”In fact, because modern computing [1] allows prices to be quickly and effortlessly recalculated and redisplayed, and [2] allows e-transactions to be fast and cheap, we have many options for fast roundtrip conversions that drastically reduces money’s need to serve as a unit of account or even as a medium of exchange. This leaves only value-storage as a discriminator among money-types.”
The overall goal of the blog post was to finally dispel the contention that bitcoin cannot succeed due to its deflationary nature. Part of Sztorc’s argument rests on the idea that the Internet and bitcoin are changing the very definition of money.
Dismissing unit of account
If being a unit of account were to remain a requirement for money, then bitcoin would be in trouble. Nearly every business or individual who accepts bitcoin still prices their goods or services in terms of the local fiat currency, but this has not been an issue for the digital commodity. This is due to the fact that essentially all bitcoin wallets are able to display bitcoin balances and payment amounts denominated in popular fiat currencies. When sending a payment from one bitcoin wallet to another, many users enter the total value they wish to send priced in US dollars, euros, or some other fiat currency. Online retailers also have their prices change on a second-by-second basis in terms of bitcoin. In fact, a real-world version of this sort of price-adjusting system is also available for brick and mortar stores.
Dismissing medium of exchange
Although consumers are able to shop at many retailers with their bitcoin, most of these bitcoin-accepting outlets don’t actually hold any bitcoin. Services such as BitPay and Coinbase are used to instantly convert the bitcoin to fiat currency at the point of sale. Noted bitcoin critic Jeffrey Robinson likes to say that this means practically no businesses or individuals are actually accepting bitcoin for goods and services.
Of course, the key takeaway here is not whether or not the merchant decides to keep the bitcoin. The only part of the process that matters is a bitcoin holder is able to exchange the bitcoin for goods and services. As more assets become digitized over time, the costs associated with switching between those assets will continue to decline. In other words, consumers may be able to pay via a wide range of assets that can be converted into whatever the merchant wishes to receive.
Bitcoin as a store of value
Pztorc makes the case that bitcoin will become the preferred money because of its limited supply. This is due to the open-source nature of the technology behind bitcoin. As Pztorc points out:
”I hope it is now clear: if Bitcoin didn’t have a fixed money supply, it would be replaced by something which did. It would have happened with a single fork and a little publicity (rich BTC-owners could spread the following word “come with us on this hard fork at Date D, and your money will automatically be more valuable”). Since Satoshi knew that this would happen (and as non-equilibrium behavior doesn’t last long [by definition], and as hard forks endanger the digital-scarcity value-proposition / create double-spend opportunities), he built it the right way the first time.”
Pztorc also explains that a decreasing money supply would not work because “nothing of consequence occurs whatsoever” in such a system. If every holder of the money loses the same percentage value of the holdings on a yearly basis, then nothing has changed. Pztroc added, “If coins are destroyed randomly, risk of wealth-loss is introduced (pointlessly).”
Although bitcoin has performed well as a store of value since its creation, its short-term volatility is still an issue for many would-be adopters. Of course this volatility has become less noticeable over time. In fact, the digital commodity has proven to be a worthy contender to some fiat currencies in terms of price stability in 2015. Additionally, bitcoin also comes with other features, such as censorship resistance and a lack of counterparty risk, that are not found with digitized versions of fiat currencies.