Bitcoin Defies the Logic of Money

The U.S. dollar price per bitcoin recently went over $6,000.  For anyone who invested in Bitcoin from the early stages, they have done very well.

Although the advocates of Bitcoin and other cryptocurrencies will typically speak against the government fiat currencies, I think some of them fail to realize that Bitcoin itself is essentially a fiat currency.  Sure, it can’t be created out of thin air in unlimited quantity, but it is still backed by nothing.

Mises and Rothbard taught a lot about the subject of money.  Money is a medium of exchange.  It is hard to consider Bitcoin or any other cryptocurrency a form of money at this point because it is not yet widely accepted.  But it is not unknown either.  There are online retailers that will accept Bitcoin.  There are charities and other non-profits that will accept Bitcoin.  At $6,000 per bitcoin, who wouldn’t want to accept them?

Mises and Rothbard explained that money originates in the marketplace because of its value and usefulness.  It is subjective value, but people did not originally seek gold and silver just to be used as money.  They were sought-after commodities, and they became of form of money because of this subjective value and their unique physical characteristics.

It was only after gold served as money in the marketplace that governments were able to come in and play games.  There were certificates issued that would represent a certain quantity of gold.  These certificates served as money, as they could be redeemed for gold at any time, at least until the government changed the rules.  Finally, the government would renege on this promise and people were left holding certificates with no gold backing.  Mises claimed that a fiat money could only come about because of the original gold backing (or some other backing).

But Bitcoin and other cryptocurrencies seem to be defying this logic.  Bitcoin is not backed by anything.  You can’t trade it for any particular commodity.  If anything, people trade it for U.S. dollars or other fiat currencies.

Perhaps Bitcoin is serving as a main form of money in a place such as Venezuela.  But even there, it is not likely being widely used.  Still, it is showing that it is possible.

I never would have guessed that Bitcoin would last this long and go up this high (again, in terms of U.S. dollars).  It is my lost opportunity, even if it all comes crashing down.

Even though it is hard to consider Bitcoin a major form of money at this point, it is still somewhat trying to prove Mises (an economic genius) wrong.  Perhaps Mises underestimated just how much some people dislike government-issued currencies.

There are cryptocurrencies popping up all over the place now.  And that is really indicative of the problem.

Can I just start a new currency called “Libertarian Investment certificates”?  I can hand them out to people and they can use them for trade in the open marketplace.  Aside from the technology, how is this any different from Bitcoin?

I don’t like criticizing Bitcoin too much, and it is not because I didn’t invest in it early on.  It is because many of its advocates tend to be on my side of the fence, at least in terms of criticizing government money.  As long as they aren’t trying to force anyone to use Bitcoin or any other cryptocurrency, then I certainly don’t regard them as enemies.

Still, for me, it doesn’t take away the fact that bitcoins and other cryptocurrencies are essentially made up out of thin air.  Bitcoin has more similarities with a government-issued currency than it does with gold in this respect.  Gold has been in demand for thousands of years, and it has other uses than just serving as a form of money.

For this reason, my long-term bet is still on gold (and silver secondarily).  I think the wave of the future in terms of free market money will be a gold-backed digital currency.  This is already starting to become a reality.  We just need for some more loosening of government restrictions.

This is a business that a company could easily start.  You have a warehouse of gold and you issue digital certificates representing the gold in the warehouse.  The warehouse could be fully audited (unlike the Federal Reserve).  It would be similar to Bitcoin, except it would be backed by gold.  It would be redeemable in gold (probably for a fee).  You could trade small fractions of a certificate that represent one ounce of gold (or however they are issued).

If you want to speculate in Bitcoin, I am not going to tell you otherwise because I have been wrong up to this point.  It is a very volatile investment and very risky.  But if you do speculate by buying bitcoins, then it should probably not be a buy-and-hold strategy because I don’t think they will last forever.

In the end, gold will beat Bitcoin and every other cryptocurrency.  It is just a matter of time.  History is on the side of gold.

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