Forbes Middle East
Bitcoin Is Not Money—Yet
Bitcoin is the new darling of investors. It has rocketed since March 2020 from $5,000 to over $40,000 before pulling back. Fans are predicting that it will resume its rise and head to $100,000 or higher.
But that doesn't make Bitcoin an alternative to the dollar yet.
People are rushing in because of a lack of faith in government currencies. The Federal Reserve and other central banks have crushed interest rates and are printing unimaginable amounts of money to pay for Covid relief measures and to stimulate damaged economies.
Bitcoin and other cryptocurrencies are now seen as a respectable investment class, and financial institutions are adding Bitcoin to their portfolios. Enthusiasts say Bitcoin is the new gold and that it will eventually replace the dollar. Not so fast!
Whatever Bitcoin is, it's not money.
We use money to buy products and services. The dollar, for instance, is like a claim check on a car, a coat or a ticket to an event—only, in the dollar's case, it can be used to purchase or sell anything.
Money works best when it has a stable value. While there are stories of vendors being willing to accept a cryptocurrency like Bitcoin, cryptocurrencies will remain curiosities until their value is stable.
Contracts are essential to an economy, whether for buying a house with a mortgage, leasing a car, purchasing insurance or countless other activities. Who in his right mind would sign a long-term contract based on Bitcoin? Had you taken out a mortgage in March 2020 for $250,000 in Bitcoin, you'd owe the bank almost $2 million today.
With Bitcoin it's steak one day, dog food the next and caviar the day after.
Another problem with Bitcoin is that there's a fixed supply of it. The amount cannot be increased. The supply of money must be able to expand in order to meet the needs of a growing economy.
Between 1775 and 1900, when the U.S. went from a simple, agricultural-based economy to the world's mightiest industrial nation, the supply of dollars increased 160-fold.
For cryptocurrencies to seriously challenge existing currencies, they must be as easy to use as money is today and must have a fixed value, being tied to gold or something like the Swiss franc so that they can be used for contracts. Unless both conditions are met, they won't be genuine alternatives to the dollar and other government-manufactured money.
Commercially usable cryptos will emerge as the Federal Reserve blunders by creating excess money out of thin air to finance Washington's massive coronavirus relief programs and other prospective big spending bills. But it won't be Bitcoin, because of its arbitrary supply limit.
The supply of Swiss francs is enormous because it is regarded by global markets as trustworthy: The franc has preserved its purchasing power better than any other currency in the world over the past 100 years.