My Objections to Cryptocurrencies
I rebut an article that attempts to "prove" Bitcoin and others are the "best" money
I was recently presented with this article extolling the virtues of Bitcoin and why it is the best money.
I will quote from the article for each point I disagree with or reject.
First, his initial definition of money:
”Money is a good that people value for the mere prospect of later exchanging without having consumed it, or, in other words, for its exchange-value.”
Followed by the conclusion:
Bitcoins, because they can be exchanged, even though they cannot be consumed, are a candidate for being money.
Anything can be exchanged, so by this conclusion then, anything can be money.
But that is not even the point as the argument completely misses the mark on what money is.
Money is credit. It is not money that people exchange and indeed there is no value in exchanging money at all! It is only goods that are exchanged. As such, in order for something to be used as money - as a medium of exchange for actual goods - it must be able to act as a measure of value for those goods in order to be able to agree on an exchange rate.
How many of my fish are worth how many of your chickens? We will haggle (barter) over the value of our fish and chicken, but if we also must haggle over the value of the money we use to represent our prices then that money is worse than useless, it makes trade impossible rather than easier and we would just go back to direct barter.
It is no different than a measuring stick - if we cannot agree on how long a meter is than we cannot use it to measure building materials or anything else. I have no way to order 10 meter beams from you if you have a different idea of what a meter represents or if our agreed meter value changes by the time you do the cutting.
Later in the article he expands on this claim that money does not need to be a consumable by comparing it to current fiat currencies around the world that, like Bitcoin, have no purpose outside of being used for exchange and concludes this as proof that it is not needed. But far from proof of virtue, this is the biggest indictment and proof that the author does not understand the nature of money, nor fiat currency, nor why their volatility.
When governments were still on the Gold Standard, the dollar and other currencies were tied to gold. So for example, if you had $20 USD, you knew you could exchange it for exactly one ounce of gold. Thus that currency acted strictly as it was originally intended - a bank note, or IOU, on some amount of gold and an assurance that you could always reclaim that gold by turning in the bank note. The author cites the change in price of gold from $20 to $35 per ounce in 1934 and claims this as volatility in gold! But it is not gold that changed in value, it is the value of the currency that was changed - devalued - by arbitrary government decree!
Likewise later changes in the value of the dollar the author cites were, and continue to be, a result of the Gold Standard being abandoned. Again it is not gold changing value, it is the fiat currencies that fluctuate as measured against gold. When one says the price of gold went up by X dollars per ounce, it is misrepresentation. Rather it is the value of the dollar that has dropped by that much.
Thus it is only the fiat currencies that have no use or value as a good. The real money still used as the measure to compare the value of those currencies - and measure their volatility - remains gold, which also continues to have value outside of being a medium of exchange. Which brings us back to the first premise of the article - the idea that something does not need to be of value in and of itself to be a candidate for money. But it is precisely because a material has value to us for other purposes that, along with some other factors covered by the article such as divisibility, purity, durability, etc. makes it desirable as a unit of exchange and why other goods can be reliably measured against it - in other words it is the factor gives it its reliability as a measure. The proof of this is the very fiat currencies and their volatility the author attempts to use as proof that it is not needed - volatility that began the moment those currencies were divorced from their ties to gold!
That is sufficient to rebut the article but I will address one other item: Scarcity.
It has been a standard claim of Bitcoin advocates that scarcity applies since there is an ultimate limit to how many bitcoins can be “mined”. The fatal flaw in this is that there is absolutely NO limit to the number of cryptocurrencies that can be created.
Gold really is scarce, and when money was tied to it, there could only be so much of it printed or minted - it was limited by the amount of gold in possession. It did not matter that each nation (or properly, each private bank) issued its own currency as long as it was tied to actual gold in its possession and thus no two currencies could make claims against the same gold. With currencies no longer tied to gold, that scarcity does not exist - governments freed themselves to print any amount of money they desire.
Bitcoin and all the other cryptocurrencies are no less fiat currencies, the limit of any given one is artificial and meaningless since any number of them can exist. By my count, looking at this site, there are almost 200 different cryptocurrencies all vying for use, and there is no reason to expect there won’t be many more as time goes on. Anyone of us could invent a new one, write software using blockchain or perhaps something of our own invention, some algorithm to “mine” them in “scarcity”, and the means to exchange them. By what measure is this considered scarcity? It is this inherent lack of value - or tie to something of actual value and actual scarcity - that guarantees continued volatility and unreliability as a measure or store of value, and this eliminates it as a real money - just as fiat currencies are also not real money, a point the author seems to not understand.