Bitcoin has garnered much mainstream media coverage in recent months which is the natural reaction to its meteoric ten-fold rise this year. The digital currency’s rise to about $11,000 today was met with awe, and then it quickly fell by 20% in a matter of hours, as has been widely reported. Still, bitcoin is 37% higher against the USD compared to one month ago and that alone is enough to get people paying attention. But in all the analysis about the astonishing price action what is all-to-often missing is a basic analysis of what bitcoin is and what it isn’t. Specifically, pundits often jump to the premise that bitcoin is money. We couldn’t disagree more for the reasons we’ll cover in this post.
Going all the way back to our first economics class, we recall that money can be thought of as anything that is simultaneously a 1) store of value, 2) unit of account and 3) medium of exchange. Let’s take one at a time considering the properties of bitcoin.
Store of Value
For money to be useful its value must be generally stable through time. A user of a currency – whether it be USD, gold, silver, shells, etc – must have faith that the purchasing power of the currency will be similar one, five, or ten years from now as it is today, less realized inflation. This is such because economic agents need the ability to plan and invest and cannot do so without taking for granted the value of their money. Even under the broadest definition of a store of value, bitcoin fails on this test. So far bitcoin has mostly gained value against the USD, which is an alluring prospect for current and potential holders of bitcoin. But it can also lose value at a jaw dropping pace, as we witnessed again today. If we can’t even predict with some measure of certainty the value of bitcoin in one hour, let alone tomorrow, how could bitcoin possibly be considered a store of value?