Why Bitcoin?

Bitcoin is the premiere asset on the Internet. Yes there are a lot of other Crypto (so called) currencies, which are not really currencies. But Bitcoin stands ahead of all of them.

There are several reasons for it, but the most important is 

“Perfection is Achieved Not When There Is Nothing More to Add, But 

When There Is Nothing Left to Take Away”

Bitcoin is the simplest blockchain, yet. It was created by only the basics required for it to function. The fact that over the last 14 years no absolute shortcomings have been discovered, makes it very compelling. Other cryptos have tried to standout by adding one or the other complexity (aka feature).

The second most important reason, is the 14 years that have passed. Anything else that tries to compete will need to last a number of years before the confidence and trust sets in. Its the same argument for Gold. Gold is the oldest surviving monetary asset in history. But Gold does not exist on the Internet. And Bitcoin is the oldest surviving monetary asset on the internet.

It will be important to understand What is Money, and the different functions of Money, before we proceed. FED at St Louis has a humorous article on functions and properties of money. Gold and Bitcoin are monetary assets. People tend to think that items that are useful are good assets, which is true, but its not true of monetary assets, actually the reverse is true. A number of properties tend to make an asset a good monetary asset, also shortened to money sometimes. They are as follows, and we will compare Bitcoin with Gold and currency.

1. Durability: Gold is very durable, but it can be stolen or lost. Bitcoin is durable, but the keys can be stolen and very easily lost. Currency depends on the whims of banks and country.
2. Portability: Bitcoins exist everywhere in the world, you just need the keys to access it where ever you are, at a fixed cost. Gold is very hard and expensive to move depending on quantity, and may be dangerous as well. Currency can be easy or hard to move depending on where you want to move it, within country its easy and cheap, abroad can be subject to laws taxes and commissions.
3. Divisibility: Gold is divisible down to an atom, but measurements have limits. Bitcoins are divisible to a single satoshi. Currency is divisible to whatever sub digits the banks keep track of generally to a hundredth of a unit. All are fairly divisible.
4. Uniformity: Gold can be reformed to loose any identification characteristics. Currency or Bitcoin both have identifying characteristics. Bitcoin transactions can be traced completely, which can be a problem. Currency notes can have the same problem to a limited extent due to being numbered. These problems are normally handled as Bonafide Acquisition rule. Currency notes generally get a better rule, as it is in the interest of the govt to support their currency. Bitcoin as such gets a negative interest in this.
5. Limited supply: Gold is being mined and refined at a rate of around less than 1.5% per annum (2500-3000Tons produced against 201000Tons total). Bitcoin is being produced at a rate of 1.7% (328500 produced against 19M existing). Bitcoin and gold are being generated at roughly equal rate. And Bitcoin will grow less faster than gold. Currency on the other hand tends to grow much faster as they want stability on the short term rather than the long term.
6. Acceptability: Currency is acceptable with the force of govt behind it. Gold has the history of thousands of years behind it. Bitcoin is the new kid on the block, but is the oldest asset on the internet. So acceptability is very low for Bitcoin at the moment. But as internet commerce grows money will tend to stay on the internet, and will require a storage mechanism there.

If you look at the properties above, nowhere it talks about usage in the industry. Actually if you think about it the value of monetary assets is totally arbitrary. A 500Rs note is as expensive to make as a 2000Rs note, but its value is 4 times, because that is what it is marked for. It has nothing to do with its intrinsic value. Gold might have more intrinsic value as jewelry, but its major value is because of its monetary properties not because it is shiny. Gold became the premiere asset because it was easy to recognize and test for and looked beautiful. Note beauty is one of the properties not the main property. The other two properties are more important for becoming a premiere asset, without those it would be nothing. Gold is not particularly rare, there are rarer metals which have failed as monetary metals, eg Platinum. Platinum looks good, but it is really hard to identify.

Silver is losing its monetary value as it is gaining industrial use. This all implies that usefulness (of a different type) or rarity is very important.

Now we have established a few things.

1. Bitcoin is the most likely to survive and flourish crypto asset on the internet.
2. Monetary assets don't need to have an other use and their value is arbitrary, depending on their need.
3. Bitcoin is better in some ways and worse in some ways compared to gold and currency in monetary properties. The only two properties at which it is weak is uniformity and acceptability, both of which are becoming better with time. And it is strongest in portability.

Now to talk about the need for a monetary asset of the Internet. Internet is becoming the place for commerce. It will slowly take over all commerce. All transactions are starting to happen over the internet via payment gateways like UPI. People are getting used to accessing their money over the internet. They are still in banks that have a physical presence, but slowly that is going to erode. Some people keep some money in internet apps like Paytm. Even Central banks are looking to introduce CBDC (Central Bank Digital Currencies). These will change the whole way people look at money. When this happens there will be no need to hold money in banks. And the money can be held with the Central bank directly. 

In the past, before the banking system, people used to hold money in physical assets like gold. But with the stability and safety of the banking system people started to hold their excesses in banks in savings accounts. This worked particularly well during the 80s and 90s when Gold was losing value in USA. This caused a whole lot of people to lose faith in Gold.

With CBDC we will have a situation where money can be held away from banks securely. The CBDC will not pay interest while sitting in users account. For that the user will have to lend it to somebody else to create more and pay interest. This is what is done traditionally by banks. But they have taken lately to gamble on the wall street or elsewhere. This will allow the less operationally expensive non-physical entities to provide this middle man task. There may even be apps which will allow debtors and creditors to talk to each other directly for a small fee.

Something like this has already been developing in the crypto world as DeFi (Decentralized Finance). This would be a natural for the CBDC. With people get directly aware of risks benefit calculation of the interest rates, they would be more likely to hold some of their money in digital assets. Now as people start to get used to keeping their money in the virtual world of CBDC, it becomes easier for them to move some of it into non-government digital assets. Bitcoin is likely to gain slowly but surely, as it becomes more and more stable over time. It will most likely gain the same standing on the internet, as gold has in the physical world. With the internet commerce completely dominating, it may even overtake gold as the premiere asset.

Note the above is not expected to happen in a couple of years. It will take atleast a decade and more likely 2 decades for Bitcoin to start acting like a Store of Value. In the present times it is more a Speculation vehicle, and acts like a 2nd rate stock. Till now it had been growing, and now it has achieved the peak where it has achieved as much mindshare it could. 

Anything lives and dies by its usefulness to the people. Bitcoin's current use is as a money transportation vehicle. In the properties section we saw that Bitcoin's best property is its portability. And that is its current best use. If you want to remit money to a country where Swift does not work or does not work well or is prohibited to work, then Bitcoin makes the transfers possible at a much cheaper costs. There is no other network that does it better than Bitcoin. This particular use will continue to become more important as world currencies get more and more unstable going forward, due to increasing hostilities between major countries.