Money from nothing
Chronic deflation may keep Bitcoin from displacing its fiat rivals
BITCOIN, to its most ardent fans, is more than a useful way to pay for drugs. It is also a technological marvel that could disrupt much of the consumer-finance industry. But is it money? The Bitcoin economy keeps growing, despite the periodic disappearance of large quantities of currency in hacker heists. The total value of Bitcoins in circulation has risen to $7.9 billion, from just $490m a year ago, while daily transaction volume is up by almost 60%. If Bitcoin aspires to match dollars and euros for money-ness, it will need to be more than just a Mastercard for nerds.
Economists reckon money is anything that serves three main functions. It must be a “medium of exchange”, which can reliably be swapped for goods and services. It should be a stable store of value, enabling users to tuck some away and come back later to find its purchasing power more or less intact. And it should function as a unit of account: a statistical yardstick against which value in an economy is measured. The American dollar meets all three conditions. Bitcoin has some way to go.
This article appeared in the Finance & economics section of the print edition under the headline "Money from nothing"
More from Finance and economics
America is in the midst of an extraordinary startup boom
How the country revived its go-getting spirit
Could America and its allies club together to weaken the dollar?
China would not be happy
Banks, at least, are making money from a turbulent world
It is once again a good time to work on a trading desk