Bitcoin… Monetary Nirvana?
If you don’t know what Bitcoin is, do some research on the internet and you’ll get a lot… but the short story is that Bitcoin was created as a medium of exchange, with no central bank or bank of issue. be involved. Furthermore, Bitcoin transactions are supposed to be private, i.e. anonymous. The most interesting thing is that bitcoins do not exist in the real world; they exist only in computer software, as a kind of virtual reality.
The general idea is that Bitcoins are ‘mined’… interesting term here… solving an increasingly difficult mathematical formula, more difficult as more Bitcoins are ‘mined’ into existence; again interesting- on a computer. Once created, the new Bitcoin is placed in an electronic “wallet”. Then it is possible to exchange real goods or Fiat currency for Bitcoins… and vice versa. Also, since there is no central issuer of Bitcoins, everything is highly distributed, making it resistant to being “managed” by authority.
Naturally, Bitcoin advocates, those who benefit from Bitcoin’s growth, insist loudly that “Bitcoin sure is money”… and not only that, but “it’s the best money ever, money from the future”. etc… Well, the defenders of Fiat shout with the same force that paper money is money… and we all know that Fiat paper is not money at all, since it lacks the most important attributes of real money. The question then is whether Bitcoin even qualifies as money… regardless of whether it is the money of the future, or the best money ever.
To find out, let’s look at the attributes that define money and see if Bitcoin qualifies. The three essential attributes of money are;
1) money is a stable store of value; the most essential attribute, since without value stability the numerary function fails, or value measurement unit.
2) money is the numeraire, the unit of account.
3) money is a medium of exchange… but other things can also fulfill this function, ie direct barter, the ‘net compensation’ of exchanged goods. Also ‘commercial goods’ (tokens) that have temporary value; and finally exchange of mutual credit; that is, compensating the value of the promises fulfilled through the exchange of bills or promissory notes.
Compared to Fiat, Bitcoin doesn’t do too badly as a medium of exchange. Fiat is only accepted in the geographic domain of its issuer. Dollars are not good in Europe, etc. Bitcoin is internationally accepted. On the other hand, very few retailers currently accept Bitcoin payments. Unless acceptance grows geometrically, Fiat wins… albeit at the cost of trade between countries.
The first condition is much more difficult; money should be a stable store of value… now bitcoins have gone from a ‘value’ of $3.00 to around $1,000, in just a few years. This is so far from being a ‘stable store of value’; how can you get! In fact, such gains are a perfect example of a speculative boom…like Dutch tulip bulbs, junior mining companies, or Nortel stocks.
Of course, Fiat also fails here; for example, the US dollar, the ‘major’ fiat, has lost over 95% of its value in a few decades…neither fiat nor Bitcoin qualify in the most important measure of money; the ability to store value and preserve value over time. Real money, that is, gold, has shown the ability to hold value not just for centuries, but for eons. Neither Fiat nor Bitcoin have this crucial ability… both fail as money.
Finally, we come to the second attribute; that of being the numerary. Now this is really interesting, and we can see why both Bitcoin and Fiat fail as money by looking closely at the ‘cash’ issue. Numeraire refers to the use of money not only to store value, but also to measure or compare value. In Austrian economics, it is considered impossible to truly measure value; after all, value resides only in human consciousness… and how can you actually measure anything in consciousness? However, through the principle of Mengerian market action, that is, the interaction between supply and demand, market prices can be established… even momentarily… and this market price is expressed in terms of numeraire, the most marketable good, which is money.
So how do we establish the value of Fiat…? Through the concept of ‘purchasing power’… that is, the value of Fiat is determined by what can be exchanged… the so-called ‘basket of goods’. But this clearly implies that Fiat has no value by itself, rather that value flows from the value of the goods and services for which it can be exchanged. The causality flows from the ‘purchased’ goods to the Fiat number. After all, what difference is there between a one-dollar bill and a hundred-dollar bill, except the number printed on it…and the purchasing power of the number?
Gold, on the other hand, is not measured by what is exchanged; rather, only, it is measured by another physical standard; by its weight or mass. A gram of gold is a gram of gold, and an ounce of gold is an ounce of gold… it doesn’t matter what number is etched on its surface, ‘face value’ or not. Causality is the opposite of Fiat’s; Gold is measured by weight, an intrinsic quality… not by purchasing power. Now, do you have any idea of the value of an ounce of Dollars? There’s no such thing. Fiat is only ‘measured’ by an ephemeral amount… the number printed on it, the ‘nominal value’.
Bitcoin is further from being the numeraire; Not only is it just a number, as much as Fiat… but its value is measured in Fiat! Even if Bitcoin is accepted internationally as a medium of exchange, and even if it manages to replace the dollar as the accepted ‘cash’, it can never have an intrinsic measure like gold does. Gold is unique in being measured by a true and unchanging physical quantity. Gold is unique in storing value for thousands of years. Nothing else within the reach of humanity has this unique combination of qualities.
In conclusion, while Bitcoin has some advantages over Fiat, namely anonymity and decentralization, it fails in its claim to be money. Its advantages are also questionable; the intention is to limit the ‘mining’ of Bitcoins to 26,000,000 units; i.e. the ‘mining’ algorithm becomes increasingly difficult to solve, then impossible after all 26 million Bitcoins are mined. Unfortunately, this announcement could very well be the death knell for Bitcoin; Some central banks have already announced that Bitcoins may become a ‘reservable’ currency.
Wow, sounds like a big step for Bitcoin, doesn’t it? After all, the ‘big banks’ seem to be accepting the true value of Bitcoin, right? What this actually means is that the banks acknowledge that they could exchange Fiat for Bitcoins… and buying the planned 26 million Bitcoins would cost a mere 26 billion Fiat dollars. Twenty-six billion dollars is no small change for Fiat printers; this is about a week’s worth of printing by the US Federal Reserve alone and, once the Bitcoins were bought and locked in the Federal Reserve ‘wallet’… to what useful purpose could they be? serve?
There would be no Bitcoins left in circulation; a perfect corner If there are no Bitcoins in circulation, how the heck could they be used as a medium of exchange? And what could Bitcoin issuers do to fend off such a fate? Change the algorithm and increase the 26 million to… 52 million? To 104 million? Join the Fiat print parade? But then, according to the quantity theory of money, Bitcoin would start to lose value, just as Fiat supposedly loses value through ‘overshoot’…
We come to the key issue; Why look for ‘new money’ when we already have the best money, gold? Fear of confiscation of gold? Lack of anonymity by an intrusive government? Brutal taxes? Legal tender fiat currency laws? All previous. The answer lies not in a new form of money, but in a new social structure, one without Fiat, without government spying, without drones and SWAT teams… without IRS, border guards, TSA goons… over and again. A world of freedom, not tyranny. Once this is accomplished, gold will resume its former and vital role as honest money…and not a moment before.