Thanks in part to two stabilizing characteristics.

Image by Gerd Altmann from Pixabay

What is money?

Money is anything that many within a given society believe can be conveniently and safely used to store and transfer wealth with each other, today and in the future.

For a money to transfer wealth, it must store some positive amount of wealth. Or more specifically, many must believe that this money stores some positive amount wealth, both today and tomorrow, or why would they exchange goods and services for it?

Preferably, but not a requirement, is that this money stores about the same amount of wealth today and tomorrow; that its wealth storage capacity is relatively stable in the short term. This characteristic makes it a better money.

Was bitcoin a money when first launched on January 3, 2009? No, because at that time bitcoins had no value, they stored no wealth. And if bitcoins did not store any wealth, they could not be used to transfer wealth. Bitcoin, with its handful of users, was stuck in a circular zero-value loop.

Until May 21, 2009, when 10,000 bitcoins were exchanged for two Papa John pizzas. This private exchange established the first positive price of bitcoin, albeit an exceptionally low price. A milestone, but not that important as two individuals really do not make a market.

A more significant milestone was achieved when the first bitcoin exchange, Mt. Gox, began operation in July of 2010. As flawed as it eventually was, Mt. Gox for the first time established a bitcoin price based on the actual market supply and demand for bitcoin, even if the market was relatively small.

Then Silk Road happened.

Launched in February 2011 by Ross Ulbright, (also known as “Dread Pirate Roberts” from The Princess Bride…), Silk Road was an online market where users were able to anonymously sell and buy mostly illegal merchandise. While the usage of the Tor browser could hide one’s IP address, an anonymous as possible method of remote payment was desired, which at the time was bitcoin.

(Silk Road. https://en.wikipedia.org/wiki/Silk_Road_(marketplace)

While Silk Road was shut down by the FBI in October 2013, during its over two years of operation bitcoin served a useful purpose, the mostly anonymous and totally trustless transfer of wealth, establishing widespread market demand for bitcoin. Combined with its inherent limited supply, and to the surprise of many, bitcoin was now a financial asset with value.

During this two-year period, the price of bitcoin increased from $1 to over $150.

The bitcoin genie was out of the bottle. Now that many accepted that bitcoins stored wealth, they could be used to transfer wealth. And because bitcoins could reliably and efficiently transfer wealth, they had value. Yes, this is a circular argument, but nevertheless is valid. Bitcoin became a money.

This is the first stabilizing characteristic of bitcoin. True for any sound money.

The bitcoin network relies on mining for integrity, the greater the collective mining computer power, the greater the integrity of the network, meaning the safer it is to use bitcoin to store and transfer wealth as the amount of mining increased. The safer the network, the greater the trust people will have in the network.

When bitcoin had no value, no trust was needed, as there was nothing of value to lose. But as bitcoins acquired value, as people started to use them to store and transfer wealth, more trust was required, more mining was required.

Luckily, (or I would like to think as planned), the miners reward is proportional to the value of bitcoin. As the value of bitcoin increased, there was more incentive to mine, meaning that as the value of bitcoin increased, the greater the integrity of the network. Which led to an increase in the value of bitcoin, another circular argument.

This is the second stabilizing characteristic of bitcoin, one unique to cyber-currencies.

It also helps that since its initial launch the bitcoin network has performed flawlessly. There have been poorly designed exchanges, and no shortage of users losing their private keys, but the network itself has not lost or misappropriated any bitcoins. It has been mathematically perfect.

Bitcoin is not a particularly good payment system, but only the most ardent naysayers can continue to deny that bitcoin is not a money, an alternative to gold, Using bitcoin, wealth can be transferred remotely, securely and without the overhead of a trusted third party.

Want to learn more?

www.WTHisAnEconomy.com

Eric Johnson is a husband, father, engineer, pilot, surfer, investor and amateur astronomer who has read a lot of books on economics.