Since the start of the pandemic, bitcoin has enjoyed a dramatic bull run. With its impressive gains, old talk has resurfaced about how it will become a new global currency and supplant the dollar’s dominance. If one listens to the younger enthusiasts, it will also bring world peace and even the much sought-after goal of economic equality. That last statement might exaggerate some claims for Bitcoin, but only slightly. If traders in gold or tin or zinc were to make such forecasts for their commodities, people would be highly skeptical and rightly so. But with Bitcoin, the claims seem to have gained acceptance in many circles. Perhaps it is because the word coin is embedded in the name.
The truth is that Bitcoin will not likely replace the dollar as the world’s dominant currency, what central bankers refer to as the reserve currency, at least it will not do so any time soon. To be sure, Bitcoin has many money-like qualities. A person can make payments in it, to buy a car, for instance, or a vacation, many things. All he or she needs to do is get the seller to agree to take Bitcoin in payment. And these days, all the hype has increased the number of sellers willing to do that. At least one government, a Swiss canton, will let citizens pay their taxes in Bitcoin. Of course, if you could get the seller to take it, you could pay in gold or zinc or tin as well. At the moment, Bitcoin has more hype on its side than these other commodities, but otherwise there is not a lot of difference.
Bitcoin does, however, have something other commodities do not, something vaguely sinister, which may in fact have increased its current sex appeal. It allows people to do their transactions anonymously, the way you can with, say, suitcases of hundred-dollar bills. Like those suitcases, except with much greater convenience, the attraction is especially great when buyers and sellers want to hide their dealings from the legal authorities.
In one crucial way, Bitcoin fails miserably as a dollar substitute. Its value is highly unstable. True, the dollar’s value fluctuates. Its worth in terms of foreign currencies changes by the minute on currency exchanges, and inflation over time has eroded its value in terms of real goods and services. But by comparison to Bitcoin, the dollar is a model of stability. Inflation runs less than two percent a year and changes against other currencies attract attention as unusual if they amount to 5-6%. If you hold assets in dollars, you have a pretty good idea of what those holdings will be worth in a year or two – compared to other currencies and especially in terms of real goods and services. The dollar, in other words, remains a pretty good store of value. Compare this record to Bitcoin’s. Its early 2018 surge, in terms of dollars, foreign currencies, and real goods and services, took it up some 350% in a matter of months. Then, over the balance of that year, it gave back just about all those gains. It was on the rise again in the second half of 2019, paused during the last months of that year, and then took off again with the pandemic, finally recovering its mid-2018 highs late in the year. It has lost a touch over 10% of its value in the last week or so.
These are wild swings, certainly not the stuff of a stable store of value. The price gyrations, of course, make Bitcoin wonderfully attractive to speculators. They can make a lot of dollars if they can time the price swings right. But these same swings hardly give ordinary people, saving, say, for a house or retirement, a stable sense of what Bitcoin-denominated assets will be worth next year or even next month. It gives these people no way to plan as an acceptable currency must. If the dollar is less stable in terms of real goods and services than people would like, it has a much better track record and is a much better store of value than Bitcoin. That gives the dollar a decisive edge as a currency.
There can be little doubt that clever Bitcoin enthusiasts would respond to this description by saying that the huge fluctuations in the dollar price of Bitcoin speak to the dollar’s instability not Bitcoin’s. That would be a compelling argument, if Bitcoin and the dollar were the only two measures on earth. But by contrasting their movements against, say, the value an hour of the average person’s labor, it is equally apparent that the movements in Bitcoin’s worth fluctuates far more against the stuff of life than does the dollar’s — or the yen’s or sterling’s or the euro’s or the Chinese yuan’s or whatever other major currency circulates these days.
Perhaps someday, Bitcoin will become widely accepted and acquire a stable value in terms of the many real things about which people care. Then it might challenge the dollar and become an independent international standard, that is, assume the status gold had in the nineteenth and early twentieth centuries. Comparisons to stodgy old gold surely detract from this technological marvel’s sexiness, but that is what Bitcoin enthusiasts seek. For now, Bitcoin remains a volatile commodity better suited to speculation than undergirding an economic system, national or global.