Benchmarking Bitcoin to Money and Implications of the Technology

bitcoin-featureA new form of currency called bitcoin (BTC) has been introduced to the mainstream for the most part over the past six months, and it’s become well-known enough that many merchants and business owners are beginning to accept the currency as a form of payment. This includes the recent Dig South conference and expo in Charleston. Opinions on bitcoin vary widely, which is the norm when a disruptive technology enters the market, but as this affects money and currency, opinions are even more extreme.

In short, I see bitcoin as second only to the creation of the Internet in terms of the holistic impact to society in modern times. This is a pretty bold statement, obviously, but to help explain why I believe this, we have to better understand the technology, first by comparing it to our existing currencies.

To begin, Webster defines currency as the following:

• Something (as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange, or

• A common article for bartering.

Additionally, many other websites state there are six or seven overall characteristics, including the following:

1. Acceptability

2. Divisibility

3. Durability

4. Limited supply

5. Portability

6. Uniformity

So let’s utilize these terms to help define bitcoin by comparing it to paper money such as the dollar:

1. Acceptability: Is the currency accepted as a form of payment by citizens of the economy? The level of acceptability (or demand) directly correlates to the value of that currency.

  • a. Dollar: This is how we currently base all transactions in our society across the world, but each country typically has its own currency, so the acceptability varies but is easily remedied by converting one currency to another through a financial institution for a fee.
  • b. Bitcoin: More than 12 million bitcoins are now in circulation, up from zero in January 2009. Additionally there are approximately 66,000 transactions in bitcoins per day worldwide. These statistics confirm the exponentially increasing acceptance of bitcoin as currency. Additionally, the fees to transfer any currency to bitcoin through a virtual wallet like Coinbase or Blockchain are much more nominal (1% fee plus a 15-cent bank fee) in relation to the current cost of converting paper currency, as a financial institution is not required as an intermediary. Once the currency is converted to bitcoin, transactions occurring between online wallets, friends, or merchants are free.

2. Divisibility: The degree to which the currency can easily be divided into smaller denominations for transactional purposes.

  • a. Dollar: The dollar can be divided into 100 separate units, as small as 1 cent (the penny).
  • b. Bitcoin: A BTC can be divided into 100 million separate units as small as 0.00000001 BTC (the satoshi). Currently 1 BTC is approximately $600, thus allowing for a transaction as small as 0.000006 USD to occur.

3. Durability: The susceptibility of physical wear and tear of the money.

  • a. Dollar: The dollar is made from a paper source, so wear and tear is the norm.
  • b. Bitcoin: This is an electronic currency, so durability is not a question. Think of an email versus a paper letter.

4. Limited supply: The value of an item is a function of its supply in relation to its demand; typically as supply increases, value decreases and inflation occurs.

  • a. Dollar: Paper money is printed by central banks with essentially no oversight or controls. There is no maximum limit on the supply as it’s no longer backed by anything of value (e.g., gold) or tied to some sort of metric (e.g., GDP). This makes the dollar and other paper money very susceptible to inflation.
  • b. Bitcoin: Bitcoins are created through a complex mathematical process called mining using computer servers, and the maximum amount of BTC that can ever exist is approximately 21 million. As a maximum supply exists, bitcoin is deflationary in nature, as once the maximum supply is mined the value will increase. In the meantime, there are limits on how many new BTC can be mined yearly, so the supply will continue to increase in a steady manner.

5. Portability: Can the currency be transported easily?

  • a. Dollar: Dollars are becoming much easier to transport with the increasing popularity of credit cards, online banking, PayPal, etc. Still, if you want to carry physical dollars, it is relatively easy unless you are carrying thousands and thousands of dollars.
  • b. Bitcoin: Bitcoin are stored in virtual wallets on your phone, computer, or tablet, so the size of a wallet with 1 BTC or 1 million BTC will be the same. Again, think of an email inbox with 10 messages versus 1 million messages.

6. Uniformity: How recognizable the currency is (the $1 bill must always look similar).

  • a. Dollar: The USD is definitely recognizable, but currency is typically only familiar to its home country (the Iraqi dinar wouldn’t be recognizable to most of us).
  • b. Bitcoin: As bitcoin is an Internet currency, it will be more recognizable across country lines and can be easily converted to and from any currency using a bitcoin wallet. Transactions can then occur in bitcoins between users and merchants of the currency.

In terms of determining what type of currency has the more beneficial characteristics, I first look at the pure efficiency of each. Similar to how the Internet created efficiencies never seen before in terms of disseminating information and communication, bitcoin and other crypto currencies bring enhanced efficiencies in terms of exchanging money (value) between independent parties. With bitcoin, I can send any number of BTC to anyone around the world for free instantaneously. Additionally, the value of the currency is 100% determined by the supply and demand of the commodity. There are no governments or agencies manually fixing the price of the currency, deciding to print additional currency, or changing interest rates that increase or decrease the money supply. Instead, bitcoin is governed via a set of mathematical formulas and distributed (peer-to-peer) networks. This creates full democratization in the control and oversight of money that has never before existed on this planet.

These two items in conjunction with the six characteristics above are the main reasons I believe that bitcoin and other cryptocurrencies have the clear advantage on all fronts over paper money, especially as the network of users continues to increase.

With all of this being said, the technology behind bitcoin has a tremendous way to go in terms of scalability and security before universal acceptance of the currency will take place. This is the norm for any technology in its infancy. As a result, there are even more opportunities for startups across the world, including in Charleston, to assist in the improvement of the technology behind bitcoin as well as apply the infrastructure and math behind the technology to other areas of our life and society.

It has never been easier to communicate with anyone across the world, and with bitcoin it is becoming more efficient to exchange money (value) globally, thus bringing a larger scale of prospective customers or targets for those same startups. The playing field for small businesses is continuing to level out versus big business due to these types of technological breakthroughs and will do so as startups continue to innovate and positively impact on society and our day-to-day lives. And there is no reason why Charleston can’t be an important hub and power broker within this movement.

Brad Ebenhoeh is the managing partner of C1 CFOs, a boutique accounting firm that specializes in providing an outsourced accounting platform to funded tech startups and companies in the creative industries. While undertaking this role, he takes the lead on the business development for the organization, is the creator of internal business models for implementation within our clients’ businesses, as well as being the lead client relationship partner. Brad is also CFO of Venture360, a private investment management platform that provides workflow to support deal-flow from the beginning (entrepreneur identification and application, benchmarking) to the end (structuring services, closing, document e-signature, fund transfer), as well as providing accounting services post-deal to ensure transparency and compliance. Brad is a certified public accountant (CPA) in the state of South Carolina and has a decade of experience in the industry, including five years spent at a Big Four accounting firm and two years as CFO of a family of wine businesses before starting his entrepreneurial journey. He holds a Master of Science degree in accounting with a specialization on information systems from Michigan State University, as well as a Bachelor of Arts in accounting from the same university.

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