classical economics
for analysis,  forecasting
and policy design

Bitcoin Price Beats Gold

                         But Only Gold Is Good Money
                                                                   By Wayne Jett © March 7, 2017

     Bitcoin turned many heads as the dollar price of one bitcoin surpassed the price of one ounce of gold. If your head is one of those just mentioned, you need to know more than that the price of bitcoin is “going up.” Bitcoin is not real money, nor is it good money, because it has neither intrinsic value (as does real money) nor stable value (as does good money).

     Real money has intrinsic value in and of itself, such as a gold coin or a silver coin. In that condition, you get the value of your work product in your hand without a requirement that you accept a paper receipt assuring you will get your value later. Bitcoin is neither a coin with intrinsic value, nor a certificate of promised value. Bitcoin is an electronically recorded right to receive a price willingly paid at a particular time by another party for the bitcoin.

     Good money means something different from real money. Good money, according to classical economics principle, requires that the money have stable intrinsic value. Good money can be exchanged repeatedly over a period of decades while preserving the same value. Gold meets this definition of good money better than any other known substance or invention.

     Bitcoin may be a good speculative investment from time to time. That would be the case any time more people wish to buy bitcoins than wish to sell them – unless bitcoin or a competitor decides to create new bitcoins and begins the bidding process anew. Of course, just as the bitcoin price is subject to significant rises during periods of euphoria among its users/investors, the price is almost certain to experience plateaus and down-drafts.

     Bitcoin has some discomfiting similarities to a chain-letter, or a Ponzi scheme. Earlier buyers have a better chance of seeing their invested funds grow, while later buyers are more likely to wind up holding the bag. These are unpleasant things to hear when enthusiasm for speculative prospects remain high. But the points may be valid, deserving consideration. If they are not, then they will not deter bitcoin’s success among its enthusiasts.

     Meanwhile, the facts remain that bitcoins are neither real money nor good money. Something else must be designed to serve those purposes.