This is actually how large technological change happens. Investors get over-excited, capital flows into the new field, all sorts of oddities get financed. Most of which, the vast majority of which, fail in the most painful mannerMy native Britain has a strongly enforced -- strongly socially enforced that is -- custom of drinking our beer in “rounds.” In a group of say four people, one will buy the first four drinks, the second the next four, and so on. These claims are not enforceable at law of course, but they do carry over from one visit to the pub to another. This is, in any useful definition, currency. Not transferable even, but having bought a round does leave you with a claim over the assets of others. Money itself acts the same way, you can buy stuff with it. That is, again, a claim over the assets of others. Perhaps this time, they will do some work for you, perhaps they’ll offer some possession in exchange for it. The guy with the full wallet is able to claim some amount of resources from others in society. It’s, in a way, anti-debt -- debt being the record that you’ve already claimed the resources of others and now owe them back. With this clear, we can see that bitcoin, and the other alt-currencies, are indeed money. For you can exchange them for real assets out here in this real world. They’re functioning as money and thus they are money. The much more interesting question is whether they’re useful money -- and there the picture is murkier. I’ve long had my doubts about bitcoin itself, a deflationary currency doesn’t sound like a good idea at all. And we’re also finding out that it doesn’t scale in a useful manner. Ethereum incorporates some other ideas but that thought of automatic contract completion doesn’t sound quite right. I’ve been in business long enough to know that there are always exceptions to a contract that must be negotiated. Similarly, there are good ideas and odd in that expanding universe of alt-coins (soon enough another that I will be involved with). What is easier to point out is that there’s definitely an investment bubble here, the flows into that world aren’t entirely rational. At which point we’re all supposed to get very worried indeed, but this is actually how large technological change happens. Investors get over-excited, capital flows into the new field, all sorts of oddities get financed. Most of which, the vast majority of which, fail in the most painful manner. The classic example here is of tulipmania, in Holland. The flower had started to become more popular among gardeners, you need to have a bulb to plant to make more tulips and the expansion of the market became capitalised into the price of the extant bulbs. Prices rose to exorbitant levels, over a year’s pay for just the one, then collapsed again, many speculators going bust. However, it’s also true that tulips became ever more popular and Holland is still the world’s leading source, centuries later. The prices at the peak of the mania were absurd, but the mania aided in financing the increased production. Equally, the dot com boom of the late 90s was absurd in many manners. But Amazon did get financed during it, as did Google -- it would not be true to say that the money spent then was more than they are worth now. There is a thought within economics that this sort of irrational exuberance is actually a necessity in getting those large technological leaps to happen. The over-valuation, thus the ease of financing, of what might happen is the very thing which enables the truly paradigm changing investments to take place. Which brings us back to bitcoin. There’s definitely something interesting in the idea of fiat currency which is not government issued. If enough people agree that an alt-coin has value then it does, it’s currency. It’s obvious that this is currently true of a handful of these new coins today. It’s also equally obvious that there is that irrational exuberance. The big question is: Is anything useful going to come out at the end of it? No, I don’t know either which is why we’ve just got to let it play out and see what happens. Current betting it that it will actually be the blockchain, the method of recording transactions rather than the currency, which will be that useful thing. But who knows? It could also turn out like John Law’s Bank of Mississippi which is now useful just as a lesson in what goes wrong when you misunderstand money. We’ve just got to wait and see is the rather boring answer here. Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
Sheng Songcheng, of the People’s Bank of China – their central bank – has told us that bitcoin is not a currency, it lacks certain vital attributes. It is very nice of him to inform us so but it’s not particularly relevant for us because we, consumers, decide what a currency is, not central bankers.
Of course, central bankers have a certain expertise here, they’re also able to influence the law as to what that says is a currency, but that’s as far as their influence goes. For the actual definition of currency, of money, is whatever people will accept as or use as money.
Butter, for example, would not meet a banker’s definition of money but it has been used as money. Cowrie shells too, and then there’s the stones of Yap. Even when one of those was lost overboard of one of the local canoes and was unrecoverable from a couple of hundred metres down -- it still existed as money and everyone agreed who owned it and continued to act as if they had it.
So this could indeed be true: “Bitcoin does not have the fundamental attributes needed to be a currency” in the eyes of Mr Sheng but that has just about no relevance to whether it is indeed a currency or not.
Without getting too philosophical about it, the essence of money is simply as a means of account. In the same way that debt is a record of who owes what to whom, money is a claim of the resources currently held by others.
Anything which performs that function is therefore in this manner money.
