Aristotle's Bitcoin

Bitcoin is ideal money according to Aristotle, or at least that's what Aristotle's description of ideal money implies.

According to Aristotle, good money should have several specific properties, because these properties make the medium suitable to be used as money.

Money must be resistant to external conditions, difficult to damage, difficult to spoil. It should not change with time. Money should be light, compress value well, hold a lot of value easily, be easy to hide and carry. Money should be divisible, so that it can be easily used to pay for something of small value, and easily combined, so that large transactions can be made with it. Money should be fungible, so that recombining money does not change its properties. A good medium of exchange does not determine the uniqueness of any of its representatives. In order to make the calculation as simple as possible, no particular money can be unique. All its particles must be treated equally, so that the graduations on the ruler measuring the value are equally spaced.

Bitcoin has all of the above characteristics. Bitcoin is very difficult to destroy because you would have to damage all the Bitcoin ledgers around the world. Since it is stored on hard drives or portable USB drives, not even a worldwide power outage can destroy this ledger. Bitcoin is therefore as resilient as the world's Internet, and is in fact its most resilient part. Bitcoin is immaterial, therefore it is perfectly light, perfectly divisible and compressible, perfectly portable (it moves at the speed of the electrical signals of the Internet network). Bitcoin is perfectly fungible because all Bitcoins are the same.

Aristotle does not explicitly mention a property that is obvious today. Money, which is supposed to retain its value for a long time, cannot be easily duplicated. In modern times, we have said that it cannot be easily printed. However, paper money did not exist in Aristotle's time, so he used the statement that money must have intrinsic value. If the value of money comes from itself, i.e. it is difficult to acquire, then it is difficult to introduce such new material into circulation, because it must first be purchased so that it can then be divided into equal parts, e.g. by minting coins. There is a particular difficulty in increasing the availability of money, so if the intrinsic value of the material from which money is made is high, a lot of work must be done to multiply that value. Consequently, inflation of money with a high intrinsic value is very costly and therefore limited. In Aristotle's time, the main problem was the substitution of precious metals for cheaper ones, so metals with a higher intrinsic value were, according to him, better as money. It should be emphasized here that intrinsic value was not a requirement because it alone makes money good, but because it is a good whip against inflation. Inflation was always present in Aristotle's time, and even more so for currencies issued by governments. That is why the choice of a medium with anti-inflationary properties was so important.

Bitcoin does not have and will never have the "problem" of inflation. Its inflation is temporary, decreasing and fixed, and above all, it is part of a protocol that cannot be changed without the consent of the users. This means that the amount of Bitcoin in circulation is not subject to corruption or interpretation, the main temptation of those in power to gain additional benefits through monetary manipulation. Bitcoin does not need to have "intrinsic value", as it was only a means to an end for any material money. The goal was to choose a money that would be subject to limited inflation because it would be difficult to produce. The difficulty of adding new money was to come from the cost of acquiring new money, and the "high intrinsic value" came from this. The lack of inflation was the goal, so if the problem of inflation does not exist, this feature is completely unnecessary.

Moreover, the crowning argument of Bitcoin's opponents, that it has no intrinsic value, is logically flawed. Gold, in the part that is used as money, does not have it either (when it is used as money, it is not used, for example, as a low-resistance conductor or a piece of jewelry). The value of the vast majority of gold comes not from its intrinsic industrial value, but from its use as money. Thus, it can be said that all of gold's value comes from its uses. Gold without uses has no value in itself. 10% of these uses are the use of gold as a raw material in industry and as a useful material for making works of art, and 90% of these uses are monetary functions, that is, gold's usefulness as money.

Bitcoin is not physical, so 100% of its value comes from its use as money. 100% of its uses are monetary functions. Gold is an imperfect form of Bitcoin. Therefore, it is obvious at first glance that those who talk about the lack of intrinsic value in Bitcoin have not fully thought through their assertion. What they are really saying is that the source of the money's quality is its ease of use and broad applicability in the economy. In other words, they would like to use as money something that has more rather than less use in the economy. By this reasoning, the very limited portion of gold's value derived from its usefulness, only 10%, is a negative thing. The use of gold as something practical beyond its monetary function, i.e. acting as money, should be as high as possible by such reasoning. Ergo, something physical that has more uses, that everyone needs, should be better money, because if everyone stops accepting it as money tomorrow, it will still be something very useful (it will still have that "intrinsic" value). One such physical material that everyone can't do without every day is water. However, it has never been used as money in history. Moreover, the vast majority of gold's value comes from its usefulness as money. This proves that its "intrinsic" value, i.e. its intrinsic utility, should it cease to be accepted as money, does not build up its market valuation in any significant way (it is only 10%).

The true value of Bitcoin comes from its subjective utility as money, which does not mean that Bitcoin was created for free. The need to mine it forms the basis of its value, but its market valuation is much higher than the cost of the energy and equipment required to create it. This difference in value is somehow sewn into Bitcoin's market valuation, because if it weren't there (if Bitcoin's production price were the selling price), no one would be profitable mining Bitcoin. This market valuation must be higher in the long run, and from the increase of this difference comes the increasing budget for protecting the Bitcoin network from threats.

However, the main source of Bitcoin's valuation is the fact that it can be treated as a kind of collector's item, since there is a finite and limited amount of it in circulation, and the total amount of Bitcoin that will ever exist can never exceed 21 million pieces. This is taken care of by the Bitcoin mining capacity reduction mechanism (called halving), which halves the amount of new Bitcoin mined every four years.

This means that in a halving of three, as we are currently in, only 6.25 Bitcoins can be mined every 10 minutes (every block). Every day, 900 new Bitcoins are mined. On the other hand, after about April 7th of year 2024 (halving 4), this amount will drop by half to 450 Bitcoins per day, and that will be the day when already 93.75% of all Bitcoins will be mined.

If no new value were to flow into or out of Bitcoin, its price could fall by less than 7% at most. This is the maximum inflationary loss we can expect, and it will be spread out over the next 100+ years. After all, mining a new Bitcoin will take until 2140 (with a halving every four years). This means that Bitcoin is completely immune to monetary inflation (money printing). Mankind has never had anything like this, which is why we have become accustomed to the gradual loss of value of money. If printing money and giving it to people would eliminate poverty, then printing college diplomas and giving them to everyone would make everyone more educated.

Virtually all of the Bitcoin that can exist is already in circulation, and as buyers arrive, the price must rise because the supply is severely limited. This means that it is money that is almost completely inelastic to demand (it will be completely inelastic after 2140). It therefore meets the requirement of being an objective and incorruptible measure of value. As industry increases productivity, produces more goods, and the fruits of labor increase (with the adoption of Bitcoin as a currency), the increased value of Bitcoin will reflect this increase.

Ultimately, if all of the world's value were expressed in Bitcoin, savings held in Bitcoin will grow as much as the world's economy grows, and even a bit more, because some Bitcoin will be lost in various accidents and through the deliberate destruction of private keys that lead to parts of it. Bitcoin will therefore be deflationary over time.

The purpose of money is to faithfully reflect value through prices. It is therefore inappropriate to create an inflation target, but it is also not ideal to stabilize prices (no inflation or deflation). If the economy is growing in wealth, this should be reflected in falling prices of all goods. Money should be an ideal indicator of changes in relative value, so its scales should not change, as it is a universal benchmark for the value of all other goods and services.

In this respect, the possibility of losing Bitcoin is a disruption of this ideal benchmark. However, I am convinced that as its value increases, and as Bitcoin becomes more widely distributed among many people who have more and more knowledge about Bitcoin (how to store it safely), the rate of loss will decrease dramatically. Bitcoin will be the one asset that everyone will want to keep and be afraid of losing, so secure it well. Pure information can be secured much better than a physical thing, because an active error correction system can be built into the information, and every physical thing decays (mostly compounds, but even atoms).

This is why, of all current technologies, Bitcoin is the most faithful representation of the ideal of money.

Zbigniew Galar, PhD

Post Scriptum

This is not investment advice. The author does not encourage the purchase of Bitcoin, nor does he discourage the purchase of Bitcoin; instead, he encourages education about Bitcoin and strongly discourages the purchase of any other non-decentralized cryptocurrency.