Is bitcoin a currency?

Bitcoin cannot function as a currency.

Unlike the namesake of "cryptocurrency" might imply, bitcoin is not a currency. It does not fulfil the economic definition of money. Instead bitcoin is best understood as a speculative cryptoasset or gambling product.

Since bitcoin is not issued by a sovereign state or central-banks there is no central party to manage the deflationary spirals that occur in the price-formation of the asset. Therefore it is subject to wild and uncontrollable volatility that makes it unsuitable as a means of exchange. No amount of technology can fix the volatility problem as it is a function of the economic design of the asset and its fixed supply. This arises out of the political imaginaries of the neo-metallism school and Austrian economics that informed the design of the bitcoin to resemble the historical gold-standard and the conception of heterodox ideas of sound money.

As evidenced by real world context there are very few businesses that are willing to transact in bitcoin because of the price volatility. Companies that attempt to do this, such as Tesla, effectively issue an option in which the goods or services payed are quoted at a strike price and if the transaction is reversed or goods returned the amount will be returned to the customer in a different currency at the strike price. This terms commerce into a security transaction and is a taxable event.

Bitcoin cannot form the foundation for an economic system because its volatility makes it unsuitable for issuing debt or loan products without extremely large risk premiums to factor in the price risk of the counterparties on long time scales. This makes common products like mortgages nearly impossible to denominate in bitcoin.

Since bitcoin is deflationary it encourages hording instead of spending on productive enterprises. This results in mass market consolidation and accumulation instead of an environment in which commerce is encouraged. This property makes bitcoin completely antithetical to the entire project of a currency which definitionally exists to be spent.

References

  1. Varoufakis, Yanis. 2021. ‘What Is Money, Really? And Why Bitcoin Is Not the Answer (Even If Blockchain Is Brilliant & Potentially Helpful in Democratising Money)’. Yanis Varoufakis (blog). 2 August 2021. https://www.yanisvaroufakis.eu/2021/08/02/what-is-money/.
  2. Taleb, Nassim Nicholas. 2021. ‘Bitcoin, Currencies, and Fragility’. ArXiv:2106.14204 [Physics, q-Fin], July. http://arxiv.org/abs/2106.14204.
  3. Corradi, Fiammetta, and Philipp Höfner. 2018. ‘The Disenchantment of Bitcoin: Unveiling the Myth of a Digital Currency’. International Review of Sociology 28 (1): 193–207. https://doi.org/10.1080/03906701.2018.1430067.
  4. Bratspies, Rebecca M. 2018. ‘Cryptocurrency and the Myth of the Trustless Transaction’. Mich. Telecomm. & Tech. L. Rev 1. https://doi.org/10.2139/ssrn.3141605.
  5. Diehl, Stephen. 2021a. ‘The Non-Innovation of Cryptocurrency’. 7 July 2021. https://www.stephendiehl.com/blog/non-innovation.html.
  6. ———. 2021b. ‘The Intellectual Incoherence of Cryptoassets’. 7 November 2021. https://www.stephendiehl.com/blog/crypto-absurd.html.
  7. ———. n.d. ‘The Case Against Crypto’. Accessed 17 February 2022. https://www.stephendiehl.com/blog/against-crypto.html.
  8. Eich, Stefan. 2018. ‘The Currency of Politics’. The Political Theory of Money from Aristotle to Keynes.
  9. Gerard, David. 2017. Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts. David Gerard.
  10. Kolchinski, Alex. 2022. ‘Crypto Is an Unproductive Bubble’. Alex Kolchinski (blog). 18 March 2022. https://alexkolchinski.com/2022/03/18/crypto-is-an-unproductive-bubble/.
  11. Krugman, Paul. 2018. ‘Bitcoin Is Basically a Ponzi Scheme’. The Seattle Times 30.
  12. ———. 2021a. ‘Technobabble, Libertarian Derp and Bitcoin’. The New York Times 21.
  13. ———. 2021b. ‘The Brutal Truth About Bitcoin’. The New York Times 21.
  14. Olson, Dan. 2022. Line Goes Up – The Problem With NFTs. https://www.youtube.com/watch?v=YQ_xWvX1n9g.
  15. Plant, Luke. 2022. ‘The Technological Case against Bitcoin and Blockchain’. Luke Plant’s Home Page. 5 March 2022. https://lukeplant.me.uk/blog/posts/the-technological-case-against-bitcoin-and-blockchain/.
  16. Stinchcombe, Kai. 2018. ‘Blockchain Is Not Only Crappy Technology but a Bad Vision for the Future’. Medium (blog). 9 April 2018. https://medium.com/@kaistinchcombe/decentralized-and-trustless-crypto-paradise-is-actually-a-medieval-hellhole-c1ca122efdec.
  17. White, Molly. 2022a. ‘Cryptocurrency Off-Ramps, and the Shift towards Centralization’. Molly White. 12 February 2022. https://blog.mollywhite.net/off-ramps/.
  18. ———. 2022b. ‘Cryptocurrency’s Robinhood Effect’. Molly White. 17 February 2022. https://blog.mollywhite.net/cryptocurrencys-robinhood-effect/.
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