Bitcoin: Money or a waste of time?
Traditional economists have mostly all dismissed Bitcoin as a poor example of money based on a three-part definition: store of value, unit of account and medium of exchange. I just finished a romp through Charles Wheelan’s “naked money” and subsequently but coincidentally jusneth’s article Suitertunity Cost, The Longitudinal Price Paid to Invest in Libertarian Ideology, which both actually relate to each other fairly well. So much so that you’d be forgiven for thinking that jusneth had also just completed this book and written his thesis directly upon this Introduction to Money 101. The one unsettling thought I’ve had though since completing these readings is that they both resolved on a common thought: Bitcoin is not really money. It’s purely an experimental tool that has one purpose, which is that of regulatory arbitrage. I don’t have nearly the economics background of Mr. Wheelan, but let’s not pretend like the Fed is any less of an experiment than Bitcoin.
The Federal Reserve is just over 100 years old and has certainly had mixed success in terms of it’s mandate. Our good friend Ben Bernanke, a Great Depression expert, has stated that his belief is that the Fed itself is the primary reason the Great Depression occurred due to it’s mismanagement, which is a rough start to say the least. The organization designed to prevent this exact event actually exacerbated or even directly caused the worst economic event in American history. Fast forward to 2008 and it seems Ben hasn’t forgotten the lessons learned back in the Depression when the Fed savaged the U.S. economy and instead decided to heroically save us all from a meltdown with only hours to spare. Yes it’s true we don’t all live on the streets today thanks to his tremendous leadership. The Fed also went ahead churned out the massive Dodd-Frank Act to curb bad behavior and deliver us the CFPB, but one begs the question why weren’t those protections in place before the Great Recession? Was it incompetence, corruption or was it learning and iterating as they went?
Bitcoin is less than 8 years old and yet proponents and opponents of the project argue constantly that it’s digital gold or that it’s simply another Farmville waste of time wrapped in cryptographic mysticism. Let’s also not forget those who can’t commit either way, but really feel good about how promising the “blockchain” is without acknowledging the dreaded Bitcoin. Blythe Masters I’m looking at you.
We all want our cake and then to sit here and eat it too, but the fact of the matter is that Bitcoin is an experiment and no one knows where this whole ridiculous thing is going. If you are proclaiming Bitcoin is as big as the advent of the Internet, or simply the next fad destined to fizzle out, you’re full of shit or a scammer or both. Someone is bound to be right in the end and claim they knew the destiny all along, but even a broken clock is right twice a day and hindsight is always 20/20.
So Bitcoin is an experiment, but is it money? Will it ever be money? Or is it just a tool for drug peddlers, pornographers and degenerate gamblers. Well it certainly does accomplish those last few things as we’ve seen proven all too well. See Silk Road, Naughty America and ironically Bitcoin.com. All of those organizations viewed Bitcoin as some sort of value, but is it money they viewed it as? Or just a marketing gimmick? A tool to get around legal complications? Do users really prefer Bitcoin over Paypal if they have a choice? Does the general public even care about Bitcoin as real money? I’ve dedicated the last few years of my life trying to find out if Bitcoin really has potential to become perfect money, but I still have no clue whether or not anyone really wants this to happen outside of programmers and libertarians.
Let’s break down some of the challenges associated with becoming truly considered perfect money:
Store of Value. Any form of commodity, asset, or money that has value and can be stored and retrieved over time. Bitcoin certainly has value, but whether that holds true over time is to be determined. It’s value is certainly not stable (for very long) and therefore isn’t a great candidate for replacing the dollar yet, but we’re fairly early on so maybe this will change over time. One positive indicator is that we’re finding more and more usages for Bitcoin, which I believe increases it’s value over the long term and as the market gets deeper and more prolific I think stability will follow.
Unit of Account. People’s brains explode if they have to deal with more than one (maybe two) units of account. For many people it’s good old USD or their local national currency. Nobody wants to buy corns on the cob or kielbasa sausages denominated in your Father’s Day coupon dollars that your kids gave you.
I don’t think this problem is getting solved anytime soon, but units of account are highly contextual in most cases and since Bitcoin is essentially a global currency this will always be a problem. I’m curious to see how we solve this. I’m not convinced we have a clue yet, but others are trying to figure it out. For the time being, having great conversion tools that can easily go between local currencies and Bitcoin rates is going to have to do. Personally I’m a Winkdex man. This is one of the biggest headaches we deal with on OpenBazaar and I’m sure others have the same problem.
Medium of Exchange. Wikipedia says a medium of exchange must possess the following attributes to be widely accepted and stable as a medium of exchange:
- Value common assets
- Common and accessible
- Constant utility
- Low cost of preservation
- High market value in relation to volume and weight
- Resistance to counterfeiting
Bitcoin clearly fails in a couple of these areas (common and accessible, low cost of preservation, recognizability), but astoundingly exceeds in others (counterfeiting resistance, divisibility, transportability). Many of these failures at the moment will get much better over time. Technology always starts out inaccessible and expensive to maintain and manage. Costs go down over time and the same will happen for Bitcoin although mining sure puts a wrinkle in that equation. Many people focus on one part of the “medium” of exchange though, which the fart-smelling pundits from Bitcoin Uncensored constantly repeat, is just a message passing system and nothing spectacularly innovative or interesting. I agree that message passing is boring and we’ve been there done that. The other side of the medium though is for messages passing through the medium to be recorded in a Sorry For Your Loss resistant immutable ledger that provides a reasonable assurance that they won’t be undone or changed. Having this be possible without a trusted single third party is what makes Bitcoin special.
So in summary Bitcoin is very much a work in progress towards declaring itself a perfect money in modern economist’s definition. I still believe it has a lot of potential to become more than simply a tool to break the law with, but it will take a lot of hard work both in technology and theory to demonstrate to the world that Bitcoin is here to stay and able to take on traditional fiat money £ for £ (little Brit-ish humor). Until that time comes it’s smart to educate yourselves on all sides of the argument, be open-minded and don’t rush to judgement. After all, everything is an experiment in the world of money whether you live in Kenya or Silicon Valley.