With the dramatic rise of bitcoin, many are talking about this crypto-currency as the new money of the future.
Such a simplification is understandable, since the matter of money is complex. Not all that glitters is gold. Likewise, what appears to be money often is not.
Bitcoin does nothing to clarify the matter, since it markets itself as a transactional currency that will be one of many digital replacements for the world’s tired old legacy currencies – especially the dollar. In addition, merchants accepting bitcoin payments give the impression that it functions as money.
Libertarians love bitcoin since it appears to break away from the bonds of government. Perhaps they exult in thinking that the predictions of economist F.A. Hayek are coming to pass. He advocated competitive currencies and even imagined monetary units like “Hayeks” alongside “Smiths” and “Joneses” jockeying for prominence in a vibrant market economy.
However, bitcoin is not money.
Difference between Money and Currency
The main confusion lies in the distinction between money and currency. In the mind of the public, the two terms are synonymous.
Currency consists of banknotes and government-issued paper bills and coins that serve as media of exchange to facilitate transactions. In the modern economy, this currency, which is the actual physical cash in circulation, accounts for only a small amount of total money supply.
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In this sense, bitcoin, acting like virtual cash, can perform functions similar to currencies’ as a medium of exchange.
What Makes Something Money
Money is something different. It requires the existence of a lawful monetary authority. In Greek, money is termed numisma (from which comes numismatics), meaning law. Money is a creation of law. Currency becomes money by the action of lawful authority that assures its universal acceptance and takes it as payment for taxes. It acquires credibility through common usage and custom.
Like a stable legal system, every society needs a stable monetary framework. Throughout history, it has always fallen to responsible government, which exists for the common good, to control money and currency supply, prevent counterfeiting, and keep money’s value stable.
That is why the American Constitution granted Congress the power to “coin money, regulate the value thereof, and of foreign coin.” Milton Friedman notes: “There is probably no other area of economic activity with respect to which government intervention has been so uniformly accepted.”
A private medium of exchange that is not accepted universally and lacks stability cannot be considered money.
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That is why bitcoin is not money.
A Measure of Value
For something to be money, it must serve three basic functions: a measure of value, a medium of exchange, and a store of wealth. These are the three reasons why bitcoin is not money.
Money is a measure of value that allows people to gauge what something is worth. A money of account serves as a yardstick. Americans look at things and calculate their worth in dollars – the dominant measure of value.
It is important that money be a stable measurement, since one cannot trade or make contracts when the unit wildly fluctuates. A yardstick that is constantly changing is useless in the construction of a house. That is why it has always been the duty of the state to safeguard the political and monetary stability needed to plan for the future. Determining a measure of value is also an attribute of sovereignty, since it involves the very life of the nation and prevents the country from falling into the hands of a shadow government of manipulators.
By its nature, bitcoin does not seek to be a stable measure of value. Its enthusiasts welcomed its speculative rise in value from one to twenty thousand dollars. No one looks at things and thinks in terms of bitcoin because one cannot be sure what the unit is worth at the moment. Bitcoin itself is further expressed in dollars and not in its own units since it has no stable value in the public mind. It is risky to make contracts in bitcoin since its future value is unknowable.
Money as Medium of Exchange
Money must also serve as a medium of exchange that facilitates the buying and selling of goods. The fact that money is universally recognized within a sovereign area makes it desirable, respected, and trusted.
Bitcoin presents itself as a medium of exchange. Using blockchain technology, the crypto-currency claims to process global transactions more efficiently and instantly, especially outside the limitations of borders and other currencies.
However, bitcoin is a limited medium of exchange restricted to those who accept it. It carries no buyer protection mechanisms against fraud and error found in more traditional methods and instruments like credit cards. Indeed, its lack of security and transparency is a major concern that undermines its reliability.
A Store of Wealth
The final function of money is what Aristotle calls “a store of wealth.” It involves money’s ability to preserve value over time and therefore ensure the stability of trade. In this sense, most experts will admit that bitcoin is a store of wealth. However, because of its volatility, it behaves more like a commodity than a currency. Indeed, since bitcoins have no real existence beyond the algorithms that create them, they represent an unreal and precarious store of wealth.
Given its extraordinary rise, bitcoin is better called a risky investment. It is hardly the calm financial yardstick and medium needed to make an economy prosper.
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This is yet another reason why bitcoin is not money.
The Drive to “Monetize” Bitcoin
The drive to “monetize” bitcoin and other digital currencies is dangerous. The bitcoin phenomenon represents those who long to break free from legacy currencies that have provided some measure of stability and expressed the sovereignty of nations. They yearn for an economy of frenetic intemperance, in which everything must be instant and effortless. It is an economy detached from reality and responsibility, from which they might create their own abstract economic worlds.
Much like political ideologues who forced their ideal systems upon others, the new economic ideologues do the same. Their economic musings are dangerous, since they tend to force reality to conform to their global fantasies of a free-flowing abstract currency that sidesteps national sovereignty and links all nations and peoples.
German sociologist Georg Simmel, who wrote about the philosophy of money, once defined money as the value of things without the things. Perhaps bitcoin might be defined as the value of nothing without something.
It is certainly not money.