Let’s Clear Up One Confusion About Bitcoin

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.

Facebooktwittergoogle_plusredditpinterestlinkedinmail
This entry was posted in Uncategorized. Bookmark the permalink.
  • kimyo

    if your hipster coffee bar happens to be located in puerto rico, then your bitcoins are worth bupkiss.

    if you’re a day trader, then bitcoin should definitely be on your list. if you’re trying to protect your wealth, run away.

    • Angela


      Google is paying 97$ per hour,with weekly payouts.You can also avail this.
      On tuesday I got a great new Land Rover Range Rover from having earned $11752 this last four weeks..with-out any doubt it’s the most-comfortable job I have ever done .. It sounds unbelievable but you wont forgive yourself if you don’t check it
      da18:
      ➽➽
      ➽➽;➽➽ http://GoogleInternetComunityCentralWorkFromHome/online/easytasks ★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫:::::!da38luuuu

  • jadan

    The crypto currencies are stateless, whereas fiat currencies exist by law of a given sovereign national entity. Money is money by decree of law. If it isn’t fiat, it isn’t money. Gold isn’t money unless it is monetized by fiat. As you have pointed out in other of your bite-sized essays, Smith, bitcoin is an asset for affluent investors, like tulip bulbs once upon a time, a fantasy asset backed by the full faith and credit of Skynet, which is not your friend like your government is, or could be, if you weren’t such an anti-government wierdo.

    • Shay


      Google is paying 97$ per hour,with weekly payouts.You can also avail this.
      On tuesday I got a great new Land Rover Range Rover from having earned $11752 this last four weeks..with-out any doubt it’s the most-comfortable job I have ever done .. It sounds unbelievable but you wont forgive yourself if you don’t check it
      da10d:
      ➽➽
      ➽➽;➽➽ http://GoogleCashNowCareerPartTimeJobs/get/hourly ★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫★★✫★✫:::::!da130u

  • animalogic

    Can BTC be broken down into smaller units – as a dollar can be into cents ?
    Assuming not, at (what ?) $5000 a BTC it’s use in everyday transactions, such as purchasing coffee would seem somewhat limited….?

  • Kansas_Voter

    Bitcoin isn’t real until you’d want to buy a cup of coffee with it. Today you’d be much better off using cash because of Bitcoin’s volatility. It’s currently caught up in an enormous bubble because of speculators, and once that bubble pops and Bitcoin settles down into the $800 per coin range it may become useful as a currency, but as of now it’s just a bunch of speculators trying to get rich quick. I’ve been using Bitcoin to purchase marijuana over the internet for a few years now, so I’ve used it and seen its ups and downs, and it’s just not something that I’d want to use if I didn’t have to. Credit cards and Paypal are much easier and cheaper, because there are always transaction fees at every level when moving Bitcoins from one place to another, plus there are times where it takes hours for transactions to be confirmed. I never thought that it would get to $5,000 much less the $7,000+ where it is today, but it IS a bubble so you should cash out while you can.

  • سنگ ساختمان