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Will Cryptocurrencies Pass the Market Test?

December 16, 2017 in Economics

By Frank Shostak


By: Frank Shostak

On Friday December 8, 2017, the price of bitcoin closed at $15,206– an increase of 28.3% from November. The yearly growth rate stood at 1,474%.

Many economists and financial commentators hold that in the unregulated market of the internet economy, bitcoin is likely to emerge as a new form of money that is going to bypass the central-bank supervision.

Bitcoin, the invention of a person, or group of people, using the name Satoshi Nakamoto, was launched on January 3, 2009.

The basic idea behind bitcoin is to create, by means of a mathematical algorithm, a substance that is scarce and fungible.

Nakamoto devised a software system that enables people to obtain bitcoins as a reward for solving complex mathematical puzzles. The resulting coins are then used for online trading. Nakamoto also arranged that the number of bitcoins can never exceed 21 million.

Some experts maintain that bitcoin will displace the existing fiat money and will usher in a new era of free banking, which will finally put to rest the menace of inflation.

To establish whether bitcoin is likely to become a new general medium of exchange (i.e. money), let us first see how money comes about. The distinguishing characteristic of money is that it is the general medium of exchange, evolved from the most marketable commodity. On this Mises wrote,

There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.

Money is the thing for which all other goods and services are traded. Furthermore, money must emerge as a commodity. An object cannot be used as money unless it already possesses an objective exchange value based on some other use. The object must have a pre-existing price for it to be accepted as money.

Why? Demand for a good arises from its perceived benefit. For instance people demand food because of the nourishment it offers. With regard to money, people demand it not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services.

The benefit money offers is its purchasing power, i.e. its price in terms of …read more


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