The Question of Bitcoin

Will Bitcoin become substantive or remain a sexy novelty?
By Milton Ezrati
Milton Ezrati
Milton Ezrati
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, a New York-based communications firm. Before joining Vested, he served as chief market strategist and economist for Lord, Abbett & Co. He also writes frequently for City Journal and blogs regularly for Forbes. His latest book is "Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live."
January 21, 2022Updated: January 27, 2022


Talk of Bitcoin’s triumph is premature, to say the least.

Bitcoin and its cryptocurrency cousins seem always in the headlines. Sometimes the interest is simply because the price has skyrocketed. Sometimes the headlines chronicle a sudden price crash. Either way, there is interest.

And sometimes the story under the headline talks of how Bitcoin will supplant the dollar and somehow “free” people by offering a truly international currency. These “freedom” stories seldom connect all the dots, but they create excitement by offering the promise of something better. What’s interesting is how the stories about massive price moves are forcefully, if unintentionally, explaining why the international dominance stories make dubious forecasts.

To be sure, claims that Bitcoin and other cryptocurrencies are money have an element of truth to them. One of the essential characteristics of money is that it facilitates the settlement of contracts. And Bitcoin has something of this character, since people can buy cars with it and use it to pay for holidays. The new mayor of New York takes his pay in Bitcoin. Some governments, though not yet in the United States, let taxpayers meet their obligations with it.

True, Bitcoin is a cumbersome way to buy a meal at the local cafe, but all the hype has increased the number of buyers and sellers who will accept it for payment. Of course, any commodity could acquire this character, if you could get others to accept it in payment for debts. But on this aspect of money, the cryptos are making progress at becoming money.

In one crucial way, however, Bitcoin fails miserably as money and certainly as a dollar substitute: Its value is highly unstable. One crucial requirement of money is that it offers people a stable store of value. People can plan with a reasonably good idea of what a given amount will get them next year or the year after.

True, the dollar’s value fluctuates. Its worth in terms of foreign currencies changes by the minute on currency exchanges, and inflation over time has eroded its real buying power, sometimes faster and sometimes slower. But by comparison to Bitcoin, the dollar is a model of stability, even considering today’s disturbing inflation.

Consider Bitcoin’s value record. It surged from late 2017 to early 2018, rising rapidly in terms of dollars (as well as real goods and services) from about $1,000 a coin to a high of about $20,000. Over the balance of 2018, the price fell so that by January 2019, it had given back more than 80 percent of its earlier gain. Then, in late 2020, it surged again, rising to about $58,000 a coin in early 2021. It then fell by almost half into the middle of the year, at which time it surged again to new highs of more than $61,000 a coin last October.

Since then, it has lost about a third of its value.

These are wild swings. They make Bitcoin wonderfully attractive to speculators and headline writers. People can make a lot of dollars if they can time the price swings right. But this record hardly presents the world with a stable store of value around which ordinary people can build their savings, plan to buy a house, or fund their retirement. No one can have any sense of what Bitcoin-denominated assets will be worth next year or even next month.

If the dollar is less stable than people would like it to be in terms of real goods and services, it has a much better track record and a much better basis for planning.

Bitcoin has something else to consider, something vaguely sinister, which may in fact have contributed to its sex appeal. It allows people to do their transactions anonymously, the way you can with, say, suitcases full of $100 bills. The attraction is especially great when buyers and sellers want to hide their dealings from the legal authorities. This particular appeal may be why the governments that accept bitcoin for taxes—one is a Swiss canton and the other is a Central American “republic”—are places well known for allowing anonymous transfers of funds with no questions asked.

Perhaps someday, Bitcoin will become widely accepted and acquire a stable value in terms of the many real things about which people care. Then it might challenge the dollar and become an independent international standard.

For now, Bitcoin remains a volatile commodity better suited to speculation than serving as money, and certainly no way to undergird an economic system, national or global.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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