In answer to a friend on Facebook who did not understand.
Money/Capital has three main properties. Store of Value, Medium of Exchange and Unit of Account.
Store of Value is easy to understand, being that if we save a certain amount of money, it should maintain purchasing power over 1 year, 10 years or 100 years. Since 2000, the US Dollar has lost nearly half of its purchasing power.
Medium of Exchange is also easy to understand, it's basically whatever form of currency is allowed within a legal jurisdiction. In the US, that is the US Dollar, so all exchanges of any kind, even in-kind trades of one thing or another, need to be priced and valued in US Dollars for reporting and tax purposes.
Unit of Account is a bit more involved, but it's basically how much a type of money or currency is used to price goods and services in the market.
There is a difference between money and currency. The Canadian Dollar is a currency, but it's not money in the United States because most retailers won't accept it directly. The CAD vs USD is too volatile, even though it doesn't move more than a few pennies in either direction over days, weeks or even months.
The US Dollar is actually issued by the Federal Reserve, which is the central bank of the United States, per the law passed in 1913. The Treasury's job is to manage the revenue and pay the expenses of the US Federal Government. But they have outsourced all of the monetary policy aspects to the Fed.
FDIC Insurance protects our accounts in the event of bank failures per bank.
The Federal Reserve has three major mandates from Congress;
1. Maximize employment while maintaining a stable inflation rate.
2. Stable prices for goods and services.
3. Moderate long-term interest rates, basically the intra-bank rates that underpin currency liquidity.
The target inflation rate according to the Fed is around 2%. But if you ask them, they can't tell you where that number comes from, it's just the way it has always been. Some finance minister in New Zealand made a comment a few decades ago, and it just stuck. The truth is that 2% is the average expansion in the circulating quantity of gold from mining operations over the past few hundred years, including the gold rushes.
But ANY inflation, even "modest" amounts like 2% result in a loss of purchasing power over time that for generations has dragged our civilization closer to the edge of a monetary cliff, and that's what we're dealing with today. It's not just in the US, it's every nation in the world because all of them run their monetary systems on a "fiat" standard, basically saying that the currency has value because they SAY it has value, not because it actually does. Remember I said that the purchasing power of the US Dollar has dropped by nearly half just over the last 25 years. The inflation rate described by the Consumer Price Index is only part of the real inflation of the supply of currency in our economy, there are many other domestic and international influences and drivers for that value.
Think about that first property of money, Store of Value. If I put $100 into a bank today, I want it to be able to buy $100 worth of goods and services in 1 year, 10 years, 100 years. That has never been true. And it never will be on a fiat based system where there is nothing backing the strength of the currency or the circulating supply of currency. For any currency, that strength is based ON that circulating supply. And the supply of US Dollars in circulation grows tremendously each and every year that we run Trillion dollar deficits. Our deficit during 2023 was 6.3% of GDP that year. The deficit requires that the money be generated by some mechanism, and that mechanism is the sale of Treasury Bonds, Bills and Notes. Billions of dollars come into the Treasury every day through the sale of these debt instruments, and every one of them requires the Treasury to repay them after a designated period of time, plus interest. The interest that the Federal Reserve is supposed to be keeping down at a reasonable level.
You're right, the money supply is supposed to be the one most easily controlled, and just how well has it been controlled when Congress refuses to even consider any option for balancing the budget and stopping the inevitable avalanche of bills coming due that we can't pay without printing an ENDLESS quantity of new debt for our children to pay off or ignore at their peril.
Getting to Bitcoin.
Who issues it? Nobody. Bitcoin is not "issued", it exists. It is computer code, locked by agreement within the software never to exceed 21 million units, each of which can be sub-divided into 100,000,000 sub-units called Satoshis (sats). The mechanism for releasing "new" Bitcoin into the network is called Proof of Work, which requires that effort or energy be expended in order to keep the entire system honest. Nothing is free, and putting computers to work at a cost is a big reason why the security of the network is absolute. Nobody is going to get into bitcoin mining unless they are willing to put in the work and pay for the energy, because the calculations done by the computers to solve the puzzle of the blockchain take a lot of energy.
Is its value guaranteed? Define value. Bitcoin when used as money only has value in exchange for goods and services, other currencies being some of those services. That's a subjective measure. But whether you are sending/spending 1,000 Bitcoin or 1,000 sats, the network doesn't care, it's all part of the math. What provides value to the network is how much energy is being expended for the miners to do their work, and the utility value of having a store of value, medium of exchange and unit of account that cannot be corrupted or influenced by any politician who wants to make or break promises just to get votes.
Bitcoin is highly regulated. It is regulated by the SEC because they think it is a security. They're wrong, but whatever. It is regulated by the CFTC because they think it is a commodity. They're wrong, but whatever. It is regulated by banking laws because in order to buy it you have to spend fiat currency, so every penny is accounted for. It is regulated by the Department of Energy and state/local parallel regulators because the banks of computers absorb raw power and every watt is accounted for.
There are a growing number of communities and countries around the world that are using Bitcoin as Store of Value and Medium of Exchange, because it is not subject to inflation rates of 2%, 20% or 200% like fiat currencies are. One of the fears of monetary policies is "deflation" when prices go down over time instead of up. In theory, this would mean that people would want to hold onto their capital instead of spending it in the market, thus reducing the power of our consumer based economy. I have never understood why that is considered something to be feared. It's not like I will stop eating because I don't want to spend the money. Or buying clothes to wear, or homes to live in or nice things for a high quality of life.
The only reason why Bitcoin is volatile is because it is a pure market priced asset. There is nobody who has the authority to say that a certain amount of Bitcoin or Sats can buy a certain amount of rice, oil or land. It's all up to the market. Is it speculative? I thought so, at first. It looked like a get rich quick scheme, money for nothing and tricks for free. I was wrong. I kept reading and learning, not just about Bitcoin but about the person(s) who created it, and what their reasoning was. Like the message they left in the very first transaction block: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks"
Do I want to see public resources used to facilitate the strongest representation of Capital that humanity has invented so far? Do I want our government to stop running deficits and end the plague of inflation that has been destroying lives and holding us back for over 100 years? Do I want the Treasury Department to start building on a monetary foundation based on wealth instead of debt?
Yes. Yes I do.
Bitcoin made me question everything I thought I knew about money, our monetary system, our fiscal system, our currency, our past, our present and our future. I did not just toss it away because I became uncomfortable with what I learned, I doubled down and learned even more. And my discomfort didn't come from what was new, but from the discrepancy between what I knew as the potential path we have in the future vs. the future we are likely to have if we DON'T allow everything to change. It won't be a recession, a depression or even a dark age. If we don't get our monetary foundation under control, it will lead to extinction. I'd rather not see that happen in my lifetime, nor any number of lifetimes. We have a galaxy to explore, and it's time we started moving in that direction instead of worrying where our next meal is going to come from.