Munich Personal RePEc Archive

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

Umlauft, Thomas (2018): Is Bitcoin Money? An Economic-Historical Analysis of Money, Its Functions and Its Prerequisites.


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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.

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