Why Crypto Isn't Money And Why It Never Will Be

[Editor’s Note: Old article updated 03/25/2022]

The origin of money has always been as the most marketable (e.g. most stable in demand and constant in value or price) good or commodity in the market before its use as a money [1]. A commodity is a type of good the businessmen or middlemen hold in “readiness for sale.” [2] This means that for a thing to become a money, it must already be a good or commodity. The very definition of money requires it to be a good before it is used as the medium of exchange.

Mises notes that monies of each nation or region lost out to other monies such that the choices for money were contracted over time. This was based on the marketability of each good. This allows for even greater divisions of labor between those using the expanded territory of the money, economic integration between those said nations or regions, and economic calculation, as the one good is now used as money by more. The mechanism described is the tendency towards one universally marketable money. This tendency means that for a new money to take over, it must be some good that is more marketable than what is being used as money, such as gold.

Once a good is decided as a money, it becomes even more marketable and thus any new money will have to be even more marketable in order to replace this money. This makes it more difficult for new monies to be adopted over an established money.

Cryptocurrency is not a good or commodity in the market outside of its use as a currency; therefore, it will not naturally become a money. Cryptocurrency proponents argue that money is necessarily unstable upon the start, but then the moneys of history would not have been the most marketable goods in the market. Attempts to use Cryptocurrency as money show the folly of using what cannot be money as money. Bitcoin since its introduction has been dominated by speculators, not users of the “good” or of the money, and the attendant price instability is obvious. 

Cryptocurrency doesn’t currently exist in a purely free market. For the same reasons the U.S. Dollar is used currently as a currency, other imperfect currencies can come to rise. More precisely, government intervention in the money market causes distortion where currencies can be adopted that otherwise wouldn’t. This is the meaning of it will not naturally become a money. Under pure free market conditions, the use of cryptocurrency as a true money is doubtful, but in current conditions, it may prove useful.

As we have seen, the difficulty of hashing has been changed in order to make sure the miners make money. There is no reason to think the miners, who dictate the money supply, will not further increase the money supply for their own gain. The idea of a privately-owned fiat currency to solve the issue of fiat currencies issued by central banks misses the point of the dangers of fiat currency. When a currency is backed with nothing but the reputation of the entity putting it forth and thus the value is not held up by other prior uses, the entity can inflate with very little of the fraud being made obvious.

This is in contrast to moneys such as silver and gold and money substitutes such as Dollars. Silver and gold in antiquity and today are used for Jewelry. Dollars started their life as money substitutes as they were receipts of actual goods. The U.S. Dollar started as a demand note that could be turned in for gold. Now the use of cryptocurrency as a money substitute is possible, but that is rarely how people propose to use cryptocurrency to solve the central bank crisis.

Citations

[1] Mises, Ludwig.

The Theory of Money and Credit: with an Introduction by Douglas E. French. Page 33.

[2] Menger, Carl.

Principles of Economics. Page 238