After seeing so much misleading information about Bitcoin and crypto currencies , I decided to write my own article.
Bitcoin cannot become money until vendors start listing their prices in BTC. For them to do so, their own suppliers also need to list in BTC. At any point in this chain, the incentive that makes a vendor list prices in BTC is the knowledge that someone, later, will accept their BTC in exchange for goods they will need. This is the regression theorem applied in the forward direction, which makes it clear that a prior market value for BTC is not a necessary condition for it to become money. The regression theorem is usually applied to explain why some commodities have emerged to become money, such as cigarettes, beaver pelts, gold and silver, and is definitely worth learning.
So, there is a possibility, a critical mass, at which a crypto currency could become money. But there are many, many obstacles to overcome. I will list them here now, in the order in which they will most likely happen in my mind:
1- Competition. Already, BTC has two major competitors, BCH and BTG, both forked from the original genesis block, with different attributes. In the same way that gold, silver and copper have historically competed with each other as money commodities, because they have various scarcities, weights, and other attributes, so will crypto currencies. The market for crypto currencies will see many forms of them emerge, all satisfying both the consumers and producers, in the same way that precious metals have emerged over centuries as the preferred currencies. For example, gold is a better store of value for long term saving, yet silver is more practical as a medium of exchange. For example, I can buy lunch with a nice 1 ounce silver coin, but the same lunch in gold would be a few grams of gold, which is not practical to carry around. The same competition applies to crypto currencies, but on new attributes. Crypto currencies have various levels of practicality, for privacy, speed, stability. Miners, just as for precious metals, also influence the popularity of currencies, because the efficiency of mining and the value of the currency all play a role in the decision to mine one over another. This is in fact the reason why BTG and BCH have split from BTC, with much debate over which would prevail. There is little reason to think only one will win out, as they all offer distinct properties for both users and miners. Even if vendors start listing some prices in crypto currency, there is no reason to expect them to all agree on the same one.
2- Inflation. Inflation, defined by Austrian economists, is the debasement of currency. It leads to price inflation, of course, which is the mainstream description of inflation. Crypto currencies are not immune from inflation. Although in theory, each one of BTC, BTG and BCH have a mathematical limit on how many 'coins' can be mined, the reality is that the forks in the blockchain have already resulted in 3x inflation over the existing money stock. In addition to this risk, is of course the possibility that crypto currencies based on more complicated block chain contracts could allow for inflating the total stock of coins in existence. In other words, while the current bitcoin blockchain restricts inflation to forking, there is no such limitation on the ethereum blockchain, and so, if an ERC20 token based currency was based on a contract that allowed for the dilution of that token, no forking would be necessary, and therefore, no consensus of miners would interfere with the process. As crypto currencies have been advanced as a solution to central bank fiat money production, it should be clear that they collectively are definitely not the solution, even if a single one of them could emerge, from its resistance to inflation, as a winner in the competition with others.
3- Volatility. Unlike all other commodities that have become money, because of their prior market value, crypto currencies do not enjoy such a status. Some people argue that it is a fatal flaw. The core issue is that when such a commodity already has a market value, such as beaver pelts being desirable and subject to barter against other goods, the status of medium of exchange can emerge, naturally, as vendors learn that holding such a good for a while is not likely to result in a loss of value, and can result in gains. At that point, holding and trading pelts becomes an accepted practice, even if no economist is around to call it a medium of exchange. Contrast this to the current situation in which nobody remembers from one day to the next how many gallons of milk a BTC can buy. In fact, the majority of BTC trading happens against fiat currencies and other crypto currencies. The current volatility of the crypto market is therefore a second enormous obstacle to vendors even daring to calculate profit and loss in order to list their prices in crypto units. Once the market cap of these crypto currencies reaches and collective yawn, through corrections and spikes, if enough vendors feel the stability of their prices is established, it is not impossible for some of them to dare list prices for their goods in those currencies, accepting to take a loss if the volatility should return. It is telling that even today, when the volatility, while high, is on a backdrop of rising prices, still few businesses list their prices in BTC. To understand the economic calculation, simply ask yourself if you would be willing to ask for your salary in terms of BTC. You would probably start by just converting your salary in fiat to today's price in BTC and take a leap of faith that the purchasing power afforded by the BTC amount your employer gives you will remain somewhat stable or rises. While this is the same nervous decision that pioneers took when first accepting beaver pelts they didn't need in payment for services, because they hoped to trade them later for things they really needed, it should be clear now that the ability to calculate profit and loss in kind is an important factor in the decision, highlighting the importance of having suppliers who also price their goods in the currency you prefer to receive as payment.
4- Legal Tender Laws. Complicating the transition of crypto currencies to the status of money is a final critical hurdle which is overlooked by many. While crypto currencies are advanced as a free market answer to ever inflating fiat money, the reality is that even if these currencies take hold, the rush to them is not likely to happen smoothly. Even in Venezuela, a country currently suffering from runaway inflation, thus dwarfing the volatility of BTC, the adoption of BTC as methods of payment and savings has been slow. The reason, of course, is because of Legal Tender Laws, which dictate that vendors must accept the fiat currency as payment from anyone, and especially government. This of course means that vendors are obligated to list their prices in fiat, and sometimes prevented from listing them in others. This does not apply to black market prices, which can sometimes liberate citizens from the central planning of prices as it did before the fall of the USSR. It is difficult to argue that crypto currencies will fare better than gold or silver in the face of such laws, considering that vendors could have listed their prices in gold and silver all along but have not done so. There are even other laws preventing contracts from being executed based on gold, although Texas has recently passed a law allowing it. Thus, if the reasons why gold or silver have not been popular, legal, or practical for their use as medium of exchange, in the face of fiat inflation and relegation to black markets, then why should crypto currencies be any different ? Crypto currencies enjoy various levels of privacy and even secrecy, but yet the ultimate goal is always to exchange them for goods, which are inherently almost never virtual. Therefore, there is some kind of circular dependency in which crypto currencies, in order to overtake government imposed fiat money, must first escape the grip of government via legal tender laws, to succeed.
In my opinion, BTC isn't comparable to beaver pelts. It's also my opinion that money will become BTC instead of BTC becoming money due to S-Curve adoption models. Nice article, by the way. There is a lot of stuff in there that people overlook and are ignorant of. It's good to see someone dropping real knowledge on here.
Thanks. I'll have to look up S-Curve models. I'm just using the Mises definition of money. But modern money theory practitioners have a different idea of it, which I think is very relativist.
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