Bitcoin… Monetary Nirvana?
If you don’t know what Bitcoin is, do a bit of research on the internet, and you will get plenty… but the short story is that Bitcoin was created as a medium of exchange, without a central bank or bank of issue being involved. Furthermore, Bitcoin transactions are supposed to be private, that is anonymous. Most interestingly, Bitcoins have no real world existence; 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 put into an electronic ‘wallet’. It is then possible to trade real goods or Fiat currency for Bitcoins… and vice versa. Furthermore, as there is no central issuer of Bitcoins, it is all highly distributed, thus resistant to being ‘managed’ by authority.
Naturally proponents of Bitcoin, those who benefit from the growth of Bitcoin, insist rather loudly that ‘for sure, Bitcoin is money’… and not only that, but ‘it is the best money ever, the money of the future’, etc… Well, the proponents of Fiat shout just as loudly that paper currency is money… and we all know that Fiat paper is not money by any means, as it lacks the most important attributes of real money. The question then is does Bitcoin even qualify as money… never mind it being 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, as without stability of value the function of numeraire, or unit of measure 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 ‘netting out’ of goods exchanged. Also ‘trade goods’ (chits) that hold value temporarily; and finally exchange of mutual credit; ie netting out the value of promises fulfilled by exchanging bills or IOU’s.
Compared to Fiat, Bitcoin does not do too badly as a medium of exchange. Fiat is only accepted in the geographic domain of its issuer. Dollars are no good in Europe etc. Bitcoin is accepted internationally. On the other hand, very few retailers currently accept payment in Bitcoin. Unless the acceptance grows geometrically, Fiat wins… although at the cost of exchange between countries.
The first condition is a lot tougher; money must 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 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 stocks.
Of course, Fiat fails here as well; for example, the US Dollar, the ‘main’ 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 capacity to store value and preserve value through time. Real money, that is Gold, has shown the ability to hold value not just for centuries, but for eons. Neither Fiat nor Bitcoin has this crucial capacity… both fail as money.
Finally, we come to the second attribute; that of being the numeraire. Now this is really interesting, and we can see why both Bitcoin and Fiat fail as money, by looking closely at the question of the ‘numeraire’. Numeraire refers to the use of money to not only store value, but to in a sense measure, or compare value. 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, that is interaction between bid and offer, market prices can be established… if only momentarily… and this market price is expressed in terms of the numeraire, the most marketable good, that 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 it can be traded for… a so called ‘basket of goods’. But his clearly implies that Fiat has no value of its own, rather value flows from the value of the goods and services it may be traded for. Causality flows from the goods ‘bought’ 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 it trades for; rather, uniquely, 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… no matter what number is engraved on its surface, ‘face value’ or otherwise. Causality is the opposite to that of Fiat; Gold is measured by weight, an intrinsic quality… not by purchasing power. Now, have you any idea of the value of an ounce of Dollars? No such thing. Fiat is only ‘measured’ by an ephemeral quantity… the number printed on it, the ‘face value’.
Bitcoin is farther away from being the numeraire; not only is it simply a number, much as 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 ‘numeraire’, it can never have an intrinsic measure like Gold has. Gold is unique in being measured by a true, unchanging physical quantity. Gold is unique in storing value for thousands of years. Nothing else in 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 being money. Its advantages are also questionable; the intent is to limit the ‘mining’ of Bitcoins to 26,000,000 units; that is, the ‘mining’ algorithm gets harder and harder to solve, then impossible after the 26 million Bitcoins are mined. Unfortunately, this announcement could very well be the death knell of Bitcoin; already, some central banks have announced that Bitcoins may become a ‘reservable’ currency.
Wow, sounds like a major step for Bitcoin, does it not? After all, the ‘big banks’ seem to be accepting the true value of the Bitcoin, no? What this actually means is banks recognize that they could trade Fiat for Bitcoins… and to actually buy up the 26 million Bitcoins planned would cost a meagre 26 Billion Fiat Dollars. Twenty six billion Dollars is not even small change to the Fiat printers; it is about a week’s worth of printing by the US Fed alone. And, once the Bitcoins bought up and locked up in the Fed’s ‘wallet’… 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 the issuers of Bitcoin possibly do to defend against such a fate? Change the algorithm and increase the 26 million to… 52 million? To 104 million? Join the Fiat printing parade? But then, by the quantity theory of money, Bitcoin would start to lose value, just as Fiat supposedly loses value through ‘over-printing’…
We come to the key issue; why search for a ‘new money’ when we already have the very 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 swat teams… without IRS, border guards, TSA thugs… on and on. A world of liberty not tyranny. Once this is accomplished, Gold will resume its ancient and vital role as honest money… and not a moment before.
Rudy J. Fritsch was born in Hungary in 1947, and fled Socialist tyranny during the Hungarian Revolution of 1956. His family had lived through WWII and the consequent Hungarian hyperinflation, thus he has intimate experience with financial destruction.
As an engineer and entrepreneur, he ran a successful family business in Canada for decades, at its peak employing over 100 workers, until economic upheaval destroyed the profitability of North American manufacturing. Driven out of business, he decided to study economics… to discover the cause of this unhappy circumstance.
As mainstream economics “The Dismal Science” made no sense to him, he ended up studying Austrian economics, the only school of economics grounded in the realities of Human Action. When he discovered Professor Antal Fekete’s work he came to admire it and made a firm commitment to help preserve and disseminate the Professor’s legacy.