No cryptocurrency is a currency. No cryptocurrency has ever been a currency.
The phrase “cryptocurrency” is one of the most successful examples of false advertising in the history of the free market.
As far as I know, I was the first economist to call into question the whole concept of bitcoin as a currency. In 2013, I wrote the following.
BITCOINS ARE NOT MONEYNow let us look at bitcoins. The market value of one bitcoin has gone from about $2 to $1,000 in a year. This is not money. This commodity is not being bought for its services as money. It is unpredictable to a fault.
Admittedly, those who got in early on this Ponzi scheme are doing very well. They will probably continue to do well for a time. As more people hear about this investment, which is justified in terms of its future potential as money, more people will buy it. Late-comers are not buying it because they understand its potential as future money, any more than the late investors in Charles Ponzi's scheme thought they were buying into the arbitrage potential of foreign postage stamps. They are buying Bitcoins because we are in the midst of a Ponzi scheme mania. They will continue to buy because they think this time it's different.
This digital so-called money will not be used to facilitate exchange. Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000. This is the classic mark of Ponzi scheme psychology. People do not buy the investment for the benefits that the investment provides as an investment, in other words, because it is a capital asset. They buy it only because it has gone up in price. They expect this to continue.
Here is the Austrian school's theory of money. People buy money because it has not fallen in price. But it has also not gone up in price much, either. It is predictable. Why? Because it is held in reserve by a large number of people over a large geographical area. It has become money through tradition, through experience, and through endless numbers of exchanges on a voluntary basis. It has proven itself in the marketplace as a means of facilitating exchange, and thereby as a means of preserving value over time. This is not the characteristic feature of a Bitcoin. People are not buying it to serve as money; they are buying it because they are in the midst of a mania, and they are gambling that the number of buyers will continue upward forever.
Here is an economic fact: the number of fools is limited. They are a scarce economic resource. As the price of bitcoins rises, more fools will be lured into the market. But this is a finite market.
In other words, bitcoins cannot possibly fulfill their supposed purpose: to serve as an unregulated currency unit. Bitcoins are not an alternative currency. They are something you buy in the midst of a mania, and you will sell at some point in order to get back your money. You are thinking of buying Bitcoins, not because Bitcoins will serve as a means of exchange, as originally argued, but because you want to get back lots more money than you paid for them. In other words, Bitcoins are not money; dollars are money. There has been no challenge from Bitcoins to the reign of the dollar.
My article was reprinted by Lew Rockwell on his site here.
The total value of all cryptocurrencies is in the range of $300 billion. To understand how insignificant this is, consider the total value of other currencies and potential currencies.
Gold: $11 trillion
Coins, banknotes, and checking deposits: $35 trillion
Total world money: $95 trillion
There are approximately 7.5 billion people on earth. Let’s assume that in round numbers, this is about 2 billion adults. The total cryptocurrency market is $300 billion. On average, that's about $150. But this is skewed by the early buyers who bought each bitcoin for a few dollars. If these people ever tried to sell, the price would collapse. That's because almost nobody invests in these falsely advertised assets.
Cryptocurrencies are not currencies. They are not used in exchange. Almost nobody knows what they are. Of those who have some vague idea of what they are, there are so few people who own them that their total wealth is $300 billion.
One of the characteristic features of money is stability of exchange. You have to have a pretty good idea of what the monetary unit is going to buy tomorrow, next week, next month. Cryptocurrencies are wildly unpredictable. Consider 2020. On January 2, it was $6,945. On February 9, it was $10,168. On March 12, it was $3,858. Today, it is about $9,500. To see these prices, you can use this chart.
This is why nobody will sell you anything for one bitcoin. Nobody sells anything for bitcoin. They will take a donation in bitcoin. Something is better than nothing. But you cannot walk into any retail store in America and buy anything with bitcoin.
This is why bitcoin is not a currency. This is why the other so-called cryptocurrencies are not currencies. They don’t buy anything except money. Yes, you can buy money, meaning real money, meaning dollars, yen, and euros, in exchange for bitcoin. That’s the only thing of value that you can buy with cryptocurrency: a real currency. Well, actually not a currency. You can buy a digital monetary unit that is recorded in your bank. There’s nothing crypto about it. Then, you can convert some of these digital monetary units into currencies, meaning paper dollars.
You cannot buy anything that doesn’t leave a transaction trail. You may think you can, but you can't. Nobody will sell you anything for a bitcoin or any of the wannabe bitcoins. You can only buy money. This creates a taxable event if you have made money on your cryptocurrency investment. The IRS knows about it. Your bank knows about it. There is nothing secret about it.
There is a record in your bank account when you buy a so-called cryptocurrency. There is a record in your bank account when you sell a crypto currency for the only thing that anyone will sell for cryptocurrency: digital money.
So, crypto is as much a false advertising term as currency is. The phrase cryptocurrency is a double-barreled deception.
Somebody bought bitcoin on February 9 for over $10,000. A month later, it was worth less than $4,000. This is a crap shoot. It isn’t money. It is never going to be money. It is simply a wild, speculative crapshoot.
© 2022 GaryNorth.com, Inc., 2005-2021 All Rights Reserved. Reproduction without permission prohibited.