Bitcoins seems to have the promise of becoming an alternative money in the future.

It’s up 61% since the beginning of the year. You can’t ignore price movements like that.

But I’m more interested in the blockchain as a technology that can disrupt business processes, just as other current technological advances are doing: machine learning, artificial intelligence, the internet of things and so on.

One industry that is ripe for disruption is property… which is my expert domain.

I was at a conference some time ago where this topic came up: the blockchain is starting to establish things like fractional ownership of dwellings, and one day, because of its secure ledger foundation, it could make closing times much quicker (hours as opposed to the current weeks of torture, as any homeowner will know).

I thought it might be interesting to look at what is going on in the context of the economic and real estate cycles because of the novelty.

I also promise there are some very old lessons to be applied to your investing.

First, let’s start with a basic question: what is money?

What Is Money?

This is where the staunchest supporters of bitcoin are clearest: bitcoin provides the promise of an alternative, efficient (albeit energy-intensive and complicated) money that transcends borders and policymakers’ rules.

This narrative is so promising that it has forged an unlikely alliance of support from older libertarians and younger millennials.

If there’s any doubt about the power of a good story in relation to investment returns, here’s your proof. Robert Shiller, a Nobel Prize-winning economist, has written an interesting book on the importance of story: Narrative Economics: How Stories Go Viral and Drive Major Economic Events.

Check it out.

I’m not saying that the idea behind bitcoin as money is somehow fictitious.

It’s just important to acknowledge how much interest in it is linked to the power of a good story.

It’s important for me to emphasize here that one of the most misunderstood ideas in economics and finance is what the nature, role, and function of money is. Since money is important to the bitcoin story, I ought to point out that this mistaken thinking has been used by its most knowledgeable proponents. 

Money is simply a generally accepted means of settling credit balances.

Settling Credit Balances

Let’s take an example.

As I write these words, I’m providing a service to my publisher.

Since I am not getting paid for a few days, my work has generated a positive credit balance. At some point, my publisher will settle this balance by instructing its bank to mark up the account I have by an amount that reflects the value we have agreed my writing is worth.

Taken on its own, this positive credit balance is useless to me. Just numbers on a screen, or if I want, paper with a former U.S. president’s head on it.

But it’s what I can do with it that counts.

For example, my cleaning lady comes to my flat for a couple of hours to dust shelves, mop the floor, vacuum, and generally tidy up my living space.

When she finishes each time, via my phone I would instruct my bank to pass some of my bank balance to her account (or I could go to a local cash machine to do the same thing).

Effectively I had taken the credits I had from my publisher, received for something they wanted (my writing) and exchanged it for something I wanted (cleaning services).

The role of money is to efficiently facilitate this sequence of exchanges so two people can swap their labor so that they are better off, regardless of what each party wants.

Money is also needed because the variety of products and services we create have different production timescales – it takes two hours to clean my flat, but it takes a month for me to produce a report.

And some products take much longer: building a bridge, for example. Money facilitates the exchange of cleaning, writing, and bridge building.

The physical or digital item that is used for this exchange needs to be accepted as a means of settling these balances by as many people as possible, otherwise this process would not work very well. The “generally accepted” nature of money I referred to above is critical to its function.

Now that we have established what money is, we can discuss how banks fit into this relationship of “credit balances.”

I’ll bring you that in another article this week. Stay tuned.

Eventually, you’ll be able to think of bitcoin better than anyone in the markets.



Phil Anderson

Editor, Cycles Trading with Phil Anderson