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. Similar to the labor theory of value, which posits that value is a function of the labor required to produce a good or service, market participants appear to believe that the price of cryptocurrencies is the product of the input costs required to "mine" cryptocurrencies. However, value, far from merely being a function of labor and/or capital deployed, is solely determined by the resulting utility. 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.
85th International Atlantic Economic Conference
March 14 - 17, 2018 | London, United Kingdom
Is bitcoin money? An economic-historical analysis of money, its functions and prerequisites
Saturday, 17 March 2018: 9:00 AM
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 providing an analysis of different monetary systems and currencies (commodity, commodity-backed and fiat money) from an economic-historical perspective, identifying universal characteristics of money through time as well as in different world regions and how they might relate to cryptocurrencies as exemplified by bitcoin. The analysis provides empirical as well as theoretical arguments that serve to illustrate that bitcoin cannot legitimately be regarded as money owing to its lack of essential characteristics universally shared by other monetary systems and currencies (i.e. medium of exchange, unit of measure, store of value and standard of deferred payment). In addition, the inelasticity of the bitcoin money 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.
Saturday, 17 March 2018: 9:00 AM
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 providing an analysis of different monetary systems and currencies (commodity, commodity-backed and fiat money) from an economic-historical perspective, identifying universal characteristics of money through time as well as in different world regions and how they might relate to cryptocurrencies as exemplified by bitcoin. The analysis provides empirical as well as theoretical arguments that serve to illustrate that bitcoin cannot legitimately be regarded as money owing to its lack of essential characteristics universally shared by other monetary systems and currencies (i.e. medium of exchange, unit of measure, store of value and standard of deferred payment). In addition, the inelasticity of the bitcoin money 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.