“It [Bitcoin] has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can.”
Now, Greenspan should know better than to say something like that. As a fiat currency, the dollar doesn't have any more intrinsic value than Bitcoin. And that's why I decided to write about this. Most of the supposed "Bitcoin Primers" out there are more confusing than helpful. They don't explain how money works or how cryptocurrencies like Bitcoin satisfy the requirements to become a currency.
What makes a Currency?
- Scarcity - If you have too much of the currency, it's value will plummet toward zero. So, there must be a limited supply.
- Verifiability - You must be able to verify that a unit or token of the currency is valid and not a forgery or imitation.
- Availability - Despite scarcity, there still must be a stable supply of the currency to match growth in the corresponding economy.
Scarcity: Only one entity, the central bank, has the authority to create and issue the currency. The central bank limits the issue of money in order to preserve its value.
Verifiability: Coins and paper money are printed or minted using materials and techniques that are difficult for average people to reproduce but are fairly easy for to verify. Money in the form of bank balances is verifiable because each bank or credit union has accounts with higher-level banks ultimately reaching the Federal Reserve. So, when I write a check from my bank to yours, our two banks contact each other and transfer the value sending records up the banking chain until they reach a common parent bank which may be the Fed. Each bank in the chain verifies that the appropriate balances are in place before allowing the transaction to proceed.