In recent days, I’ve watched Bitcoin trade upwards of $140 per Bitcoin. On a lark, I mined 0.146 Bitcoin several months ago. When it started trading this high, I sold what I had mined because Bitcoin is not a store of value and hence not a true money. Let’s analyze Bitcoin using Aristotle’s qualities of a good money:
1) It must be durable, meaning it stands the test of time and elements. To the extent we believe digital data can last forever, Bitcoin passes this test.
2) It must be portable, meaning it holds high value relative to its size and weight. Bitcoins weigh nothing (meaning their value is irrelevant vis-à-vis assessing their portability) and are mobile even in the face of government currency controls. Bitcoin passes this as well.
3) It must be divisible and consistent. Bitcoin is digitally divisible into 100 millionths. Another pass for Bitcoin.
4) It must have intrinsic value. This is where Bitcoin fails. Let’s deal with the two major arguments in favor of Bitcoin’s intrinsic value: (a) it requires effort to acquire in the form of compute cycles and related electrical energy and (b) the number of Bitcoins that can be created is algorithmically limited.
Regarding A: The effort required to acquire a Bitcoin is not useful effort, and the result of the effort does not produce a good that has any intrinsic use. It would be akin to digging a hole and filling it back up again, and getting scraps of paper in return. Those scraps of paper do not have value simply because real effort was expended to obtain them.
Regarding B: Acknowledging that there is a finite number of Bitcoin available does not mean it is scarce. This point is lost on several Austrian economists I have been reading and listening to over the past weeks. Allow me to explain by taking the example of gold, which itself is (1) durable, (2) portable, and (3) divisible and consistent. Gold has (4) intrinsic value because it has inherent usefulness (jewelry, industrial uses, etc.) and also because it is scarce — meaning there is a finite number of gold atoms found on this earth. As such, it is a good money. Imagine for a moment that the technology existed to make another compound, say “gold2” that had the exact same number of protons, neutrons, electrons, the exact same physical properties and appearance, and with the exact same scarcity as regular “gold.” Would we be so keen on gold if gold2 were available? Perhaps gold would lose half its value, but then what is to stop technology from producing gold3, gold4, . . . goldN? How would participants in the marketplace value gold in comparison to gold283? (Initially gold would be preferred to gold283 since gold entered the market first, but this would evaporate once market participants realized they had identical properties). This is why Bitcoin is not scarce. The goodwill accumulated in Bitcoin as the first market-entrant digital currency is all that causes it to be preferred over other digital currencies–not its scarcity. Other digital currencies already exist that have all the same properties of Bitcoin, but are simply waiting to gain market acceptance. (See Litecoin, Namecoin, et al.). “Trust” backed currency is similar to fiat currency, having the additional limitation that Bitcoin and other such currencies do not benefit from legal tender laws mandating their use.
A scenario for Bitcoin’s destruction might be that a large corporation producing goods that people want to buy (e.g. Wal-Mart) begins its own digital currency, accumulates large amounts for itself before making them generally available for mining, accepts them in exchange for their products, and profits from the proliferation and use of the competing currency. In another scenario, a competing digital currency gets a super-cool celebrity endorsement . . . or maybe a whole lot of both happens and people realize what a fad digital currencies are. This is all that separates holders of Bitcoin from complete annihilation because Bitcoins are not scarce (because infinite material having identical properties can be created) and Bitcoins have no intrinsic value (nobody wants a Bitcoin for Bitcoin’s sake).