Can BTC ever be money?

Bitcoin is said to be a sound money alternative to debasing fiat currencies. But enthusiasts fail to understand the role of credit and why a stability of value is vital.

The key issue is whether bitcoin can be a future form of money. If so, then it can become the future anchor-value for currencies and lower forms of credit. If not, then it is merely an ephemera, a latter-day tulipomania, the evidence of a speculative mania liable to be punctured as the credit bubble deflates.

There are some important aspects of the bitcoin phenomenon. There is the brilliance of a self-auditing blockchain coupled with an electronic mining system, which removes systemic risk. Once a bitcoin is mined, it exists for ever as an identified unit, capable of being transferred between owners as a medium of exchange ad infinitum. But without the status of legal tender, can it ever truly be money? And will the blockchain allow the authorities to identify and confiscate bitcoin on the basis that a previous owner bought and sold it to launder the proceeds of crime?

For most people, whether bitcoin will become money legal or otherwise is immaterial. Fortunes have been made, the arithmetic of supply relative to fiat currencies is compelling, and investors are onto a sure thing.

This article ignores the many bitcoin issues, concentrating on monetary practicalities. It is not intended for those with strong convictions either way who have made up their minds, but for the large majority of readers seeking a balanced analysis.

The logic behind bitcoin is compelling: a fixed maximum supply of 21 million compares with government money printing at an accelerating rate towards infinity. It leads to comparing bitcoin’s market capitalisation of $2.145 trillion with global credit outstanding of over $300 trillion and expanding, giving a theoretical current value of nearly $15 million dollars for each bitcoin. No wonder there are hopes that bitcoin will go considerably higher.