The general idea is that Bitcoins Are ‘mined’… interesting term here… by solving an increasingly difficult mathematical formula -more difficult as more Bitcoins are ‘mined’ into existence; yet again intriguing- to a computer. Once established, the new Bitcoin is put into an electronic ‘wallet’. It’s then feasible to trade real goods or Fiat money for Bitcoins… and vice versa. Additionally, since there’s no central issuer of Bitcoins, it’s all highly distributed, hence resistant to being ‘managed’ by jurisdiction.
Naturally proponents of Bitcoin, Those who benefit from the development of Bitcoin, insist rather loudly that ‘for certain, Bitcoin is cash’… and not only that, but ‘it’s the best money ever, the cash of the future’, etc.. . The proponents of Fiat shout just as loudly that paper money is money… and most of us know that Fiat newspaper is not cash by any means, as it lacks the main attributes of genuine cash. The issue then is does Bitcoin even qualify as money… never mind that it being the cash of the near future, or the best money ever.
Compared to Fiat, Bitcoin does not Do too badly as a medium of exchange. Fiat is only accepted in the geographic domain of its own issuer. Dollars aren’t any good in Europe etc.. Bitcoin is accepted internationally. On the other hand, very few retailers currently accept payment in Bitcoin. Unless the approval grows geometrically, Fiat wins… although in the cost of exchange between nations.
The primary condition is a great deal Tougher; money has to be a stable store of value… now Bitcoins have gone out of a ‘value’ of $3.00 to about $1,000, in just a couple decades. That is about as far from being a ‘stable store of value’; since you can get! Truly, such gains are a perfect example of a speculative boom… like Dutch tulip bulbs, or junior mining companies, or even Nortel stocks. What have just discussed is crucial for your knowledge about bitcoin revolution, but there is much more to think about. They are by no means all there is to know as you will easily discover. It is difficult to determine all the different means by which they can serve you. Once your understanding is more complete, then you will feel more confident about the subject. So we will provide you with a few more important points to think about.
Naturally, Fiat fails as well; As an example, the US Dollar, the ‘primary’ Fiat, has dropped over 95% of its worth in a few decades… neither fiat nor Bitcoin qualify in the most important measure of cash; the capacity to store value and preserve value through time. Actual money, which is Gold, has shown the capacity to maintain value not just for centuries, but for eons. Neither Fiat nor Bitcoin has this critical capacity… both fail as cash.
Ultimately, we come to the next Attribute; that of being the numeraire. Now this is actually interesting, and we can see why both Bitcoin and Fiat fail as cash, by looking closely at the question of the ‘numeraire’. Numeraire refers to the usage of cash to not only store worth, but to at a way step, or compare worth. In Austrian economics, it’s considered impossible to actually measure value; after all, significance resides just in human comprehension… and how can anything else in understanding really be measured? But through the principle of Mengerian market action, that is interaction between bid and offer, market prices can be established… if just briefly… and this market price is expressed in terms of the numeraire, the most marketable good, that’s money.
So how do we establish the value of Fiat… ? Through the concept of ‘buying power’… which is, the worth of Fiat is determined by what it can be exchanged for… a so called ‘basket of goods’. But his clearly implies that Fiat has no value of its own, but instead appreciate flows from the value of the goods and services it may be exchanged for. Causality flows from the goods ‘bought’ into the Fiat number. After all, what difference is there between a 1 Dollar bill and a hundred Dollar bill, except that the amount printed on it… along with the buying power of the amount?
Gold, on the other hand, is not Quantified by what it deals for; rather, uniquely, it is measured by another physical standard; by its weight, or mass. A gram of Gold is a gram of gold, and an ounce of Gold is an ounce of Gold… no matter what amount is engraved on its surface, ‘face value’ or otherwise. Causality is the opposite to that of Fiat; Gold is measured by weight, an intrinsic quality… not by purchasing power. Now, have you really any idea of the value of an oz of Dollars? No such thing. Fiat is just ‘quantified’ with an ephemeral quantity… the amount printed on it, the ‘face value’.
Bitcoin is farther away from being The numeraire; not only can it be simply a number, much as Fiat… but its value is measured in Fiat! Even if Bitcoin becomes internationally accepted as a medium of trade, and even though it succeeds to replace the Dollar as the accepted ‘numeraire’, it can never possess an intrinsic measure like Gold has. Gold is unique in being measured by a real, unchanging physical quantity. Gold is unique in preserving worth for thousands of years. Nothing else in touch of humanity has this unique blend of attributes.