WHILE WE HAVE SO FAR DISCUSSED it as currency, its advocates frequently promote Bitcoin as a new form of money (see, e.g., Emery and Stewart 2015; Smart 2015). Money and currency are not identical. “Money,” as we use the word today and as economists define it in standard textbooks, serves three critical functions: medium of exchange, store of value, and unit of account (see, e.g., Abel, Bernanke, and Croushore 2008, 248–49). Medium of exchange means that a token (which need not be physical; a token might be nothing more than an entry in an accounting ledger) can be used to buy or sell products and services; store of value means that the tokens can be saved, and (despite a certain level of inherent volatility) can be relied on to maintain their purchasing power. Unit of account, sometimes also called measure of value, refers to the fact that the market uses the token in determining the value of products, which is to say, their prices. It is worth noting that, in circular reasoning typical of ideological constructions, these textbook definitions of money are frequently rejected by Bitcoin advocates, even as they insist that Bitcoin is money. That is, though Bitcoin fails to meet the criteria we have long used to identify money, we are told that we must accept that Bitcoin is money (see, e.g., both “Myths”; and Smart 2015 for conspiratorial redefinitions of “money”).
Of these three classical functions, it is arguable that Bitcoin serves only as a medium of exchange. It is possible to buy and sell products using Bitcoin. Speaking very roughly, “medium of exchange” might well be thought of as the “currency function” of money. As many economists have pointed out, though, virtually anything can serve as a medium of exchange, and nonmonetary media of exchange proliferate in our world: from frequent flyer miles to credit card bonus point programs, from grocery store coupons to high-value goods like fine art, precious metals, and gems. None of these alternative currencies poses any threat whatsoever to national sovereignty over money, let alone national sovereignty itself. Yet Bitcoin advocates frequently attempt to redefine money as if the term refers only to medium of exchange.
Whether Bitcoin serves the unit of account or measure of value function is much less clear. It is rare, though not unheard of, for markets to exist that price their goods only in Bitcoin, and rarer still for those prices to exist in relation to nothing other than Bitcoin: that is to say, even the infamous deep web drug marketplaces like Silk Road and its various offshoots clearly set the Bitcoin
prices for their goods according to their value in official world currencies, despite having prices nominally listed in Bitcoin (i.e., those prices rise and fall with changes not just in Bitcoin’s valuation, but in the price of drugs in national currencies). Exactly because Bitcoin lacks any relationship to bodies that need the currency to exist in relationship to mechanisms of international exchange, or of state-internal matters like taxes, Bitcoin on its own floats free of any anchor to ordinary valuing processes. If Bitcoin-only economies were to develop, in which labor were priced in raw relation to Bitcoin regardless of Bitcoin’s exchange value with world currencies (i.e., labor is priced at 1 BTC an hour regardless of whether 1 BTC is worth US$10 or US$1,000), this situation might change, but this presents the same chicken-and-egg problem we see throughout Bitcoin propaganda: if states were to go away and if entire economies existed in Bitcoin, then it could become money; but it is simultaneously said to be Bitcoin that will cause states to wither away and that will produce those economies.
The third function, store of value, is Bitcoin’s fundamental and most interesting obstacle, and the place where conspiratorial economic thought becomes most clearly implicated in the structure and usage of the software itself. Part of why Bitcoin is so well-known is precisely because of its volatility: it was Bitcoin’s remarkable climb to over US$1,000 that brought it to general public attention. Despite the fact that this is seen by many Bitcoin promoters as a “positive” change in value, a change is a change regardless of direction. An instrument that grows to 400 percent of its original value (from US$200 to US$1,000) in under a year can and will lose 80 percent of its value in a similar time period. A person storing their savings or profits from business in Bitcoin has absolutely no reason to expect that that value will be maintained over even a short time frame, and in fact has every reason to expect that it will not.
Bitcoin’s status—or lack of status—as store of value is a crucial site at which to observe the currency’s ideological functions. One of the most frequent conspiratorial frames for the promotion of Bitcoin is gold itself, or “the gold standard,” itself a critical nexus point for conspiratorial financial theory. Bitcoin is routinely promoted as if it constitutes or could constitute a “real” or “sound” store of value the way gold purportedly does, and is often championed in the same right-wing media that sells precious metals as an alternative to the “debased” nation currencies that are said to have lost all their value via inflation. Bitcoin advocates make repeated reference to the superiority of gold-backed money, despite the fact that governments fixed even the price of gold at many moments in history to tame volatility, and in the face of current stories about gold and silver prices being part of the Libor price-fixing scandal. This preference for gold versus what they somewhat inaccurately call the “fiat
currency” of nation-states only shows the ideological nature of their assertions, since gold exists right now, is widely traded and can be untraceable, largely resistant to counterfeiting, and yet is widely used (though not as a currency peg) by the very nation-states and central banks that Bitcoin advocates say they are in the process of dismantling. Just as revealing are statements like those by self- described “currency trader and economics nerd” Brian Kelly, who in The Bitcoin Big Bang inaccurately attributes the threefold nature of money to currency, and despite this, after laying out the case that Bitcoin only serves the medium-of- exchange function, suggests that “we are too tethered to the conventional definition of a currency as a medium of exchange, a store of value, and a unit of account” (2015, 13). Bitcoin therefore is at once everything that money is, but to the degree it turns out not to be everything that money is, the definition is what’s wrong. The problem is that the definition provided by economists is descriptive, not normative: it says that the money function as we understand it is only filled by objects that have those three characteristics, not that this is how things should be. This kind of semantic play is typical of ideological constructions, but not of serious analysis.
Indeed, the story told so far has if anything tilted the story too much in Bitcoin’s favor. For while the textbook account of money includes the three critical functions we have mentioned, the majority of expert economic theory simply defines money as currency that is issued by a sovereign government. This theory is known as “Modern Monetary Theory” (MMT) or “neochartalism” and has its roots in economics going back at least to John Maynard Keynes, whose views have perpetually been a major target for every sort of attack from right-wing thinkers. According to this view, the difference between money and currency is that money is currency issued by the state and indicates the form of currency in which taxes must be paid. It is precisely the pegging of a given national currency to factors like taxation, national industrial production, and international trade that enables the store of value and unit of account functions of money. That is, nation-state sovereignty and the very idea of money are inextricably linked in our world, and so the notion of money that is not issued by a nation-state is essentially a contradiction. Like most right-wing discourses, Bitcoin rhetoric thrives on such paradoxical constructions.
One of the places in which this conundrum is most visible is in the claims of Bitcoin advocates about “fiat money,” also an important trope in right-wing extremism. As a general idea, the notion of “fiat currency” has a long history in economics. For example, decades prior to the development of Bitcoin, liberal economist John Kenneth Galbraith (1975, 63) offered the following typology of money:
Writers on money have regularly distinguished between three types of currency: (1) that which owes its value, as do gold or silver, to an inherent desirability derived from well- established service to pride of possession, prestige of ownership, personal adornment, dinner service or dentistry;
(2) that which can readily be exchanged for something of such inherent desirability or which carries the promise, like the early Massachusetts Bay notes, of eventual exchange; and (3) currency which is intrinsically worthless, carries no promise that it will be redeemed in anything useful or desirable and which is sustained, at most, by the fiat of the state that it be accepted.
Note to begin with that Bitcoin does not conform to any of these descriptions. At best it is a variation on (3), since what distinguishes (3), “fiat money,” from the other two, is that whatever token is being exchanged has no “intrinsic value”— that is, where the token used as currency for that money has demonstrable value in another context. The most typical example of non-fiat currency is gold, because gold has many uses and is still valuable even when not in circulation as currency; paper money, on the other hand, is taken to be fiat because the paper on which it is printed is nearly valueless as paper.
Frequently in Bitcoin discussions, one reads the circular assessment that “fiat” in “fiat money” refers to the “fiat” of the state—that is, an official decree—that turns a currency into money. While there is an element of truth to this, it does not reflect the history and usage of the term “fiat money”: since money is inherently a creation of the state, regardless of whether it is based on a token of intrinsic value, even a gold standard would be “fiat currency” according to this definition. One suspects that “fiat by the state” is used in these definitions because the thought of some non-state actor deliberately suggesting that it could flout national law and declare its own currency to be “money” would have been unthinkable until very recently. But there is no way around the fact that Bitcoin advocates have no mechanism except fiat by which to declare their currency to be money. The point of the “fiat” label is to distinguish currencies with “intrinsic value” from those without it because these otherwise nearly worthless tokens have been declared to be of value by (someone’s) fiat. Further, this definition is the one that has wide usage in conspiracy theories, which allege that the failure to peg “worthless” paper money to a commodity with intrinsic value is part of what deprives ordinary citizens of their wealth. According to these standard usages, Bitcoin could only be fiat money; Schroeder (2015, 1n2) writes that Bitcoin “can be considered a fiat currency in that it also has no underlying asset.” Yet because of the appeal of currencies with intrinsic value to the right wing, one of the most frequent objects of Bitcoin discourse has been either to redefine “fiat” so as to exclude Bitcoin (see, e.g., both Kelly 2015; and Cox 2013 for this sort of ad-hoc redefinition), or to redefine “intrinsic value” so that some aspect of the Bitcoin software system (e.g., the energy put into mining, or the “trust” put into the system by its users) can qualify.
The supposed problem with fiat currency, which happens to be a favored talking point of conspiratorial libertarians like Ron Paul and Rand Paul (Shoff 2012), is that it interferes with the store of value function of money. Without the stability of value that they (erroneously) claim proceeds from either the use of valuable commodities as currency (e.g., gold used for coinage) or as a grounding mechanism for money (e.g., a “gold standard”), not just economic instability but actual totalitarian political power is the inevitable result. As Ron Paul put it in 2003 in a speech before the U.S. House of Representatives, “If unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny.”
What people like Paul criticize about “fiat” currencies is that “central bankers” can manipulate the value of the currency, which is purportedly not the case with asset-backed currencies like gold. The whole point of this is to have a stable currency, one whose value does not fluctuate wildly. But because the value of Bitcoin cannot be modulated except by market transactions, it cannot separate its asset from currency functions. This makes it too volatile to use as a store of value, despite the fact that advocates recommend it for its superior stability.
These paradoxes are endemic to right-wing rhetoric about money, much of which encourages pushes people to abandon national moneys and to put the proceeds in precious metals like gold (see, e.g., Mencimer 2010 on Glenn Beck’s promotion of gold), because they are supposedly stable in value. Yet history shows that gold standards themselves are regulatory in nature, and no more free from manipulation, derivation, and speculation than are any other currencies; gold itself provides clear evidence of this in its recent price volatility (see Allen 2013; also see Andolfatto 2013 on the parallels between Bitcoin and gold price volatility), as do the wildly fluctuating prices of all rare commodities.
As Bitcoin hit an all-time high (albeit briefly) of US$1,124.76 on November 29, 2013 (“History of Bitcoin”), it wasn’t hard to find—in fact it was difficult to avoid—cyberlibertarian believers celebrating this surge and similar ones in the past as proof of Bitcoin’s importance (see, e.g., Falkvinge 2013b). While the surge certainly did indicate something, it was remarkable to read celebrations of the surge as if it demonstrated Bitcoin’s feasibility as what it is advertised to be, a new form of money or currency. Under any conventional economic theory such surges prove not that Bitcoin is a new government-toppling currency, but to the contrary, that it cannot perform those functions: it is too volatile to serve as a store of value, and this function is critical to money. Like so many other aspects of cyberlibertarian practice, the case for Bitcoin’s supposed power is so perched on contradictions that it is surprising to find people taking it seriously, and yet if anything exposure of these contradictions seems only to inspire renewed seriousness and missionary zeal on the part of Bitcoin advocates.
The tension between its function as currency and as investment have informed Bitcoin discussions from the beginning, but particularly in the wake of its extreme volatility during and after 2013. In the early stages of one of its surges upward in price, Pirate Party founder and self-described “political evangelist” Rick Falkvinge (2013b) posted a piece on his widely read Falkvinge.net blog titled “The Target Value for Bitcoin Is Not Some $50 or $100: It is $100,000 to $1,000,000.” Falkvinge appends his Bitcoin pieces with a note saying that he “has a significant investment in Bitcoin. Specifically, he went all-in two years ago after having run these very numbers,” referring to his statement in May 2011 that he was “putting all of [his] savings into Bitcoin” (Falkvinge 2011). In that earlier piece he makes the typically paradoxical claim that Bitcoin “is a currency, but an entirely new kind of currency,” and then explains that he is “investing all of the money [he] had saved and all that [he] can borrow into the currency.” In both pieces and many like them, Falkvinge appears unaware that he is simultaneously advocating for two diametrically opposed ends: for Bitcoin’s wide adoption as money, for which it must be able to maintain a stable valuation, and for its desirability as a get-rich-quick investment, which disqualifies it as money. It is no surprise that in the same piece where Falkvinge (2011) claims that Bitcoin “will replace the current financial system” he notes that “in the past fourteen months, the value has more than thousandfolded” and predicts that in “the coming years . . . the value of a Bitcoin will increase another thousandfold” without even a hint of acknowledgment that such increases by definition would rule out Bitcoin as a form of money.
Perhaps even more remarkably, in the same piece Falkvinge claims that Bitcoin can “safeguard fundamental civil liberties for the whole population,” while simultaneously noting that the “second wave” of Bitcoin adopters will be “people who don’t want or are not allowed to use the legacy banking system for their everyday transactions.” Since many of the regulatory measures built into the legacy banking system exist specifically to protect what most of us would regard as core civil liberties (e.g., to have our ownership of our property protected by deposit insurance and credit card chargebacks) the idea that Bitcoin protects civil liberties by encouraging those who are “not allowed to use the legacy banking system”—a category that mostly includes people convicted of illegal activities—is one that only a deeply committed ideologue would make.
The comparison with gold opens the door to the right-wing theories that underlie too much writing and thinking about Bitcoin. Many of its most vociferous advocates rely on characterizations of the Federal Reserve as a corrupt idea in and of itself, a device run by conspiratorial bankers who want “the state to control everyone’s lives” (Weiner 2013). These claims are grounded in rhetoric propounded in the United States and across the world by far-right politicians like Ron Paul, a vocal advocate of Bitcoin (Borchgrevink 2014), whose bald declarations about the Federal Reserve are far more ideological than substantive in nature. Paul claims to want the abolition of the Fed and a return to the gold standard, as if this would result in the kind of absolute economic freedom libertarians demand, which is itself a line of argument with deep connections to racist conspiracy theories in which Paul has long been implicated (see, e.g., “Ron Paul Sites” 2011).
Such beliefs require one to ignore the direct evidence of one’s own eyes. Precisely because it is outside of legal regulatory structures, Bitcoin is particularly prone to the kinds of hoarding, dumping, derivation, and manipulation that characterize all instruments that lack central bank control and regulatory oversight by bodies like the SEC. Contrary to the advocates’ claims, unregulated securities instruments are everywhere in contemporary finance; there is convincing evidence that the inability of the Commodities Futures Trade Commission to establish regulatory authority over CDOs and CMOs is the proximate cause for the economic crisis of 2008 (Frontline 2009). Now the lack of regulation of Bitcoin means that hoarders (as of December 2013, half of all Bitcoins were owned by approximately 927 people, with such proletarian heroes as the Winklevoss twins of Facebook infamy among them; see Wile 2013) can use all sorts of sophisticated trading methods to manipulate the market. This means that fly-by-night operations can come and go, stealing huge amounts of Bitcoin for themselves, as allegedly did the operators of both the short-lived Silk Road drug supermarket replacement ironically called the Sheep Marketplace (Madore 2015) and the CEO of the most widely used Bitcoin exchange, Mt. Gox (Sarkar 2015).
Bitcoin’s incredible volatility and lack of regulation, celebrated by cyberlibertarians, actually prevent the cryptocurrency from being used in just the way its advocates claim. The very reason central banks regulate the value of currencies is to ensure they serve as stable sources of value. The Bitcoin experiment demonstrates an enduring principle of finance: absolutely free markets produce extreme boom-and-bust cycles. If Bitcoin becomes regulated enough to serve as a stable store of value and to ensure that debacles like Mt. Gox don’t happen in the future, it may be useful as a global system of payments (but so are generally non-transformative technologies like PayPal and Dwolla). But that will hardly shake world political structures at their foundations. If it remains outside of all forms of both value and transactional regulation, Bitcoin will continue to be a very dangerous place for any but the most risk-tolerant among us (i.e., the very wealthy, whose interest in Bitcoin should indicate to advocates how and why it cannot be economically transformative) to put their hard-earned money.
It is beyond ironic, indeed it is symptomatic, that Bitcoin has experienced dramatic deflationary and inflationary spirals just as it is being promoted as a corrective to inflation and deflation. Politically, this points to the resistance of ideologies to being disproven by contrary facts. Practically, it shows that the problems with currencies actually aren’t formal, or mechanical, or algorithmic, despite what Bitcoin propagandists want us to believe. They are social and political problems that can only be solved by political mechanisms. That is why, despite the rhetoric of Bitcoin advocates, today most national currencies are far more stable than Bitcoin will ever or can ever be.
Many economists recognize something that appears to have been beyond the inventors and advocates of Bitcoin. Without direct supply-based regulatory structures that discourage an instrument from being used as an investment (aka “hoarding”), any financial instrument (even gold) will be subject to derivation, securitization, and ultimately extreme boom-and-bust cycles that it is actually the purpose of central banks to prevent. In fact, there is an underlying general proposition that applies not just to Bitcoin but also to other tradeable commodities: “investment” and “currency” functions oppose each other. Despite this, it becomes increasingly clear that a majority of Bitcoin enthusiasm emerges not from its utility as a currency but as a highly speculative investment (Glaser et al. 2014), despite the arguments in its favor focusing almost exclusively on Bitcoin’s currency-like characteristics.
In fact, because the cycles of rapid deflation and inflation provoke constant exchanges of Bitcoin for other stores of value, usually national currencies, Bitcoin can more readily be understood not merely as a commodity, as just one among many other digital commodities, but also as a kind of derivative itself— an option or futures contract related to the value of other instruments and on which investors of all sorts can speculate and, depending on the volume of transactions, even manipulate the market. Given Bitcoin’s foundational anti- legal regulatory stance, it is almost inconceivable that major players are refraining from such manipulation. No less a prominent Bitcoin advocate than Rick Falkvinge himself, who after claiming in March 2013 (Falkvinge 2013b) that the correct price of one Bitcoin could eventually be as high as US$1 million, wrote in September of the same year (2013a) that its valuation had become “unwarranted by several orders of magnitude” due to “illegal price-fixing,” even though “for many Bitcoin enthusiasts, the Bitcoin market’s unenforceability of governmental rules is a feature, not a bug” and that in manipulating the market, some Bitcoin traders were engaging in “cheating of some kind, a breaking of the social contract.” Thus the involvement of high-profile players like the Winklevoss twins, too, cannot be a cause for celebration of Bitcoin’s potential as a currency, but rather demonstrates its utility as a commodity that established capital can readily manipulate to its own ends. In this sense, it becomes a tool for existing power to concentrate itself, rather than a challenge to the existing order: as some better economically informed commentators consistently point out, Bitcoin functions much more like a speculative investment than a currency (Worstall 2013; Yermack 2014), although what one is investing in, beyond Bitcoin itself, is not at all clear.