If you're not familiar with Bitcoin, you can learn a lot about it online. However, the short version is that Bitcoin was developed as a form of exchange without the aid of a central bank or bank of issue. Additionally, Bitcoin transactions are meant to be secretive and anonymous. The most intriguing aspect about Bitcoins is that they only exist as a type of virtual reality in computer software, not in the actual world.
The main concept is that Bitcoins are ""mined""—interesting term—by solving a challenging mathematical equation on a computer. The challenge increases as more Bitcoins are ""mined"" into existence. The newly minted Bitcoin is then loaded into an electronic ""wallet."" Then, you can exchange fiat money or real items for bitcoins, and vice versa. Furthermore, Bitcoins are spread widely and cannot be ""controlled"" by an authority because there is no single entity responsible for issuing them.
Naturally, those who support Bitcoin and stand to gain financially from its expansion shout out their assertions that ""for sure, Bitcoin is money"" and that ""it is the best money ever, the money of the future,"" etc. Indeed, those who support Fiat yell just as loudly that paper money is money, yet we all know that Fiat paper is by no means money because it lacks the most crucial characteristics of actual money. The question then becomes: Does Bitcoin really count as money, let alone the best money ever or the money of the future?
Let's examine the characteristics of money to find out if Bitcoin satisfies them. There are three crucial characteristics of money:
1) The most important quality of money is that it may be used as a stable store of value. Without this quality, money cannot serve as a numeraire, or unit of measure of worth.
2) The numeraire, or unit of account, is money.
3) Money is a medium of exchange, but other items, such as direct barter and the ""netting out"" of products transferred, can also serve this purpose. Additionally, there are ""trade products"" (chits) that have short-term worth. Finally, there is an exchange of mutual credit, which nets out the value of promises fulfilled by bills or IOUs.
Bitcoin does not perform horribly as a medium of exchange when compared to Fiat. Fiat is only recognized in the country in which it was issued. Dollars are useless in places like Europe. The use of bitcoin is widespread worldwide. On the other hand, not many businesses now accept Bitcoin as payment. Unless adoption increases geometrically, Fiat prevails—albeit at the expense of international trade.
The first requirement is much more difficult to meet; money must be a reliable medium of exchange. Currently, Bitcoins have gone from having a $3.00 ""worth"" to about $1,000 in a few of years. This is as far as you can get from being a ""stable store of value""! Indeed, such profits are a perfect illustration of a speculative boom, just like junior mining firms, Dutch tulip bulbs, or Nortel equities.
Naturally, fiat also falls short in this regard; for instance, the US Dollar, the ""primary"" currency, has lost more than 95% of its value in recent decades. Neither fiat nor Bitcoin pass the most crucial test for money, which is its ability to retain value and maintain value over time. Real money, or gold, has demonstrated the ability to maintain value through eons rather than just centuries. Both Fiat and Bitcoin fail as currencies because they lack this essential capability.
The second quality, being the numeraire, is the last one. Now, this is pretty interesting, because by carefully examining the ""numeraire"" dilemma, we can understand why both Bitcoin and Fiat fail as money. The term ""numeraire"" describes the use of money as a means of both storing and, to some extent, comparing worth. According to Austrian economics, it is impossible to really quantify value because it only exists in human awareness and nothing in consciousness can be quantified. Nevertheless, market prices can be established by the notion of Mengerian market activity, which is the interplay between bid and offer, and this market price is defined in terms of the numeraire, the most marketable good, which is money.
So how can we calculate Fiat's value...? Through the idea of ""purchasing power,"" which states that the value of Fiat is based on what it can be exchanged for, or a ""basket of goods,"" However, it is implied by this that Fiat has no intrinsic worth and derives value instead from the value of the commodities and services it may be exchanged for. The products that were 'purchased' cause the Fiat number, and vice versa. In the end, the only difference between a one dollar bill and a hundred dollar bill is the number printed on it, along with its purchasing power.
On the other hand, gold is unique in that it is measured by a different physical standard; specifically, by its weight or mass. No matter what number is etched on its surface, whether it says ""face value"" or not, a gram of gold is a gram of gold, and an ounce of gold is an ounce of gold. Contrary to Fiat, gold is measured by its weight, an intrinsic quality, not by its purchasing power. Do you know how much an ounce of money is worth? Not at all. The only thing that can be used to ""measure"" a Fiat is the number that is printed on it, or its ""face value.""
Since Bitcoin is measured in fiat currency in addition to being just a number, it is further from being the numeraire. Bitcoin will never have an intrinsic measure like Gold has, even if it manages to replace the Dollar as the accepted ""numeraire"" and becomes widely accepted globally as a means of exchange. Being measured by a real, constant physical quantity makes gold special. Gold is exceptional in that it may retain value for countless years. Nothing else that is accessible to humans possesses this particular set of attributes.
In conclusion, Bitcoin fails in its claim to be money even though it offers some advantages over Fiat, such as privacy and decentralization. Its benefits are also debatable because there is a cap on the number of Bitcoins that can be ""mined"" at 26,000,000, meaning that once that number is reached, solving the ""mining"" process becomes impossible. Since some central banks have already stated that Bitcoins may become a ""reservable"" currency, this statement may unfortunately spell the end for the cryptocurrency.
Wow, that certainly sounds like a significant milestone for Bitcoin. After all, it appears that the ""big banks"" recognize the genuine worth of Bitcoin. This essentially means that banks are aware of the possibility of exchanging fiat currency for bitcoins, and that the actual cost of purchasing the 26 million planned bitcoins would be a pitiful 26 billion fiat dollars. 26 billion dollars, or roughly one week's worth of printing by the US Fed alone, is hardly even pocket change to the Fiat printers. After being purchased and secured in the Fed's ""wallet,"" what beneficial purpose may the Bitcoins serve?
A ideal corner would be when there would be no more Bitcoins in circulation. How on earth could Bitcoins be utilized as a medium of exchange if they aren't in use? And what might Bitcoin's creators possibly do to prevent such a fate? The algorithm should be modified, raising the 26 million to... 52 million? 1004 million? Get in on the Fiat printing action? But then, by the quantity theory of money, Bitcoin would start to lose value, just as Fiat supposedly loses value through 'over-printing'...
We come to the key issue; why search for a 'new money' when we already have the very best money, Gold? Fear of gold being seized? Inability to remain anonymous from a nosy government? harsh taxation Fiat money legal tender laws? the aforementioned. The answer is not in a new form of money, but in a new social structure, one without Fiat, without Government spying, without drones and swat teams... without IRS, border guards, TSA thugs... on and on. A world of liberty not tyranny. Once this is accomplished, Gold will resume its ancient and vital role as honest money... and not a moment before."""