People sink down the rabbit hole of a particular line of thinking and rarely stop to look around for scenarios in which they may be wrong. And I’m not saying this from a place of zen-like perfection, I’ve been tempted by this too many times in my life, likely still am in some areas.
Which is why it’s a habit of mine to periodically re-evaluate the fundamentals behind any ideas and decisions. Well, that and I also prefer when me and other people aren’t colossally wrong. Especially about things like business and economics. Doubly so when they’re expected to be experts in those fields and take on advising others what to do.
I noticed that it often happens with this one idea about the functions of money.
I don’t know which of these expert fellas applied it to evaluating the viability of cryptocurrencies first. Nonetheless, I now heard it in dozens of different places and read countless opinion pieces on the subject.
What tipped the scales for me was hearing this from a business analyst in a conversation. To explain my frustration with an analogy: some random guy in a subway being clueless about human anatomy is unlikely to be an issue. If that guy is a practicing surgeon, though? That’s where we enter the danger zone.
I have to step in and make sense of this before people start losing limbs and/or profits.
Here’s the argument:
According to Economics 101, money is commonly defined by its three main functions. It serves as
Pretty easy, right? You have giving/getting stuff, having stuff and knowing what stuff costs as the three pillars of money. This can be dollars, pesos or sea shells for all we care, they can all serve these functions.
So at some point in time someone who just took their first econ lecture came up with applying this argument with cryptocurrencies. You compare them to fiat (USD for simplicity) in all three of these areas and it looks something like this:
Decent argument, right? Compared to USD, cryptocurrencies fall flat on all three and are an inferior medium of exchange.
Some people even go further and conclude that it can’t and shouldn’t be used as money due to these limitations. This is the same as saying that because the plane built by the Wright Brothers wasn’t fit for commercial travel, the entire aviation industry is bunk.
So let’s not go to the extremely dumb end of the spectrum on this argument and just stick with a «today», alright? So cryptocurrencies don’t work so well as money today.
Let’s go on a mental journey, to a land where this is flipped. Let’s say a cryptocurrency is king where we are. Hell, let’s even say it’s Bitcoin, with all its current flaws. So you have the transactions that can take hours, the concerns about privacy and the high transaction costs when the network is clogged. Which would be always in our upside down land. It’s far from perfect is what I’m saying.
It kinda sucks.
We would probably have to sign checks to confirm that we did in fact pay for that meal at the restaurant, so they have something to prove it in case transaction is cancelled or fails during the time they may be waiting. Everything would be slightly delayed, right?
So we’re not in some market heaven with the perfect currency, our money still kinda sucks. But hey, we’ve all come to use it and bit that bullet. Now it’s not volatile because everyone uses it (in fact, it’s a deflationary currency, so it slowly but steadily grows in price), it’s accepted almost everywhere and we measure the cost of most things in Bitcoin.
«Oi guys! Our money isn’t perfect. In fact, it kinda sucks. I came up with a far better alternative. I called it the USD. Don’t ask why, I just did.
Check this out: it’s instant and sometimes anonymous transactions! I just have a bunch of these pieces of paper that I can give to someone, and they basically represent stuff we’re gonna do later – our future productivity, yo! It’s totally debt-based.
I’m just gonna be issuing as many of these as I think we can pay back in the future. Heck we can even write them into computers as strings of numbers so we don’t have to pass paper around, don’t matter. So I’ll just write as much of these as I think we need for it to work and stuff.
I’ll be totally fair about this and only get into as much debt as the economy can pay off, for real! I’m super smart about this and know exactly when and how to pull that leaver. And then all of you folks can enjoy almost instant, cheap transactions.
When you pay with these numbers in computers instead of paper, I’ll know and will be able to stop or cut you off – but I’ll only do this sorta thing with criminals, so you got nothing to worry about, no privacy concerns like with that Bitcoin we all use. It’ll be great!
Why are you looking at me like that?»
Oh, I’m just thinking about the three functions of money. Just had my first lecture in an economics class, actually.
You see, Sam, this can’t possibly work today. Maybe in some future world where your USD isn’t just ideas and promises you came up with, but there is no way we can implement any of this and use it as money. Compare this USD of yours to Bitcoin:
Not to mention stuff is always going to get more expensive as this USD thing inflates over time. I guess the thing you have on us is transaction speed. We’re working on that.
Alright, great trip!
Back into the normal world now – let’s bookend this thing.
The perspective flip we did just now isn’t an argument for cryptocurrencies and against fiat, but a rejection of the deterministic thinking that it entails. You can easily rally around any dominant medium of exchange in any historical period with such statements. Yes, even seashells.
Thing is, the three functions of money aren’t intended to simply slap judgements on. There’s actually a gazillion factors we use to determine if something works for us as money or not, and they’re prioritized on an individual basis, applied to any given situation.
We have to understand where value comes from in the first place to make sense of anything.
We didn’t have the choice of cryptocurrencies before – now we do. So, this is exactly what’s happening: countless individuals are determining the viability of cryptocurrencies as money, in real time, as you’re reading this.
We’re experimenting and slowly building up different forms of consensus. Notice, for example, how prices of most popular coins are often compared and valued in BTC. In these cases, we decided that it works better than USD for measuring their value.
There are people out there who will find cryptocurrencies a superior money to fiat no matter what, they tick all the requirements for them. Just like there those who can do the same with seashells, for that matter – and if they work better in their circumstances, then they’re objectively using better money.
Like doctors are supposed to understand anatomy, businessfolk are supposed to understand economics. Bad analysis kills opportunities as efficiently as medical malpractice kills people.
It’s important to not only think about the seen, but also the unseen – what is and what could be. Human decisions involve lots of factors. We’re not Borg with the same priorities for everyone.
Lack of widespread adoption might be turning some people off and attracting others for the same reasons. This is what differentiates economics from social engineering.
Experiment. Exchange value with other people and make the world a better place. Don’t let others decide what the superior form of money is, make your own mind up.
And hey, I may not be a business analyst, but do operate a bit like a surgeon. I also have 4-5+ week waiting lists, making the analogy fit even better. If you would like to sign up for a check up, you can do so at https://alexpartin.com/clients