In a recent exchange on Twitter with my London based friend Max Keiser (www.maxkeiser.com) I suggested that the monetary upstart known as bitcoin is merely the latest evolution of the tulip mania speculation. The Economist describes the tulip mania:
“Tulpenwoede” (tulip madness) resulted in big increases in tulip prices. At the beginning of 1637, some tulip contracts reached a level about 20 times the level of three months earlier. A particularly rare tulip, Semper Augustus, was priced at around 1,000 guilders in the 1620s. But just before the crash, it was valued at 5,500 guilders per bulb–roughly the cost of luxurious house in Amsterdam. Prices collapsed in February 1637–although data here are particularly poor–and a few investors were left bankrupt.
The reason for the tulip analogy is that the value of the bitcoin, a notional means of exchange stored on computers, has been on a wild ride. “Back in early September, one Bitcoin would get you about $110 U.S. dollars,” reports USA Today. “That value spiked to more than $1,100 in early December only to fall back to $550 in mid-December.” At present, one bitcoin or “BTC” is worth about $850. The volatility suggests a profile closer to a rare earth metal than a currency.
Last week, mortgage market maven Rob Chrisman described the breadth of opinion on bitcoin:
“Regarding bitcoins, former Fed Chair Greenspan called it a “bubble” and said it is difficult to determine its ‘intrinsic value;’ China has ruled it is not a currency and banned its banks from doing business in it; Bank of America has predicted it will become a ‘major means of payment for ecommerce;’ current Fed Chair Bernanke said the Fed has no plans to regulate it; the ABA said bank interest in doing Bitcoin transactions is “not high” on the list of priorities; the Treasury is warning anyone using Bitcoin they will need to comply with regulations as a money transmitter and with anti-money laundering rules; China banned its country’s Bitcoin exchanges from accepting new inflows of cash and Denmark is working on standards around virtual currencies as it clamps down. Heck, we don’t even seem to know if we should capitalize the word!”
So what is a bitcoin? First and foremost, it is a way for the globally astute to flee the financial destruction of the established fiat currencies. The financial repression being waged against savers in the US and around the world by the low interest rate policies of the Federal Open Market Committee has convinced many people that the dollar is doomed. So it is natural for people to look for alternatives. But is bitcoin a form of money in the classical sense or merely just another valueless means of exchange on a par with the weary greenback?
Author Martin Mayer taught me years ago that money has three components: It is a store of value; it is a unit of account; and it is a means of exchange. The dollar has not been a store of value since the Civil War, when Abraham Lincoln suspended gold convertibility to pay for that terrible conflict, but the greenback has been the world’s means of exchange and unit of account since WWII. Notice that whenever you have a discussion about money, you must inevitably speak of war and conflict. As Cicero observed: “The sinews of war are infinite money.”
It is pretty clear that bitcoin is not a store of value, at least not one that is very stable. It is certainly a means of exchange. But it is not yet a unit of account with widespread acceptance and use. But given time and a little less volatility, it could become a unit of account globally. But that does not mean that bitcoin is or ever will be money, because it lacks the essential sponsorship of a weapon wielding empire. People don’t trust the dollar because it is sound money, but because it is widely accepted and backed by the military might of the United States. Just ask the King of Saudi Arabia.
But at the end of the day, the phenomenon known as bitcoin is just another chapter in the “financialization” of the US economy. Lawrence E. Mitchell of Case Western Reserve University School of Law argues (2007) that “the stock market became the driving force of the American economy in the first decade of the 20th century as a result of the birth of the giant modern corporation.” Finance was no longer merely a means of supporting commerce, but became an end unto itself for more and more Americans.
To me, bitcoin is simply more evidence that the global economy cannot provide adequate means of support for all of the people who wish to work. With central banks destroying the value of the dollar and other fiat currencies in a desperate attempt to breathe life back into the dead corpse of the post-WWII world, reasonable people may see bitcoin as a viable alternative to the dollar.
The only trouble is that without the coercive power of the state to protect its monopoly, bitcoin cannot protect its market position. Anybody with a computer and access to the Internet can create a new “currency.” Thus at the end of the day bitcoin must be seen not as money, in the classical sense, but a movement that has attracted a crowd – at least till something better comes along. If Kanye West can start a new digital currency called Coinye, then anybody can make money. And surely they will.