Past and future of money and currencies

Luca BertagnolioE: luca@berta.com

T: @lucaberta

Bitcoin Meetup Geneva - 2014-11-19

Money or currency

● I've searched around and there seems to be quite a lot of confusion on the actual meaning of these two words

● In a lot of cases they are considered to be synonym

● Let's consider them synonyms for now

The 3 main functions of a currency

● Every currency has 3 main functions:

1.Medium of exchange

2.Unit of account

3.Store of value

● No currency is perfect on all 3 qualities, each one has tradeoffs

The 4 types of currencies

● Currencies can be categorized by:– Being commodity based OR fiat

– Being issued privately OR by a government

Commodity based

Fiat

Privately issued

IOUs Bitcoin

Government issued

Gold standard notes

Most “modern” currencies

Medium of exchange

● Is a more efficient way to exchange products and services compared to barter

● It is an intermediary between parties in a trade● A good medium of exchange should satisfy

some specific qualities to be mutually accepted

Qualities of a medium of exchange

● Durability: metals/gems vs grain/tobacco● Transportability: paper vs metals● Divisibility: metals vs cattle/grains● Non-counterfaitability: paper vs gold● Fungibility: shells vs coins vs bullion vs gems

Primitive mediums of exchange

Unit of account

● A standard measurement of the value of goods● Allows for comparison of goods● Preferably a stable unit of measure, but if an

inflationary currency is used, over time the value will change

● Can be the same as the medium of exchange, but there are cases in which prices are set in one currency, and settled with another one

Store of value

● A way to save wealth today, and retrieve it in the future

● Supply and demand are the drivers of the value● Not only typical of currencies, but of assets in general● Examples of store of values are:

– Gold, silver, diamonds, art

– Real estate

– Reserve currencies, stocks, bonds

The case of the stones of Rai (1/2)

● In the island of Yap in Micronesia, large circular stones have been used as money

● Since these are largeand heavy, and thus failon the transportabilityaspect, how could theybe used as money?

The case of the stones of Rai (2/2)

● The stones did not need to be moved, but were rather used as “tokens” during transactions

● If a stone was to be transferred to someone else, all that was needed was recording this fact into a “public ledger” which was shared verbally between all the participants in this market

● Thus the stones were effectively a store of value, and so would qualify as money due to the network effect

● This is precisely the reason why Bitcoin can be considered money too, since the block chain is a public ledger

Why does Bitcoin have value?

● Main reasons:– It's based on a trusted public ledger

– It does not suffer from debasing like fiat currencies

– Supply is fixed and slowly increasing

– Demand is growing rapidly

● There is a powerful network effect and this creates a market which goes beyond borders, for the very first time, thanks to the Internet

Money or currency, take two

● My view is that the real difference between currency and money lies in the store of value

● Most modern fiat currencies would not qualify as money, since they are a terrible store of value given how the rate of inflation and money printing is affecting the supply

Is Bitcoin currency or money?

● Bitcoin is a private currency, but is not backed by any physical asset, so it is fiat in nature

● But since it is not coined by a government, and its supply is limited to 21 million BTCs, it can be a solid long term store of value unlike common fiat currencies

● In my view, this qualifies Bitcoin as money

Risks of Bitcoin as money

● Bitcoin is very recent, while gold has been around for thousands of years

● In case of network issues, no new transactions can be made, but the current blocks remain valid

● The Bitcoin network could be infiltrated and disturbed by those who don't like to see it succeed, and this would drive the value down

● The worst case would be an attack from a crypto standpoint, but the Bitcoin code is always being studied to improve it and avoid such issues

Sources of information

● A good amount of information comes from the University of Nicosia free MOOC on Digital Currencies, Lesson 1 “(Brief) History of money”

http://digitalcurrency.unic.ac.cy/free-introductory-mooc

● All images come from Wikipedia and are licensed under Public domain via Wikimedia Commons

https://commons.wikimedia.org/wiki/Main_Page