To start, let me be clear that I embrace a libertarian point of view on our current pecuniary structure and interventions assumed by our government and other agencies, which in most people’s view regardless of party, has resulted in aggravating business cycles and enormous inflation. Bitcoin and it’s functions have the immense influence to emancipate it’s users from municipal norms they disagree with. I will admit, the utilization of bitcoin as a payment makes it impossible for the state to audit in cases of tax evasion or money laundering, which is a bit freighting. Making bitcoin inherently threatening to society. Regulation of payments is necessary for the safety of the consumer and online merchants. Regardless of the difficulty the IRS will have resolving the inability to tax a decentralized currency, Bitcoin presents a foundational modernization of money. The ‘P2P network’ (Peer-to-peer) displays a broad diversification of specialized features, and because of it’s youth, has yet to see multiple waves of innovation.
So, is this in fact a currency? Peter Surda explains best,
In order to avoid the whole legal aspect and concentrate on the economic one, I propose my own definition of money substitutes: money substitutes are goods which have a persistent causal link to money in the narrower sense, and act as a (near) perfect substitute to it from an economic point of view.
Given that Bitcoin could be considered as a medium of exchange, it’s success depends on choice. Normally, liquidity is the definitive characteristic in a medium being chosen by consumers. However, Peter Surda created a table of other factors that influence the choice as well which is shown below.
Economic development reduces economic sacrifices that influence choice. Technical progress in payment guides a noteworthy decrease of transaction costs. Bitcoin has displayed numerous potential improvements that our financial system could utilize. But a generalized definition of a monetary preference by Hans-Hermann Hoppe perhaps fits best.
Driven by no more than narrow self-interest, man will always prefer a more general and, if possible, a universal medium of exchange to a less general or non-universal one.
Carl Menger once wrote that the sale ableness of a commodity, is affected by:
“Their durability, i.e, their suitableness for preservation.”
What we see is when consumers adopt a medium of exchange, it isn’t by motiveless choice. Since Bitcoin is as universal as it gets and can be as long-lasting or fragile as the owner wishes, it is difficult to visualize a system more durable. The repercussions of more efficient transaction costs, borderless transaction ability, and a person-to-person payment potential is an amplification of new business opportunities off and online. However, Bitcoin is not about low transaction fees, or freedom to trade throughout the world, it prevents an undemocratic financial system.
At this point in time, Bitcoin needs to stabilize, and become liquid as a result of consumer trust. Otherwise, what will replace it upon failure? Peter Surda explains,
This process would need to follow the same rules as other situations where one medium of exchange would replace another, in other words, provide a comparative advantage over Bitcoin sufficient enough to motivate people to switch. Either it would need to undercut Bitcoin on transaction costs, or it would have to out-compete its liquidity.
Multiple currencies allow for economic innovation, and adaptation within financial efficiency. In my opinion, it is unlikely that the transition into a digital economy will be overcome by our already standing fiat monetary system. Comparative advantage within our monetary selection is crucial to Bitcoin’s success. According to FederalReserve.Gov, our taxes supported a 826 million dollar budget to print new money in 2014. In an era where every penny counts, we need to embrace new innovation and develop it further to improve the way our financial system operates. Why not use Bitcoin as a conduit into the stronger, and more specialized U.S and world economy?