For the past few years, Bitcoin and the other cryptocurrencies have been on fire. From seemingly out of nowhere, what was once an obscure technocrats’ dream now has thousands of evangelizers shouting its glory. While I try to avoid bandwagons, the false confidence Bitcoin has gained aroused me to write an article on the matter. I do not wish to spend much time on the subject so I will briefly explain why Bitcoin will fail. It does not require special foresight to predict Bitcoin’s gloomy future. Most of this stuff is common sense once a fundamental understanding of money is grasped.
Before discussing Bitcoin, it is vital we cover the difference between currency and money. Let’s start by defining money. Money is a store of value. This brief definition is not overly simplistic, but precisely accurate. Anything that is an asset is money. Although we know that money is an asset, we often fail to realize that all assets are also money. Your house, your car, your phone, your TV, most importantly, your skills, are all money.
A currency on the other hand, is money that has become an accepted medium of exchange. Currencies do not come out of the void, they were first regular everyday assets. However, what makes one asset become currency over a thousand others is the key to understanding the future failure of bitcoin.
An asset is eligible to become currency if and only if it fulfills a universal need. Since everyone needs this asset either now or in the near future, that particular asset circulates rapidly enough to become currency. This explain why for most of history, the assets that became currency were consumable commodities. Money was rice in Japan, wheat in Egypt, Salt in Celtic Europe, etc. Looking at it from this perspective, we see that currency is a natural element. It is the most rapidly circulating commodity of a period.
Bitcoin in and of itself does not fulfill a universal human need. This point is self evident because you cannot consume a Bitcoin nor can you utilize it alone without a counter-party. Since Bitcoin is not a standalone asset, it is not money. It can be argued however, that although Bitcoin does not fulfill a biological need, it does have value in the domain of monetary exchange. This argument is valid- but only if Bitcoin succeeds as a social network like the U.S dollar did.
All social networks are inherently worthless and Bitcoin is no different. What gives them value are the users participating. This implies that the future of Bitcoin is dependent on its success as a social network. Unfortunately, Bitcoin is not being mass adopted by mainstream. It is becoming a tool for speculation by an elite few rather than a medium of exchange for the proletariat.
This transformation of Bitcoin into a speculative instrument has ruined its possibility to be adopted by mainstream merchants. That is because it is impossible to price consumer goods in such a volatile currency. The ever changing price of Bitcoin also makes it painstakingly difficult for merchants to settle accounts. Stability is one of the key elements of money, an attribute Bitcoin does not possess.
Overall, Bitcoin is a positive movement gone horribly wrong. This negative direction has been fueled by speculators arousing a desperate population seeking to acquire wealth without dutiful labor. Fortunately, there is no royal road to success, not for you, not for Bitcoin.
