A friend recently forwarded an article to me which claimed that Bitcoin is "still not widely accepted enough to truly be money" and that it is a speculative asset that behaves a lot like real estate because of its fixed supply. While I was happy to see the author conclude that the price of Bitcoin could go as high as $200,000, I feel compelled to weigh in on the not-a-money conclusion.
Rather than post my comments line for line within the article like I did for my friend, I thought I'd just list the article's primary claims here along with my rebuttals. If you make it all the way to the end and would like to discuss, please reach out.
"Some people will accept bitcoin in exchange for goods and labor. But it’s still not widely accepted enough to truly be money."
This point is only a minor issue of semantics, but I think it's important to establish that whether something is money or not, doesn't have much to do with how widely accepted it is.
Money is any medium of exchange that allows humans to overcome the challenges of direct exchange. Money allows indirect exchange. When a good is acquired not to be consumed or used itself, but instead to be traded later for some other good, it becomes money. The good then has not only its market demand, but also a monetary demand. Humans have used all sorts of goods as money throughout history. Grains, seashells, Rai stones, glass beads, cattle, land, and even cigarettes in WWII prisoner camps. For something to be “widely accepted enough” it only needs to be recognized by enough people for exchange to happen. If you and I started trading neckties in order to settle work we did for each other, then neckties would become money in our mini society. Some monies are better than others and societies that have chosen poorly have had disastrous consequences. More on that in the next rebuttal below. The author admits that “some people will accept bitcoin in exchange for goods and labor.” This statement alone means that Bitcoin is money. It may not be globally accepted as money at this point, but that only makes it not a globally accepted money. It doesn’t mean it isn’t money. In El Salvador at this moment bitcoin is legal tender. We don’t need a government to recognize money for it to be money, but even mainstream pundits must recognize that something has become money when it becomes legal tender.
"Bitcoin’s supply is limited to 21 million coins.
The supply schedule is baked into bitcoin’s code. So, there’s no way of minting more new bitcoins as prices go up.
And when excess demand acts on limited supply, you get a highly speculative asset."
Now we have a problem. As civilizations and markets develop, some goods will serve better as money than others. Economist Carl Menger gave us great insight into which goods might perform better by offering that “salability” is the property that makes one good more desirable as money than. Salability is the ease with which a good can be sold in a market at any convenient time at current prevalent prices. This is important because if one stores value in a good, he will want it to be salable, or able to be converted to something of equivalent value - and at any convenient time. A good money will need to be salable across time, goods, space, and scale, but for this argument - let’s focus on time.
Salability across time is what leads us to understand why a fixed supply is important. We’d like whatever we choose as money to give us the same value at a later time as what we had put into it at an earlier time. Money that gives a smaller value in the future isn’t as salable across time and would be a poor choice for a money. As humans have sought for better stores of value over time, they needed to find goods that didn’t rapidly expand in supply as they were used as money. When a good obtains a monetary demand in addition to its market demand there is strong incentive for manufacturers or miners of that good to profit from making more of it. If society started using neckties as money, the increased demand for neckties would drive manufacturers to continue making more of them until there was no more profit left in making more of them. You might trade the value of whatever product or service you offer for neckties in hopes of saving enough neckties to later buy a house. You might trade for neckties in a world where there only a million neckties in existence and go to buy the house later in a world where there are three million neckties. Each necktie would be worth less, the price of each house would have risen, and the value would have been transferred from you to the manufacturers of the ties. It’s clear that this wouldn’t be good for society and so humans have chosen (whether consciously or by trial and error) to use goods as money can't easily be mined or manufactured in meaningful quantities relative to the existing supply. These goods have a high stock-to-flow ratio. These are goods for which the existing stock of the good in the world is much higher than the flow of newly created units of that good. When goods with a high stock to flow ratio are chosen, the percent that the entire stockpile in the market of that good will change is small. When the change is small, people can count on very little of their value being transferred away to miners or manufacturers while they store up value for future purchases.
The good on our planet that has the highest stock-to-flow ratio is gold. The story of how humanity arrived at gold and how gold eventually won out over silver (and grain, and cattle, and Rai stones) is fascinating but beyond the scope of this rebuttal. Gold’s stock-to-flow ratio has consistently averaged around 60 which translates to an average annual growth of 1.5%. (It is hilarious to hear gold skeptics claim that we need to use dollars instead of gold as money because dollar supply growth can be managed for stability whereas one large gold mining find could upset the global supply of gold. This just hasn’t happened. Gold has consistently grown at 1.5% per year, even as mining technology has advanced tremendously, while those who “manage” fiat currencies have grown them at multiples or sometimes even exponentially.)
Let’s get back to bitcoin and its fixed money supply. While gold has been the good on the planet that has provided the best salability over time for thousands of years, it does have limitations. Gold will likely play an important role in monetary economics for many years to come. But because gold is physical and heavy and dangerous to carry around in large quantities it starts to make sense to store it in centrally located, highly-secure locations. And it also makes it convenient for those who run those locations to want to issue paper gold notes (IOUs – the gold repository owes you the gold if you come back to redeem it) that people can more discreetly trade than the actual gold itself. This situation is incredibly tempting to those around the world who would like to inflate the money supply for their benefit by issuing more gold notes than there is gold. This reduces the salability across time of the gold notes, enriches those printing the extra notes, and is what has been happening across the planet for at least the last 50 years.
Bitcoin fixes this irresistible temptation to print more gold notes. The supply can’t be manipulated. And when we understand the problems in society money is trying to solve and what properties make a good a good money, we start to realize that the absolute quantity of money is unimportant. Money is unique from all economic goods in that its absolute quantity does not matter to its holder. The only aspect of money that matters is its purchasing power. As the author correctly states, the economic value of money lies in its ability to be exchanged for other goods.
As long as it can be divided up into small enough units any supply of money will work. Economist Dr. Saifedean Ammous shares in his new book Principles of Economics that:
“If the money supply is fixed then economic growth will cause prices of real goods and services to drop, allowing people to purchase increasing quantities of goods and services with their money in the future…. Such a world would indeed discourage immediate consumption, just like the Keynesians fear it would, but it would also encourage saving and investment for the future… But to non-Keynesians- that is, to economists familiar with the concept of capital- a decline in spending is not just harmless, it is the bedrock of civilized society. It is only by reducing consumption and increasing saving that the deployment of capital is possible.”
While skeptics may think such a world is a fantasy, we don’t need to look back in history very far to find such a thing. The period up until the federal reserve was created was one of more economic progress and reduction in poverty than any other. Economist Murray Rothbard shares:
“A world of constant money supply would be one similar to that of much of the eighteenth and nineteenth centuries, marked by the successful flowering of the industrial revolution which increased capital investment increasing the supply of goods and with falling prices for those goods as well as falling costs of production.”
Many are adamant that falling prices would destroy society. But that’s how things usually were until the federal reserve was created. But we don’t need history to tell us that falling prices would be a good thing. What family is losing sleep at night worried that their money will be able to buy more tomorrow than it did today?
It’s like land. It’s another asset with a fixed supply that’s prone (to) speculation.
It is like land only in that both have a fixed supply. Bitcoin offers superior salability across time, goods, space, and scale. Land doesn’t.
This is why the price of bitcoin has been on an upward trajectory, albeit a highly volatile one.
The price of both bitcoin and land have been on an upward trajectory because the “price” most are measuring the value of both in is dollars. The supply of dollars has increased dramatically recently so the price of most things measured in dollars has also increased. Bitcoin’s price has also been increasing because of its superior salability as described above. Bitcoin is still a new good and a new money so its price in terms of other monies is still volatile. This will likely continue for some time. It would be great if Bitcoin’s price would go to $200,000, but to hope for only that would be to miss the point of the value a thing like bitcoin brings to humanity. It’s also possible that the equilibrium price settles at something lower than it is today. That is unlikely as bitcoin doesn’t inflate and all other currencies do.
"There are no limits to how high a rent-based asset can go up in price. Because unlike with goods or services, higher prices don’t bring forward new supply.
This is what makes real estate the most valuable asset class of all."
It is true that as more people have moved onto a fixed supply of land its market demand has increased and this has driven prices up. What we’ve also seen in the last 50 years is land picking up monetary demand as well. As the supply of money has increased, investors needed to park their value in something that has more salability across time than the constantly inflating dollar. Real estate offers this. It offers it imperfectly and inefficiently (real estate has large maintenance costs) but real estate preserves value better than an inflating currency. This has been a large part of the speculation. This phenomenon accelerated after Covid as money printing accelerated. Real estate prices increased even more. Today real estate is more unaffordable than ever for the average family because its price includes not only the market demand of families needing a place to live or businesses needing a place to operate, but also the monetary demand of wealthy investors trying to protect their value. This is a bubble that will pop at some point.
"This is one of the reasons for the hype surrounding bitcoin and the wild surges in its price. Assets that generate rent often become the focus of intense speculation.
This seems like a new phenomenon because bitcoin is a new type of asset. But it follows a well-worn historical pattern."
Time will show us how bitcoin’s adoption plays out. But bitcoin is not just another type of asset like land. It offers superior salability and protection from manipulation and confiscation that humanity has never seen before. It is true that there is a scenario in which bitcoin doesn’t ever get adopted globally and its price plummets to near zero. But that would be because people failed to understand it or its critics successfully outlawed it before it got enough traction. Should this scenario actually unfold, it wouldn’t be because bitcoin is just like land.