Bitcoin… Monetary Nirvana?
If you don’t know what Bitcoin is, do a little research on the internet and you’ll get a lot… but the short story is that Bitcoin was created as a medium of exchange, without a 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…by 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”. So 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 the authority.
Naturally, Bitcoin advocates, those who profit from Bitcoin’s growth, loudly insist that “Bitcoin sure is money”… and not only that, but “it’s the best money ever, money.” from the future”. etc… Well, Fiat supporters scream just as loudly that paper money 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…regardless of whether it is the money of the future, or the best money ever.
To find out, let’s look at the defining attributes of 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 stability of value the function of numeraire, or unit of measurement of value, fails.
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 the goods exchanged. Also ‘trade goods’ (tokens) that have value temporarily; and finally mutual credit exchange; that is, offsetting the value of the promises fulfilled through the exchange of bills or promissory notes.
Compared to Fiat, Bitcoin does not perform too poorly 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 retailers currently accept payments in Bitcoin. 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 earnings are a perfect example of a speculative boom… like Dutch tulip bulbs, junior mining companies, or Nortel stock.
Of course, Fiat also fails here; 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 in the most important measure of money; the ability to store value and preserve value over time. Real money, namely gold, has demonstrated the ability to hold value not just for centuries, but for eons. Neither Fiat nor Bitcoin have this crucial capability… they 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 ‘numerary’ issue. Numerary 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 actually measure value; after all, value resides only in the human conscience… and how can you really measure anything in conscience? However, through the Mengerian principle of 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 the 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 does not have value by itself, but rather that value flows from the value of 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 dollar bill and a hundred dollar bill, except for 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, it is only 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 engraved on its surface, ‘face value’ or not. Causality is the opposite of Fiat; 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 a fleeting amount… the number printed on it, the ‘face value’.
Bitcoin is further from being the numeraire; not only is it just a number, much like Fiat… but its value is measured in Fiat! Even if Bitcoin becomes internationally accepted as a medium of exchange, and even if it manages to replace the dollar as the accepted ‘numerary’, it will never be able to have an intrinsic measure like gold has. 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 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 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 embracing the true value of Bitcoin, right? What this actually means is that the banks recognize 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; it’s about a week’s worth of printing by the US Federal Reserve alone. And, once the Bitcoins were bought and locked up in the Federal Reserve’s ‘wallet’… to what useful purpose could they serve?
There would be no Bitcoins left in circulation; a 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 fend off such a fate? Change the algorithm and increase the 26 million to… 52 million? At 104 million? Join the Fiat print parade? But then, according to the quantity theory of money, Bitcoin would begin to lose value, just as Fiat allegedly loses value through ‘overprinting’…
We come to the key issue; Why look for a ‘new money’ when we already have the best money, gold? Fear of gold confiscation? Lack of anonymity by an intrusive government? Brutal taxes? Legal tender fiat currency laws? All previous. The answer is not in a new form of money, but in a new social structure, one without Fiat, without government espionage, without drones and SWAT teams… without IRS, border guards, TSA goons… over and over again. again. A world of freedom, not tyranny. Once this is achieved, gold will resume its old and vital role as honest money…and not a moment sooner.