeiting or the reversal of transactions.
Medium of Exchange
While bitcoin is not yet as globally accepted as fiat currencies, its peer-to-peer nature, fast transaction times, and low fees make it an increasingly attractive medium of exchange, particularly for cross-border transactions. This is made possible by the fact that it is:
- Portable: Bitcoin, being digital, allows for borderless and intermediary-free transfers between individuals, making it a convenient and accessible medium of exchange. While some fiat currencies also offer digital solutions, those in developing or war-torn countries may struggle to access banking services that fulfil this need. Bitcoin's decentralised nature makes it accessible to anyone with an internet connection, providing a viable alternative to traditional banking systems in areas with limited access to financial services.
- Divisible: bitcoin's extreme divisibility is one of its key advantages as a currency. With each bitcoin divisible up to eight decimal places, the smallest unit, a Satoshi, is worth a mere fraction of a cent. Depending on the method of transacting, i.e. layer one or two, this makes bitcoin highly adaptable to transactions of any size, from small purchases to large investments.
- Accepted: While acceptance of bitcoin is not yet universal, its increasing adoption by merchants, institutions, and individuals around the world suggests that it is becoming more widely accepted as a legitimate form of payment.
Unit of Account
As bitcoin has gained recognition as a medium of exchange, it has quickly climbed the ranks as a reliable unit of account for goods and services, much like fiat currencies. However, what sets Bitcoin apart from fiat is its ability to provide a secure, transparent, and decentralised method of transacting. The major contributor to Bitcoin's increasing adoption as a unit of account is the fact that it is:
- Fungible: Each bitcoin is indistinguishable from any other, making it easily exchangeable, which is not always the case with physical currencies that may have unique identifiers or be of varying quality.
The Asset vs The Network
You may have noticed above that Bitcoin isn't simply a powerful asset for which to store value, but its unique characteristics also make it an incredibly secure and efficient network for transacting. This may sound a little confusing, so let us explain. Bitcoin, like fiat, is made up of two components:
The asset (referred to as bitcoin with a lowercase “b”) – This is what we purchase that's accessible from our wallet. When stored outside centralised exchanges or wallets, our reliance on trust is minimised, primarily centring around the security of our hardware. Even then, we can minimise that trust by securely backing up our seed phrase or using custodial options such as multi-signature. Moreover, considering that any decisions aimed at modifying the fundamental attributes of Bitcoin, such as its total supply, are determined and upheld by the community, there is a robust safeguard against the implementation of detrimental changes that could harm users, i.e. currency debasement through supply expansion.
The network (referred to as Bitcoin with an upper case “B”) – These are the rails which facilitate the trade of bitcoin-the-asset. The network allows anyone to send, verify or confirm transactions. Bitcoin's decentralised nature, supported by numerous nodes, miners, and developers, ensures a distributed structure where no single entity holds dominance over another. This offers a reassuring sense of security and reliability when transacting, eliminating concerns about potential reversals, denials, freezes, or other interruptions.
When we view fiat currencies from the perspective of "the asset" and "the network," it becomes apparent that we must place far greater trust and dependence on third parties and intermediaries. For example:
The Asset - The fiat currencies we use as a store of value (E.g. US dollar, euro, yen, franc, pound sterling, etc.).
Central Banks oversee Monetary Policy – Monetary policy refers to the measures taken by a central bank to manage the interest rates and the total supply of money in circulation. When the central bank lowers interest rates or increases the money supply, it injects new money into the economy, thereby diluting the value of the existing currency in circulation. This results in a reduction of the currency's purchasing power, creating inflation.
Governments oversee Fiscal Policy – Fiscal Policy pertains to government actions related to taxation and government spending. For instance, if the government decides to stimulate the economy by lowering taxes and providing stimulus checks, it increases the disposable income of the population, leading to higher spending. This increased spending can drive up prices, leading to inflation and lowering our purchasing power over time.
As citizens, we are subject to the decisions made by those in charge of monetary and fiscal policies, and we must rely on their judgment. We entrust our government and unelected central bankers to act in our best interests, but their choices can significantly affect our currency's purchasing power and, consequently, our standard of living. And history has demonstrated on numerous occasions that this trust has been violated, resulting in monetary debasement.
The Network - The rails that allow us to transact with one another.
When purchasing a coffee using our credit card, there are four or more different intermediaries - First is the bank with which the coffee shop uses. Second, are the communication networks that enable the banks to transfer funds between each other. Next, there is the association that processes the transaction, such as Visa, Mastercard, or Discover. And finally, there is our own banking institution, which verifies and records the transaction.
When sending a wire transfer, we touch four or more third parties - To initiate a wire transfer, we need to provide our bank with the recipient's bank details. Since our bank may not directly connect with the recipient's bank, the transaction information is sent through the SWIFT (Society for Worldwide Interbank Financial Telecommunications) network using a correspondent or intermediary bank. These banks then contact the recipient's bank to complete the transfer.
Regulatory bodies oversee various arms of the financial rails we use daily - If our political views conflict with the regulations governing the monetary networks or any part of the intermediary process, our transactions may be at risk of being blocked, and our assets could be seized. In extreme cases, we may even face the possibility of being excluded from the financial system altogether.
Does this sound frightening or improbable? In early 2022, during the trucker rally in Canada, individuals donated to support the cause. Prime Minister Trudeau had some of these individuals' bank accounts frozen by his decree. Irrespective of one's opinion on the matter, the fact that people's assets were seized for their differing views should be a red flag.
With this in mind, there are immense advantages to not only having access to a valuable, scarce asset but a secure, efficient, trustless, global, and low-fee network for exchanging value. And this is where Bitcoin excels. As discussed at length, Bitcoin's decentralised and digital nature makes an unparalleled network for fast, secure, and cost-effective transactions without the need for intermediaries or third parties. Here are a few examples of those benefiting from Bitcoin's unparalleled asset and network:
Commerce
Bitcoin gives merchants unprecedented control over their transactions, allowing them to bypass traditional financial intermediaries such as banks and credit card companies. This means that more money stays in the hands of the merchant rather than being siphoned off by costly transaction fees and other charges. With Bitcoin, merchants can also choose to accept payments from anywhere in the world without the need for currency conversion or other intermediaries, further reducing costs and increasing profit margins. By giving merchants greater control over their transactions, Bitcoin is changing the way we think about commerce, empowering businesses of all sizes to compete in an increasingly globalised economy.
Inflation
As of late 2022, almost half of the world was grappling with double-digit inflation, making it a pressing concern. If inflation rates remain at this level for the next decade, it will result in a 65% loss of purchasing power. However, bitcoin now offers anyone a way out. Being a truly scarce asset, its value cannot be eroded through supply expansion, offering us an escape from the negative impacts of debasing currencies.
Fleeing War-Torn or Unstable Countries
Bitcoin provides a viable option for moving value for those fleeing war-torn or unstable countries. In many cases, individuals in these situations are unable to access traditional banking services due to a lack of infrastructure or government control over financial systems. Bitcoin allows these individuals to store value in a decentralised and secure way without the need for intermediaries or physical assets that may be vulnerable to theft or confiscation. With bitcoin, individuals can carry their wealth in their heads, across borders and without any fear of losing their assets to any physical or political upheaval. This provides a level of financial freedom and independence that is unparalleled in the traditional financial system.
Money Transfer
We will discuss this in much greater detail in the following module, but for now, we want to mention that Bitcoin provides individuals with an efficient and cost-effective way to remit money back to loved ones abroad. Unlike traditional remittance methods, which often involve high transaction fees and lengthy processing times, Bitcoin transactions can be completed quickly and with minimal fees.
In light of this, while bitcoin, the asset, may offer significant benefits to those looking to escape inflation or store value in a more secure currency, we recognise that many individuals may not be able to take advantage of the asset, i.e. the volatility of bitcoin as an asset, may not be suitable for short-term value storage or those with limited savings. Luckily, Bitcoin's network will play a crucial role here, especially for individuals without access to banks or financial assets, given that the network's payment rails facilitate digital financial transactions for anyone with a mobile phone and internet connection.
Bitcoin is also quickly becoming the underlying value-transfer protocol of the internet. Because of the low-cost transaction capability, services such as value-streaming are starting to proliferate, connecting content creators directly to their audiences. Similarly, this low-cost streaming capability is seeing breakthroughs in paid-for-services such as energy metering, whereby users are able to pay for instantaneous demand, streaming bitcoin on a pay-for-use cost basis. Frictionless peer-to-peer payment offerings are revolutionising the way people interact with goods and services through the digital realm.
Conclusion
Bitcoin's unique characteristics as a store of value, medium of exchange, and unit of account make it a currency that is in a class of its own. Its decentralisation, scarcity, durability, immutability, portability, acceptance, divisibility, and fungibility combine to create a powerful and efficient network that can be used for transactions with finality, security, efficiency, and low fees.
Furthermore, these combined attributes not only position Bitcoin as a potent instrument for storing and building wealth over the long term (bitcoin the asset) but also offer many advantages for those looking to employ Bitcoin as a transactional medium (Bitcoin the network). This starkly contrasts fiat currencies, which necessitate trust and intermediaries in both scenarios. This makes Bitcoin an attractive currency for individuals and businesses alike, regardless of whether it is used for saving or transacting.