Abandoning The Fiat Standard
Not long ago, one of my favourite mobile Bitcoin wallets, Samourai, abandoned all reference to any fiat currency in its app. At the time I had been clamouring for them to add CAD as a unit of account, having reached out via twitter previously.
Upon the announcement I was a tad annoyed, disappointed, and concerned that I may have to migrate away from the wallet to a new solution. Surely this move was completely counterintuitive and would only serve to hinder adoption, right?
https://www.coindesk.com/samourai-wallet-stops-showing-fiat-value-of-bitcoin-balances/
Over time I’ve not only come to terms with their decision, but now firmly believe it was the right one to make. In fact I think the idea of removing fiat balances in wallets is such a wonderful idea that I wish it would be adopted across the board. Let me explain my reasoning, and why I think the team at Samourai are doing something so fundamentally imperative to building the general public’s perception of Bitcoin.
1. Establishing Value Independence
Ever since the market first deemed Bitcoin to have value, that value has been referred to in dollars, yen, yuan, etc. Of course this was a natural thing for people to do — relating a new asset to the value of something familiar to them. I also believe that referring to a fiat value of Bitcoin is obviously needed in a variety of cases (more on that later). However, at this point in time I believe it is imperative to the growth of this asset that we start to refer to it independent of conversion rates to local currencies. Here are a couple examples of what I mean:
Imagine you are a US citizen and you’re planning a trip to Europe. You want 100 EUR so you check the rate at your bank. We’ll use Google’s rate for this example.
Ok great. It’ll cost you $112.98 to buy 100 Euros.
Now… if someone asked you how many Euros you have, what would you reply?
“About $113 dollars worth” OR “100 Euros”?
The Euro is clearly its own asset with its own independent value, so it seems a tad ridiculous to refer to the amount of dollars necessary to acquire the Euros in your pocket.
“But Ben… Bitcoin is a volatile asset many use for investment purposes. Regular forex conversions aren’t exactly a fair comparison.”
Fair point, random internet person! Let’s take a look at another example that falls into a different asset class: Gold. Let’s say you’re an individual that likes the idea of sound money, and because of this you’ve decided to invest in precious metals. You check the current prices and decide to pick up 10oz of gold to store in your safe.
Once again, when someone asks you how much gold you’re holding, are you more likely to say “About $12,900 worth” or “10oz”? While an investor will likely have a knowledge of the fiat value of their gold holdings, it makes more sense to say 10oz for a couple of reasons:
A) The person you’re speaking to may not know the spot price of gold, so quoting dollars doesn’t inform them as to the amount of gold you have. At the very least, you should offer them both metrics here.
B) If your reason for holding gold is for sound money and wealth preservation, accumulation is likely the name of the game for you. OZ becomes the preferred unit of account, because THAT’S the number you’re trying to increase.
2. What the Hell Is The Price?
In the above examples I was using the Google price… but is that accurate? Will it be the same wherever I go? How are these prices calculated?
When you go to a store to buy a product, it’s pretty clear cut how a price works. You see a chair for $10 dollars, and that is the price. That same chair MAY be more or less expensive at other stores. There is no official “global chair price” — the price of the chair is whatever you have agreed to pay, and that store may opt to change that price based on supply and demand.
Markets for foreign currencies and gold can be looked at the same way. If I look up Euros on Google I get a USD rate, but my bank rate will vary from that. If I go to a currency converter in the mall or at the airport, the rate will also likely be higher. With gold, rates may vary depending on if you’re investing through a fund and holding a certificate, demanding physical delivery, or buying direct at a local precious metals seller.
The same is especially true of Bitcoin — rates can widely vary based on the service used to obtain your coins. The main problem to be addressed here is that Bitcoin has attracted a lot of people who may have never invested in anything else before — and are therefore unfamiliar with all of these intricacies.
Are you getting your BTC from an individual on LocalBitcoins, an OTC dealer, an online exchange? Each one of them will have a price that they themselves set, and the market (you) will decide if you’re willing to pay it. Furthermore, some of these options may tack on additional fees for actions like funding an online account with dollars, or sending your Bitcoin to a personal wallet. THEN, once you have your BTC in a personal wallet, the app may be citing a dollar conversion price quoted from an entirely different source than where you just bought — which is the main source of confusion for newcomers.
This can become particularly pronounced in geographies where Bitcoin is more scarce, and thus carries a premium. Prices in Canada can often be quite a bit higher than the US due to liquidity problems. If you’re using a mobile wallet that references US prices and simply converts that value to CAD, the fiat value represented in your app can often be much lower than what you would be able to get on most local exchanges.
In removing the fiat conversion rate for wallets, it will put the focus and VALUE on bitcoin itself. It will shift the mentality of buyers from “I want $500 worth of Bitcoin” to “I want Bitcoin… how much will $500 get me?” Both statements result in the same transaction, but statement two shifts the importance from what you’re spending to what you’re getting.
3. The Drive Towards Sats
All this talk about valuing Bitcoin for what it is brings up another important point that has been circulating through the cryptosphere lately — using Satoshis as the dominant unit for BTC. Those unfamiliar with this: Bitcoin can be divided by 8 decimal places, the smallest of which is called a Satoshi, or Sat. One bitcoin will contain 100 million satoshis.
Let’s face it, even if you’re a hardcore Bitcoin Maximalist, it can be difficult to look at a wallet with 0.00034500 BTC and see it as more than just a bit of pocket change. Decimals are funny like that. Lately however, many have been advocating that we use that final decimal place, satoshis, as our regular method of tracking holdings. With the example here, instead of having a difficult to decipher fraction of a bitcoin, you suddenly have 34,500 SATS. I don’t know about you, but this makes me appreciate the value sitting in my wallet much more. It also encourages a couple other things:
A) Responsible spending — “That coffee is only 0.00079BTC!” vs “Do I really want to drop 79,000 SATS on a coffee?”
B) Efficient use of the Bitcoin Network — “Not bad, my transaction fee was only 0.00002BTC vs “Hmmm 2000 sats for a transaction fee. I wonder if I can reduce that by using segwit or lightning?”
4. The Monetization Roadmap
At this point some of you may be thinking that I’m advocating for many things that sound counterintuitive to a new global currency. Won’t discouraging spending and encouraging hodling inhibit the “money” use case?
There are many reasons why I don’t think so, and it can be difficult to encapsulate all of them. In general I believe that Bitcoin will be a global currency, but that we are not there yet — and we have many milestones to hit before we should treat it as such.
I recently listened to some thoughts from a gentleman by the name of Murad Mahmudov. He was able to concisely sum up a roadmap of the journey from nerdy digital collectible to global hard money. There are basically transitional stages from collectible, to store of value, medium of exchange, unit of account, and finally full global currency. Each stage has a number of notable accomplishments along the way. This chart does a good job representing it.
A great compliment to this chart is a podcast in which Murad was interviewed by Anthony Pompliano. I highly recommend everyone check it out. The podcast itself is called “Off The Chain” and the episode title is “The Ultimate Bitcoin Argument”
ITUNES:
GOOGLE PLAY:
Furthermore, you can follow Murad on twitter @MustStopMurad
5. So… Where IS Fiat Price Useful?
Now that we’ve had a bit of a journey together, I want to outline where I find fiat price conversions to be useful and necessary (for now).
- TRADING: As a cryptocurrency day-trader you may want to use USD (or any other local currency) as your base trading pair, particularly if this is your full time gig and your profits are used to pay your monthly bills/living expenses. It is this instance alone that I believe a native fiat conversion rate should be presented in the app/web interface itself. However, if your profits are strictly long term play money and you believe in Bitcoin’s value proposition, then you would likely be using SATS as your base trading pair, and your goal is to accumulate more BTC. I get the feeling that these individuals will be the least opposed to moving away from fiat in personal wallets.
- SPENDING: Some people REALLY want to spend their Bitcoin, and that is their prerogative. That said, in the cases of spending your BTC I still believe the best path would be for the merchant to display the price of the item in fiat/BTC but to also make abundantly clear where they get their rate from. This means that a fiat balance in the user’s wallet is still entirely unnecessary because the BTC rate is agreed upon at the time of sale — as presented by the merchant. Down the line if Bitcoin achieves price stability and becomes a unit of account, these conversions will become unnecessary.
- P2P EXCHANGE: Peer to peer transactions when converting to local currency require some sort of a reference rate. This is where the problem with wallets representing fiat value really becomes evident. If you want to buy BTC from someone, you may both be running different mobile wallets, which are pulling prices from different places. Whose wallet is right? No matter what, someone will end up feeling cheated unless you’re both on the same app. By removing fiat values, you can both agree on an external price source (likely finding an average or median price) and both come away with exactly what you’ve agreed upon. An exact amount of BTC for an exact amount of Fiat. Once again, if Bitcoin succeeds eventually in becoming a global currency — these types of exchanges cease to be necessary, because one could simply spend their Bitcoin locally.
Conclusion
I genuinely believe that the growth and adoption of Bitcoin as a global sound money is an economic reality that even the biggest critics will eventually be unable to escape. Anything I write here will have little or no bearing on it whatsoever. That said, in order to help others better understand, it may be best to tear off this band-aid sooner rather than later. There’s a lot of learning for the general population to do, and wallets that do away with fait/default to satoshis as a unit will jump-start that conversation. If we truly want to accelerate a world built on the Bitcoin standard, I believe we must first abandon the fiat standard.
