How I Am Learning To Use Bitcoin like Currency
(And stop worrying about the prices)
When I first used bitcoin to pay for an item, not just trading it for cash, I had to think quite a bit about whether spending it is the smart/wise thing to do. I never had to consider this when spending cash because a dollar will always remain a dollar (so to speak) and it won’t suddenly be worth more.
Meanwhile, if I spend the bitcoin today, I feel that I might be losing out or missing out on something because the price of bitcoin might very well go up (although it could also go down and it has), and I would feel like an idiot for spending it.
However, the dollar in my pocket has the exact problem but in reverse. If I don’t spend it today and hold onto it instead, the value of the dollar would definitely have gone down, which means I need to spend more dollars to buy the same thing.
Therefore, the smart thing would be to not spend the bitcoin and be in a hurry to convert my dollars to something else that hopefully would be able to retain its value in the future. This is where investing comes into the picture.
After giving this a lot of thought, I’ve came to the following conclusions:
We’ve been trained to spend cash but not money.
The price of something used to be tied to the value of the item but that is no longer the case.
We think twice, maybe thrice, when spending money, but not when we spend cash.
As a consumeristic society where economical growth is based on consumerism, not necessarily productivity, we are where we are because of this concept.
Try denominating things in bitcoin the next time you make a meaningful purchase.
The following are some of my thought processes on how I arrived at the above. If that is not of interest, then feel free to stop here :)
The Difference between Currency and Money
I’d always thought that currency and money are interchangeable, but they’re actually not. The biggest difference between the two, as explained in this YouTube video (3:07 to 6:31), is that money has all the properties of currency (fungible, durable, medium of exchange, portable, a unit of account ) and most importantly, a store of value.
By this definition alone, I can confidently say that currency is not money.
Note: in some cases I may use “cash” instead of “currency”. Sorry if this can be a bit confusing. To me, both of these are pretty much interchangeable.
What made things confusing is that cash used to be like money. That was when the world was still on the gold standard. The piece of paper known as a dollar bill could be redeemed for the same value in gold. This gave cash validation as a store of value.
At that time, having 5 dollars is just as good as having 5 gold coins in your hand. It just feels lighter in your pocket but in your heart and mind, it carries the same weight.
Getting off the Gold Standard
Ideally, you would have the same amount of cash as you have gold coins in the vault. If the vault has 5 million gold coins, you only print 5 million dollars. But what if you want to spend more than what you have in gold? It’s easy to print more cash, but it’s not as easy to dig out more gold. What happens then?
Back in Roman times, the Romans also faced a similar problem. The Roman Empire needed to spend more than what it had, so it did the “smart” thing, which was to dilute the amount of silver in each coin, basically stretching the supply of silver further.
It’s not difficult to imagine what happened. The Roman currency, the denarius, was worth less and less to the point it became practically worthless. Now you know how inflation came about.
The word “inflate” literally means making something bigger than what it is. It’s not a coincidence that the act of inflating something, like a balloon or a life raft, involves putting a lot of air into it. Air is a kind of substance but it is also nothing at the same time.
When the world got off the gold standard, meaning you couldn’t use the dollar to redeem for gold anymore, cash ceased to be money because it was no longer storing value. Instead, it was backed by the might of the country issuing the currency, which is where we’re at today.
What Inflation Actually Means
Since currency is now backed by the might of the country, a tangible way to measure the might of a country is through GDP, as we do nowadays. This indirectly translates to income for the country. The amount of currency in circulation should be on par with what’s coming in with taxes and revenue for the country, give or take…. 2%. :)
However, things don’t always work out as planned and inflation can be much higher than 2% as we all know, regardless of what the official rates say.
Here are some examples of the inflation rate in countries, as provided by tradingeconomics.com.
The chart below shows the 10-year inflation for New Zealand:
Next is the same chart for the US:
Then comes Australia, which is very similar to New Zealand’s:
And finally, the UK chart looks the scariest as their inflation rate almost topped 11% at one point before heading down to where it is now at 6.7%.
When countries need to spend more than what they can bring in, they have two choices: sell bonds to raise capital (which would be the economically logical thing to do) or issue more currency, basically injecting cash from thin air.
That was what happened during Covid-19, when almost every country was handing out some kind of subsidy in one way or another to its citizens. Did that money come from each country’s rainy-day savings? I doubt it.
Issuing Bonds vs Quantitative Easing a.k.a. printing money
Bond issuance is probably the better way to raise money compared to quantitative easing as it’s still within the total circulation supply in some ways. This is because someone needs to go get some cash somewhere to buy those bonds.
Quantitative easing, on the other hand, is literally printing currency from thin air. This just flat-out increases the supply of currency in circulation! Too much currency chasing for the same amount of things = prices go up.
Think of what happens in an auction and expand that to everyday life.
Spending Cash instead of Money
All my life, I’ve been trained to spend currency and equate price as an indicator of an item’s value. If a toothbrush is sold for 3 dollars, that’s what the item is worth. If the same toothbrush is sold for 5 dollars three months later, can I say that the value of the item went up? Most of us would think not. It’s the same item after all. But I have to hand over 2 extra dollars to buy the same toothbrush, all because of inflation.
But what happens when I spend money? Instead of spending 3 dollars for a toothbrush, I spend 3 gold coins for the toothbrush. Here’s where it gets really interesting:
Should the toothbrush be denominated in cash or money?
Let’s say that the toothbrush is denominated in both: 3 dollars or 3 gold coins. You have a choice to pay with either. 3 months later, the toothbrush is now 5 dollars and 3 gold coins. Which one would you pay with?
Seeing that the toothbrush is essential, at least to most people, it would be better to use dollars to pay for it than gold coins because the dollar is worth less. You spend the one that is of lesser value.
If this is the case, then why should I spend the gold coins? I should be hoarding it and using cash wherever possible because it’s worth less than gold.
And I agree.
However, if we want to get a better idea of the value of something, it might be worth thinking of it in terms of gold, or in bitcoin, rather than what the price tag says.
You might argue: well, gold and bitcoin are also denominated in dollars, so what’s the difference?
It’s true that there isn’t a parallel standard where things are also denominated in something other than currency. If that were the case, I think we would not be where we are today.
It’s precisely that we don’t have one, which is why with bitcoin emerging, we now have a halfway alternative to having this parallel standard where it did not exist previously.
Comparing Bitcoin and Gold
Bitcoin is widely touted as digital gold. Whatever makes gold rare is also what makes bitcoin rare. The only difference, and this may be the key argument, is that gold is a tangible object but bitcoin isn’t.
If only tangible objects have value, then I guess that’s why we’re not charged for breathing air. But don’t forget, we harness the wind to generate energy, and we charge for the output. ;)
If you believe that gold is money, then you can think of bitcoin as something that allows for easy transference of ownership and value too.
What makes gold valuable is time and scarcity. If someone were to discover a new planet or land upon an asteroid where gold is in abundance, and assuming the discoverer did not hoard this knowledge but made it publicly known, and the means of extracting this gold supply were of reasonable value, the value of gold would plummet because the scarcity factor would be gone but it will still be of value because of its historical roots.
What gives bitcoin value is scarcity. If some quantum computer were able to crack the code that allows more than 21 million bitcoins to be generated, maybe to infinity, that’s when the value of bitcoin would go down faster than you can say “Ouch!” when you got splashed with boiling water.
In addition, there are also about 3 million bitcoins stuck in a black hole due to lost private keys. So there’s actually only 18 million bitcoin that could be in circulation. We’ve already mined 19.5 million so far.
Which of the two scenarios are more likely to happen? That’s up to you to decide :)
The Bitcoin Halving Event
There’s also a guaranteed deflationary mechanism built into the bitcoin program called the Halving. What this means is that only half the amount of bitcoin will be generated after 6 months.
Currently, there are 900 bitcoins generated daily. After the halving, there will only be 450 bitcoins generated daily.
Summary
The volatility of bitcoin is also what drives many to be afraid or discount its usefulness as a standard unit of account. I agree that it is also somewhat susceptible to market manipulation where gold is less so.
Yet in the early days of the gold rush, when gold was first discovered in great quantities, the volatility then could be equal to what we have with bitcoin now if not more.
Compare this with the same period for bitcoin:
While the spike in the bitcoin chart in 2021 looks very scary, gold also had a pretty big spike though not as high, in 2011.
In the end, whether you choose to believe in gold or bitcoin, I hope that you will at least reconsider the value of what you’re paying for and maybe start evaluating your purchases and spending in bitcoin terms. You might be pleasantly surprised!
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