So is Bitcoin Money or not ?

October 21, 2019

参禅之初,看山是山,看水是水; 禅有悟时,看山不是山,看水不是水; 禅中彻悟,看山仍然山,看水仍然是水。

This is a Chinese philosophy that describes the progress of people’s understanding to a specific matter. At the beginning, you see mountain as mountain and you see water as water; after more considerations, you started to see mountain as no mountain and water as no water; at the end of the day, going through more in your life, you finally find that mountain is still mountain and water is still water.

I know it sounds boring to death but this is exactly what I have been through on the matter of whether Bitcoin is money or not.

Bitcoin is Money

Bitcoin was born to be addressed as an “Electronic Peer to Peer Cash System”, which means it is a digital format cash system that needs no trusted 3rd part for making transactions.

After a while, people started to use more fancy words on it, saying it’s a super-sovereignty money that is NOT controlled by any country’s central banks or treasury departments.

Cypher punks get super pumped for it and started their evangelism since then.

Bitcoin is Not Money

However, being money is not that easy.

Let’s first imagine a currency that is used in a single specific market, something like the Starbucks gift card credits, and think about this: what’s gonna happen if the people owns gift card credits knows it has a limited supply.

The answer is they will not spend their credits today to buy coffee anymore, because they know tomorrow they can buy more coffee with the same amount of credits.

And when this happens, Starbuck’s revenue goes down due to the decreased sales volume, and eventually get bankrupted, which means people lose jobs and everyone has to live a miserable life.

This is how a deflated money can destroy a small economy in a single market, and this can also happens to the whole global economy when the most generally used currency - money - has a similar deflated monetary policy.

At the root of it, the supply of money needs to be adjusted according to the growth of GDP of an economy. If a currency only has a fixed supply curve, just like Bitcoin does, it will has no chance to be money at all.

Bitcoin is Still Money

However, money creation process is not that easy.

Maybe you have heard of Money Multiplier Effect. Basically when a commercial bank get $100 deposits, it will lend $80 out (assuming the law sets a 20% reserve rate), and this $80 will be deposited into the bank gain and again $64 will be lended out. Just like this, if you do the math, you will see that $500 will be “created” out of $100 initial deposits.

The point is: not only central bank prints money, so does the commercial banks or other kinds of private sectors that has similar functions (sometimes referred as Shadow Banks), such as private fund and lending companies.

So what could happen to Bitcoin in the future is:

  • Block rewards get too low to support all the needed hash rate for security after 3 or 4 halving;
  • Transaction cost gets higher to supplement the miner compensation that was offered by the block rewards;
  • More private “banks” pump out to provide off-chain transactions services with a much cheaper price or even free;
  • These banks draws Bitcoin deposits and create Bitcoin based money like all the commercial banks do today
  • There will be no central banks to regulate the reserve rate, but these banks will compete with each other and limited by each other; cause when they are broken they know that no body can save them
  • In this way, the supply of Bitcoin money is adapted to the market demands, which is aligned with the economy growth

At the end of the day, there will be a credit based money with real BTC as reserves, but still, people will call it Bitcoin.

So that’s why Bitcoin is still money.