Bitcoin… Monetary Nirvana?
If you don’t know what Bitcoin is, do a little research on the internet, and you’ll get plenty… but the short story is that Bitcoin was created as a medium of exchange, without a central bank or issuing bank being involved. Furthermore, Bitcoin transactions should 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… by solving an increasingly difficult mathematical formula – increasingly difficult as more Bitcoins are ‘mined’ into existence; interesting again – on the computer. After creation, the new Bitcoin is placed in an electronic ‘wallet’. It is then possible to trade real goods or fiat currency for bitcoins… and vice versa. Furthermore, since there is no central issuer of bitcoins, they are all highly distributed, making it resistant to being ‘managed’ by authorities.
Of course, the proponents of Bitcoin, those who benefit from the growth of Bitcoin, insist quite loudly that ‘sure, Bitcoin is money’… and not only that, but ‘it’s the best money ever, the money of the future’, etc. .Well, Fiat proponents shout just as loudly that paper currency is money… and we all know that Fiat paper is not money at all, as it lacks the most important attributes of real money. The question then is whether Bitcoin even qualifies as money… never mind that 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 means of storing value; the most important attribute, because without stability of value the numeraire function, or unit of measure of value, fails.
2) money is a numeraire, a unit of account.
3) money is a means of exchange… but other things can also fulfill this function, i.e. direct barter, ‘netting’ of exchanged goods. Also ‘trade goods’ (chits) which temporarily have value; and finally mutual credit exchange; ie netting the value of promises fulfilled by the exchange of accounts or IOUs.
Compared to fiat, Bitcoin does not perform 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 accepted internationally. On the other hand, very few merchants currently accept payment in bitcoins. Unless acceptance grows geometrically, Fiat wins…albeit at the cost of exchange between countries.
The first condition is much more difficult; money has to be a stable store of value… now bitcoins have gone from a ‘value’ of $3.00 to around $1000, in just a few years. This is about as far from being a ‘stable store of value’; as you can get! Indeed, such gains are a perfect example of a speculative boom… like Dutch tulip bulbs, or junior mining companies, or Nortel shares.
Of course, Fiat fails here too; for example, the US dollar, the ‘main’ fiat, has lost over 95% of its value in a few decades… neither fiat nor bitcoin qualify as the most important measure of money; the ability to store value and preserve value over time. Real money, i.e. gold, has shown the ability to hold value not just for centuries, but for eons. Neither Fiat nor Bitcoin have this key capacity… both fail like money.
Finally, we come to the second attribute; that numeraire. This is really interesting and we can see why both Bitcoin and Fiat are failing as money if we look closely at the ‘numeraire’ issue. Numeraire refers to the use of money not only to store value, but also to measure or compare values. In Austrian economics, it is considered impossible to actually measure value; after all, value resides only in human consciousness… and how can anything in consciousness actually be measured? Nevertheless, through the principle of Mengerian market action, i.e. the interaction between supply and offer, market prices can be established… even for a moment… and this market price is expressed in numeraire, the most marketable good, i.e. is money.
So how do we determine the value of a Fiat…? Through the concept of ‘purchasing power’… that is, the value of Fiat is determined by what it can be traded for… the so-called ‘basket of goods’. But he clearly implies that Fiat has no value of its own, but that value derives from the value of goods and services for which it can be traded. Causality flows from the ‘bought’ goods to the Fiat number. After all, what’s the difference between a one dollar bill and a hundred dollar bill other than the number printed on it… and the purchasing power of the number?
Gold, on the other hand, is not measured by what it is traded for; rather, uniquely, it is measured by another physical standard; by its weight, i.e. mass. A gram of gold is a gram of gold, and an ounce of gold is an ounce of gold… no matter what number is engraved on its surface, ‘face value’ or otherwise. The causality is the opposite of that of Fiat; Gold is measured by weight, intrinsic quality… not purchasing power. Now, do you have any idea what an ounce of dollars is worth? There is no such thing. Fiat is only ‘measured’ by an ephemeral quantity… a number printed on it, a ‘face value’.
Bitcoin is far from being numeraire; not only is it just a number, just like Fiat… but its value is measured in Fiat! Even if bitcoin becomes internationally accepted as a medium of exchange, and even if it succeeds in replacing the dollar as the accepted ‘numeraire’, it can never have an intrinsic measure like gold. Gold is unique in that it is measured in true, unchanging physical quantity. Gold is unique in preserving its value for thousands of years. Nothing else within the reach of mankind 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 benefits are also questionable; the intention is to limit Bitcoin ‘mining’ to 26,000,000 units; that is, the ‘mining’ algorithm becomes harder and harder to solve, and then impossible after 26 million bitcoins have been mined. Unfortunately, this announcement could be the death knell for Bitcoin; already some central banks have announced that bitcoins could become a reserve currency.
Wow, sounds like a big step for Bitcoin, doesn’t it? After all, the ‘big banks’ seem to accept the true value of Bitcoin, don’t they? What this actually means is that the banks are admitting that they could trade Fiat for Bitcoins… and to actually buy back the planned 26 million Bitcoins would cost a measly 26 billion Fiat dollars. Twenty-six billion dollars is no small thing for Fiat Printers; that’s about a week of printing by the US Fed. And, once bitcoins are purchased and locked away in a Fed ‘wallet’… what useful purpose could they possibly serve?
There would be no bitcoins in circulation; perfect corner. If there are no Bitcoins in circulation, how on earth could they be used as a medium of exchange? And, what could Bitcoin issuers do to protect themselves from such a fate? Change the algorithm and increase 26 million to… 52 million? At 104 million? Join the Fiat Printing Press Parade? But then, according to the quantity theory of money, Bitcoin would begin to lose value, just as Fiat supposedly loses value by ‘overprinting’…
We come to the key question; why look for ‘new money’ when we already have the best money, gold? Fear of gold confiscation? Lack of anonymity from an intrusive government? Brutal taxation? Fiat money legal tender laws? All of the above. The answer is not in a new form of money, but in a new social structure, one without Fiat, without Government spying, without drones and special forces… without IRS, border guards, TSA thugs… and on and on. A world of freedom, not tyranny. Once this is achieved, gold will resume its ancient and vital role as honest money… and not a moment before.