The bottom line is that cryptocoins are not money. The Austrian analysis rules.
Money’s key property is
that it is a numeraire for goods. Wikipedia puts it
this way:
“Numéraire
is a basic standard by which value is computed. Acting as the numéraire is one of the functions of money, to serve as a
unit of account: to measure the worth of different goods and services
relative to one another, i.e. in same units.”
Gold is still the world’s
numeraire or unit of account, although this fact is
hidden by the daily use of currencies like dollars, yen, rubles, francs and
so on.
A numeraire
like gold cannot arise unless people in markets are willing to exchange for
it in the first place. Consider an unconventional example. Suppose that we
are in ancient Egypt. The pharaoh requires a tax of 10 bushels of corn from
each adult male. Call the 10 bushels a TEC. The people might conceivably
start to quote prices of other objects in terms of TECs, because everyone has
to pay taxes. A horse might exchange for 5 TECs, say. The Pharaoh might
introduce a paper bill that he is willing to accept in lieu of 10 bushels,
and it could become a paper TEC. He’d pay his soldiers with this paper.
They’d spend it and others who have to pay taxes would accept it. When April
15 rolled around, some people would pay the Pharaoh in paper TECs. Others
would deliver corn. The TEC could become a unit of account or numeraire. If the Pharaoh inflated his issues of paper TECs,
the prices of goods quoted in TECs would rise. It would take more than 1 TEC
to buy 10 bushels of corn.
Gold is a free market and
international unit of account. It got that way without a Pharaoh. It got that
way because of its properties as a good that was internationally valued and
recognized, by its durability, divisibility, high value per unit of weight,
relatively low variation in supply, and so on. Once it became a numeraire,
paper certificates could be issued against it. It still remained the numeraire.
The proof that gold is
still numeraire is that the price of gold has tended to rise, as quoted in
units of each paper currency, to the corresponding extent that these paper
currencies have been inflated. The two (gold prices and money supply) are linked,
even if not perfectly and not in lockstep. Expectations of future money
policy and temporary supply factors cause noise in the basic linkage. This
means that the prices of goods quoted against gold have risen, with gold as
numeraire. The paper currencies are not a numeraire. They got their prices
against gold by being issued at first against gold and later, when delinked
from gold, by bearing some relation to tax revenues of the government.
Gold at $35 an ounce
means $1 buys 0.02857 ounces of gold. In other words, the price of a dollar
(representing a general purchasing power over goods) is 0.02857 ounces of
gold. Gold at $1,300 an ounce means that $1 buys only 0.0007692 ounces of
gold. It takes 37.14 dollars to buy that same ounce of gold. This means that
gold and all items quoted in terms of gold cost 37 times as many dollars,
apart from particular changes in prices arising from changes in technology
and tastes.
If a shave and a haircut
was 2 bits ($0.25), it’s now 37 x $0.25 = $9.25. I choose this because there
has been little productivity change in a haircut. But the point is that the
fiat dollar is not the numeraire. Gold still has that function.
New computer-bytes,
called “cryptocoins” and “cryptocurrencies”, are being devised such as the
“auroracoin”. These are not metallic coins. They are groups of digits
arranged in a certain way and under the control of some persons. Their
transfer and supply properties vary from case to case. The term “crypto”
refers to their generation using cryptography.
Whatever their value as goods, their prices are quoted in terms of paper
currencies, which in turn have meaningful prices by being linked to prices of
goods and gold in particular as numeraire.
If cryptocoins had been
invented thousands of years ago when many items from gold to cattle to cowry
were in use as numeraire and money at different times and places, would they
have displaced these items? Would they have come to be the numeraire for
prices? Would a single cryptocoin have emerged in terms of which all other
prices would be quoted?
I think not, and
therefore I do not think that one cryptocoin will emerge as a new numeraire
in the future. There are two important free market reasons. First, any
cryptocoin has no significant independent value as a good, other than its
possible use to exchange for other goods. By contrast, gold’s value in terms
of corn and vice versa were established in exchange because each was an
independent item of value. Each had one or more uses independent of possible
service as a numeraire or currency. If the cryptocoin has no other use but as
something to exchange for other items, this bartering exchange value cannot
be established.
Second, there is no limit
on the supply of competing cryptocoins. There are already many of these. The
number of competing cryptocoins is unlimited. In the limit, cryptocoins are
like tokens that a person stamps out in his garage, or stamps that a person
prints using his copier. Their value is almost nil
even if each person manufacturing them limits their supply because they are
all substitutes for their sole use, which is as an exchange medium. An
individual coin may be limited in supply but the market supply is not.
There is a third non-free
market reason, which is that governments are unlikely to allow cryptocoins to
survive if their main uses are to evade detection of money flows or taxation.
But this is not a core argument.
The fact that cryptocoins
trade at a non-zero price doesn’t counter the arguments given above.
Novelties and fads also trade at non-zero prices.
Here is another way to
understand why cryptocoins are not money. Imagine that a
circle of persons decides to have its own private currency in the form
of a cryptocoin. Their task is to establish exchange rates for all the goods
and services that they exchange in terms of their private coin. They need to
develop a supply process for coins and they need to decide how the coins are
to be allocated among the group. A group of even a moderate size will
immediately encounter difficulties in this if they try to set prices
themselves, because there are so many goods and services and so many dynamic
contingencies. They cannot create a numeraire. The best they can do is to
fashion a bidding process by which members bid for coins in terms of some
other goods that they offer. Suppose the group overcomes the severe
allocation problem by deciding to own all the coins jointly. It then auctions
them off. How can the auctioneer decide what the highest bid is if people
offer a variety of goods and services? They need a numeraire. They will have
to choose some item, like a paper currency or a good. They can’t establish a
price for their cryptocoin without such a numeraire. This shows that the
cryptocoins are not the numeraire and not money. At best, they are a derivative money or a substitute money.
Cryptocoins might still
survive and be useful in certain transactions, but, like air, be so plentiful
that they cost very little. For example, suppose that a person in Russia
wants secretly to exchange rubles held in Moscow for dollars held in London.
Instead of using a foreign exchange desk, he buys a cryptocoin with rubles
from an exchange located outside Russia. He then sells the cryptocoin for a
dollar deposit in London. For this use to survive, the cryptocoin exchange is
going to have to become a foreign exchange trading desk with dealers to
manage currency inventories. It will also have to somehow keep itself secret,
which will be extremely difficult if it is doing many transactions.
The argument for
unlimited supply of cryptocoins says that cryptocoins are headed for low
prices, even zero. If cryptocoins are really no more than coins one can stamp
out of cheap metal on a cheap machine, they’ll be worth virtually nil.
