The Four Stages of Bitcoin's Evolution as Money
Bitcoin is just a digital collectible but it can eventually become a unit of account.
Before money was invented, people used to barter goods between each other. The problem with the barter system is the problem of coincidence of wants. One person might have firewood to sell and another person has some fruits to sell. The fruit seller doesn’t need the firewood, so they now need to find a 3rd person who can buy firewood in exchange for something that the fruit seller wants.
Money stores value for future trade. Money itself doesn’t need any intrinsic value because the value is in the trust that other people will accept that form of money in return for goods and services that have consumption value. Historically, people have even used rice as money because rice is divisible and largely fungible but rice doesn’t last long. It’s not a durable form of money.
Something emerges as money because of its monetary properties. Money should be durable, portable, verifiable, fungible, divisible, scarce, should have established history, and be censorship resistant. Bitcoin has all these properties and that’s why it is slowly emerging as money.
Gold emerged as money because of all the properties mentioned about but in the digital age, it is not portable, verifiable, and divisible enough. Government-issued money has many of the above properties but it is not scarce which is the biggest problem for saving money. Scarcity is the most important function of anything that is going to emerge as money.
If money is not scarce and if someone else has the power to inflate it, it punishes the savers. It’s a hidden tax. They don’t take away your money, but they reduce the purchasing capacity of your money through inflation. If you want to learn about the effects of inflation on the economy and how it makes the rich richer and the poor poorer, please read the book Economics 101.
Bitcoin cannot go from nothing to the world’s primary form of money overnight. It takes time. Money is the foundation of human civilization and it is not recommended that it becomes money overnight. Anything that emerges as money goes through four different stages.
The first stage is that it is just a cute collectible. A pet rock. It’s nice, it is novel and it is scarce. Once enough people want it, there comes a valuation to it. This valuation makes it a long-term store of value which is the 2nd stage of money. An asset.
Real estate is an asset and a store of value for many people because it is scarce but it cannot become money because it is not fungible, not divisible, and not censorship-resistant.
Governments have taken away people’s land and houses many times. If it’s not your own government, there is a chance some other government can take it away. I hope this never happens but as they say, only the paranoid survive. There are many examples from the Middle East. Palestinian families have lost their land and houses to nearby countries that occupy their territory through force.
Right now Bitcoin has emerged from being a collectible to a long-term store of value. Because it fluctuates a lot in price and we are still in the price discovery stage of this asset, it has not become a medium of exchange. Medium of exchange is the 3rd stage of money.
Using Bitcoin as a legal tender, a medium of exchange for goods and services is not legal in many countries. And people do not want to use it as a payment system yet.
In the next stage of maturity, once Bitcoin price stabilizes and has very low volatility, and when countries recognize Bitcoin as a legal tender, maybe even back their currency with Bitcoin reserves, then it can become a medium of exchange.
The 4th stage is when Bitcoin becomes a unit of account.
You calculate the price of everything in Bitcoin terms. One Bitcoin is made of 100,000,000 satoshis (sats). So instead of saying that a house is worth a million dollars, you will say that a house is worth a million sats.
Right now dollars and other fiat currencies are the unit of account.
So that’s the 4 stages of money:
A collectible
A store of value
A medium of exchange
A unit of account.
Right now Bitcoin should be treated as a store of value. Something that will appreciate over time. If you buy Bitcoin for $50,000 and sell it for $100,000, you have to pay capital gains tax on the $50,000 profit that you made. It will take a very long time, maybe decades for Bitcoin to become money.
Governments have not banned Bitcoin because they understand it cannot be banned and if people are using Bitcoin as an asset, then they can tax the gains they make on Bitcoin.
Only when Bitcoin is used as a payment system that conflicts with the government’s currencies, then there be a chance that governments will want to ban it because Bitcoin becomes a threat to govt. issued currencies.
Right now, governments do not have a problem if you buy Bitcoin and keep it as an asset. If it was illegal, I wouldn’t be writing these lessons in the first place.
Art, Real estate, and antiques are also stores of value but they cannot become money because they lack the monetary properties. They do not have a global demand like Bitcoin. I believe that Bitcoin will give better returns than every other savings vehicle that there is, for the rest of time. It has already performed that way in the last 10 years.
Do not take payments in Bitcoin or pay other people in Bitcoin. Right now, you should use it only as a store of value.
According to Wikipedia, the total amount of wealth in the world is 454 Trillion dollars. Bitcoin right now is just 0.8 Trillion. That's 0.17% of the world's total wealth in Bitcoin. People put money in stocks, art, real estate, and other channels to "grow" their fiat money.
If Bitcoin stays decentralized and secure and proves to be an immutable asset and gives higher returns than any other asset class, then it will be obvious to anyone understanding this that more of the world's wealth will be stored in Bitcoin as time passes.
If 10% of the world's wealth is stored in Bitcoin, 1 Bitcoin will be worth $2.1 million. This might never happen, or it might, but in case it does, you shouldn't feel that you completely missed out on it.
No one who has ever invested money in Bitcoin has lost money as long as they were ready to wait for at least 4 years. Bitcoin moves up and down in 4-year cycles and we will learn more about that in future posts.