Year 2008. An unidentified person, nicknamed Satoshi Nakamoto, registers bitcoin.org and publishes a paper titled Bitcoin: A Peer-To-Peer Electronic Cash System. Claiming that electronic transactions can work without relying on trust in a centralised party.
In January 2009, Nakamoto releases the bitcoin network, mines the very first block, and embeds a message for all users to come, before disappearing from public knowledge for good:
Yes, we will not find a solution to political problems in cryptography, but we can win a major battle in the arms race and gain a new territory of freedom.
On currencies
Since the early ages of humanity, people have loved to trade. This interest in trading fostered specialisation, cultural exchange, and communication between populations. Soon it was found that a general medium of exchange — what we call a currency — made trade far more feasible. This idea has been applied in many societies and in many creative forms. Like sea shells, cows, cigarettes, and noodle packs.
When an item is established as the standard medium of exchange, everybody wants it. This is the power of a currency. It’s not that the item has intrinsic value or practical use — it’s that it has the power to convince everyone that it has value. You may think of it as a collective delusion. And it kinda is. But it’s a very powerful one.
Same thing happens with present currencies. Euros and dollars have no real intrinsic value. They have value because people think they have value. I want to possess dollars because I’m confident everyone will accept something actually valuable in exchange for them. And while each one of us feels the same way, collectively we contribute to the acceptance, usage, and value of that currency.
But that a currency is well established does not mean it will last forever. When a currency can no longer fulfil its role, new alternatives will always be on the table.
The gold standard
Through most of history, gold has been the standard currency between societies. Every other currency was gauged in gold. The British pound had value because it could be exchanged for gold, not by itself. And because the empire had a lot of gold, they could promise reliable interchange between pounds and gold. They couldn’t fool foreign investors with passionate promises of future wealth, or print more pounds to inflate their apparent riches. They had to prove their value with gold.
Gold remained the international measure of wealth until the twentieth century, when almost the entire planet cut the link between their currencies and gold.
Nowadays, some people wholeheartedly miss the gold standard.
Some economists argue that the lack of an objective, non-manipulable metric of wealth is leading the worldwide economy into an ever-growing debt trap. Survivalists loved gold too, because it held the promise of a stable currency in a governmental vacuum — and prevented out-of-hand money printing, the kind that triggers disasters like Zimbabwe’s hyperinflation.
Others argue the gold standard wouldn’t save us from today’s problems. Gold coins are susceptible to scams, have little intrinsic value in modern society, and there might not be enough of it to sustain the world’s economy. Some survivalists even point out that it lacks nutritional value, and that in a real collapse, gold should be far down the list of things to stuff in the bag before fleeing into the wilds.
So you might be wondering: is some new shiny token going to become the gold of our era?
Over the past couple of years, we’ve witnessed an outrageously sharp increase in cryptocurrency prices, especially Bitcoin’s. This has sparked discussion on whether it’s a bubble and what its real value is.
Unlike stocks, Bitcoin cannot provide returns. Not because it’s broken — because it was never intended to produce profit. It was intended to become a currency. And no currency produces profit by itself.
So the only value Bitcoin has to offer is its usage as a currency. To assess whether it’s overvalued, we need to reckon its feasibility of actually becoming one.
Can Bitcoin be a currency?
A currency needs three things: it has to work as a medium of exchange, it needs to store value, and it needs to serve as a unit of account.
Medium of exchange
Have you ever tried to buy something with Bitcoin? Would you accept payment in Bitcoin? These are the questions that matter.
It will be a medium of exchange when it proves useful for that purpose — when it’s actually used as one. Bitcoin does have a great advantage over physical currencies: because of its digital nature, it can be split into infinitely tiny pieces. You can always add another zero to a string of numbers. This sounds trivial, but it’s a real logistic constraint for physical currencies.
Bitcoin is sometimes used to buy and sell goods. It’s used as an alternative way to convert currencies, avoiding the high fees big banks charge on exchange. It’s also used for transactions requiring secrecy — which is great news for anarchists.
So yes, Bitcoin could be useful as a medium of exchange.
Storing value
This was meant to be the flagship of the Bitcoin movement. This is where a lot of defenders are putting their hats.
When greedy governments become reckless, they print money. A lot of money. Printing money devalues the currency, leading to artificial inflation — which can spiral into hyperinflation. This jeopardises savings, erodes confidence, and people stop trusting their money. If you don’t know what your money will be worth tomorrow, you’re better off spending it on durable goods: houses, land, livestock, or whatever holds value.
The technology beneath Bitcoin puts a cap on how many can exist and be created. This simple characteristic makes it hard for governments to engage in self-destructive money printing. In other words, it could do what the gold standard used to do. A modern form of gold standard.
Sounds great, right?
The problem is that printing money isn’t the only way to destabilise a currency. Volatility does it too.
Bitcoin’s price volatility is much greater than that of any fiat currency. And it changes drastically over time — even during periods of apparent calm, you can’t be confident the price won’t start dancing wildly again. Saving money in Bitcoin is extremely risky.
Some argue that huge fluctuations are normal for a young currency with no banking support and no public understanding. Maybe the volatility will dilute over time. Maybe it won’t.
But volatility erodes confidence. Price stability carries safety. Nobody will save their money in a currency that doesn’t feel safe. This alone can prevent Bitcoin from becoming a store of value.
Unit of account
How many bitcoins for a pizza? How many bitcoins is an hour of your time worth? What’s the minimum amount of Bitcoin you’d accept as your salary?
As long as people can’t answer these questions without converting to dollars, Bitcoin will not be a unit of account.
The value of Bitcoin is always discussed in terms of dollars. So dollars are the unit of account. Not Bitcoin.
This may change someday. But nobody, in any region on Earth, uses Bitcoin as their unit of account today. They always need a local or global currency to know what a Bitcoin is worth. Maybe because people aren’t using it in their everyday lives. Maybe because of the price instability. Either way, Bitcoin is not being used as a unit of account, and it doesn’t look like it will be any time soon.
It’s also true that decentralised blockchain technology has huge potential and people want to use it. Cryptocurrencies have value in that the technology beneath them is genuinely innovative. The relationship to users is unique — a hybrid of the anonymity of cash, the ease of credit cards, and the security of a vault. But to become mainstream, these currencies need their applications to become easier over time. Allowing the average person to use them while feeling safe.