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?