Does Bitcoin need a new theory of money?

[davido]

Conventional theories of money assume that money is backed by precious metal (the theory known as bullionism) or by the state (chartalism) but Bitcoin is backed by neither. Economists also often define money as anything that serves as a medium of exchange, but Bitcoin isn't much good at that either (so far, at least). So does that mean Bitcoin is not money, or is the problem with these theories?
I have posted a paper on this question here, comments/responses appreciated: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624371

[oblivi]

Conventional theories of money assume that money is backed by precious metal (the theory known as bullionism) or by the state (chartalism) but Bitcoin is backed by neither. Economists also often define money as anything that serves as a medium of exchange, but Bitcoin isn't much good at that either (so far, at least). So does that mean Bitcoin is not money, or is the problem with these theories?
I have posted a paper on this question here, comments/responses appreciated: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624371

How Bitcoin isn't good as somethng that serves as a medium of exchange? it's the best ever. The fact we lack merchants isn't Bitcoin fault, it's people being idiot's fault. It will take time for merchants to spread, maybe one or two decades.
Bitcoin doesn't need anything physical to be backed with, scarcity has now been achieved digitally. I know the grandpas out there struggle to get this one.

[davido]

How Bitcoin isn't good as somethng that serves as a medium of exchange? it's the best ever. The fact we lack merchants isn't Bitcoin fault, it's people being idiot's fault. It will take time for merchants to spread, maybe one or two decades.

True but some would say Bitcoin is too specialized at the moment to be considered a medium of exchange, see e.g. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2434194
But I think the problem is that the medium of exchange doesn't define what money is, it is more a description of what money does. Which is one reason we need a new theory ...

[davido]

Bitcoin doesn't need anything physical to be backed with, scarcity has now been achieved digitally. I know the grandpas out there struggle to get this one.

Agree with the first part, but scarcity itself does not make Bitcoin into money. I would say it does have backing, not by something physical such as gold, or by the state, but by its expanding network of users.

[greBit]

Bitcoin doesn't need anything physical to be backed with, scarcity has now been achieved digitally. I know the grandpas out there struggle to get this one.

Agree with the first part, but scarcity itself does not make Bitcoin into money. I would say it does have backing, not by something physical such as gold, or by the state, but by its expanding network of users.

Yes, bitcoin is backed by the people. Gold was/is believed to be the most widely accepted asset and everybody recognized its value and importance. This value and importance was created by the people itself, who bestowed all their support and trust on Gold. Look how widely accepted it still is, even after more than a century. If the same kind of trust and support is provided to bitcoin by people all over the world, how can that not be regarded as the best currency in terms of store of value

[Possum577]

Conventional theories of money assume that money is backed by precious metal (the theory known as bullionism) or by the state (chartalism) but Bitcoin is backed by neither. Economists also often define money as anything that serves as a medium of exchange, but Bitcoin isn't much good at that either (so far, at least). So does that mean Bitcoin is not money, or is the problem with these theories?
I have posted a paper on this question here, comments/responses appreciated: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624371

Is it too soon to think that "backed b the state" may be losing it's value? As long as governments keep manipulating money there will likely be an interest and audience for bitcoin.

What data did you find for the purposes of your study? Thanks for sharing it!

[davido]

Is it too soon to think that "backed b the state" may be losing it's value? As long as governments keep manipulating money there will likely be an interest and audience for bitcoin.
What data did you find for the purposes of your study? Thanks for sharing it!

Yes, "backed by the state" is losing some of its prestige! The paper came out of a book I'm doing about money. The data points are events that were not available to anyone writing about this even a decade ago - the emergence of Bitcoin and other cybercurrencies.

[AtheistAKASaneBrain]

Bitcoin doesn't need anything physical to be backed with, scarcity has now been achieved digitally. I know the grandpas out there struggle to get this one.

Agree with the first part, but scarcity itself does not make Bitcoin into money. I would say it does have backing, not by something physical such as gold, or by the state, but by its expanding network of users.

Well, fiat isn't scarce and is considered money because people use it to acquire goods and services which is all that matters for it to be money. But we can talk about what makes money quality money, and quality money needs to be scarce.

[maku]

Bitcoin does not need new theory of money. We already have enough of theorycrafting about it we know it all. What needs to change is people's perception about bitcoin.
Bitcoin is viewed by people in the different light now: some treat it as commodity, some like asset, speculation tool and others as currency.

[davido]

Bitcoin does not need new theory of money. We already have enough of theorycrafting about it we know it all. What needs to change is people's perception about bitcoin.

People's perceptions are shaped by theories of money. For example Alan Greenspan said: "I do not understand where the backing of Bitcoin is coming from. There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it's a government or an individual." So he is making a judgement about Bitcoin because it does not conform to the traditional idea that money needs to be backed either by intrinsic value (e.g. gold) or by a centralized issuer (e.g. the state).
Agree there is a lot of theorizing about money, but not much of it applies very well to Bitcoin ... Also, money is something that is completely missing from most economic models (e.g. Stephanie Kelton: "Money, debt and finance don’t even fit into many economic models)" which is another sign that the theories aren't working.

[Falconer]

I never thought about it before, and I think it is an important thing for bitcoin itself, which it can help to define what bitcoin is to all people in this world. People who dont have any idea about bitcoin often misunderstood bitcoin as poker chip, money for one specific website, etc.

[manselr]

How Bitcoin isn't good as somethng that serves as a medium of exchange? it's the best ever. The fact we lack merchants isn't Bitcoin fault, it's people being idiot's fault. It will take time for merchants to spread, maybe one or two decades.

True but some would say Bitcoin is too specialized at the moment to be considered a medium of exchange, see e.g. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2434194
But I think the problem is that the medium of exchange doesn't define what money is, it is more a description of what money does. Which is one reason we need a new theory ...

I don't understand the critique of Bitcoin being "too specialized".
Anyone can start a business and start accepting payments instantly. No matter what you do in your business, you can start making money out of it.
Again, the problem of Bitcoin is lack of adoption, it's obvious Bitcoin is money and indeed the best form of money humanity as ever seen. Let's look at the traits of money and compare:

[Coinbanker]

My understandings of bitcoin backup by following things:

1. electricty.  
2. limited supply - rareness -  /fiat cant have it/
3. blockchain network - /fiat cant have it/
4. math - unbreakable, no forgery, speed of light.   you cant break the math unless god.
5. people and idea - people's money, not property of any corporations and government, that makes ultimate world currency


gold has no future in 100 years if people become able to mine golds on  asteroids, moon.
even nuclear physicists made it in lab 70 years ago

[alva5763]

One problem for many people not to be involved with bitcoin is the difficulty in obtaining it,we can't all be miners.

[davido]

My understandings of bitcoin backup by following things:
1. electricty.  
2. limited supply - rareness -  /fiat cant have it/
3. blockchain network - /fiat cant have it/
4. math - unbreakable, no forgery, speed of light.   you cant break the math unless god.
5. people and idea - people's money, not property of any corporations and government, that makes ultimate world currency

Agree with all of these, what I'm not clear on is whether bitcoin needs to be backed by electricity (since it is backed by the other things). I understand that the mining process puts a price on the blockchain and is a security feature, but on the other hand it is wasteful of electricity! So is this there just so that bitcoin will be backed by something real (i.e. electricity and computational power)? Is it necessary? And could other approaches that require less energy (e.g. Litecoin, proof-of-stake) work just as well?

[Erdogan]

Bitcoin is money all right. It is backed by nothing, i.e it is unbacked. It is free market, world money.

It has all the good qualities of money, see above.

It's value derives from the reserve demand, from people wanting to hold the money in reserve, and the supply, which is opposite, the desire to hold less.

[mrhelpful]

One problem for many people not to be involved with bitcoin is the difficulty in obtaining it,we can't all be miners.

A lot of us can be miners, but it should be like a minimum that doesnt ruin us with a huge electricity bill.

Id expect to collect a miner fee aka bitcoin producing a year thing, rather then a month collection. But still get free btc..and atleast you help the network.

[redsn0w]

Yes, I think bitcoin and the cryptocurrencies in generally need a new economic theory because the actual economic system isn't compatilble with them.


Who gives value to something?

[bornil267645]

The days of government-controlled ‘money’ are over. In the 21st century, you are the controller of your own money. Since the dawn of civilization, the use of a local currency has turned into a tradition. People used to trade physical tokens and objects among them, but now they can use digital currency. You are free from any government regulation and fees. It is a currency made by the people, belonging to the people and for the people.

[techgeek]

Theres a recent bitcoin documentary movie made, on the theory of money.

movie title: Bitcoin The end of money as we know it

You should check it out if you havent, but its basically a evolution process on what people traded back then eventually leading to the 1st coin.

So its going through a similar process like the 1st metal coin did which were produced by the kings etc.