Send this article to a friend:

November
08
2017

Clearing Up One Specific Confusion About Bitcoin
Charles Hugh Smith

Charles says that Bitcoin is a superior means of exchange than fiat for this one specific reason. Here’s why…

If bitcoin can be converted into fiat currencies at a lower transaction cost than the fiat-to-fiat conversions made by banks and credit card companies, it’s a superior means of exchange.

One of the most common comments I hear from bitcoin skeptics goes something like this: Bitcoin isn’t real money until I can buy a cup of coffee with it.

In other words, bitcoin fails the first of the two core tests of “money”: that it is a means of exchange and a store of value. If we can’t buy a cup of coffee with bitcoin, it obviously doesn’t qualify as a means of exchange.

The confusion here is the same one that plagues the conventional understanding of the foreign exchange markets: people confuse exchange and convertibility, which are both flows, i.e. transactions.

Here’s an illustration of the difference.

Let’s say Hipster Coffee Bar accepts payment in bitcoin (BTC) for a cup of coffee. In the U.S., the coffee bar accepts the BTC as payment, which is then converted into the local currency, the U.S. dollar, to pay rent, employees’ wages and so on.

The Hipster Coffee Bar branch in Mexico converts the BTC into pesos, the branch in Thailand converts the BTC into baht, and so on around the world.

Another coffee shop, Most Excellent Coffee, doesn’t accept bitcoin in exchange for a cup of coffee. So when I enter Most Excellent Coffee, I convert a sum of BTC into U.S. dollars if I’m in the US, to pesos if I’m in Mexico or into baht if I’m in Thailand, and proceed to buy the cup of coffee.

You see the point: what matters isn’t whether the coffee shop accepts bitcoin directly; what matters is whether bitcoin is easily convertible to the local fiat currency. Put another way: convertibility rests on the recognition that the “money” is a reliable store of value that can be converted into a variety of other currencies.

As long as the cost of converting one form of “money” into another form of “money” is fast and low-cost (i.e. nearly frictionless), then it no longer matters whether the “money” in question can be used directly in an exchange or not.

Consider a credit card. Part of the service offered by the issuer isn’t just a line of credit to fund purchases; it’s convertibility from one’s domestic currency into whatever currency is used in the place where you’re making the purchase.

This convertibility is certainly fast in the credit card realm, but it’s not frictionless; rather, it’s costly, as a hefty fee is skimmed for every transaction paid in one currency and converted to the cardholder’s domestic currency.

If bitcoin can be converted into fiat currencies at a lower transaction cost than the fiat-to-fiat conversions made by banks and credit card companies, it’s a superior means of exchange.

In other words, it doesn’t matter what currency the coffee shop accepts; what matters is the friction involved in converting the currency you hold with the one the shop accepts.

If bitcoin can be converted into U.S. dollars at a lower transaction cost that the USD can be converted into (say) Swiss francs, it’s superior to fiat currencies as a means of exchange.

If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

Check out both of my new books, Inequality and the Collapse of Privilege($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

 

At readers' request, I've prepared a biography. I am not confident this is the right length or has the desired information; the whole project veers uncomfortably close to PR. On the other hand, who wants to read a boring bio? I am reminded of the "Peanuts" comic character Lucy, who once issued this terse biographical summary: "A man was born, he lived, he died." All undoubtedly true, but somewhat lacking in narrative.

I was raised in southern California as a rootless cosmopolitan: born in Santa Monica, and then towed by an upwardly mobile family to Van Nuys, Tarzana, Los Feliz and San Marino, where the penultimate conclusion of upward mobility, divorce and a shattered family, sent us to Big Bear Lake in the San Bernadino mountains.

The next iteration of family took us to the island of Lanai in Hawaii, where I was honored to join the outstanding basketball team (as benchwarmer), and where we rode the only Matchless 350 cc motorcycle on the island, and most likely in the state, through the red-dirt pineapple fields to the splendidly isolated rocky coastline. In 1969-70, this was the old planation Hawaii, where we picked pine in summer beneath a sweltering sun.

We next moved to Honolulu, where I graduated from Punahou School and earned a degree in Comparative Philosophy (i.e. East and West) at the University of Hawaii-Manoa. The family moved back to California and I stayed on, working my way through college apprenticing in the building/remodeling trades.

I was quite active in the American Friends Service Committee (Quakers) and the People's Party of Hawaii in this era (1970s).

I next moved to the Big Island of Hawaii, where my partner and I built over fifty custom homes and a 43-unit subdivision, as well as several commercial projects.

Nearly going broke was all well and good, but I was driven to pursue my dream-career as a writer, so we moved to the San Francisco Bay Area in 1987 where I worked in non-profit education while writing free-lance journalism articles on housing, design and urban planning.

Within a few years I returned to self-employment, a genteel poverty interrupted by an 18-month gig re-organizing the back office of a quantitative stock market analyst. I learned how to lose money in the market with efficiency and aplomb, lessons I continue to practice when the temptation to battle the Monster Id strikes.

Somewhere in here my first novel was published by The Permanent Press, but alas it fell still-born from the press--a now monotonous result of writing fiction. (Seven novels and I still can't stop myself.)

I started the Of Two Minds blog in May 2005 as a side project of self-expression, and in an unpredictable twist of evolutionary incaution, that project has ballooned into a website with about 3,500 pages that has drawn almost 20 million page views.

The site's primary asset may well be the extensive global network of friends and correspondents I draw upon for intelligence and analysis.

The blog is #7 in CNBC's top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. I am frequently interviewed by alternative media personalities such as Max Keiser, and am a contributing writer on peakprosperity.com.

 

 

www.oftwominds.com