On the monetary function of Bitcoin

Have you ever had any of the following questions?

1. Is Bitcoin a currency?

2. Bitcoin has almost no applications, so why is it valuable?

3. Altcoins, two-coins, and eight-coins have more powerful functions, so why are their market capitalizations so low?

4. The issue of capacity expansion remains unresolved, so why is Bitcoin still rising?

This article will attempt to answer all these questions.

Is Bitcoin a currency?

First of all, we need to clarify what money is. According to Mankiw's "Principles of Economics":

“Money is a group of assets that people in an economy use regularly to buy goods and services from each other. Money has three functions in an economy: medium of exchange, unit of account, and store of value.”

Bitcoin can be used to purchase goods and services, is a medium of exchange, and occasionally serves as a unit of account, a means of storing value. Therefore, many people believe that Bitcoin is a currency. However, strictly speaking, Bitcoin cannot be considered a currency because people do not use it often.

Many things were once money, such as shells, tobacco, gold, etc. This is because they were once used frequently to buy goods and services. However, these things are not used frequently now, so we do not consider them money now.

To sum up, Bitcoin has the three functions of currency, but it has not been used frequently. Therefore, Bitcoin cannot be considered as currency at present, although it has great potential to become currency.

Bitcoin VS Fiat Currency?

Even if we admit that Bitcoin is a currency, what advantages does it have compared to legal tender such as the US dollar? To answer this question, we need to examine the monetary function of Bitcoin.

1.交换媒介. Is Bitcoin a better medium of exchange than the U.S. dollar? We can compare it in the following two aspects: (1) Online transactions. Bitcoin cash can be traded directly online. It takes an average of 10 minutes for transaction confirmation. Large transactions should wait for an hour, and a handling fee is required. However, even so, it is stronger than fiat currencies such as the U.S. dollar, because fiat cash (without the help of banks or third-party payment) cannot be traded directly online. (2) Offline transactions. Bitcoin cash cannot be traded offline (in the case of network disconnection, although private keys can be delivered directly using paper wallets, this practice is very unsafe), while fiat cash can be traded directly offline. Therefore, when acting as a medium of exchange, Bitcoin and fiat currency are equally matched and can complement each other.

2.计价单位. Is Bitcoin a better unit of account than fiat currencies such as the US dollar? Obviously not. Bitcoin prices fluctuate greatly and are not suitable as a unit of account at all. Currently, even if merchants accept Bitcoin payments, they rarely use Bitcoin as a unit of account. Therefore, when it comes to serving as a unit of account, Bitcoin is completely defeated.

3.价值储藏. Is Bitcoin a better store of value than the U.S. dollar? Hopefully. Satoshi Nakamoto created Bitcoin primarily to preserve its value like gold. So he set a rigid upper limit for Bitcoin, imitating gold, and used blockchain and proof-of-work mechanisms to ensure decentralization. Satoshi’s goal was basically achieved, and the Bitcoin system works well. When it comes to storing value, at least so far, Bitcoin has won.

Do you still think that Bitcoin has no applications? The biggest application of Bitcoin is to store value. In layman's terms, the biggest application of Bitcoin is to save the money that you can't spend today in Bitcoin. Those who look silly and buy a little bit every month are the ones who use Bitcoin correctly, and they have all received rich returns.

What will happen to Bitcoin in the future?

Now, let's imagine the future. If Bitcoin really becomes a currency in the future, what should it look like? Let's start with the three currency functions of Bitcoin.

1. Pricing unit . When the volume of Bitcoin becomes large enough, its price fluctuation should become smaller. Therefore, Bitcoin has the potential to become a pricing unit in the future. However, we also need to note that this is just our good wishes. No one knows whether Bitcoin can truly achieve price stability. In other words, in this regard, Bitcoin will still be a complete failure in the future, at least for a long time.
2. Exchange medium . In the future, banking and third-party payment technologies will advance by leaps and bounds. With the help of banks and third-party payments, legal tender will not only be able to realize online transactions, but also will be better than Bitcoin in terms of transaction speed and transaction scope. In the past two years, WeChat and Alipay have completely occupied the payment of Chinese people. In another 3-5 years, cross-border transfers will not be a problem through WeChat or Alipay. We transfer RMB and the other party receives USD. This is not difficult at all technically. After the internationalization of RMB, it will not be a problem politically. Of course, Bitcoin can also use third-party payment to increase transaction speed. But in any case, Bitcoin cannot realize offline transactions like legal tender. Therefore, in this regard, Bitcoin will be completely defeated in the future, and this day will not be too long.
3. Value storage . The first two aspects will fail completely. If Bitcoin wants to occupy a place in the currency field, this third aspect must be guaranteed. And it is precisely in this aspect that legal currency cannot compete with Bitcoin, because as long as it is legal currency, there will be additional issuance.

Therefore, any future upgrade or development of Bitcoin needs to ensure its value storage function. If the value storage function of Bitcoin is shaken, Bitcoin has no need to exist, because it will not be able to compete with legal tender in the other two aspects. If value storage is not good, then we might as well use legal tender directly.

How to ensure the value storage function?

We know that gold has a very good value storage function because it can maintain and increase its value. On the other hand, legal tender has a very poor value storage function because it continues to depreciate. If Bitcoin wants to have a place in the future currency war, it should have the value preservation and appreciation function like gold. Next, let's analyze which properties can ensure the value preservation and appreciation of Bitcoin.

Scarcity

No matter how practical something is, if it is not scarce, it has no storage value. For example, air is a necessity for each of us, but it has no storage value because it is not scarce. The rigid total amount of Bitcoin is to maintain its scarcity.

The next question is, how can we ensure that the rigid total amount of Bitcoin will not be modified? This is not 100% guaranteed, because the rules of Bitcoin can be changed. Since hard forks can modify any rules of Bitcoin, they can also modify the total amount of Bitcoin. It is for this reason that many Bitcoin players oppose any form of hard forks, and this concern is also reasonable.

stability

For physical objects, if they are to be used for storing value, they must be very stable. This is one of the reasons why gold can store value, because it has stable physical and chemical properties. If gold is a radioactive element, or if gold is easy to rust, would you still store gold? The same is true for Bitcoin. It is best not to split into two chains, and at the same time ensure the security of the blockchain, otherwise, the value storage function of Bitcoin will be greatly reduced.

Credit

Compared with scarcity and stability, credit is a very abstract concept. However, the storage function of Bitcoin relies more on credit. The US dollar has credit because it is backed by the Federal Reserve. It is based on this credit that people believe that $1 stored today can be spent as $1 tomorrow. Gold also has credit because it is backed by natural laws. It is based on this credit that people believe that 1 gram of gold stored today will not deteriorate tomorrow and will be more valuable. People also have credit. There are some people to whom I can lend all my wealth. There are some people to whom I will not lend a dime. Why? It's still credit.

Many experts say that Bitcoin has no credibility, but they don't understand. Bitcoin also has credibility. It has decentralization, and is backed by diehard fans and miners. Bitcoin has a large group of diehard fans and miners. These people jointly support the Bitcoin network. This is real credibility and is easy to understand. Although there is no clear standard for measuring the degree of decentralization. However, we can still feel that Bitcoin has the highest degree of decentralization among all virtual currencies. The most typical example is that the founder of Bitcoin has disappeared. The storage value of coins that can be forked as soon as the founder shouts, such as ETH, will be discounted. The storage value of coins whose founders have not disappeared, such as LTC and ETH, will also be discounted. Those basically plagiarized copycat coins, such as LTC and Doge, will inevitably reduce their credibility due to plagiarism, so their storage value will be discounted. Those coins that have countless hard forks and have been issued, such as BTS, have a bad reputation, and their storage value will sooner or later return to zero. Those anonymous and completely opaque coins, such as Zcash, will also return to zero. Of course, I am not saying that you will definitely lose money if you speculate on these coins. However, in the long run, none of these currencies can outperform Bitcoin because the credit of Bitcoin is higher than the credit of all of them combined.

Why are the market capitalizations of altcoins, second-coins, and eighth-coins not high, even though they have stronger functions? Because they have no credit. To ensure scarcity and stability, the value storage must have credit, and credit is not established in one day. Gold has accumulated credit for thousands of years. Although it has completely lost its trading function today, its market capitalization is still high, and it will be even higher.

Is capacity expansion important?

It doesn't matter at all.

I have said more than once that whether the expansion problem is solved or not, as long as the value storage function of Bitcoin is not shaken, the price of Bitcoin will continue to rise. This is because Bitcoin needs to ensure scarcity and stability first, and maintain its credit. The convenience of transactions is not important, and no matter how it is upgraded, it cannot compete with third-party payment in terms of transactions.

It has been one and a half years since Gavin proposed the 20M block expansion plan last year. Has the expansion problem been truly solved? I don’t think so! Has Bitcoin increased? It has increased three times!

If you were fooled by the expansionists and sold your coins because Bitcoin did not solve the expansion problem, who should you blame? Of course, blame yourself! Look at those expansionists who are shouting the loudest, have they sold their Bitcoin? As far as I know, none of them have sold. This shows that they know very well that the expansion problem is not important, otherwise, why don’t they sell their coins if an important problem is not solved? So, don’t look at what others say, but look at what others do.

People who are good at solving problems know this truth: any solution will bring new problems. Therefore, the essence of solving problems is to solve old problems, and people can tolerate the new problems brought about. If the expansion does not bring new problems, no one will oppose the expansion. But the problem is that hard fork expansion not only brings new problems, but also very serious new problems. The biggest problem is the hard fork rules. If the fork rules are not clear, the scarcity of Bitcoin in the future will not be guaranteed. If Gavin can rashly implement a hard fork with just a few shouts, then he is threatening the credit of Bitcoin. Unlimited blocks will cause huge nodes. If only large companies run nodes in the future, the Bitcoin network will be easily attacked, which threatens the security of Bitcoin. In order to solve an unimportant problem, it is not worth the loss to shake the value storage function of Bitcoin.

Summarize

1. Is Bitcoin a currency? Bitcoin has three functions of a currency, but it has not been used frequently. Therefore, Bitcoin cannot be considered a currency at present.

2. Bitcoin has almost no applications, so why is it valuable? The biggest application of Bitcoin is to store value. In layman's terms, the biggest application of Bitcoin is to convert the money that cannot be spent today into Bitcoin and save it.

3. Why are the market capitalizations of altcoins, second-coins, and eighth-coins, which have stronger functions, not high? Because they have no credit.

4. Why is Bitcoin still rising when the capacity expansion issue is still unresolved? The capacity expansion issue is not important. Whether it is solved or not, as long as the value storage function of Bitcoin is not shaken, Bitcoin will still take off.

Finally, Bitcoin is not the only asset that can store value, and considering its huge volatility, it is not the best means of storing value. I hope that there will be a currency in the world that will no longer be issued and depreciated, and people's wealth will no longer be plundered by currency issuers. This vision drives me to use Bitcoin to store value, no matter how high or how low the price is, I will continue to do so. If you don't have the same vision in your heart, it's best not to touch Bitcoin, let alone fool others into touching Bitcoin.

Questions for consideration:

Is it an important question whether Segregated Witness can be activated?