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Beyond Store of Value - How Can Bitcoin Be A Viable Medium of Exchange and Unit of Account?

bitcoinexchangeguide.com 13 October 2021 18:26, UTC
Reading time: ~5 m

How can a good store of value (SoV) also be a good medium of exchange (MoE) and unit of account (UoA)? Seems too perfect, right? With Bitcoin expected to rise in value forever, wouldn't it be prohibitive to use Bitcoin for paying for things? This perspective comes from measuring Bitcoin's value in an inferior, depreciating form of money and stems largely from a collective price illusion that the dollar is a stable representation of monetary value. The dollar price of Bitcoin is merely relative face value, not intrinsic value, while Bitcoin, as a nascent form of money, is still in the process of discovering its true value to humanity. Money is anything that's accepted as representing value by the parties to any transaction. Three thousand years ago, cowrie shells were used to represent value. Humans have always sought money that can hold value over time until it was required to purchase other things that hold value to them - goods and services. When you purchase goods and services now, the question you ask yourself is whether what you're purchasing is more valuable to you than the dollars you have in hand. Everything being denominated in dollars/fiat money lends a perspective of dollar just represents value, which can buy me things I need in life. When we get to a place where sats replace dollars as UoA, it would be a question of whether the good/service you're purchasing is worth more to you than the sats you have in your wallet. But how can Bitcoin be money when its supply is finite and limited to 21 million? Well, it's finite but divisible. Perhaps there's not enough Bitcoin to go around for everyone, but there's certainly enough sats to go around for everybody - circa. 2.1 quadrillion. Let’s try imagining that 1 Bitcoin represents a billion-dollar bill, which at the current rate of inflation may not be so far-fetched to imagine in the near future. Are there enough billion-dollar bills to go around for everyone? No. But there are enough ten-dollar bills to go around for everyone. Further, the smallest unit on Lightning Network is not sats but millisats, 1/1000th of a sat. Mill is 1/1000th of a dollar, an abstract unit of account in dollar-denominated accounting.

  • 1 Bitcoin = 100 million sats
  • 21 million Bitcoin = 2.1 quadrillion sats = 2.1 quintillion millisats

Infinite divisibility, but not infinite supply, is an important property of money. The best scarce money in history, gold, does not have this property. Bitcoin does. What a Bitcoin Standard would do is immediately eliminate the moral hazards that inhere within a monetary paradigm predicated on arbitrary, whimsical, unscrupulous, and flagrantly unmoderated expansionary policies founded upon nothing more than the existence of a lender of last resort with access to an infinite supply of money created without any effort out of thin air to continually bail out those at the top of the pyramid, who exploit said moral hazards with impunity. It would restore rigor and sustainability to credit lines without frequent intervention at the cost of rampant inflation, and overall, cultivate better spending habits. The current system of credit constantly incentivizes or even forces you through a myriad of machinations to keep spending money from tomorrow's labor, but then the new injection of money from your tomorrow's labor ends up being concentrated at the top, with the ultimate consequence of inequitably destroying your own purchasing power and continually enriching those at the top of the pyramid. In short, the money you borrow ends up destroying your purchasing power while the lender profits from your future labor. This system is "sustainable" for a reasonably long period of time until hyperinflation becomes untenable, only because it enables infinite, unmoderated expansion of the money supply. Fiat monetary systems have never in history survived beyond a few generations. [caption align="aligncenter"]We’ve had 3800 fiat currencies in history. They’ve all failed We’ve had 3800 fiat currencies in history. They’ve all failed[/caption] “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.” - Woodrow Wilson in 1919, in reference to the Federal Reserve act of 1913, which he signed into law. [caption align="alignnone"]A system of credit based on infinite, but concentrated expansion of supply. Inflation benefits those close to the new money (top of the pyramid), while those at the bottom bear the brunt of it. This is Cantillon Effect. A system of credit based on infinite, but concentrated expansion of supply. Inflation benefits those close to the new money (top of the pyramid), while those at the bottom bear the brunt of it. This is Cantillon Effect.[/caption] I view Bitcoin to be the culmination of humanity's 7000-year quest to perfect the representation of value by truly democratizing its creation, distribution, and exchange. There has never been a money in history with all the necessary properties of money. All previous forms of money had compromises. Scarce money has always been sound money, but previous iterations of scarce money lacked the other properties required to be viable MoE and UoA - fungible, readily portable, infinitely divisible, incorruptible, indestructible, provably finite, and objectively verifiable. Bitcoin ticks all the boxes. [caption align="alignnone"]Sound money fulfills all three functions of money - SoV, MoE, UoA Sound money fulfills all three functions of money - SoV, MoE, UoA[/caption] Further, Bitcoin is the only monetary system in history that has the properties to last forever, for it doesn't derive value from the authority/wealth of the issuer, which is fleeting, but a timeless, universal constant - hard-coded mathematics. Bitcoin is the reserve currency of the universe. [caption align="alignnone"]Reserve currency status does not last forever Reserve currency status does not last forever

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