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Cash, Cash, Cash

Cash, Cash, Cash
Written by Jon Gulson @jongulson
Posted 31 January 2018
A common criticism of bitcoin is it's yet to become money: that Satoshi’s original idea of purely peer to peer digital cash has yet to achieve fruition because of blockchain inefficiencies (slow speed, increasing transaction costs and high energy consumption).

Cold, hard money; warm, soft cash

The accusation of failure (of bitcoin not considered money) is frequently tempered with the view bitcoin is a commodity and store of value. In all of this however, there is no comprehensive definition of what cash actually is other than an implication of some significant level of general acceptance.

From its beginning the character of bitcoin as cash in the evolution of money was understood in terms of a time component: for money to emerge from a barter economy, it must have had pre-existing commodity value: commodities such as gold and silver became commodity money and subsequently fiat money. The initial transition from a barter to monetary system being caused by a need to reduce mental transaction costs where a co-incidence of wants existed between traders.

This all happened from a memory of previous prices and is why the first bitcoin enterprises were exchanges: it meant bitcoin could be expressed in dollar terms, just as years before fiat money began as references for commodity weight measurements – a translated knowledge of money. So if we understand cash or currency simply as what is now, we can still see bitcoin isn’t cash (yet) but can maybe understand how it could become so.

The Cost of Identity and Mental Transactions

In his May 1999 paper Micropayments and Mental Transaction Costs, Nick Szabo surmises how money can become intuitive. Satoshi was influenced by Szabo and in introducing the bitcoin white paper Satoshi writes how costs of mediation in online commerce prevent small casual transactions and why merchants hassle customers for information they don’t need.



Just as the mental transaction costs incurred in barter were sufficient for the emergence of commodity money to fulfill the coincidence of wants between counterparties, mental transaction costs for a typical online customer were seen by Szabo as higher than more familiar areas of commerce and why micropayments hadn’t succeeded on the internet. This is the problem bitcoin was designed to resolve.

The cost of a mental transaction is translated into understanding value, prices, trust, avoiding a poor deal or buyer’s remorse. If bitcoin were to become accepted as cash then a new form of consumption could arise where decision making became increasingly intuitive and absent of regret – just as haggling reduced where retail prices became a smaller fraction of customer wealth.

As we remarked in a previous blog, bitcoin isn’t necessarily about inflation resistant, anti-censorship money outside the control of banks. Whilst bitcoin may be attractive for these reasons in the developing world and other situations, generally speaking the first world doesn’t follow third world trends. Irrespective of the second layer technology solutions which are happening, bitcoin needs to show how it can actually function as cash.

Electricity Bills

In Micropayments and Mental Transaction Costs, Szabo uses electricity bills as an area where statements account for transactions in gratuitously small increments which many people don’t work out or can’t understand – which could improve the value they get for their payments. The reason for this according to Szabo is ‘they are not worth the brain cycles. They have reached a mental accounting barrier’.



A Chief Executive of one of the UK’s largest energy suppliers recently echoed these words where he said before Parliament customers deserve to pay more if they don’t research the market.  As energy is the consumer price which drives all consumer prices, adoption of bitcoin among UK energy suppliers would overcome this problem for consumers as well as adding digital cash to the supplier’s bottom line and propagating the network effect of bitcoin (as cash).

If there is a reason why bitcoin holds value, it is to mitigate mental transaction costs.


Written by Jon Gulson @jongulson
Posted 31 January 2018
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