Is Bitcoin money? No. Could it become money? Yes
Bitcoin shows that a would-be form of money can still arise through private initiative (as argued more fully in my book, The Power of Money). Before the 2008 financial crisis, few economists would have believed this was possible. True, numerous local currencies, community currencies and so forth existed. But these used the prevailing national money as their unit of account. They were exchangeable at a fixed rate with the dominant state money. Bitcoin is a privately created, irredeemable electronic asset with claims to be money.
True, it has a long way to go. Bitcoins are accepted only to a limited extent as a medium of exchange/ payment for a range of goods and services. People do not view them as a reliable store of value. Few merchants use Bitcoin to express prices of goods, services and assets. The unit of account function is the most central and critical quality of money. Unless goods and services are priced in bitcoin, it has to be exchanged into another medium of exchange – such as dollars or pounds – first. This adds to the costs of using it.
However, it is not going away. Look at its price! This soared to a peak of $41,940 in January 2021 and stood close to $40,000 before the Tesla announcement (see below). If it has no basis whatsoever – either as a potential store of value or as potential money – it should have fallen close to zero after its initial launch. Clearly people were willing to “speculate”. They risked large sums on the outcome. But can speculation in itself account for such sustained demand? I doubt it.
Look at gold. Critics of gold as money often say that gold is in a 5,000 years-old “speculative bubble” – showing how empty such accusations are. Such critics know nothing either about gold or money or history. These people use the term “speculation” to hide their ignorance of the factors driving demand.
Warren Buffet says he would never buy bitcoin because it has no underlying value. But a credible limit on supply, plus payment functionality, however restricted, provide “services” and hence underlying value to holders.
Bitcoiners infuriate many central bankers, commercial bankers and economists. Benoît Coeuré, a eurozone central banker now at the BIS, famously described bitcoin as ‘the evil spawn of the financial crisis’.
Yet the market sent a different message: wait and see.
From the start, when anonymous founder “Satoshi Nakamoto” issued his challenge to conventional money in 2009, demand for the cryptocurrency has been fuelled by mistrust of state money. It still is. Is that demand “speculative” and so likely to be short-lived? No, Sir. Issuers of state money invariably abuse their monetary prerogatives while smilingly promising stability.
Of course there are risks in holding bitcoin. But I expect it will become a mainstream monetary asset quite soon. Yes, its value is too volatile to qualify it as a “money”. At least right now. Yet give it time! With more people using it to make payments, its market price should stabilise, at least to some extent. If it did, this would greatly advance its claims to be money. In every sense of the word.
To misquote Shakespeare, methinks central bankers do protest too much.
Do central bankers live in a dream world?
Central bankers themselves tempt fortune when they promise long-term stability in money’s real value. That’s way beyond their reach.
A persistent fault of central bankers’ critique of cryptocurrencies notably of bitcoin is that they posit a fine, sound, system – a system that does not exist! – as the foundation of the monetary system. They underplay the existential threats to fiat (state) currencies. Confidence in that official system rests fundamentally on the foundations of sovereign credit and political stability. Yet we see social unrest, political turmoil, rapidly escalating sovereign debt, and in many countries unprecedented fiscal deficits. We read about promises of constant fiscal and monetary stimulus stretching ahead to infinity – governments with central banks have promised to do “whatever it takes” and “for however long it takes” to sustain demand. This will end in tears. Bad banking systems, dysfunctional finance, zombie companies, concealed unemployment litter the economic landscape. We also see states stepping up their mass surveillance of citizens, curtailment of citizens rights, and all kinds of restrictions on liberties.
This is the real world – a world ignored by most central bankers. Are they dreaming or what?
They have another dream. This is that people trust the currencies issued by central banks while they do not trust cryptocurrencies. Well, few of them have got any bitcoins yet so the rest of us probably will wait and see, But the notion that we trust domestic currencies is another comforting illusion. OK, so we know we can buy stuff with money and my bank probably won’t steal it. But the bank will probably gamble with it, fix the markets in it, and use it to pay massive bonuses to their top guys. Most people feel deeply cynical of the entire world of finance and money. To keep it going at all seems to require throwing money around like confetti. Small businesses can’t get a loan for love or money. Governments borrow and spend trillions – where does it go to? To them that already have a lot of it. It’s all fixed. You can tell that by the way banks pay millions to hire a former finance minister to “open doors” for them (wink, wink).
The central banks have helped create a monster with little connection with the real world – and of no real use. The world of money has become completely detached. Money is not useful any longer for long term investment – it’s too flaky and uncertain. You can’t really trust it. That’s what people feel anyway.
An American friend put it well to me as follows: “I can attest”, he says that “there is a large minority of opinion out there that simply does not trust the central banks to protect the long term purchasing power of the national currencies including the US dollar”.
Central bankers should be content to make the more credible claim that, given the right conditions, even in the current rickety monetary system without any firm anchor they can still – with a bit of luck – produce a better quality of money than democratically-elected governments, left to themselves, would deliver.
That’s more like it
The creation of Bitcoin Cash in 2017 enhanced its monetary character. This is geared to meet transactions demand. Its market value appears to track that of bitcoin quite closely. It is part of the bitcoin family and brand with a credibly limited supply. But it is more suitable to normal transactions. This is essential if a crypto-currrency is ever to be widely accepted as a currency. It must be easy and cheap to use.
The number of transactions that can be processed every second is critical. For example, Visa credit cards process around 2000 transactions per second, whereas bitcoin can only manage about 7 transactions per second. Bitcoin Cash can support more than 100 transactions per second.
This is still far short of leading credit card. But it indicates its potential as Money-in Waiting.
Both have been added to the giant payments provider Paypal’s platform. This is highly significant.
To be sure, central bank liabilities – bank notes and bank reserves – will remain the ultimate means of settlement for the foreseeable future.
Bitcoin tells central bankers that their credibility is a fragile plant. Let’s hope they get the message. Competition is good for everybody – even for these mandarins of Haute Finance (or should it be Haughty Finance?)
They will not have the final say.
In the end, it will be up to the market, the people, what forms of money have value and which do not.
The Tesla effect
Tesla’s announcement that it had invested $1.5 billion in bitcoin in January and that it would accept bitcoin in payment for Tesla products boosted the bitcoin price to a new record on Feb 8, touching $44,100. ( not bad, a cool paper profit of around $150 million in a few hours) and systemically the question is whether this could mark…
Another stage towards monetisation….?
Expect another blast of cold air accompanied by expletives from the usual quarters.
But the momentum could become unstoppable.
Please also see Chapter 18 of The Power of Money – How Ideas about Money Shaped the Modern World