This is a guest post by David Orrell, a mathematician and author of books including Truth or Beauty: Science and the Quest for Order (Yale University Press). He is currently working on a book about money.
“I do not understand where the backing of bitcoin is coming from. There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual.” — Alan Greenspan
Is bitcoin money? To most readers the answer will be a resounding yes, but to many people, including former Federal Reserve Chairman Alan Greenspan, the answer is less clear. Indeed, one of the things holding back the adoption of cybercurrencies such as bitcoin is that they do not conform with traditional ideas about money.
Bullionists, for example, argue that money needs to be backed by precious metal – and bitcoin is not. Chartalists (from the Latin charta for a record), on the other hand, assert that coins and other money objects are just tokens that the state agrees to accept as payment of things like taxes. Again, bitcoin fails. Most mainstream economists, meanwhile, would ascribe to the view that money has no unique or special qualities, but instead is defined by its roles, e.g. as a medium of exchange. But emerging cybercurrencies do not have much use as a medium of exchange – at least at first.
So how do they become money? The answer to this question is that money of any sort has quantum, dualistic properties – analogous to the wave/particle duality of quantum physics – which allow it to be booted up from the ether.
As an example of quantum money, consider a U.S. dollar bill. On the one hand, it is a physical object which can be owned, traded and valued. On the other hand, it represents the number one, which is why it says “1” or “one” in fifteen different places. And numbers and things are as different as waves and particles. Numbers live in the abstract, virtual world of mathematics, while things live in the real world. Numbers are exact, while qualities such as perceived value depend on the person and the context. Numbers are hard and fixed, like the particle aspect of matter. Concepts or judgments such as worth or value are fuzzy, like the wave aspect of matter. The tension between these contradictory aspects is what gives money its powerful and paradoxical qualities.
The trade of money objects for goods or labor in a market means that those things attain a numerical value as well, namely the price, by contagion, just as the atoms in iron spontaneously align in a magnetic field. Market prices are therefore an emergent property of the system, in the sense that they emerge from the use of money objects. Of course, a bitcoin transfer does not resemble the traditional, Newtonian idea of a self-contained object, but then neither does matter when viewed from a quantum perspective – the real and virtual become blurred.
Money objects are unique in that their value is designed to be objectively fixed and stable. For other goods, their values are indeterminate until the moment they are exchanged for money (just as, according to quantum mechanics, the position or momentum of a particle is fundamentally undetermined until it is measured, at which point it “chooses” a value). This special status makes money objects desirable in themselves.
Implicit to traditional theories is the idea that money has to be backed by some pre-existing quantity, be it real (e.g. metal) or virtual (e.g. the law of the state). It therefore passively inherits its value from outside. But from a quantum perspective, rather than money being backed by something of monetary value, it is the other way round – market prices emerge dynamically from the use of money. A cybercurrency is supported not by metal or the state, but by something much more distributed and amorphous – its network of users. A property of networks is that their power expands rapidly with size. The value of a cybercurrency therefore grows in the same way with the size of the network of users, so can initially be near-zero. It is not necessary to begin with an external debt or a source of value, because the two can expand together.
This process makes sense only when we see money as a quantum, dualistic phenomenon. Just as bitcoin is revolutionizing money, so we need to update theories of money that were shaped by previous monetary eras of gold standard or state fiat currencies.
Adapted from the full paper available at SSRN. See video presentation of related Marshall McLuhan lecture, hosted by transmediale and the Canadian Embassy in Berlin.