By Mary Mellor, Emeritus Professor, Northumbria University author of The Future of Money Pluto 2010
Things have not been going well for the bitcoin experiment recently. There have been accusations of money laundering, enabling the global drugs trade, tax and capital control evasion, fraud and theft (leading to the collapse of the MtGox exchange). Prices have fluctuated wildly and monetary authorities are suspicious, if not actively hostile.
What is bitcoin?
It is a privately issued digital currency. It can be earned by using powerful computers to carry out the cryptographic processing tasks the currency relies on. Existing coins can also be bought using national currencies, or it can be bartered for other goods and services. It is unique in that it aims to be a free-standing self-generating currency, created and enabled by its users but controlled by no-one. The creator(s) Satoshi Nakamoto appear to have set the system in motion and walked away. The system is programmed to create a maximum of 21 million ‘coins’ that, once created, have a life of their own and can circulate in perpetuity. Unlike money borrowed from a bank the coins do not have to be repaid. Unlike national currency there is no guarantee or backing. It is the textbook ideal of a neutral currency that can be used to enable exchange – or can it?
The textbook ideal
The textbook story is that money was originally a commodity (gold, silver) that had its own intrinsic value. Modern money developed from this and acts as a useful mechanism to enable exchange and payment, store value and act as a yardstick to judge and record relative values (unit of account). The problem for bitcoin is that this traditional story is a myth. Modern money is not solely the child of gold and silver, it also has a long history of purely credit instruments such as bills of exchange and promissory notes. Coinage also has a long political history, particularly in the state designation of its face value, and control of its minting and circulation.
Is bitcoin money?
This depends on how money itself is defined. The intrinsic value theory of money has largely been rejected because historians of money have found that metal coins varied widely in quality and face value. Modern money has purely ‘fiat’ value whereby public authorities determine what form the money will take and what its face value will be. Like fiat money, bitcoin has no intrinsic value, but it has commodity value, in that its value is not fixed but traded. Because of this it cannot fulfil two of the functions of money. It cannot be used as a fixed unit of account or a reliable store of value. In this sense it is a financial commodity, rather than money. Its value has fluctuated widely from a few pounds to many hundreds and it is clear that many of its users are engaged in speculative investment.
As bitcoin is also used to make purchases (although not very widely as yet) doesn’t this make it money? No, because conventional money has one important difference. Its fixed face value means that it is used as the ‘universal equivalent’ in exchange. Conventional money is the fixed nominal value around which goods and services pivot. In trades using bitcoin both sides of the exchange are fluctuating in value. What matters is what value a bitcoin has at that moment on that day. Using bitcoin in trade is therefore more akin to barter than monetary exchange.
A digital currency
A major claim for bitcoin is that it is very useful as a digital means of transferring national currency, particularly across national boundaries. However it is unclear how much more useful this is than using national currencies in digital form. The ecological efficiency of bitcoin is also in question. It takes a lot of computer power to create and maintain bitcoin as each coin has a unique identity that is updated every time it is used. This compares with national currencies where the sender and receiver are uniquely identified, but the money is only identified by quantity. Also, using bitcoin requires access to, and familiarity with, digital processes. It may be a geek’s paradise – but is it feasible for mass use, particularly in face of its artificial scarcity? There can only be 21 million bitcoins whereas world GDP is in many trillions. Finally, can the decentralised peer to peer coin creation and operating system be compromised, could it be captured?
So what is bitcoin?
The history of money indicates three origins of money: sovereign power/authority, commercial mechanisms of establishing and transferring value and social custom or convention. Bitcoin has no public authority. It also has no means of establishing a fixed nominal value for trade. This leaves social convention. Far from the ideal of money as a freely circulating neutral instrument for exchange, which seems to have informed its design, bitcoin is more like a social money, akin to the complementary or parallel currencies, that have emerged in recent years. While it does not appear to have the social and/or ecological aims of most local money systems, like them it is adopted by people on a voluntary self-organised basis.
Bitcoin seems to have been created with good intentions. As yet no sinister financial motive has appeared other than an anarchic attempt to enable people to interact without public (or market?) control. The mysterious founder(s) appear to be seeking no profit for themselves. Bitcoin seems to have been an idealistic aim to create a pure medium of exchange. However bitcoin fails in this aim as it has no fixed face value as money, so we are left once more with bitcoin as a speculative asset fit only for barter.