Cryptocurrencies Are Not Money


Opinions are solely mine and are not connected to any companies I have founded or been part of.

Recently, we heard that Gemini exchange’s partnership with Flexa has partnered with Whole Foods, Nordstrom, and presumably a host of other retailers to accept bitcoin and other cryptocurrencies as payments for purchases.

Cool! Exciting! This is a lot like paying for groceries with Uber stock.

What is Money?

Just because prominent entrepreneurs, Austrian economists, and pundits claim that cryptocurrencies are money, that does not make them money. There is a profound misunderstanding about what money is and what it can do.

While there is a technical definition of money, the practical definition is:

Money is what your landlord will accept as rent and what your lender will accept as repayment of your loan.

A Store of Value is Not Money

Cryptocurrencies have a problem: because their “monetary policy” is to have a practically fixed number of coins, they are volatile against more stable currencies we use every day. If somehow we all lived our lives with bitcoin as our base currency, then prices would be stable. But it would also cause booms and busts as the demand for “money” would cause price instability.

Imagine the demand for money goes up. In that case, your house is worthless, because people would rather have money than a nice house. As Friedrick Hayek said:

… if today all the legal obstacles were removed which prevent such an issue of private money under distinct names, in the first instance indeed, as all of you would expect, people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. … if people were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.

Whoops. This comes from the venerable Hayek. Most crypto-enthusiasts would say his ideas helped form the foundation of cryptocurrencies as money.

But cryptocurrencies are not money. They are a store of value, as gold is. They are inefficiently taxed, but they are far more secure and easy to manage than gold. They have a huge advantage over gold — you don’t need to issue a certificate that’s good for a cryptocurrency. That’s a big deal. It makes cryptocurrencies a good substitute for gold.

Gold is not money. We don’t price things in gold anymore. If we did, we’d have to adjust prices daily. As the value of gold went up, the value of your assets would go down. We shouldn’t confuse a store of value with a unit of account.

Investments are Not Money

You shouldn’t use stock to pay for things. You shouldn’t even use Amazon stock to pay for things you buy on Amazon. Why? Because the demand for the stock is tied to investors’ belief about future profits, and demand for strollers is tied to parents and children’s mobility. These are very different things. Like gold, if the demand for the stock goes up, that would make strollers cheaper, and vice versa.

In general: investment is a limited amount of equity in a project, whereas money may be limited but it’s on the scale of an entire economy. We shouldn’t be using investments to price and buy things.

Purchasing and Payments

You may have read that Whole Foods is now accepting bitcoin. What are they not saying? They are not saying what really happens:

  1. When you check out, you’ll get your total in dollars. You’ll use the Spedn (“Spend” in crypto-speak) app to generate a QR code that gives the merchant the dollars they want.
  2. Your Spend app takes the appropriate amount of bitcoin or other cryptocurrencies from the address account you have funded with them.
  3. They use their own ERC20 token, the Flexacoin, as a buffer to make payments immediately, while the actual bitcoin transaction takes minutes or hours to settle. This coin has a fixed number and is effectively an investment contract. It was given to investors as an incentive to back and promote the system. If successful, this token will increase in value and provide a good return to investors. Is it necessary? If everything will be done using smart contracts (DeFi), then yes, it is. But the fixed nature of it makes it volatile. They may have been able to use a more stable alternative.

Is that amazing? No. It’s basically topping up your debit card with crypto, and we know a few things about that:

  1. The spreads are typically horrendous. You may convert your bitcoin to dollars, but you’ll do it at a far higher rate than on Coinbase. Past crypto-debit cards have had enormous spreads — you could easily pay an extra ten percent of the value of your purchase in the conversion. In this case, they have partnered with Gemini so we can assume the rates are better than other scams but watch out — they could be quite a lot higher than you may have bargained for. Remember — this is the hidden source of profit that lets the rest of the system run “for free.”
  2. Most of these use the normal payment system. Whole Foods and Nordstrom don’t have to do very much to accommodate these new purchases. Retailers want dollars. They only ever see dollars. They never see cryptocurrencies.
  3. It doesn’t really make that much sense unless the majority of your holdings are in crypto. If you are holding cryptocurrencies, you’re probably doing so as an investment, not as a short-term store of value. If you want to buy something, you very likely have dollars to do it with.

This comes under the category of a dumb idea — using investment products to pay for everyday purchases. I doubt it will have much impact beyond a few press releases and a few people saying “watch what I can do with bitcoin, isn’t that cool?”

What we really need is 1) central-bank digital currency, 2) better monetary policy, and 3) a dollar-based, decentralized payment system that has very low fees. Pay attention to the big stuff and ignore the noise.

David Siegel is a serial entrepreneur, founder of the Pillar Project and 20|30. He is the author of and A Short Primer on Money. He is starting a new community of idealists to change the world. Join them at