When The Bartender Takes Bitcoin: On The Evolution of Money, Trade, and Exchange

When The Bartender Takes Bitcoin: On The Evolution of Money, Trade, and Exchange
<a href="https://pixabay.com/users/EivindPedersen/">EivindPedersen</a> / Pixabay

A lawyer, an economist, and a student walk into a bar. They engage in an exchange with the establishment, trading money for a drink of their choice. The lawyer understands, handing over a five-dollar bill, that she’s using legal government tender. The economist understands that he’s employing a medium of exchange. The student understands that she’s participating in a system of collectibles, having taken on invisible debt for the only vaguely quantifiable value of a University degree.

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To define the term ‘money’ is to begin at the beginning. But it’s not to begin with consensus; the lawyer, the economist, and the student have vastly different relationships with what is in their wallets. This is as it’s always been, as our systems of exchange continue to emerge- gradually, and with modification.

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The Evolution Of Money: Emergence vs. Creation

Money is an emergent system. We’ve used it as a language of promise, a system of inheritance, a substitute for aggression, and a unit of account through which we can appraise things across unrelated fields—otherwise, we would have to say a University degree costs 40,000 Bud Lights.

We can think of the evolution of money the way we think about the evolution of language. Language came into being spontaneously—it emerged, it wasn’t designed. For all of its syntactical, grammatical, and conversational complexity, no ‘inventor’ ever laid down the rules. We employ the rules because they’re useful to us, even as they continue to change.

Money, too, is a relational tool that undergoes slow, undirected, and inevitable change. Like language, it has no creator; there’s no authority to whom we can trace its invention, nor any ruling power to whom we can attribute its shifts. The complexity of our financial system certainly rivals that of our linguistic system, but it works by the same emergent principles. What we call ‘money’ happened spontaneously, born of a need, and it continues to happen, to change.

The need peaked in the 18th century, when people started working for wages rather than being paid in kind. Short on coins, some employers started engineering their own tokens. Private currencies emerged—many, and almost all at once—and what we mean when we say money has continued to evolve. That our coins now wear the faces of kings, queens, and founding fathers is less an indication of authorship and much more a measure of power’s appetite to brand.

What Makes A Currency

As free monetary systems have come into being, smart people have identified common principles that make for successful, reliable exchange. The lawyer, the economist, and the student in the bar are interested in the same goals as the eighteenth-century employee. A successful ‘currency’ is one that is easily transported, stored, and divided. Its value needs to be dependable, and there needs to be a way to keep a reliable record of its trade.

To have dependable value, a currency needs to have a source of scarcity; the lawyer at the bar is not allowed to invent a bank note out of a napkin. When she does hand over a five-dollar bill, the transaction needs to be defensible. That the sanctioned note is now in the bartender’s hand has traditionally been sufficient proof. As our systems of payment have grown in their complexity, we’ve needed more from our systems of proof.

Managing scarcity and proving transactions have been the self-appointed domain of regulating entities. Fiat currency is sort of like a napkin, and as it stands, we rely on our systems of government to affirm, approve, and defend its exchange. But ours is a transitional system, ripe with inefficiencies. And, being no exception, it’s a system that isn’t likely to last.

What We Mean When We Say Bitcoin

Again, let’s begin at the beginning. Bitcoin is a cryptocurrency. Cryptocurrencies are protected through a system of advanced cryptography. Blockchain technology, and the wonders of computing, make digital cryptography the best system of defense we’ve ever seen.

We can now affirm, approve, and defend our own exchanges without having to rely on a ‘trusted’ third party. The verification of Bitcoin and other cryptocurrencies takes place in the cloud through a distributed network that’s completely independent of government. We’ve met the criteria of a successful currency—bitcoins are easily transported, stored, and divided. They’re the most defensible form of contract that we have, and the Blockchain technology has scarcity built into its design.

Blockchain technology, and Bitcoin as one example, offers us a different way to exchange information. We’re now (again) capable of divorcing defensibility from regulation; the ‘value-adds’ of centralized authorities can be replaced, and enhanced, by code. We’ll be left with a more robust system of exchange that doesn’t ask us to dispense with our trust.

When we watch Bitcoin’s price index, it’s almost like we’re watching small modifications to the design of those early 18th century tokens. Eventually, none of it will matter. Whether or not Bitcoin remains completely viable, a future without Blockchain technology is almost unimaginable. The lawyer sitting in a Delaware bar will be able to transact with a friend in Tuscany without either government needing to interfere. And if the student picks up the tab, the economist will be able to pay her back without any intermediary needing to validate the payment.

Watching this closely from the FX space, it’s clear that we’re in a new chapter on the evolution of money. Bitcoin, standing on the shoulders of Blockchain technology, represents a continuation of the age-old instinct to equalize and incentivize trade. To argue around whether or not it’s the final form of decentralized currency is to miss the point; if history is any indication, it’s probably not. But the larger phenomenon happening around us demands our full attention. We are fast-approaching the day when the bartender takes Bitcoin, and again, as if all at once, the world will appear to have changed.

About Dave Sanderson

Dave Sanderson is the President of Red Jacket Capital, a boutique hedge fund that specializes in FX trading. Previously, Dave was the Founder of KFL Capital Management, winner of the 2015 CTA Newcomer of the Year Award for Commodity Trading Managers. To date, Red Jacket has placed over $3 billion worth of FX products with sophisticated investors.

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