Bitcoin still isn't money, because people aren't using it as if it was

Back in 1875, the economist William Stanley Jevons described the functions of money as [*]:

1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services;
2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and
3. It is a store of value - you can keep it and it will retain its value into the future.

Since the introduction of Bitcoin in 2009 (if not earlier), there has been an ongoing debate about whether Bitcoin (and other cryptocurrencies) are money. I've blogged on this topic before (see here and here), and to me it is pretty clear that cryptocurrencies are not money. For one thing, their value is too volatile to act as a unit of account. Second, whether they are a good store of value is questionable. Just ask anyone who held TerraUSD or Luna cryptocurrencies in 2022. And, does anyone use Bitcoin as a medium of exchange?

That last question was addressed in this recent article in The Conversation by John Hawkins (University of Canberra):

The whole point of Bitcoin, as its creator “Satoshi Nakamoto” stated in the opening sentence of the 2008 white paper outlining the concept, was that:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

The latest data demolishing this idea comes from Australia’s central bank.

Every three years the Reserve Bank of Australia surveys a representative sample of 1,000 adults about how they pay for things. As the following graph shows, cryptocurrency is making almost no impression as a payments instrument, being used by no more than 2% of adults.

You can go to the article to see the graph that Hawkins refers to, but the point is clear. While around 65 percent of Australians have used PayPal to make a payment in the previous 12 months, only 2 percent of Australians have used cryptocurrency to do so. But it's not just Australia:

These findings confirm 2022 data from the US Federal Reserve, showing just 2% of the adult US population made a payment using a cryptocurrrency, and Sweden’s Riksbank, showing less than 1% of Swedes made payments using crypto.

So, if people aren't using Bitcoin as money, why do they have it? Hawkins notes that:

But most people buying Bitcoin essentially as a speculative token, hoping its price will go up, are likely to be disappointed. A BIS study has found the majority of Bitcoin buyers globally between August 2015 and December 2022 have made losses...

UK government research published in 2022 found that 52% of British crypto holders owned it as a “fun investment”, which sounds like a euphemism for gambling. Another 8% explicitly said it was for gambling.

 Bitcoin still isn't money. People simply aren't using it in that way.

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[*] Jevons noted a fourth function, a standard of value (a way of valuing debts), which we now consider to be much the same as a unit of account.

Read more:

• You may be able to buy Coke with Bitcoin, but that still doesn't make Bitcoin money
• No, El Salvador hasn't just turned Bitcoin into money

No, El Salvador hasn't just turned Bitcoin into money

One of the big news items over the last week was El Salvador's announcement that Bitcoin would become legal tender. As the New Zealand Herald reported:

Cryptocurrencies have bounced back in a big way this morning after El Salvador voted to become the first nation in the world to adopt bitcoin as legal tender.

Over the weekend, the Central American nation's president crashed a wild bitcoin conference in Miami to reveal his plans for digital currencies to a rapturous reception.

Overnight, those pland [sic] edged closer to reality after they were backed by congress...

 "The #BitcoinLaw has just been approved by a qualified majority" in the legislative assembly, President Nayib Bukele tweeted after the vote late on Tuesday (local time).

"History!" the president added.

This isn't the first time that it has been asserted that Bitcoin is money. To be classified as money by economists, Bitcoin must meet certain conditions, as I noted in this 2019 post:

To an economist, money is something that fulfils three functions, which date back to William Stanley Jevons in 1875...:

1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services.

2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and

3. It is a store of value - you can keep it and it will retain its value into the future.

Anything that fulfils those three functions can be considered money. So, coins and banknotes are money because you can exchange them for goods and services, you can use them to measure the value of things, and you can store them and use their value in the future.

And as I wrote last year in relation to Bitcoin:

...Bitcoin is used to buy at least some goods and services. However, Bitcoin fails on the last two criteria. It isn't used as a unit of account - no one's quoting you prices in Bitcoin, and I bet the vending machines don't report the Bitcoin price of a can of Coke. And, Bitcoin isn't much of a store of value. It fails on both of those criteria because the value of Bitcoin is far too volatile.

What has changed now? Perhaps Bitcoin will now be used as a medium of exchange, at least in El Salvador. But unless sellers start quoting prices in Bitcoin, and debts are recorded in Bitcoin, it is still not a unit of account. And Bitcoin is still too volatile to be a store of value. This year alone a single Bitcoin has fluctuated in value from US$30,000 to $US60,000. Why would a saver want to keep their savings in something that routinely gains or loses half of its value?

Even in terms of medium of exchange, there are some issues, as John Hawkins wrote this morning in The Conversation:

Consider the provision in the new law that “all obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin”.

Even that is complicated. How, and by whom, will the amount of bitcoins necessary to pay a debt be determined? Will it be based on the Bitcoin price at the time the debt was incurred, or when the debt falls due?

The difference of even a few days could be significant.

If the expectation is the price of Bitcoin is going to rise, why would you want to buy things with it? Why not wait? If the expectation is the price is going to fall, why would you want to accept it? For most transactions, using US dollars will still make the most sense.

Hawkins notes that there are serious risks to El Salvador's economy as a result of this move, and that the proclaimed benefits in terms of increased GDP and facilitating international remittances are not all that clear. What is clear is that this change still doesn't make Bitcoin money. 

Read more:

• You may be able to buy Coke with Bitcoin, but that still doesn't make Bitcoin money

You may be able to buy Coke with Bitcoin, but that still doesn't make Bitcoin money

This story in the New Zealand Herald yesterday caught my eye:

A lot of the narrative on virtual currency revolves around its yo-yo-ing worth.

Will we see geeks buying more Ferraris if bitcoin breaks back toward US$20,000, or crying into their keyboards if it crashes below US$5000 again?

But to become an enduring currency, it will also have to prove its utility on a meat-and-potatoes level - such as buying everyday stuff.

That goal has got a little bit closer today with a deal that means Australians and New Zealanders can now buy a coke from a vending machine with bitcoin.

Interestingly, in our ECONS101 tutorial on the topic of money and inflation, we ask the question of whether Bitcoin is money. The answer is no. To see why though, you have to understand what money is.

As I noted in this post last year:

To an economist, money is something that fulfils three functions, which date back to William Stanley Jevons in 1875...:

1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services.

2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and

3. It is a store of value - you can keep it and it will retain its value into the future.

Anything that fulfils those three functions can be considered money. So, coins and banknotes are money because you can exchange them for goods and services, you can use them to measure the value of things, and you can store them and use their value in the future.

Does Bitcoin fulfil those three functions of money? The Herald article only covers the first (medium of exchange) - Bitcoin is used to buy at least some goods and services. However, Bitcoin fails on the last two criteria. It isn't used as a unit of account - no one's quoting you prices in Bitcoin, and I bet the vending machines don't report the Bitcoin price of a can of Coke. And, Bitcoin isn't much of a store of value. It fails on both of those criteria because the value of Bitcoin is far too volatile. Here's the value of Bitcoin over the last twelve months (from Coindesk):

You wouldn't want to store value in an asset that routinely loses a third of its value in a matter of weeks. You're also unlikely to want to quote prices in something that varies widely in value even across a day or two. And on top of that, Bitcoin probably still isn't widely accepted enough to even be considered a medium of exchange.

So, other than creating a bit of media attention for Coke and for their technology partner, this story isn't telling us that Bitcoin is money. You don't need to throw away your dollars just yet.

Bucks as money on the American frontier

This week I'm in Pittsburgh, and yesterday I got the opportunity to do a bit of sightseeing, including the excellent Fort Pitt Museum. It was very enlightening in terms of the early history of the city as a frontier fort town, including its role as a trading post in the fur trade. This exhibit in particular caught my attention:

In ECONS101, we talk about the roles of money, as: a medium of exchange (you give it up when you buy goods or services, and you can receive it when you sell goods or services); a unit of account (you can measure the value of something using the amount of money it is worth); and a store of value (you can keep it and it will retain its value into the future). The exhibit caught my attention because of this note on the wall:

It shows the use of deer skins as a unit of account. Notice that, on the left, it shows how much skins of different animals are worth, measured in "bucks", where one buck is one deer skin. So, six raccoon skins is equal to one buck, or two otter skins is equal to one buck. On the right, it shows what you can buy, again measured in "bucks". So, one pound of gunpowder is one buck, and 12 flints is one raccoon skin (which is 1/6 of a buck).

Of course, money existed in the 18th Century. But coins and other money were in short supply on the American frontier, so deer skins were a useful alternative. Interestingly, this also shows the origin of our use of the term "bucks" to refer to money!

Money isn't only what you think it is

When most ordinary people think of money, they think of the coins and banknotes that are increasingly becoming redundant. Maybe they think about the virtual balance in their bank account (it's virtual because the bank isn't physically storing that amount of money for you). However, when economists think of money they think of much more.

To an economist, money is something that fulfils three functions, which date back to William Stanley Jevons in 1875 [*]:

1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services;
2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and
3. It is a store of value - you can keep it and it will retain its value into the future.

Anything that fulfils those three functions can be considered money. So, coins and banknotes are money because you can exchange them for goods and services, you can use them to measure the value of things, and you can store them and use their value in the future.

The surprising thing is that we accept coins and banknotes as money even though they have no intrinsic value - we only value them because they can be used as money. They are used as money because the government has decreed that they have value - they are called fiat money because they are given value by government fiat. That distinguishes them from gold or silver, which were previously used as money, and had intrinsic value - gold and silver are forms of commodity money.

In some ways, commodity money is more interesting (to me, at least), because of the variety of ways it can arise. You might have heard of prisoners of war in POW camps using cigarettes as money, or the giant stone wheels (Rai) used as money on the Micronesian island of Yap. Or, my personal favourite, beaver pelts used as money by the Hudson Bay Company in Canada in the 18th Century.

I was interested recently to read this article in The Guardian by Richard Davies, who has a new book Extreme Economies: Survival, Failure, Future. The book looks interesting (expect a book review from me, but not for a while as I have a long backlog to get through first), but in the article there was a focus on money:

The use of dollars inside the prison is a puzzle. Anyone running a major drug operation is going to need to shift large cash balances, but dollar bills are something sniffer dogs can detect, and any digital transfers can be traced. It turns out that drug traders and smugglers face none of these risks, because Louisiana prisons have a remarkable new currency innovation. “Cash is contraband, but people have got cash,” the former prisoner explained, “but it is not cash like cash in hand. It is untraceable. It is all based on numbers. People pay each other with dots.”...

The name of the prisoners’ new currency comes from the popular Green Dot brand of these cards, which carry the Visa or Mastercard logo and can be used to make purchases wherever regular credit and debit cards are accepted. Some users have found ways to set up an account for the card without using their true identification details. They then buy a second card, this one a single-use scratch card called a MoneyPak, which is used to load the debit card with credit of anywhere between $20 and $500. Both cards can be bought pretty much anywhere: at Walmart, at CVS or any other pharmacy. Scratching away the back of a MoneyPak reveals a 14-digit number. This number, the “dots”, is the vital link, carrying up to $500 of buying power. The user goes online, logs in to their account and enters the number, and the credit appears, instantly, on their debit card.

The person buying the Green Dot card can pay in cash, as can the person buying a $500 MoneyPak, so there is no trace of who owns them. The beneficiary of the credit does not need to see the MoneyPak itself – all they need are the numbers. Texting someone the 14-digit “dots” using a contraband phone, sending them a photo or letter with the numbers, or simply communicating the numbers over a telephone call will do. The dots are a currency close to cash: an instant, simple and safe transfer of value over long distance.

To make a large cash payment, a prisoner asks a friend on the outside to buy a MoneyPak and to pass on the dots once they have done so. These 14 digits can then be exchanged with a guard or another prisoner for something in the prison, including drugs.

Are "dots" money? They are certainly a medium of exchange (that is their main function). Because they are dollar-denominated, they can be used as a unit of account. And because they can be stored and used later, they are a store of value. There is great variety in the forms that money can take, and technology is helping to identify new forms.

[HT: Marginal Revolution]

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[*]  Jevons noted a fourth function, a standard of value (a way of valuing debts), which we now consider to be much the same as a unit of account.