Bitcoin was created as a medium of exchange, without a central bank or bank of issue being involved. Furthermore, Bitcoin transactions are supposed to be private, that is anonymous. Most interestingly, Bitcoins have no real world existence; they exist only in computer software, as a kind of virtual reality. Bitcoins are ‘mined’ into existence; again interesting- on a computer. Once created, the new Bitcoin is put into an electronic ‘wallet’. Furthermore, as there is no central issuer of Bitcoins, it is all highly distributed, thus resistant to being ‘managed’ by authority. Fiat paper is not money by any means, as it lacks the most important attributes of real money. To find out, let’s look at the attributes that define money, and see if Bitcoin qualifies. 1) money is a stable store of value; the most essential attribute, as without stability of value the function of numeraire, or unit of measure of value, fails. 2) money is the numeraire, the unit of account.
Also ‘trade goods’ (chits) that hold value temporarily; and finally exchange of mutual credit; ie netting out the value of promises fulfilled by exchanging bills or IOU’s. Compared to Fiat, Bitcoin does not do too badly as a medium of exchange. Fiat is only accepted in the geographic domain of its issuer. Dollars are no good in Europe etc. Bitcoin is accepted internationally. On the other hand, very few retailers currently accept payment in Bitcoin. Bitcoins have gone from a ‘value’ of $3.00 to around $1,000, in just a few years. This is about as far from being a ‘stable store of value’; as you can get! Dutch tulip bulbs, or junior mining companies, or Nortel stocks. Bitcoin qualify in the most important measure of money; the capacity to store value and preserve value through time. Real money, that is Gold, has shown the ability to hold value not just for centuries, but for eons. Finally, we come to the second attribute; that of being the numeraire.
Now this is really interesting, and we can see why both Bitcoin and Fiat fail as money, by looking closely at the question of the ‘numeraire’. Numeraire refers to the use of money to not only store value, but to in a sense measure, or compare value. But his clearly implies that Fiat has no value of its own, rather value flows from the value of the goods and services it may be traded for. Causality flows from the goods ‘bought’ to the Fiat number. Gold, on the other hand, is not measured by what it trades for; rather, uniquely, it is measured by another physical standard; by its weight, or mass. Now, have you any idea of the value of an ounce of Dollars? Fiat! Even if Bitcoin becomes internationally accepted as a medium of exchange, and even if it manages to replace the Dollar as the accepted ‘numeraire’, it can never have an intrinsic measure like Gold has. Gold is unique in being measured by a true, unchanging physical quantity. Gold is unique in storing value for thousands of years. Nothing else in reach of humanity has this unique combination of qualities.
In conclusion, while Bitcoin has some advantages over Fiat, namely anonymity and decentralization, it fails in its claim to being money. Its advantages are also questionable; the intent is to limit the ‘mining’ of Bitcoins to 26,000,000 units; that is, the ‘mining’ algorithm gets harder and harder to solve, then impossible after the 26 million Bitcoins are mined. Unfortunately, this announcement could very well be the death knell of Bitcoin; already, some central banks have announced that Bitcoins may become a ‘reservable’ currency. Wow, sounds like a major step for Bitcoin, does it not? After all, the ‘big banks’ seem to be accepting the true value of the Bitcoin, no? 26 million Bitcoins planned would cost a meagre 26 Billion Fiat Dollars. Twenty six billion Dollars is not even small change to the Fiat printers; it is about a week’s worth of printing by the US Fed alone. There would be no Bitcoins left in circulation; a perfect corner. If there are no Bitcoins in circulation, how on Earth could they be used as a medium of exchange? And, what could the issuers of bitcoin possibly do to defend against such a fate? 52 million? To 104 million? Join the Fiat printing parade? We come to the key issue; why search for a ‘new money’ when we already have the very best money, Gold? Fear of Gold confiscation? Lack of anonymity from an intrusive government? Brutal taxation? Fiat money legal tender laws? All of the above. A world of liberty not tyranny.
On the other hand, the increasing use of Bitcoin by criminals has been cited by legislative authorities, law enforcement agencies and financial regulators as a major cause of concern. The owner of Bitcoin voucher service Azteco, Akin Fernandez comments that there will shortly be an important game-changer in the manner Bitcoin is generated. The rate of Bitcoin generation every day will be literally ‘halved’ and this may alter the perception of Bitcoin completely, although it will be almost impossible to predict how the public at large and the merchants will react to such a move. Against the backdrop of such a move, the predictions are that the transaction volume of Bitcoin is set to triple this year riding on the back of a probable Donald Trump presidency. Some market commentators are of the view that the price of the digital currency could spike in the event of such a possibility leading to market turmoil globally. The Panama Papers scandal which broke out in May this year has spurred the European Union to fight against tax avoidance strategies that the rich and powerful use to stash wealth by bringing in new rules. The current rules seek to close the loopholes and among the measures proposed are efforts to end anonymous trading on virtual currency platforms like Bitcoin. A lot more research has to be done by the European Banking Authority and the European Central Bank on the best strategies to deal with digital currencies as currently there is no EU legislation governing them.