Bitcoin’s proponents promise a future that it cannot deliver
In the aftermath of World War II, Germany was in desperate shape. To say that words do not do justice to the country’s broken state is a prime example of understatement. All the post-war ruins alone, if stacked, would have soared well over 4 miles into the sky.
In the midst of all the destruction, money appeared to facilitate the exchange of the few goods available for sale. Some might ask how this could have been since there wasn’t much of a government to speak of, except that it doesn’t take a libertarian to observe that government isn’t necessary when it comes to money. Since people want to get things back for what they have, money is always evident wherever there is production. As I point out in my new book The money confusionmoney can always be found where goods and services are circulated as if they were given to us – yes – by an invisible hand.
In Germany’s case, cigarettes appeared as a medium of exchange. With the Reichsmark destroyed, and realistically invalid as legal tender, cigarettes asserted themselves as the most stable measure intended to facilitate the exchange of goods and services. In post-war Germany, cigarettes could be exchanged for food, cameras and even nights with a member of the opposite sex. Money’s sole purpose is to enable the exchange of actual goods and services, and cigarettes were money par excellence in Germany precisely because those exchanging actual goods, services and services saw them as the most credible measure. Stop and think about it.
Please think about it with modern life in mind. Many who should know better, and this includes libertarians, argue that there is “no free market for money.” Except it is. We know this primarily because more dollars circulate outside the United States than they do within. The previous truth is proof that when it comes to exchange, manufacturers don’t accept just any currency, including the currency of their country of residence.
To be more specific, what did the Russian people do when the war with Ukraine began, and when many Russians began to leave their own country as a consequence? They quickly withdrew US dollars that they had in their bank accounts, and likewise traded tips with other Russians on how to obtain dollars. When you’re on the run, the dollar governs goods and services worldwide. No “free market” for money?
Why the dollar? Although it has obvious drawbacks, including those related to instability (see the $7-$10 trillion in daily currency trading around the world), it remains—arguably—the world’s most reliable currency. And it’s the most reliable because, at least compared to other currencies, it has a pretty good history of reasonable stability. So while dollar holders have suffered from instability and devaluation over decades, the dollar is still accepted just about anywhere as a medium.
Which brings us to bitcoin. USC professor Nik Bhatia claims Layered money the Bitcoin
At the same time, it is difficult to argue that it will appear as money par excellence as its adherents imagine. They point to scarcity as a selling point, but in reality the amount of money is only limited by production. See above. Wherever there is production, there is always money to move goods and services between producers. The amount of good money is by definition unlimited simply because money is always the constant consequence of production. Since Bitcoin cannot grow with production, logically it cannot facilitate the exchange of the same.
As some strangely say the scarcity discussed above is a Bitcoin feature. While gold continues to be discovered, Bitcoin is limited to 21 million coins. Such a view misunderstands gold twice, and realistically misunderstands money. This means that good money continues to grow in value. Actually, good money is like a foot, a minute or a tablespoon. It is constant. Assuming Bitcoin’s value just goes up, up and up, how would that recommend it as money? Money is an agreement of value that facilitates exchange. How then would a measure that is not a measure function as money?
Also, gold does not achieve its monetary qualities from scarcity as it is. Gold’s use as money is precisely because the value of the yellow metal itself neither increases nor decreases. Due to unique storage/flow properties, gold is constant. What moves are the currencies and the commodities they are measured in, not the gold itself. This is crucial. Per Bhatia himself, gold emerged as money over thousands of years as more and more producers recognized its rather unique stability.
All this speaks of future challenges for Bitcoin. Without turning up our noses at what it has become for a second, history is very clear that market players eager to trade products for products (the definition of trade) always do so on whatever is most stable as their medium of exchange. And for obvious reasons: they want to receive roughly the same as what they bring to the market.
The problem for Bitcoin is that, as its biggest cheerleaders unknowingly or implicitly acknowledge, it cannot be stable. What is fixed in supply cannot logically be. Bitcoin may continue to thrive as a scarcity speculation, but it cannot be the last and also be money. It is not a comment from a critic so much as it is an acknowledgment of what commerce is, and what producers of goods and services have always demanded. They want what Bitcoin cannot be. This is free markets at work.
