If you don't know what Bitcoin is, do some research on the internet... but the short story is that Bitcoin was created as a medium of exchange without the involvement of a central bank or bank of issue. Furthermore, Bitcoin transactions are intended to be private, i.e. anonymous. Most intriguingly, Bitcoins do not exist in the real world; they exist only in computer software, as a kind of virtual reality.
The general idea is that Bitcoins are'mined'... interesting term... on a computer by solving an increasingly difficult mathematical formula - more difficult as more Bitcoins are'mined' into existence; again, interesting. The newly created Bitcoin is stored in an electronic 'wallet'. Then, real goods or fiat currency can be exchanged for Bitcoins... and vice versa. Furthermore, because there is no central issuer of Bitcoins, the currency is highly distributed and thus resistant to being'managed' by authority.
Naturally, Bitcoin supporters, those who benefit from its growth, insist loudly that 'for sure, Bitcoin is money'... and not only that, but 'it is the best money ever, the money of the future,' and so on... Fiat supporters, on the other hand, scream just as loudly that paper currency is money... and we all know that Fiat paper is not money by any means, as it lacks the most important characteristics of real money. The question then is whether Bitcoin even qualifies as money, let alone the money of the future or the best money ever.
To find out, consider the characteristics that define money and see if Bitcoin qualifies. Money has three essential characteristics:
1) Money is a stable store of value; this is the most important feature, because without value stability, the function of numeraire, or unit of measurement of value, fails.
2) The numeraire, or unit of account, is money.
3) Money is a medium of exchange... but other things, such as direct barter and the 'netting out' of goods exchanged, can also serve this purpose. Also, 'trade goods' (chits) that have temporary value; and, finally, the exchange of mutual credit; that is, netting out the value of promises fulfilled by exchanging bills or IOUs.
When compared to fiat currency, Bitcoin performs admirably as a medium of exchange. Fiat is only accepted in the country of its issuer. Dollars are worthless in Europe, for example. Bitcoin is accepted all over the world. On the other hand, very few retailers currently accept Bitcoin payments. Unless acceptance grows geometrically, Fiat wins... at the expense of currency exchange between countries.
The first condition is much more difficult; money must be a stable store of value... in just a few years, Bitcoins have gone from a 'value' of $3.00 to around $1,000. This is as far from a ""stable store of value"" as you can get! Indeed, such gains are a textbook example of a speculative bubble... just like Dutch tulip bulbs, junior mining companies, or Nortel stocks.
Of course, Fiat fails here as well; for example, the'main' Fiat, the US Dollar, has lost over 95% of its value in a few decades... neither fiat nor Bitcoin qualify in the most important measure of money; the ability to store and preserve value over time. Gold, as real money, has demonstrated the ability to retain value not just for centuries, but for eons. Neither Fiat nor Bitcoin possesses this critical capability; both fail as money.
Finally, we arrive at the second characteristic, that of being the numeraire. This is really interesting, and we can see why both Bitcoin and Fiat fail as money by examining the 'numeraire' question closely. The term numeraire refers to the use of money to not only store but also measure or compare value. In Austrian economics, measuring value is considered impossible; after all, value exists only in human consciousness... and how can anything in consciousness be measured? Nonetheless, market prices can be established... if only momentarily... through the principle of Mengerian market action, that is interaction between bid and offer, and this market price is expressed in terms of the numeraire, the most marketable good, that is money.
So, how do we determine Fiat's worth...? The value of Fiat is determined by what it can be traded for... a so-called 'basket of goods'. However, this clearly implies that Fiat has no intrinsic value; rather, value is derived from the value of the goods and services for which it can be exchanged. Causality flows from the 'bought' goods to the Fiat number. After all, what distinguishes a one-dollar bill from a hundred-dollar bill other than the number printed on it... and the purchasing power of the number?
Gold, on the other hand, is measured by another physical standard, its weight or mass, rather than by what it trades for. A gram of gold is a gram of gold, and an ounce of gold is an ounce of gold... regardless of the number engraved on its surface, 'face value' or not. Causality is the inverse of Fiat; gold is measured by weight, an intrinsic quality... rather than purchasing power. Do you know how much an ounce of Dollars is worth? There is no such thing. Fiat is only'measured' by an ephemeral quantity... the number printed on it, the 'face value'.
Bitcoin is even further from being the numeraire; it is not only a number, much like Fiat... but its value is measured in Fiat! Even if Bitcoin becomes an internationally accepted medium of exchange and replaces the US dollar as the accepted 'numeraire,' it will never have an intrinsic measure like gold. Gold is unique in that it is measured by a true, constant physical quantity. Gold is unique in its ability to store value for thousands of years. Nothing else in human history has such a unique combination of qualities.
In conclusion, while Bitcoin has some advantages over fiat currency, namely anonymity and decentralization, it fails to meet the definition of money. Its benefits are also questionable; the intention is to limit the'mining' of Bitcoins to 26,000,000 units; that is, the'mining' algorithm becomes increasingly difficult to solve, eventually becoming impossible after the 26 million Bitcoins have been mined. Unfortunately, this announcement could spell the end of Bitcoin; some central banks have already stated that Bitcoins may become a ""reservable"" currency.
Doesn't that sound like a significant step forward for Bitcoin? After all, the ""big banks"" appear to accept Bitcoin's true value, don't they? This essentially means that banks recognize that they can trade Fiat for Bitcoins... and that purchasing the 26 million Bitcoins planned would cost a pittance of 26 billion Fiat Dollars. To the Fiat printers, $26 billion is not small change; it is roughly a week's worth of printing by the US Fed alone. And, once the Bitcoins are purchased and stored in the Fed's ""wallet,"" what useful purpose can they serve?
There would be no Bitcoins in circulation; it would be a perfect corner. How can Bitcoins be used as a medium of exchange if they are not in circulation? And what could Bitcoin's creators possibly do to avoid such a fate? Change the algorithm, and the 26 million becomes... 52 million? To 104 million people? Why not join the Fiat printing parade? But then, by the quantity theory of money, Bitcoin would start to lose value, just as Fiat supposedly loses value through 'over-printing'...
We come to the key issue; why search for a 'new money' when we already have the very best money, Gold? Fear of Gold confiscation? Lack of anonymity from an intrusive government? Brutal taxation? Fiat money legal tender laws? All of the above. The answer is not in a new form of money, but in a new social structure, one without Fiat, without Government spying, without drones and swat teams... without IRS, border guards, TSA thugs... on and on. A world of liberty not tyranny. Once this is accomplished, Gold will resume its ancient and vital role as honest money... and not a moment before."""