Why crypto currencies are not currencies

I have received some email of people asking my point of view about Bitcoin, so I have decided to write down a few lines about it.

Preface:

I am not a trader and I am the least interested in the stock markets, so don’t expect any advice on how to make profits by trading crypto currencies. What I am going to describe is the nature of the crypto currencies and why you should be careful when calling them currencies, or even money.

Money is not a commodity, money is debt.

Bitcoin is not money, it is a commodity.

In order to understand why Bitcoin (or similar crypto currencies) is not money we need to have clear in mind the nature of money and its functioning.

I have already written a detail text about the nature of money, here is the link to the page: Money and Money Things.

Once you have understood the concepts introduced on that page, you can continue with this article.

Why isn’t Bitcoin a currency, money?

Because it is not accepted by any central government in tax payment.

It is true that today Bitcoin or other crypto currencies can be used to purchase goods and services (mostly online). Nonetheless, the fact that “something” can be used as means of payment is not a sufficient condition for considering it as money.

As a matter of fact, when you pay for something using Bitcoin you are actually doing a barter, you exchange a commodity for another commodity.

What is a currency?

It is a social unit of account, money, issued by a central state and managed by the Central Bank of that state. Since it is created and enforced by the state it is a legal tender.

What is a crypto currency?

It is a figment that can be created by anyone with a computer and an internet connection. It doesn’t have any intrinsic value nor is it a legal tender.

Why are these figments worth a fortune?

Because two categories of people have decided that crypto currencies should have a value X and these same people are willing to invest real money in such fantasies. And the more they invest their money and buy the crypto currencies the more their price increases (simple supply-demand law).

The two categories of investors are the speculators and the common people (the glebe), with a significant difference: speculators know how to make fortune out of nothing, the glebe usually not and guess who will be the winners in this game.

They are not currencies but they are called currencies anyway, why?

It’s a bait. By using the term “currency” the speculators know that they can lure more and more common people and induce them to buy in order for the price to increase. Calling them crypto commodity or crypto credit would not have produced the same appealing effect.

They are commonly called currencies even though it is wrong.

There is only one currency, the one issued by a State, managed by a Central Bank and with legal tender.

Crypto currencies are like commodities or raw materials, they are traded on the market and have a market value (more or less fictive); the higher the demand the higher the price, like any other raw material, be it iron, copper or oil.

You cannot pay taxes to either central or local governments since they are not recognised as legal currencies.

Unless one or more central governments will announce that it will consider crypto currencies as legal tenders, Bitcoin and similar will survive only until there is someone willing to value and trade them, like any other commodity.

When some other figment or commodity will be introduced in the market and attract speculators and common people more than the bitcoins are doing today, their value will likely approach to 0 nullifying all hopes of common people that holds them.

Different is the situation for the national currencies, real money, and their demand will only be guaranteed by the fact that there is a government imposing tax denominated in those currencies (this is explained in the link I pasted above).

Should you stay away from crypto currencies?

It depends on your risk aversion, but it is utterly important for you to understand that a crypto-currency is not money, it is a commodity. And you need to have a good knowledge of the markets when trading commodities, you can of course make profits (even big ones) out of pure luck and at the same time you can lose everything out of pure ignorance.

 


Objection 1: there are countries where bitcoins are accepted in tax payments.

No, you are confused. There are countries when you can pay your local taxes in bitcoin but the government does not accept bitcoin in tax payment, there is big difference.

Let’s take as an example Seminole County, Florida (USA), whose tax collector enabled taxes to be paid in Bitcoin.
It works more or less in this way:
a citizen makes a tax payment to the county through a system called BitPay.
BitPay is a broker, it takes Bitcoin from tax payers, converts them into a given currency (in this case US Dollars) and then transfers the corresponding amount of currency ($) to the County.
So, the County is not really accepting bitcoins even though tax payers can pay with them, the transaction is made possible by the intermediary that converts bitcoins into dollars (BitPay in this case).

The local government only accepts US Dollars, it is the trader that has to convert your Bitcoin into Dollars.
It is more or less the same situation in place when we normally pay taxes.
We go to our bank and make a bank transfer to the tax office using our checking account.
Again, the government accepts our payments only because an intermediary (in this case the bank) converts bank money (money things) into money.
So, as long as there is an intermediary between public creditor and private debtor, bitcoins cannot really be considered money, a commodity or money things at most.

 

Objection 2: Bitcoins are money because we can use them to make payments.

The ability to use something to settle payments is not a sufficient condition for considering a commodity as money.

Tax payment acceptance, this is a sufficient condition for turning a commodity into money (again, check the link above).

 

Objection 3: money is a commodity, so if you say that bitcoins are a commodity you are indirectly implying they are money.

No, money is debt, it is an IOU, it is not a commodity.

There was a time when commodities were actual money, under the golden era or under the gold-standard (governments accepted tax payment in gold or you could convert local currencies into gold). This is not the case today when most currencies are fiat and the gold standard ceased to exist in 1963.

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