It should be easy to understand why Bitcoin is used as money


When I first introduce people to Bitcoin, I usually receive a blank stare in return and a comment such as, “But there’s no actual value to Bitcoin.” Anyone who understands Bitcoin even a little bit can understand how it has value as money. The hasty reaction to these types of comments might be to dismiss their understanding of money and currency as incorrect or ignorant, but in my own view, the problem is not so much that people don’t understand currency—it is that they fail to correctly apply their knowledge and understanding to anything new or innovative because it does not fit into what they are used to.

It is by no means rare for the media, i.e. television shows et al, to portray the idea of money and make it the center of a joke. Take the hit show The Office. In an episode entitled “The Job,” Dwight attempts to introduce an intra-office currency called “Schrute Bucks” (for those unfamiliar, Schrute is Dwight’s last name) that is given to workers as a reward for performing well. If they earn 1000 Schrute Bucks, they are entitled to an extra five minutes for lunch. When asked about the cash value for his new money, he says they are worth “one one-hundreth of a cent.”

Of course, not surprisingly, nobody takes Dwight and his Schrute Bucks seriously. It all comes to a head when Stanley confronts him. (Apologies for the poor quality of the video, this was the best I could find.)

Another example is taken from the episode “Wiener Barons” from The Ren & Stimpy Show. While on the search for jobs, Ren and Stimpy discover that they can “strike it rich in Canada” with “fortunes to be made in the wiener industry.” After a lot of hard work, setbacks, and perseverance harvesting, fishing, mining, and drilling for wieners, they eventually find themselves very comfortable living the good life from their wealth they had accumulated in wieners.

That is until the unthinkable happens:

(Jump to 8:52)

These clips wouldn’t be funny if people did not understand how currency and money worked. Money is “worth something” because people en masse assign value to it. In the example from The Office, no one other than Dwight believes there is any value in the Schrute Bucks, so they were worthless. In the Ren & Stimpy episode, the wieners held value until the new synthetic sausage made no one have much of a reason to demand them.

The loss of power and value of money can happen to any form of it. For years and years and across many cultures, gold has been used as universal money. This metal is beautiful and is used for decoration, but it also is valuable in various industries, including electronics. Let’s imagine that a new material is discovered that is better than gold in all aspects and its supply is plentiful. Suddenly, gold would lose its value. The price would drop through the floor.

Money, like anything else, follows the principles of supply and demand. All else equal, if more people demand a certain kind of money, the price increases, and vice versa.

One of the reasons why people are so quick to reject Bitcoin is that they mistakenly think that money such as gold and the US dollar have some kind of intrinsic value, but in reality that value only comes from the perception. People perceive that they can exchange their money for something else that they value. Once they no longer perceive that, they reject the currency and move onto something else.

So why did Bitcoin jump up so high in price relative to the dollar? People started to perceive that it had value, despite the value of Bitcoin coming from something very different than what we’ve seen before in money. Bitcoin provides a level of anonymity in transactions and allows those who partake to move away from the large banks of the institutionalized financial sector. If Bitcoin loses these and the other benefits that give the cryptocurrency its value, then there will be no reason for people to want it and its price (like the price of gold in the above example) will drop. As more people discover its usefulness, the price per Bitcoin will rise.

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I think some of the other reasons why people are afraid to adopt bitcoin is because of stories like Mt Gox and the market volatility.