This is the first in a series designed to dispel the mystique of digital currency, think Bitcoin, but trust me we’ll go way beyond that. My goal is to explain in common language all you’ll need to know about digital currency, so you can confidently answer questions when you sit down with your first social network, your family.
As a species, our most significant evolutionary trait is our capability for building social networks. While social networks are found in many other high order mammals, we really do take it to the next level. Let’s face it for our first 36 months outside the womb we’re pretty much a defenseless bag of water rolling around wherever we’re placed. We can’t even effectively flee from even the most basic predator without assistance. From the moment we’re born we establish strong bonds with our parents and siblings, who become our first social network, our family. In our formative years, this network fills all our basic needs. It is this first network that introduces us to the second network we join, often very early in life, and that is the network of money.
Initially, we learn how to spend our first social network’s money as we roll down the aisle of the market and point out the foods we like. Soon members of our first network are sharing their money with us in return for our time when we do a task or achieve a milestone. Many of you up to this point possibly never viewed money as a social network, until recently it hadn’t occurred to me, but in fact, it is. On its face money is nothing more than a worthless token designed exclusively to be exchanged. It is these exchanges that form a network of commerce. If you closely examine your tightest social bonds, outside of your first network, they very likely were started or fueled by money. Outside of family one of my closest friends exists because over a decade ago I exchanged money in return for joining another social network. While I haven’t been associated with that network for years, this friend still shows up whenever I need him most, and it’s no longer about money.
Terminology is critical to our understanding. Mentally we often have trouble grasping something until we can assign it a name. For years you’ve carried money around in your pocket, but have you ever considered it as your fiat currency? Here in the US, our fiat currency is the dollar. It’s very possible you’ve taken it for granted so long you never even viewed it this way. A fiat currency is the one officially sanctioned and managed by the government, another network, under which you live. If you only need one currency, in my case the dollar, then the concept of fiat becomes mute, but what happens when you begin to use more than one?
Sitting here in North Carolina a month ago for the first time in my life I need to spend some Bitcoin which I’d been gifted a few years earlier. Bitcoin is the most well-known digital currency, but it is NOT a fiat currency because it hasn’t been issued by a government. The vendor I wished to purchase a small digital currency mining rig from in China ONLY accepted Bitcoin, NOT my US dollars via credit card. At the time Bitcoin was trading around $10,000 USD so buying something for $250 USD meant I was spending a fraction of a Bitcoin. I’m only aware of a single fractional unit of a Bitcoin and that’s called a Satoshi which is equal to one ten-millionth of a Bitcoin. So, I shelled out roughly 2.5M Satoshi for my rig and anxiously awaited its arrival. We’ll dive more into Bitcoin and Satoshi in future posts, but I thought it a prudent example where the fiat currency wasn’t accepted. Next year we’ll have Libra, Facebook’s digital currency, and that’s already giving those who manage our fiat currencies serious concerns.
In computer science, there’s a concept called Metcalfe’s law which states that the value of a network is equal to the square of the number of nodes or members in that network. My extended family has roughly fifty members, so its potential value is fifty squared or 2,500. My friend has nearly 100 in his extended family, so his family’s value is 10,000. Metcalfe’s law came along with computer networking, long after Alexander Graham Bell had invented the telephone, but Bell was aware that the value of his invention would only be truly realized once it had been widely adopted. Within 10 years of its invention over 100,000 phones had been installed in the US. Bell died 46 years after his invention knowing that his new network had changed the world.
Facebook is the largest social network our species has ever created. With over two billion active users this means that one person in four uses this network monthly. Right now, the clear majority of those two billion people live their lives with their fiat currency, and unless they travel they rarely if ever deal with another. Next year Facebook will issue its fiat currency, Libra, and it will change everything. Now it should be noted that Facebook isn’t a country so the concept of them issuing currency has raised some serious concerns from those who do issue currency. Countries around the globe are taking Facebook’s Libra head-on because they know it represents a Pandora’s box of problems for their own monetary systems, and here’s the main reason why.
Looking at Facebook as a network we could say its value is two squared or four, for now, let’s drop the all the billions as it just makes the numbers incomprehensibly large. The US has a population of 0.327 billion so the value of it as a network (again without the billions) is 0.1 and China has a population of 1.386 billion, so the value of its network is 1.9. If we now view these countries populations as networks, we see that Facebook’s value is twice that of the US and China combined. Extend that to currencies and you can why all the fuss, and why you might need to understand digital currency.
Next, we’ll dismiss the intrinsic value argument, that’s where grandpa says Bitcoin is worthless because there’s nothing behind it. You can then counter with the US went off the gold standard decades ago so why isn’t the dollar worthless? We’ll provide you with that side of the argument.