Wednesday, January 31, 2018

FEE’s Essential Guide to Cryptocurrency and Bitcoins

In the 36-page ebook “FEE’s Essential Guide to Cryptocurrency and Bitcoins,” Jeffery M. Tucker has contributed two essays (“Bitcoin for Beginners” and “What Gave Bitcoin its Value?”) which offer an interesting insight into the monetary theory on which the Bitcoin system is based. Tucker shows that the Bitcoins follow the economic ideas of Carl Menger and Ludwig von Mises.

Menger has established that the market is the fountainhead of money.  Money gradually comes into existence when entrepreneurs seek out a commodity for conducting financial transactions. In his book The Theory of Money and Credit, Mises has shown that money gets its price in terms of the goods and services that it obtains. Bitcoin is something that is being accepted by the market as a system for indirect exchange and hence it is a money.

According to Tucker, a major, if not the primary purpose of developing Bitcoin was to have a protocol which weaves together the currency feature with a payment system. The two features are interlinked in the structure of the Bitcoin code.

Here’s an excerpt from the Tucker’s essay, “What Gave Bitcoin its Value?”:
Bitcoin is both a payment system and a money. The payment system is the source of value, while the accounting unit merely expresses that value in terms of price. The unity of money and payment is its most unusual feature, and the one that most commentators have had trouble wrapping their heads around.  
We are all used to thinking of currency as separate from payment systems. This thinking is a reflection of the technological limitations of history. There is the dollar and there are credit cards. There is the euro and there is PayPal. There is the yen and there are wire services. In each case, money transfer relies on third-party service providers. In order to use them, you need to establish what is called a “trust relationship” with them, which is to say that the institution arranging the deal has to believe that you are going to pay.  
This wedge between money and payment has always been with us, except for the case of physical proximity. If I give you a dollar for your pizza slice, there is no third party. But payment systems, third parties, and trust relationships become necessary once you leave geographic proximity. That’s when companies like Visa and institutions like banks become indispensable. They are the application that makes the monetary so ware do what you want it to do. 
The hitch is that the payment systems we have today are not available to just anyone. In fact, a vast majority of humanity does not have access to such tools, which is a major reason for poverty in the world. The financially disenfranchised are confined to only local trade and cannot extend their trading relationships with the world.  
A major, if not a primary, purpose of developing Bitcoin was to solve this problem. The protocol set out to weave together the currency feature with a payment system. The two are utterly interlinked in the structure of the code itself. This connection is what makes bitcoin different from any existing national currency, and, really, any currency in history. 
The ebook also has essays by Billy Silva (“From Bitcoin to Ether: Today’s Blockchain Basics”), Andreas Antonopoulos (“Bitcoin Technology: A Festival of the Commons”), Steve Patterson (“Bitcoin: Currency of Currencies”), and Skyler J. Collins (“What Cryptocurrency Can Teach Us About Political Governance”).

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