The Bitcoin price was getting close to US$20,000 at the end of last month, but has since come down to a bit over US$18,000. In March, it was around US$5,000 (see chart above). There has been a lot of speculative money going into Bitcoin, driven partly by the Fear of Missing Out (e.g. check out The Wealthy Are Jumping Into Bitcoin as Stigma Around Crypto Fades and Tyler Winklevoss: ‘Smartest people in the room buying the Bitcoin quietly’). Bitcoin is also seen by some as a hedge against future hyper-inflations (as governments resort to Modern Monetary Theory) and political chaos (e.g. check out Naval Ravikant’s latest interview on the Tim Ferriss Show). I have come to think that a fundamental breakdown in civilisation would actually be required for Bitcoin to become useful as money, but then you’d have to wonder what would guarantee the internet would function and Bitcoin would be a reliable means of payment.
Bitcoin can’t really become a useful form of money if its value is so volatile, as most people would be reluctant to set prices or write contracts in Bitcoin. The cryptocurrency faces a huge challenge in supplanting traditional currencies, which benefit from a lock-in effect. In his brilliant 2016 book Macroeconomics in Times of Liquidity Crises, renowned Argentine-American economist Guillermo Calvo nicely explains why money has value, even though it is no longer backed by a commodity such as gold. Calvo suggests it has to be much more than the fact that government require tax liabilities to be paid in fiat currencies, and he writes (pp. 28-29):
An explanation that has been largely ignored by the profession and that I find very appealing—although admittedly incomplete—was proposed in Keynes’s General Theory. He writes: “the fact that contracts are fixed, and wages are usually somewhat stable in terms of money, unquestionably plays a large part in attracting to money so high a liquidity-premium”…
…the PTM [Price Theory of Money] asserts that money’s output value cannot be nil in equilibrium because economic agents set several key nominal prices/wages in advance, thereby offering a ground-up output guarantee to cash.
That strikes me as incredibly insightful and shows the huge barrier that Bitcoin and other cryptocurrencies need to overcome. To have true value as money, prices, wages, and contract values will need to be enumerated in Bitcoin (or some other cryptocurrency). At the moment, anyone who tried to specify a Bitcoin price for a commodity or asset in advance would be engaging in highly risky speculation. Unfortunately for Bitcoin, this means it won’t end up with a reasonably stable value and its price will continue to swing wildly as it is merely a plaything of speculators.
We’d need to see an outbreak of hyper-inflation, which looks unlikely at the moment given the state of the global economy, and possibly widespread political chaos, for Bitcoin to become widely adopted and to have any real value as a money in my view.
For more on Bitcoin, I’d recommend John Quiggin’s 2018 blog post Bitcoin’s belated bust. While Bitcoin has surged in value since John’s post, I think the points he makes about the problems with Bitcoin are still apposite.
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