Is Bitcoin Real Money?

December 20, 2013

In the 1930s, when the Federal Reserve let the money supply contract, there was a true shortage of currency. At least 150 communities experimented with scrip -- printing their own money to grease the wheels of commerce. None worked, and all have disappeared. Today, because of worries about the Fed printing too much money, a private online global scrip, called Bitcoin, has been created. This scrip is supposed to protect society from inflationary monetary policy, says Brian Wesbury, chief economist at First Trust Advisors LP.

Could Bitcoins become an alternative to the money or monies that exist across the globe?

  • Bitcoins are "mined" by running a computer algorithm, creating a digitized code, which can then be used to complete online transactions.
  • The algorithm makes it progressively harder to mine Bitcoins as the total number increases.
  • Preset limits supposedly cap the maximum number of Bitcoins at 21 million, and right now there are roughly 12 million in existence.

Bitcoins meet most of the criteria of money. They are a medium of exchange, a unit of account, a store of value and a standard of deferred payment. But what ultimately gives money value is that it is accepted by others in trade for something of value. And that is why scrip doesn't work. To become a true alternative currency, Bitcoins need to be accepted in a wide enough swath of society to facilitate the normal transaction of business.

  • Right now, total cash and deposits in the U.S. banking system (the M2 money supply), is roughly $11 trillion.
  • Assuming 21 million Bitcoins are mined and they become an accepted currency, each one could be worth as much as $524,000.
  • This is a massive potential appreciation from their current level.

However, the list of companies that accept Bitcoin as payment for actual transactions make up what Wesbury estimates to be less than one-hundredth of a percent of all spending, or gross domestic product. Since money gets its value from the goods, services and assets that it can purchase, a Bitcoin is currently worth only 0.01 percent of its true potential, or about $52.40.

To become a real alternative currency, Bitcoins must be recognized by a majority of businesses and consumers. They must be as safe, or safer, than currency issued by a central bank -- a concern as hackers become more and more sophisticated. And they must be transportable. Currently, the Bitcoin does not meet any of these requirements, and this is why it is trading for much less than its actual convertible U.S. dollar value.

Source: Brian Wesbury, "How Much Does that Burger Cost in Bitcoins?" Wall Street Journal, December 15, 2013.

 

Browse more articles on Economic Issues