Bitcoins are not money. They are similar to a gold coin or real estate, or any sort of financial asset that you could use as a middle-man between a transaction. They are something you can invest into, buy and sell as middle-man between transactions, but that doesn’t make them money.
Money is more than just a piece of paper. On a deserted island, that paper would be useless. It has no intrinsic in and of itself, but its usefulness derives itself from complex social relationships between people. Society recognizes the worth of this money and accepts it as trade for real goods ands services.
Initially, money was backed by things like gold because it takes a certain amount of labor time on average for society to produce an ounce of gold, meaning that everything could just be compared to the value of gold. But maintaining a bunch of gold is inefficient, so eventually central banks would do away with the gold, but still try to maintain the price of the money through controlling the money supply, to prevent it from rapidly fluctuating, since there is no longer any standard to compare it to.
This stability aspect comes from the liability of the money. The fact it is controlled by a central bank that is responsible for it. Without a central bank, Bitcoin cannot be reliably used as money. Its price constantly fluctuates, which would lead to rapid inflation or deflation. Even worse, there is no credit body for Bitcoin. If Bitcoin randomly depreciates, I get screwed and lose all my money, and there is no one I can complain to. Bitcoin at one point suddenly depreciated from from nearly $20,000 per Bitcoin to $3,100 per Bitcoin which caused huge losses and there is no one to complain to about it or get any sort of compensation.
there are all sorts of issues around failure and recourse. At present, if you have got a payment system, you basically have to run a help desk, and you have to run a fraud detection service, and an asset recovery service, and so on, so that if something goes wrong, you’ve got somebody to call. And that’s a requirement in your payment services directive. But Bitcoin has none of that. If someone hacks your computer and steals your Bitcoin wallet, there’s nobody you can phone. The money is irretrievably gone. And so for that reason, there’s some debate if Bitcoin is actually a currency at all. And I personally tend to see it simply as something like being an industrial bearer bond, a digital equivalent to a gold coin.
— Professor Ross Anderson, “Bitcoin Problems”, Computerphile
The lack of a central bank also means you can’t print Bitcoin to keep up with rising demand. This means that if a lot of people start using Bitcoin tomorrow, its value would go through the roof yet again, again demonstrating the volatility of Bitcoin.
It also lacks a “human” aspect to it since you cannot control the currency’s supply. Most human currencies you buy and sell in amounts ranging from 0.01 to 100 units. While in Bitcoin, a penny (0.01 USD) is 0.0000002 Bitcoins and 100 USD is 0.00168 Bitcoins. The vast majority of transactions are being done in tiny tiny tiny fractions of a Bitcoin which is not very human-friendly.
You might think “well we can just change the name of 0.0000002 Bitcoins to a microbitcoin and then 1 dollar would be 100 microbitcoins and it’d be easier!” The problem with just changing the name is, again, there is no currency regulation. So the Bitcoin could just rapidly inflate or deflate again, and you’d have to constantly update the names, and you’d be constantly updating them in relation to an actual currency, in this case the USD.
All these problems also lead you to a big problem with banking. The unreliability of Bitcoin means there is no banks that take Bitcoin. By this I don’t mean there are no banks that will allow for transactions with Bitcoin, but that they do not allow you to start a savings account where they then speculate with your Bitcoins on the market. You need banking in order to save money, so the money can be reinvested back into the economy and not just sit there. If all Bitcoins are hoarded without any banking mechanism, this is harmful to the economy.
A lot of businesses won’t take them either because of the unreliability of them which limits their use as money. Some places have begun allowing payment in Bitcoin, but those places do not keep a hoard of Bitcoins. They calculate the exchange rate on the fly, let you pay that amount, and then immediately exchange the Bitcoins. In other words, they get around the rapid fluctuations in Bitcoins simply by allowing the Bitcoin to serve as a middle-man “currency”. These stores that are accepting Bitcoin are not even treating the Bitcoin like a primary source of money but a middle-man between a transaction between two real forms of money, which could just as much be done with gold or real estate.
From the perspective of the function of money, the most basic function of money is to realize the transaction of commodities, that is, to serve as the medium of exchange. To be a medium of exchange, money must meet at least five requirements.
The first one is the monetary standard. For a wide variety of commodities (and services, the same hereinafter), determined by different values, in order for money to represent the value of a commodity as a price, it is technically necessary to divide money into certain subdivisions (e.g. US$ is divided into dollars and cents, RMB is divided into yuan, jiao, fen, etc.). But the Bitcoin does not have such a monetary standard of division, which means it does not have the most basic conditions to be money in terms of its function as a measure of value.
The second requirement is the amount of money in circulation. In economic development, the quantity of commodities has a trend of continuous increase, which determines that the amount of money put into circulation should be able to meet the needs of commodity circulation. Historically, a decisive factor in the withdrawal of precious metals such as gold from the monetary category was that the increase in their number was far less than the increase in the number of commodities to be exchanged, which could not satisfy the expansion of commodity transaction. Bitcoin, by contrast, was limited to 21m coins by its creator from the very beginning, and it has not been fully mined so far. Even if it had been fully mined and put into circulation, such a limited number could not meet the needs of commodity transaction.
The third requirement is monetary stability. In commodity transactions, the amount of money in circulation represents the demand, and the stability of value of money is the basic premise of transactions. Therefore, regulating the amount of money in circulation has become a basic orientation of monetary policy. In contrast, the drastic fluctuations of transaction value and the lack of the most basic stabilization mechanism make it impossible for the Bitcoin to become a type of transaction money.
The fourth requirement is the hoarding of money. The ability to withdraw from circulation and become a hoarding of money is a basic function of money. In modern financial system, the “deposit” methods are more often selected for the hoarding of money, which is conducive to hoarding and obtaining return of interest rate. However, Bitcoin itself lacks a mechanism of hoarding, since no bank has offered the deposit method of Bitcoins.
The fifth requirement is the means of payment. On the basis of the above analyses, money can play a role through the payment mechanism in large transactions or wholesale transactions. Under the condition of electronic money, the function of payment of money can also be realized through the internet or mobile phones in the retail sector. Since Bitcoins lack the above functions, they are certainly lacking in the ability of payment, and therefore cannot be a type of money
— “Marx’s monetary theory and its practical value”, China Political Economy
Hence, Bitcoins are not any more “money” than something like gold or real estate. All the “benefits” you get from Bitcoin you can replicate just by buying and selling shares, or any sort of financial asset in general. It is not money, but a virtual financial asset.
In fact, Bitcoin is just a kind of virtual financial asset, belonging to the object of financial transactions, with the same category as the trading index initially set up by Lehman Brothers or other objects of virtual financial transactions. More than 3,000 types of money have been identified by encryption, far more than the number of countries and regions all over the world, and their transaction values have fluctuated and rarely been “stable,” proving that these products labeled with the name of money are actually financial instruments. Compared with ordinary financial instruments (or financial products), these virtual “currencies” have two characteristics. First, they are created by institutions (even virtual ones without legal identities) that do not have a credit function or cannot assume any credit obligations or legal liabilities for the “cryptocurrencies” they create. Second, these “cryptocurrencies” use the internet to conduct global transactions and break through the legal restrictions and financial regulations of relevant countries (or regions), becoming a borderless financial product and trading market, and providing a new channel for the global flow of funds. Therefore, they are favored by some international financial market investors and those who try to transfer funds across the border on the one hand, and they are also tightly controlled by financial regulatory authorities of various countries and regions on the other.
— “Marx’s monetary theory and its practical value”, China Political Economy
These issues largely apply to cryptocurrency itself, but Bitcoin more specifically has tons of problems that make it unsustainable and unscalable even as a financial asset. I will not go into this in too much detail, anyone can research into the “Bitcoin scalability problem” themselves, but one could always argue these problems are inherent to Bitcoin and not cryptocurrency itself, and thus a new cryptocurrency may address them.
I am instead more interested in Bitcoin’s problems that apply to all cryptocurrencies. The fact is, the thing people love Bitcoins for is the exact reason they are a failure when it comes to replacing money. It is the decentralized nature of them. People like to declare that Bitcoin is the future because we don’t need a central bank. It fits into vague American notions of “freedom!” But this is exactly the problem with Bitcoin.
Most businesses in the real world do not care about vague notions of “freedom”. They care about making a profit. They would prefer their currency to be regulated and controlled so that the could make a reliable profit, and for that currency to have liability so there is someone to complain to if something does go wrong.
Money cannot be volatile because it is important to have consistent value in the currency for a business to be able to adequately calculate its expenses. If the money itself — the measure by which it compares all expenses — constantly fluctuates, then this would lead to constant failures in an individual business to properly balance its finance.
This would have a snowball effect throughout the entire economy as this problem would become compounded as it goes up a supply chain. There would be huge shortages caused by this and economic devastation. Money cannot be volatile and unpredictable but has to be tightly regulated and controlled, and when things go wrong there has to be liability in order for the public to have trust in that currency.
Many people consistently believe Bitcoin will “replace” money. It won’t, because it’s not even money. That’s not to say Bitcoin is bad, but one should realize its place. I do not view cryptocurrencies as something going away any time soon, because they have a place in the economy and fulfill a purpose. That place is just not as money. It is already fulfilling its place.
Bitcoin fails to replace money because it isn’t even money. In computer science, it’s something new, but in economics, it really is not anything new. You have been able to buy and sell financial assets as a middle-man between transactions for a long long time. Bitcoin is not doing anything new here. Some will say it’s great because of the anonymity aspect of it, since using a middle-man helps cover up the direct transaction. Yet, using financial assets as a middle-man to cover up a transaction is quite literally the definition of money laundering. That is not new either.
At best, Bitcoin allows for a secondary avenue for what is effectively money laundering in order to perform transactions anonymity, but first converting a real currency into Bitcoin, exchanging the Bitcoins for the product, and then the Bitcoins become converted back into the real currency on the other side. It doesn’t replace money but simply allows for an avenue for anonymity. There are other cryptocurrencies that even do the anonymity part better than Bitcoin as well.
