The Elements That Would Make Bitcoin a Currency

Financial Times columnist Martin Sandbu gets it correct:

[A] currency is not something that has a price: a currency is what you denominate prices in. Until prices of products and services are quoted in bitcoin (say) — and the parallel price in official currency is constantly adjusted to the bitcoin price rather than the other way round — bitcoin is not a currency.

More directly, I would add it would become a currency once we started "thinking" in terms of it. That is, "Bread costs x Bitcoin," "Gasoline is x Bitcoin per gallon," "They offered me an annual salary of  x Bitcoin." This is not going on now.

Sandbu also thinks deeper:

For enough people to adopt one as a real currency, rather than merely a novelty investment, it will have to perform at least as well as existing alternatives. And all advanced countries have well-performing currencies at the moment. So ruling out places marred by serious monetary instability or looting governments, what advantage can cryptocurrencies possibly offer over conventional currency?

The answer is obvious: the one thing that cryptocurrencies can do better than real money is to carry out illicit transactions or launder ill-gotten gains. Morality and legality aside, this is a real advantage that offers private value (but social cost). But only for as long as governments continue to tolerate it. As soon as they do not — and they surely will not once it becomes a substantial activity — cryptocurrencies will lose whatever value they may currently have. And governments have plenty of ways to crack down — by regulating the interface between cryptocurrencies and their own currency, such as bitcoin exchanges.

Bottom line: Unless an e-currency is controlled by government, it will be killed if it gains any significant transactional use, that is significant use as a medium of exchange.

    -RW