I think bitcoin's true believers are wrong

Is bitcoin money, or a payment system? If bitcoin is good at both those jobs, then it's probably got a bright future. If it's good at neither of them ... well, farewell, bitcoin, we hardly knew ye.

So what of bitcoin-as-money? That's a complicated question, because money is an insanely complicated concept, even though it seems simple to us when we're exchanging $5 for an Extra Value Meal. But economists broadly agree on two core functions of money: it is a medium of exchange, and a store of value.

Bitcoin has real advantages over gold if you are, say, attempting to get your money out of a country with strict limits on shipping currency abroad.

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A medium of exchange means that, well, people will give you stuff in exchange for it. And there are already places where people will give you real goods and services for your bitcoin. But there aren't that many of them.

If you were a merchant, would you take an extremely volatile currency that, six months hence, might be able to buy you a car or a pack of chewing gum? Heck, six hours can make a big difference in the price.

In general, merchants do not like to accept payments that could be worth radically more or less than the posted price of the goods by the time they deposit the cash in their bank account. If they do accept it, they will demand a premium to compensate them for the risk. Which will in turn make bitcoin less attractive to consumers.

When people sell something, they are effectively buying an option on future consumption, and they want to know how much that option will be worth before they trade real, valuable labor and raw materials for it. In other words, while the buyer wants a medium of exchange, the seller wants a store of value.

Many things that we treat as stores of value are volatile. Stocks are volatile. Bonds are volatile, at least compared to cash. Gold is volatile, and for a long time, gold was money in most of the Western world. It is still the favoured investment for many people when things start going to hell in the local or global economy.

Which brings us to the thing that a lot of people seem to think bitcoin really is good for: hiding your money from the government.

Bitcoin has real advantages over gold if you are, say, attempting to get your money out of a country with strict limits on shipping currency abroad. It's a lot easier to hide a USB drive than a truck full of gold bullion, or even a foreign bank account stuffed with smuggled cash.

But bitcoin has real disadvantages, too: A USB drive is easier to steal, or lose, than a truck full of gold bullion. Moreover, gold does have actual uses, which means its value will never fall to zero, as bitcoin's might. And bitcoin is a good bit more volatile than gold, which means that you could suddenly discover that your carefully smuggled savings are worth very little when you need them.

Perhaps the biggest weakness, however, is that if bitcoin really turns out to be a good way to keep governments from controlling their economies and their citizenry, then governments will crush it.

The price of bitcoin seems to be driven by people who think that this can't or won't happen. As a longtime observer of the extraordinary, and often unjust, lengths that governments will go to in order to maintain their control over the financial system, I think bitcoin's true believers are wrong.


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