Comparing bitcoin to other currencies

By November 3, 2014Bitcoin Business
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Now that you know how Bitcoin works, let's talk about how it compares with other forms of value. We'll start with the ones you're probably familiar with. We'll look at them in terms of the forms they take, whether they work well online, the authority that guarantees their value, and what your recourse is if spend it and then you want to take it back without getting lawyers involved. And we'll also look at the overall cost of use to you taking the risks into account. We'll start with Bitcoin. In form, it's a purely digital currency. It doesn't exist in any other place.

As such, it's completely online ready. As described earlier, it uses an online network rather than a central authority in order to oversee it. When you spend Bitcoin, it is absolutely spent. There is no way to get it back except to go to the courts and demand it back that way. Finally, the cost of use for Bitcoin is very low compared to other forms of value. Now let's look at cash. It's form is purely physical and as such it is not in any way online ready. The authority is whatever government backs the cash, whether it's the United States or Britain or anywhere else.

When you spend it, you have no recourse except, again, go to the courts and it's cost of use is actually very low. Moving on to checks, these are mostly physical, although that is moving around somewhat, in that you can now take pictures of checks and deposit them that way. As such, they're a little bit online-ready, but mostly they're a physical form. The authority comes from the bank that issues them, and you do have recourse by going to that bank. The cost of use is moderate, that is, you have to spend a certain amount in fees and overdraft protection and so forth in order to make the checking system work.

Then we come to credit cards. At this point, credit cards are mostly digital, and you can use them online quite well. The authority, once again, is the bank that issues them, and if you want to get your money back, you do still have recourse through the bank. The cost of use, however, is very high, because the bank is guaranteeing the value until the transaction closes, which can be weeks or months later. So, those are the common forms of money, but there are actually many other forms of value that people use everyday. First is the oldest form of money in the world, trading one valuable thing for another, or as it's properly called, barter.

Gold falls into this category because you have to physically exchange it for whatever it is you're getting. It's a purely physical form, much like cash, and as such, it is not in any way online ready. The only authority you have is physical proof. You can see the object and check to make sure that it is actually what you think it is, but there's no central authority that's going to guarantee its value. Once you've made the exchange, there is no recourse to you and the cost of use is actually very high. You have to bring the object to the other person and get that person's object into your hands.

Finally, we come to something called Scrip, which is a category that encompasses all forms of private tokens of value. For example, gift cards, Linden Dollars on Second Life, babysitting certificates, and so on. The form varies quite a bit and as such, it's not always online-ready, although it can be, for example, gift cards for online sites. The authority guaranteeing the value of the scrip is the company or organization that issued it. If there's any sort of dispute over the transaction, there's often some form of recourse through the company or organization, but it depends on that company or organization.

And the cost of use varies depending on the organization that issues the script. That covers most common forms of value. But there's one other kind we should discuss. After Bitcoin appeared, people tweaked the details in Satoshi Nakamoto's Bitcoin paper and created hundreds of other cryptocurrencies, only about a half dozen are widely traded at any given time. And here's some criteria for comparing them with Bitcoin. First, is their ease of use. Second, is the value of each coin, along with the number of coins in circulation.

When you multiply the two together, you get the market capitalization, which is the sign of how strong the coin is in the world. Third, are the technical details. For example, what kind of cryptography is protecting it, and what procedures are used to spend it or mine it? The real reason to compare all these things is to help decide which form of money is right for a particular purpose. You already do this when you decide whether to use cash or a credit card at the grocery store.

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