Bitcoin’s Proponents Promise a Future That It Cannot Provide

In World War II’s aftermath, Germany was in desperate shape. To say that words don’t measure up to the country’s devastated state is a good example of understatement. All the post-war rubble alone, if stacked, would have soared well over 4 miles into the sky.

Amid all the destruction, money emerged to facilitate the exchange of the few goods available for sale. Some might be asking 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 on the matter of money. Since people want to get things in return for what they have, money is always evident wherever there’s production. As I point out in my new book The Money Confusion, money can always be found where goods and services are being circulated as though bestowed on us – yes – by an invisible hand.

In the case of Germany, cigarettes emerged as the medium of exchange. With the Reichsmark destroyed, and realistically invalid as legal tender, cigarettes asserted themselves as the most stable measure meant to facilitate 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 only purpose is to enable exchange of actual goods and services, and cigarettes were money par excellence in Germany precisely because those exchanging actual goods, services and favors viewed them as the most credible measure. Please stop and think about that.

Please think about it with modern life top of mind. Many who should know better, and this includes libertarians, claim there’s “no free market in money.” Except that there is. We know this first and foremost simply because more dollars circulate outside the United States than they do within. The previous truth is evidence that on the matter of exchange, producers don’t just accept any currency, including the currency of the country they’re residing in.

Getting more specific, what did the Russian people do once the war with Ukraine began, and once many Russians began to exit their own country as a consequence? They quickly withdrew U.S. dollars that they had in banking accounts, and similarly they traded tips with fellow Russians about how to acquire dollars. When you’re on the run, the dollar commands goods and services the world over. No “free market” for money?

Why the dollar? While it has obvious demerits including those related to instability (see $7-$10 trillion in daily currency trading around the world), it remains – by far – the world’s most trusted currency. And it’s the most trusted because at least relative to other currencies, it has a fairly good history of reasonable stability. So while dollar-holders have suffered bouts of instability and devaluation over the decades, the dollar is still accepted just about anywhere as a medium.

Which brings us to bitcoin. USC professor Nik Bhatia asserts in Layered Money that BitcoinBTC
is the future of money, and one piece of evidence supporting his claim is ownership of the private currency that exceeds 100 million people. Up front, what Bitcoin has become is a staggering achievement. Better yet, without Bitcoin’s growing usage as a store of value, the movement toward private money would be much less advanced. When the history of how private money gradually pushed out government measures is written, Bitcoin will loom large.

At the same time, it’s hard to make a strong case that it will emerge as money par excellence as its proponents imagine. They point to its scarcity as a selling point, but in reality the quantity of money is only limited by production. See above. Wherever there’s production, there’s always money to move goods and services between producers. Good money’s quantity is by definition limitless simply because money is always the constant consequence of production. Since Bitcoin can’t grow with production it logically can’t facilitate the exchange of same.

To which some oddly say that the scarcity discussed above is a Bitcoin feature. While gold continues to be discovered, Bitcoin is capped at 21 million coins. Such a view misunderstands gold twice, and realistically misunderstands money. It implies that good money continues to grow in value. Actually, good money is like a foot, a minute, or a tablespoon. It’s constant. Assuming Bitcoin’s value just goes up, up, and up, how would that recommend it as money? Money is an agreement about value that facilitates exchange. How then, would a measure that’s not a measure work as money?

Furthermore, gold doesn’t attain its money qualities from scarcity as is. Gold’s use as money is precisely because the value of the yellow metal itself neither goes up or down. Due to unique stock/flow characteristics, gold is constant. What moves are the currencies and goods that it’s measured in, not 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 of which speaks to future challenges for Bitcoin. Without turning up one’s nose to what it’s become for even a second, history is very clear that market actors eager to exchange products for products (the definition of trade) invariably happen on what’s most stable as their exchange medium. And for obvious reasons: they want to receive roughly equal to what they bring to the marketplace.

The problem for Bitcoin is that as its biggest cheerleaders unwittingly or implicitly acknowledge, it can’t be stable. What’s fixed in supply logically cannot be. Bitcoin will perhaps continue to thrive as a speculation on scarcity, but it can’t be the latter and also be money. That’s not a comment from a critic as much as it’s an acknowledgement of what trade is, and what producers of goods and services have always demanded. They want what Bitcoin cannot be. This is free markets at work.