Is Bitcoin Real or Fake?

What do you mean? Imagine browsing through some electronic devices on Amazon – in order to buy there, you’d have to make a money transfer whether you want to pay with PayPal or your Visa/MasterCard. So, once you make that transfer – is it a real transaction or a fake one? Well, I guess it’s somewhat real if Amazon actually sends the physical product in a beautiful box right at your door. It wouldn’t become a successful business if people sent fake money. And here is the thing – PayPal and card-based money is digital, right? Why wouldn’t Bitcoin be digital as well?

Bitcoin is a virtual form of value, which exists on the internet. To be more precise, it exists on multiple servers distributed around the world in a network called blockchain. The PayPal and card dollars used for the Amazon purchase do also exist online, right? However, you might think that digital US dollars are backed by paper money while Bitcoin is not backed by anything physical. Really? Let’s check this:

What you see above is the US M0 money supply – a measure (also called narrow money) that refers to all the US dollar banknotes and coins that exist in the world. Thus, all the physical US dollars in the world put together would reach $3.5 trillion as of July 2018. However, do you think that this is all the money out there? Of course not – the combined wealth of all the billionaires (over 2000 as of today) is over $7 trillion. It’s true that we also assess their assets, like stocks and real estate, but anyway – there is much more money than $3.5 trillion. So where is the money? Check out this chart below:

The chart shows the M2 money supply statistics – M2 comprises all forms of US dollars, including banknotes and coins (M0), deposits (saving deposits, checking deposits), mutual funds, money market securities, and other forms of money. In total, this indicator reaches $14 trillion as of today. It’s exactly four times more than the M0 money supply figure. Thus, there are 400% more digital US dollars than paper money. And the question is – are they fake? Legally – not. Everyone is using digital money because there is demand. However, if all the people and companies would like to convert all their USD deposits in paper money, there wouldn’t be enough US dollars. In other words, over $10.5 trillion (the difference between M2 and M0) cannot be transformed into cash at all. At least people are lucky that most of the merchants accept digital money, including via PayPal and credit/debit cards.

Thus, if someone tells you Bitcoin is fake, you should better check the US dollar (as well as any other fiat currency – all the banks operate with fractional reserve banking). But there is more – the US government can generate money out of nothing to fund different programs and projects. It’s like a form of theft – the government is constantly devaluing its fiat currency, making it hard for people to save value in time. If you’re skeptical – check this chart below – the US dollar has lost 96% of its value since 1913:

Jamie Dimon, when criticizing Bitcoin, recognized that the US dollar is created out of thin air.

“Creating money out of thin air without government backing is very different from money with government backing,” he said.

Governments will close down bitcoin and cryptocurrencies if they get too big, warns Jamie Dimon

However, Bitcoin is not created out of thin air in the first place – you know what mining is, right? There is a limited supply of Bitcoins and Dimon should have known this before making his comments. On the other side, there is no upper limit when it comes to the US dollar – check how the M0 and M2 money supply charts are continually increasing.

Bitcoin is based on the same supply/demand principles as any other asset out there, and yes – it is real. It is not physical, but it is real as soon as people believe it has value. The US dollar has more attributes of fake currency, but it is real anyway because people believe in its value and because it is backed by the law.

If this was not clear enough – ask yourself: is the Internet real or fake? The same answer applies to Bitcoin.

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