Bitcoin is a disruptive technology, and since time immemorial disruptive technologies have challenged our existing theories and demanded improvement. I'm not going to beat around the bush trying to make Bitcoin conform to our existing schemas. We need to rethink what makes types of money that particular type; not look into why Bitcoin can function as a currency - that is already well understood. I'll outline what I think are the important constituents of money that help differentiate them today. We'll then look into how Bitcoin fits in, hopefully in such a way that convinces you Bitcoin is truly novel.
Broadly, the three well understood forms of money are as follows: fiat money, commodity money (CM), and commodity-backed money (CBM). People will often separate the former with the latter two based on the notion of 'intrinsic value'. While we can agree that all three have value, we also know that the value of fiat money is derived from legislation: not an intrinsic property.
While this categorisation schema works for the above, I believe there is a more pertinent distinction to be made: that of non-monetary use-value; i.e. the money type in question has some primary purpose other than to simply exchange value between parties. The primary use of fiat money is to exchange value, we can therefore see that not only does fiat not have any non-monetary use-value, but that the use-value of fiat money is fundamentally bound to the exchange-value. On the other hand, we see that CM and CBM derive their use value not just from exchange, but also from the intrinsic properties of the commodity itself. Therefore we can categorise these three forms of money as before, but with the determinant being non-monetary use-value.
The second property I'd like to introduce is the concept of 'deferred value', and 'direct value'. Ultimately you can think of these as 'an IOU', or 'not an IOU' respectively.
Deferred value is seen in both commodity-backed money, and fiat money. Both are not so much valuable because of what they are, but because of what they entitle the user to. This is easy to see in the case of commodity-backed money, such as a gold certificate, as it is redeemable for a commodity (in this case, gold). However, in the case of fiat money, it is not directly redeemable for any particular commodity, but is legislated that it has value. Put in another way: fiat money entitles the user to some value. We should consider that if the legislatory environment surrounding either of the above were to collapse, they would respectively become useless. Commodity money can never truly reach zero value, but both CBM and fiat can, and so participating in such systems is like passing a hot potato; it's okay as long as you're not the one to get burnt. This is part of the nature of deferred value.
On the other hand, direct value implies that the received value is intrinsically tied to the received object. In the case of commodity money - say, rice - it is trivial to see that the value of rice (that you can eat it) is bestowed to the recipient immediately upon receipt.
By viewing the property of non-monetary use-value in light of deferred or direct value, we can see that while a gold certificate may have no particular non-monetary uses in and of itself, by acting as a method of deferred value it can inherit non-monetary use value from the commodity it is tied to.
As a visual summary, here is what we've talked about so far:
Deferred Value | Direct Value |
--------------------------------------------
commodity-backed | Commodity | Has non-monetary
Money | Money | use value
--------------------------------------------
Fiat Money, | | No non-monetary
Generic IOUs (e.g.| | use value
paypal-us-dollars)| |
Enter Bitcoin: the rule breaker, the status quo usurper. You might have noticed there is one particular combination of the above properties that has not been covered by traditional monetary systems. It's tempting to fill in the blank with Bitcoin; but we should remember that Bitcoin is merely an example of this missing puzzle piece, just as the US Dollar is just an example of fiat currency.
Definition: Factum Money
A stand-alone money system in which each unit, by its intrinsic properties alone, necessarily holds a non-zero value.
Rational:
Factum loosely translates from latin as 'done'; a play on words, as fiat loosely translates as 'let it be so'.
Factum also lends itself to 'fact based currency': because of each individuals' knowledge of the system, it is able to be used to exchange value; an appropriate description.
To gain an intuitive understanding of what this really means, let us diverge from the topic for a moment to discuss aliens. (Bear with me!) It's an assumed property of the universe that no matter where you are spatiotemporally the number pi will be constant. You can express this in various ways; but the simplest is that the ratio between the radius and circumference of a perfect circle is always constant. I suggest that Factum Money has a similar property: that regardless of position in space and time, society, culture, species, or any other physical differences, true Factum Money is able to transfer value. Doubtless each instance of factum money can have local environmental factors that prohibit its use; Bitcoin is known to lack quantum computing resistance and will fail if SHA256 is broken, just as Litecoin relies on Scrypt. However, due to the particular conditions of today, Bitcoin is able to transfer value, and holds the mantle of 'Factum Money'.
Filling in the blank, we now we have a table that looks like this:
Deferred Value | Direct Value |
--------------------------------------------
commodity-backed | Commodity | Has non-monetary
Money | Money | use value
---------------------------------------------
Fiat Money | Factum Money | No non-monetary
Generic IOUs (e.g. | e.g. Bitcoin | use value
paypal-us-dollars) | |
There's a great deal left to explore within this idea; of particular interest (which I'll explore in a follow up post) is what this actually means for Bitcoiners, and how we can predict and take advantage of this model. Cryptocurrency has many facets that have so far only been theoretically explored, in particular perfect money laundering, and distributed exchanges. I'll largely be exploring distributed exchanges in my next post.
I think I've changed my mind about Bitcoin as money. Particularly: it's a fiat currency ( money is just fiat in disguise), and I don't think it's sound money anymore. Just because it doesn't have government backing doesn't mean that it isn't fiat.
The reason for the change-of-mind is that I've started reading Theory of Money and Credit by Mises (TMC). I don't think Mises would be in favor of Bitcoin; how does one answer what is the origin of Bitcoin's value? -- I don't think there's a substantive answer.
Related discussion: https://discuss.criticalfallibilism.com/t/crypto-currency-fraud/128/18 (this post and on).
I am planning on writing a post about this soon (after I finish and understand TMC).
Elliot criticized this post for not giving proper attribution:
I started reading TMC entirely because Elliot referenced it in the original 'related discussion' link. Elliot's original post:
Particularly: was the bit to convince me that it was worth reading TMC. The idea that Bitcoin (or anything) trying to be something other than commodity money was bad: I got that from Elliot. I was especially interested in reading TMC because I first learnt about Mises through articles and discussion around Bitcoin-as-money (prior to writing n/2002) and Elliot's comment implied there was a conflict between Mises's ideas and the reasons I thought Bitcoin was sound money (I now agree there is a conflict there). I thought (and, IMO, many Bitcoiners did and still do think) that Mises would have liked Bitcoin -- I was convinced otherwise by the first ~7 chapters of TMC which seem pretty cut-and-dry WRT the important qualities of the origin of the value of a money.
Additionally wrt other unattributed ideas: re-reading the original factum money post; most of the foundational ideas (like non-monetary use-value) seem to be lifted from TMC, or at least they're descendants of ideas in TMC and elsewhere too (IDK enough about the history of econ ideas to know what they're descendants of, exactly). And, ofc, I was way less rigorous with them than Mises is in TMC.
There's also at least one thing I said that Mises refuted in TMC -- ; I haven't closely re-read OP to know if there are more. That mistake is a key point behind my argument in n/2002 that Bitcoin isn't fiat, which is the excuse to invent . I now think the entire bottom row of the table in n/2002 is all fiat: