Bitcoin … Money nirvana?
If you don’t know what bitcoin is, do a little research on the internet and you will get a lot … but the short story is that bitcoin was created as a medium of exchange without any central bank or issuing bank involved. In addition, bitcoin transactions are assumed to be private, ie anonymous. Most interestingly, 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” … an interesting term here … by solving an increasingly difficult mathematical formula – more difficult because more bitcoins are “mined” for existence; again interesting – on a computer. Once created, the new bitcoin is placed in an electronic “wallet”. Then it is possible to trade real goods or fiat currency for bitcoins … and vice versa. In addition, because there is no central issuer of bitcoins, they are all widespread and thus cannot be “managed” by the authorities.
Naturally, Bitcoin proponents, those who are taking advantage of the growth of bitcoin, insist quite loudly that “certainly bitcoin is money” … and not only that, but “this is the best money so far, the money of the future”. etc … Well, Fiat supporters are shouting just as loudly that paper currency is money … and we all know that Fiat paper is not money in any way, because it lacks the most important attributes of real money. The question then is whether bitcoin qualifies as money at all … it doesn’t matter if it’s the money of the future or the best money ever.
To understand, let’s look at the attributes that define money and see if bitcoin meets the requirements. The three main attributes of money are;
1) money is a stable means of storing value; the most important attribute, because without value stability the numeraire function, or unit of measure, fails.
2) money is numeraire, the unit of account.
3) money is a medium of exchange … but other things can also perform this function, ie. direct barter, “netting” of exchanged goods. Also “merchandise” (cheats) that have a temporary value; and finally the exchange of mutual credit; i.e. netting the value of promises made through an exchange of accounts or IOU.
Compared to Fiat, bitcoin is not as bad as a medium of exchange. Fiat is only accepted in its publisher’s geographic domain. Dollars are not good in Europe, etc. Bitcoin is accepted internationally. On the other hand, very few retailers currently accept bitcoin payments. Unless acceptance grows exponentially, Fiat wins … albeit at the cost of exchanges between countries.
The first condition is much more difficult; money must be a stable means of storing value … bitcoins have now gone from a “value” of $ 3.00 to about $ 1,000 in just a few years. This is far from being “stable storage of value”; as you can get! Indeed, such profits are a perfect example of a speculative boom … such as Dutch tulip bulbs, young mining companies or Nortel shares.
Of course, Fiat fails here too; for example, the US dollar, the “main” Fiat, has lost more than 95% of its value in a few decades … neither Fiat nor bitcoin qualifies as 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 maintain value not only for centuries, but for eons. Neither Fiat nor Bitcoin have that crucial capacity … both fail like money.
Finally we come to the second attribute; to be the numerator. Now this is really interesting and we can understand why both bitcoin and fiat fail like money by looking closely at the issue of “numerical number”. Numeraire refers to the use of money not only to store value, but also to measure or compare value in a sense. In the Austrian economy, it is considered impossible to really measure value; after all, value is only in human consciousness … and how can one actually measure something in consciousness? However, through the principle of Mengerian market action, ie the interaction between offer and offer, market prices can be established … even if only for a moment … and this market price is expressed through numeraire, the best-selling commodity, which is money.
So how do we determine the value of Fiat …? Through the concept of “purchasing power” … ie. Fiat’s value is determined by what it can be traded for … the so-called ‘basket of goods’. But he makes it clear that Fiat has no value of its own, rather the value comes from the value of the goods and services that can be traded. The causal link runs from the “purchased” 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 trades for; rather unique, it is measured by another physical standard; according to its weight or 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 causal link is the opposite of that of Fiat; Gold is measured by weight, inherent quality … not by purchasing power. Now, do you have any idea about the value of an ounce of dollars? No such thing. Fiat is “measured” only by an ephemeral quantity … the number printed on it, the “face value”.
Bitcoin is far from being the number; not only is it a prime number, similar to 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 with accepted numeraire, it can never have an inherent measure like gold. Gold is unique in that it is measured by a true, unchanged physical quantity. Gold has been unique in storing value for thousands of years. Nothing else in 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 to claim money. Its advantages are also in question; the intention is to limit the “extraction” of bitcoins to 26,000,000 units; this means that the digging algorithm is getting harder and harder to solve, and then impossible once 26 million bitcoins have been mined. Unfortunately, this message could be the death knell for bitcoin; already some central banks have announced that bitcoins could become a “reserved” currency.
Wow, sounds like a big step for bitcoin, right? After all, big banks seem to accept the true value of bitcoin, don’t they? This actually means that banks recognize that they can trade fiat for bitcoins … and the actual purchase of the planned 26 million bitcoins would cost a meager 26 billion fiat dollars. Twenty-six billion dollars is not a small change for Fiat printers; this is approximately one week of printing by the US Fed alone. And after the bitcoins were bought and locked in the Fed’s “wallet” … what useful purpose could they serve?
There will be no bitcoins in circulation; perfect angle. If there are no bitcoins in circulation, how the hell 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 from 26 million to … 52 million? Up to 104 million? Join the Fiat printing parade? But then, according to the quantitative theory of money, bitcoin will begin to lose value, just as Fiat is supposed to lose value through “overprinting” …
We come to the key question; why look for “new money” when we already have the best money, Gold? Fear of confiscating gold? Lack of anonymity from an intrusive government? Brutal taxation? Laws on legal tender for fiat money? All listed. The answer is not in a new form of money, but in a new social structure, one without Fiat, without spying on the government, without drones and special forces … without the IRS, border guards, thugs from the TSA … and so on. A world of freedom, not tyranny. Once this is achieved, gold will resume its ancient and vital role of honest money … and not a moment before.