past and future of money and currencies
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Presentation given to the Geneva Bitcoin meetup audience on 2014-11-19TRANSCRIPT
Past and future of money and currencies
Luca BertagnolioE: [email protected]
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
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