Bitcoin is Money, but that’s beside the Point


In an interview with The Conversation, David Yermack argues that Bitcoin ought not to be considered to be ‘money’. Steve Forbes agrees. The claim that value volatility excludes Bitcoin from qualifying as anything resembling a ‘store of value’ has become all too familiar. It is not likely to bear intellectual or practical fruit. It is indubitable that Bitcoin functions, on small scale, as transferable credit: it is money, but it is private money. What we really need to know is whether it will ever be anything more.


What is money?

According to Yermack, stones, gold and paper are all examples of money, which has evolved into the kind of money that ‘exists only in computer memory’ – what Yermack calls ‘virtual money’. It is, in fact, entirely the other way around.


Barter and money

The idea that the story of money begins with commodities stems from Adam Smith’s The Wealth of Nations. According Smith’s account, nascent economies start with barter. The division of labour then creates a problem that economists term ‘the double coincidence of wants’. It goes like this:

Abi has some kiwis and wants to get some strawberries. Bibi has strawberries but wants bananas. In order to get the strawberries from Bibi Abi must now find some third person with bananas who wants kiwis.

This is clearly very silly: by the time she finds such a person her kiwis might have over-ripened, or Bibi might have changed her mind. To make this picture easier, we are told, we need a third thing that everyone wants and will accept in exchange for the things that we want: in short, we need money. So, money is a commodity medium of exchange.


Money and value

This view of money has been extremely adhesive, and it goes hand in hand with the idea that the value of money comes from the metal make-up of coins: when we talk about money we come back often to the gold specie or bullion standard, even though the latter was abandoned altogether in 1931. According to this view bank accounts derive their value from the coins to which they are ultimately reducible. For an excellent parody of it read Terry Pratchett’s Making Money.

A moment’s consideration tells us that gold cannot really be at the bottom of all of this. Imagine that you are stranded on a desert island. You have no food, water, or way of getting home. In this hypothetical, you are entitled to one item. What do you choose? Your answer is extremely unlikely to be ‘gold’.

The reason we think gold is intrinsically valuable is probably something to do with the fact that we have an absurd obsession with sparkly things. A report published by Toni Shephard revealed that the myth of the ‘thieving magpie’ is really a human fetish for gleam. Magpies do not, in fact, display any preference at all for shiny objects. That we think they do is simple observational bias.



This part of money’s story is simply wrong. In the words of Professor Dame Caroline Humphrey, ‘No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money’. But if money didn’t come from barter, where did it come from? And how did it gets its value?

In 1913 and 1914 respectively, Alfred Mitchell-Innes published two papers in the Banking Law Journal, ‘What is Money’ and ‘The Credit Theory of Money’, in which he argued that what lay at the heart of money was not some commodity, but rather credit. Credit is nothing complex or special. It is simply debt, viewed from the other end. We call it ‘credit’ when we want to emphasis the feature that is important to the story of money: it can be used to extinguish unconnected third party liabilities.

When credit circulates as a mechanism for releasing debts, and when it can be expressed by reference to accepted calibrations of value, we have both a payment mechanism and a currency. In other words, we have ‘money’. And it derives its value not from any commodity, but from what we can do with it: we can use it to create and release the debts by which we acquire things, services, opportunities, even status and power.


Virtual Money

In his book Debt: The First 5000 Years, Graeber explains that the translation of Mesopotamian cuneiform demonstrated that credit systems in fact preceded coinage by thousands of years. In the Sumerian economy, although silver was the standard unit of account, it barely circulated at all. Where it did, it circulated in unworked form, even though there was easily enough of it, and sufficiently advanced technology, to coin it. One reason for this was that although debts were calculated in silver, they did not have to be paid in silver. Transactions were carried out on credit, and paid later in barley, goats, furniture, precious stones – anything of recognised value. In short, it is not coinage that came first, but virtual money itself: credit.


Is Bitcoin Money?


Store of value

The primary reason that Yermack considers that Bitcoin cannot be thought of as money is price volatility. Here we must be careful. Orthodox economic theory has it that money is three things: a medium of exchange; a unit of account, and a store of value. But the last of these is not what defines money, but rather what makes it work: if the value of a currency fluctuates too much, it will not circulate effectively. We know all too well that our monetary system is entirely based upon trust, and people need to be able to have confidence that the money they are given can be used, in turn, to extinguish their own liabilities. So, value stability is a condition of effective money.


How good is Bitcoin at being money?

There is absolutely no doubt that Bitcoin does indeed circulate as a mechanism for releasing liabilities. It is money, at least to some people. Indeed, to those who send and accept payments in bitcoin it is in a sense even more like money than bank credit: it is ‘cash’ in the true sense, because it can be transferred without the help of any third party. But its pool of users is still small. What we need to work out is whether Bitcoin will ever function effectively as money on a broader scale, and what opportunities and risks that may create. Stability of value will contribute to the likelihood of that eventuality; so too effective marketing, dissatisfaction with existing payment service providers, and the emergence of new payment behaviours. Significant research efforts are needed to determine how best to incorporate developing payment technologies into mainstream public and private culture. The semantics of Bitcoin and money do not help that effort. The question we need to answer is not ‘is Bitcoin money?’ but ‘how good is Bitcoin at being money?’


Tatiana Cutts


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