Merchants are already currency speculators. They just don’t know it yet.

Along the Bitcoin success roadmap, among the regulatory potholes and IT growing pains, lies an essential piece in the puzzle: merchant acceptance of Bitcoin.

Although the author disagrees with those who claim that Bitcoin must be widely used and accepted to gain universal traction (case in point: the $7T of extant gold which nobody seems to own nor use to buy things), he does agree that a digital currency such as Bitcoin would undoubtedly benefit from merchant adoption as well.

The main selling point that companies such as BitPay and Coinbase use to convince new merchants to accept magic internet money is that they can remove the dreaded volatility factor, and conveniently convert any proffered bitcoins in the form of fiat currency such as dollars, euros, or yen.

When asked why they prefer to go through these financial intermediaries instead of accepting bitcoin outright, most companies reply that they are in the business of “x” and not currency speculation. “x,” of course, can be anything: selling tires, installing electrical outlets, transporting goats. Regardless of the industry, business owners prefer to stick to their personal expertise, which does not include speculating on currency.

This week, the Venezuelan government tacitly admitted that its currency is in free fall. Close to triple figure inflation year-on-year is dissolving the savings of the country while simultaneously wreaking political and financial havoc.

This example reminds us that merchants are not just goods and services output machines, but rather, that they are traders. The engine of economic activity is the trade, whereby one individual who can produce something at a lower marginal cost offers it to another, in exchange for something of perceived value.

In reality, all merchants are also currency speculators as well. Given a relatively stable currency, a merchant may have the luxury of forgetting this essential half of the equation, and convincing him or herself that the money they accept is some kind of universal constant. But a quick page turn back into recent history reveals the plight of merchants as they struggle to survive, forced to be shrewd in both their business practices as well as the medium of exchange which they choose to accept in return.

The author recalls visiting Zimbabwe in the early 2000’s, and finding himself in need of a camera battery. Having already accumulated a stash of Zimbabwean dollars at the official rate (which was about 4x more expensive than the black market rate), and being currency agnostic, he found a vendor in the streets who was willing to sell him the necessary battery, but who discounted heavily the price in USD, even beyond the black market rate. He was so terrified of the value loss he would incur from accepting Zimbabwean dollars, that he was willing to take what appeared to be a financial hit, but in reality, allowed him the self-indulgence to simply go home at the end of the day, rather than speculating once more by converting his Zimbabwean dollars into something with a greater potential to preserve value (Rice? Bread?). He certainly didn’t want to hang on to it too long. The cost of goods in stores at this point was being updated multiple times per day.

Our favorite camera battery seller in Zimbabwe didn’t want to be a currency speculator. But chances are that if he moved to New York he’d make a better Wall Street analyst than bodega vendor. Such is the plight of the merchant, who must spin what often feels to be an ever-increasing number of fragile plates.

Bringing this back to the developed world, the message might fall flat at first, but the fact that people who sell things must also decide what is an acceptable exchange medium is all-embracing. To the merchants of the world, take note. You are already speculating on currency. You accept it, you save it, you spend it, and if you are lucky you put aside some for your daughter’s education. You should care about the inflation rate, whether 2%, 200%, or -5%.

You may not want to hold bitcoin today, but keep a close eye on your currency of choice. You are a currency speculator whether you like it or not, and you owe it to yourself to be proficient in money matters. In time, you might even find it prudent to keep 10%, 20%, or more of the bitcoin you accept. You may not be a hedge fund, but this choice is potentially in your interest and – more importantly – certainly within your purview.

The issue of currency is a current event, and how much is issued is your concern too.


Bitcoin is already backed by gold… sort of

Common among economic misunderstanding is the concept of “backing.” Somehow, the word “backing” signifies a final, and perplexingly, in my opinion, acceptable point.

Among all things that ever occurred in the history of the world during the entire existence of humans, the only thing which could ever be, or needed to be, backed, was a promise.

Somebody could accept a favor and “back” it with the promise to pay their debtor back in the future, in the form of something valuable to the lender. A coconut for a crab, or vice versa, perhaps.

Fiat currency is so pervasive today, that many people have little perspective on the concept of value. Historically, we are in uncharted territory. Never before have so many nations been so intricately tied together by a global monetary system. And yet, to the layman, the one who toils aways to make a living for a family, this seems normal.

It is not normal.

The main chink in the Keynsian armor is that monetarists ignore a central concept known as the subjective theory of value. If you read a modern macroeconomic textbook on the matter, you will encounter this term, but it tends to be buried and ignored. However, the implications are significant.

Why should anybody call for the “backing” of anything? The answer lies in a subtle observation of the subjective theory of value. For instance, if you make hats, you may very well be as excited about your 100th cap as you were about the first, for your own consumption, but you probably weren’t. In essence, the value to which you ascribe your 100th is light years behind the value that an undoffed individual might enjoy.

In such a world, where un-had things are better than many-had things, one might search for a more objective measure of value. After all, if the value of all things is subjective, how can we trade amongst one another without resorting to barter? When two individuals wish to trade, it helps to employ a medium of exchange which deviates as little as possible compared to the whims of their endeavors.

And what is the number one factor that determines objective value? There are many contenders, but the absolute winner in the equation is scarcity.

When the US was on a gold standard, the implication was that any individual could walk into a bank, proffer about $20 worth of paper currency, and receive gold in exchange. This was the gold-backed currency of yestercentury. But why was gold chosen?

Despite what many gold enthusiasts may claim today, it had nothing to do with gold’s industrial uses. In fact, the lack of industrial uses contributed to its status as a store of value. Sure, you can wear gold, but more people hid it away in safes than plastered it to their wrists.

Gold is scarce. However, even this term is often misunderstood. Because gold is highly divisible, scarcity isn’t really the best term to use. Gold is limited, or at least highly limited. What you know when you hold a gold coin in your hand is that is may indeed lose value, but not because somebody made more of it over the weekend. In you hand you hold a piece of hard work, labored over precisely because gold is limited.

So why is Bitcoin backed by gold? Admittedly, it isn’t. “Backing” requires a “backer,” somebody who will redeem a promise with a limited item, a token of posterity, an objective measure of value, or at least, as close as you can get to such a thing.

This is why those who claim that Bitcoin is backed by nothing are misunderstanding why backings occur in the first place. The only thing that can be backed is a promise, and the best backing possible is a universally accepted, limited, measure of value. Bitcoin is no such promise. It is gold unto itself. Bitcoin is the backing.

And for the adventurous mind, pairing gold to Bitcoin is quite easy. With a total valuation of about $8T of gold, and a total valuation of $7B of Bitcoin, Bitcoin comes out at about ~1,000x undervalued. That puts Bitcoin around ~$500,000 per coin if you equate 1 ounce of gold to the equivalent portion of outstanding bitcoins.

Of course, this valuation is crazy. After all, the world would never adopt a frictionless, honest, and limited store of value as their backing article of choice if it happened to be digital too… right?