Is Bitcoin Money? An Economic-Historical Analysis of Money, Its Functions and Its Prerequisites

Discussion paper prepared for the “Prices, Business Fluctuations and Cycles and Capital” panel at the 85th International Atlantic Economic Conference, London, United Kingdom, 17 March 2018

23 Pages Posted: 1 Jun 2018 Last revised: 8 Aug 2018

Date Written: July 2018

Abstract

Bitcoin and other cryptocurrencies’ spectacular rise over the past years has attracted considerable public and academic interest. The important question arising in this context is whether cryptocurrencies can legitimately be regarded as money. This paper contributes to the current discourse by evaluating cryptocurrencies’ monetary merits based on (1) the orthodox, or Metallist, school of money and (2) the heterodox, or Chartalist, approach. The theoretical as well as empirical findings advanced in this paper serve to illustrate that cryptocurrencies cannot legitimately be regarded as money owing to their lack of essential characteristics universally shared by other monetary systems. By cryptocurrencies’ lack of intrinsic value as well as government support, virtual currencies fail according to the orthodox as well as the heterodox school of money, respectively. In addition, the inelasticity of the bitcoin stock due to the fixed maximum amount of 21 million units stands in sharp contrast to that of other monetary systems – including gold and other depletable resources –, further reducing bitcoin’s suitability as a medium of exchange, and thus as money. In an attempt to explain the apparent discrepancy between the current value the market attaches to cryptocurrencies and their monetary deficiencies, we advance that market participants are misled by what we term the input fallacy of value (IFV). Similar to the labour theory of value, which posits that value is a function of the labour required to produce a good or service, market participants appear to be misled into believing that the value of cryptocurrencies is the product of the input costs required in the “mining” process. In this context, it is overlooked that value, far from merely being a function of labour and capital deployed, is solely determined by the resultant utility. Since, however – as detailed in this paper –, bitcoin lacks the essential characteristics associated with money, cryptocurrencies’ utility, and hence price, should tend towards zero over time.

Keywords: Bitcoin, Cryptocurrencies, Economic Bubbles, Nature of Money, Origin of Money, Theories of Money, Money, Medium of Exchange, Orthodox School of Money, Heterodox School of Money, Chartalist School, Metallist School, Labour Theory of Value, Input Fallacy of Value, Stone Currency of Yap

JEL Classification: N10, N20, B12, B13, B15, B25, B59, E31, E41, E42, E51, E58

Suggested Citation

Umlauft, Thomas S., Is Bitcoin Money? An Economic-Historical Analysis of Money, Its Functions and Its Prerequisites (July 2018). Discussion paper prepared for the “Prices, Business Fluctuations and Cycles and Capital” panel at the 85th International Atlantic Economic Conference, London, United Kingdom, 17 March 2018. Available at SSRN: https://ssrn.com/abstract=3182646 or http://dx.doi.org/10.2139/ssrn.3182646

Thomas S. Umlauft (Contact Author)

University of Vienna ( email )

Vienna, Vienna 1090
Austria

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