Since the start of the pandemic, bitcoin has experienced a spectacular bull run. With its impressive gains, the old rhetoric has resurfaced on how it will become a new global currency and supplant the dominance of the dollar. Listening to the youngest enthusiasts will also bring world peace and even the much sought-after goal of economic equality. This latest statement might exaggerate some claims for Bitcoin, but only slightly. If traders in gold, tin or zinc made such predictions for their commodities, people would be very skeptical and rightly so. But with Bitcoin, the claims seem to have been accepted in many circles. This may be because the word coin is embedded in the name.
The truth is, Bitcoin probably won’t replace the dollar as the world’s dominant currency, which central bankers call the reserve currency, at least it won’t any time soon. To be sure, Bitcoin has many qualities that are similar to money. A person can make payments there, to buy a car, for example, or a vacation, a lot of things. All he or she has to do is get the seller to agree to take Bitcoin as payment. And these days, all the hype has increased the number of salespeople willing to do it. At least one government, a Swiss canton, will allow citizens to pay their taxes in Bitcoin. Of course, if you could convince the seller to take it, you could also pay in gold, zinc, or tin. Right now, Bitcoin has more hype on its side than these other products, but otherwise there isn’t much of a difference.
Bitcoin does have something that other commodities don’t, however, something vaguely sinister, which may in fact have increased its current sex appeal. This allows people to do their transactions anonymously, as you can with, for example, suitcases of hundred dollar bills. Like these suitcases, except with much more convenience, the appeal is especially great when buyers and sellers want to hide their transactions from legal authorities.
Crucially, Bitcoin fails miserably as a dollar substitute. Its value is very unstable. True, the value of the dollar fluctuates. Its value in terms of foreign currency changes by the minute on currency exchanges, and inflation over time has eroded its value in terms of real goods and services. But compared to Bitcoin, the dollar is a model of stability. Inflation is less than 2% per annum and variations against other currencies attract attention as unusual if they amount to 5-6%. If you hold assets in dollars, you have a pretty good idea of how much those assets are worth a year or two from now – relative to other currencies and especially in terms of actual goods and services. The dollar, in other words, remains a fairly good store of value. Compare this record to that of Bitcoin. Its early 2018 surge, in dollars, currencies and real goods and services, took it by some 350% in a matter of months. Then, over the rest of the year, he returned pretty much all of those gains. It was on the rise again in the second half of 2019, paused in the last months of this year, then left with the pandemic, finally regaining its highs of mid-2018 at the end of the year. It has lost just over 10% of its value in the past week.
These are wild swings, certainly not the makings of a stable store of value. Price fluctuations, of course, make Bitcoin wonderfully attractive to speculators. They can make a lot of money if they manage to time price fluctuations correctly. But those same fluctuations hardly give ordinary people, say, saving for a house or retirement, a stable idea of the value of Bitcoin-denominated assets next year or even next month. It gives them no way to plan like an acceptable currency should be. While the dollar is less stable in terms of real goods and services than people would like, it has a much better balance sheet and is a much better store of value than Bitcoin. This gives the dollar a decisive advantage as a currency.
There is no doubt that smart Bitcoin enthusiasts would respond to this description by saying that the huge fluctuations in the dollar price of Bitcoin speak of the volatility of the dollar and not that of Bitcoin. It would be a compelling argument, if Bitcoin and the dollar were the only two measures on earth. But by comparing their movements to, say, an hour’s worth of the average person’s labor, it’s also evident that Bitcoin’s value movements fluctuate much more against life than the dollar – or the yen, the pound sterling or the euro. or the Chinese yuan or any other major currency in circulation these days.
Maybe one day Bitcoin will become widely accepted and gain stable value in terms of many of the real things people care about. Then it could challenge the dollar and become an independent international standard, that is, assume the status of gold in the 19th and early 20th centuries. Comparisons to heavy old gold surely detract from the sensuality of this technological marvel, but that’s what Bitcoin enthusiasts are looking for. For now, Bitcoin remains a volatile commodity better suited to speculation than underlying an economic, national or global system.