Economics
Two big things have happened in the cryptocurrency world recently. The first is that there are now two competing versions of bitcoin: bitcoin core and bitcoin classic. There is quite a lot of argument about which will become more popular. The second development is that the price of bitcoin — now known as bitcoin core — rose a lot in late 2015: This has raised the expectations of many cryptocurrency buffs that bitcoin will replace the fiat money printed by central banks.
But when I read these debates, I see a lot of misunderstanding. Whether people are talking about which version of bitcoin will prevail, or whether cryptocurrency in general will replace fiat currency, they keep making the same error.
That error is the assumption that long-term value is what makes a currency good. The truth is it’s almost the opposite.
Most people I meet — including tech people, many of whom are big bitcoin fans — haven’t had much contact with monetary economics. Many of them tend to assume that in order for a currency to be valuable, it has to be backed by some valuable commodity — gold, for example. Without backing, the folk theory goes, money is intrinsically worthless — just pieces of paper.
In this view, money is comparable to a stock certificate — a placeholder that marks ownership of something intrinsically valuable. It implicitly equates the word “money” with value.
But unlike gold or stocks or housing or other real assets, money’s primary value depends not on intrinsic value but on something else — liquidity.
“Liquidity” is a loose term. In general, it means your ability to quickly and easily trade something for other things. Houses are not very liquid, since it can take months to sell one. Stocks are more liquid. But money should be the most liquid […]
