If Seashells were Money, Why not Bitcoin?

If seashells were money at one time,* why not Bitcoin? One of the earliest forms of money was seashells; however, gold and silver eventually became the preferred form of money because of their relative scarcity, divisibility, durability, portability, fungibility and then acceptability. The bottom line is that if enough people recognize it as money and accept it as such, who’s to say it isn’t money?

Let’s consider Bitcoin. It’s widely accepted for payment of goods. It’s available for purchase around the world, from the United States to Germany to Argentina to China, and even El Salvador. It’s easily divisible. It’s fungible, easily transported at a low cost, and stored in relative safety. It’s relatively rare. While only 21 million will ever be made, Bitcoin is divisible to eight decimal places. That means there are 2.1 quadrillion pieces, or Satoshis (the name of the smallest unit). In my opinion, Bitcoin will eventually be quoted in Satoshis, not per Bitcoin, because it will go way up in price relative to all the fiat currencies of the world in which they are quoted.

Between the limited supply and the number of Bitcoins already lost, Bitcoin is inherently deflationary. And if people expect the value of Bitcoin to stay the same or go up relative to the fiat currencies of the world, they’ll hoard them rather than spend them. Thus, it seems unlikely to me that much business will be conducted with Bitcoin, except in cases of emergencies. It’ll be treated as digital gold.

In the short run, while the fiat currencies of the world still have some value, I think we’ll see Gresham’s Law come into effect; i.e., bad money drives out good money. In other words, fiat currencies will be used first whenever possible…just to get rid of them while they still hold some value and because they are legal tender; i.e., required by law to be accepted as payment for all debts, public and private. In the long run, either Bitcoin, or some other crypto-asset will replace the fiat currencies because they are more stable; i.e., they can’t be printed into oblivion like a Central Bank Digital Currency (CBDC).

What about the cost to produce Bitcoins? Because the quantity that Bitcoin miners receive is cut in half every 4 years, only the most efficient miners will survive. They will survive by cutting their costs and providing ever better service. That’s the nice thing about the profit motive (which governments don’t have).

What about volatility? Obviously, the price of Bitcoin is stated relative to the fiat currencies of the world. In my opinion, the Bitcoin price will become much more volatile in the short run, as more people adopt it to flee the fiat currencies, but in the long run, when there are virtually no more Bitcoin to be mined, and the fiat currencies are no longer used, it will become a stable store of value.

One last thought about Bitcoin…I recently visited a nearby college campus and stopped a handful of students to ask them what they could tell me about Bitcoin. All but one of them responded, “Nothing.” I was amazed! The new money of the digital age and they didn’t know anything about it! On the other hand, they probably didn’t know that seashells were once used as money, either.

Robert F. Sennholz

*See page 10 of Age of Inflation, by Hans F. Sennholz for a brief history of money.

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