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Cost of money: a big problem solved by bitcoin

Jul 27, 2016

In 1998 a group of unsuspecting fishermen happened upon a shipwreck off the coast of Belitung Island in Indonesia. The wrecked ship was an Arabian dhow that had left China and was bound for Africa when it met its fate less than a mile from land. A horde of treasure was uncovered inside the hull, including ceramic artifacts, spice jars, inkwells, funeral urns, crystals, gilt-silver boxes, pearls, rubies, sapphires, and gold from the Tang Dynasty. All together the find was worth about $80 million in today’s USD.

Stories like this immediately grab our attention and imagination. Wouldn’t it be great to happen upon such a treasure by accident? What would you do with so much money? Would you be allowed to keep it?

Perhaps more interesting than the treasure itself is what it tells us about our ancestors. Let's ignore the jewels and valuable artifacts for a moment and focus on the gold. Considering the density of gold, and it’s propensity to sink in water, why would somebody put something so valuable in such a precarious place? Ideally gold should be in a vault on land, not in a boat on the ocean, where there is risk of bad weather and pirates. We can only conclude that people must have had a very good reason to put their gold at risk in this way.

And it turns out people did have a good reason: it had to be moved in order to work as money, and moving it by sea was faster and easier than moving it over land.

Solutions for using money locally have long existed: a trader living in 9th century China could entrust their gold to a goldsmith or banker, who would issue paper certificates that were much easier to carry around. Within a certain geographic range, these certificates were “as good as gold,” meaning they could be traded or sold to others who could go back to the goldsmith and take physical delivery of the gold if desired.

But what happened when people wanted to do business outside of their town? What would a Chinese merchant do if he wanted to purchase goods in Africa? Even though his African counterparts accepted gold as money, they wouldn’t accept his paper certificates, which could only be redeemed for physical gold if taken back to China. For this reason, the gold had to move, and so it was reluctantly loaded up in the hulls of trading ships.

Transporting gold may seem archaic, but it’s a great example of what is known as the “cost of money.” The cost of money is the aggregate burden borne by society to store, secure, transport, and manage money. Today, the gold our ancestors relied on has been replaced by paper currency and credit cards, but the same principle applies. Think about how many companies are enlisted in one or more of these tasks, everything from office buildings to printing presses to IT infrastructure to armored vehicles; even down to that little plastic card in your pocket. These are the modern-day equivalent of the treasure-laden merchant ship.

We have come so far in the pursuit of solutions to the cost of money, but there is still room for improvement. Bitcoin offers a leap forward in this regard. How would you normally move $80 million from China to Africa - say, Kenya - today? Assuming you were so fortunate to have these funds at your disposal, you would have to convert your Yuan Renminbi into Kenyan Shillings. You would start by giving your money to your local bank, but your local bank doesn’t have a direct connection to the bank in Kenya. So they would find other middlemen to carry out the transaction, all of whom would take a fee for their service. Although we no longer have to worry about the money getting lost at sea, the cost of moving it is still substantial, and it still takes quite a bit of time to arrive -- sometimes as much as 10 business days for international remittances.

Since bitcoin is a global currency, there may come a day when individuals, businesses, and governments all use it as an alternative to national currencies. Even today it is already possible for a person in Shanghai to send $80 million worth of bitcoin to a partner in Nairobi, near instantly, for about 5 cents. And this technology isn't only for large amounts - why not buy a distant friend a $3 beer, just to show them you’re thinking about them?

Bitcoin has a “cost of money” too, but it’s far cheaper than dollars, euros, or yen. It doesn’t take an enormous stretch of the imagination to envision a future where international wire transfers seem as old fashioned as sunken treasure.

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