Bitcoin is often promoted as the antidote to the madness of fiat irredeemable currencies. It is also promoted as the replacement. Bitcoin is promoted not only as money, but the future money, and our monetary future.

In fact, it is not.

Why not? To answer, let us start with a look at the incentives offered by bitcoin. We saw a comment this week, which is apropos:

“Crypto is so exciting and stimulating that is actually very hard for me to be interested in/do things unrelated to it lately.”

This sentiment is chilling. It illustrates another way that bitcoin speculation is affecting the real world. Some people are actually producing less. Speculators like him get free money (i.e. the accumulated savings of others, provided as income). Why should they do mundane work for wages? The net result is that someone at the margin will have to consume less.

We could dub this the “tragedy of the speculations.”

We don’t prefer to focus on the real or alleged intentions of bitcoin creator Satoshi. We do not call this “unintended consequences” (though we doubt that Satoshi could have foreseen this). Instead, we say that the skyrocketing price creates a perverse incentive. A perverse incentive causes a perverse outcome. If people produce less because speculation is so much more fun (and rewarding), this is a perverse outcome.

A monetary system is supposed to enable greater productivity, not reduce it. A stable interest rate—and hence asset prices—is the principle virtue of a free market in money (i.e. the unadulterated gold standard).

Bitcoin’s unstable price makes it unusable as money. Merchants may seem to accept bitcoin, but really they just want dollars. Such merchants use a bitcoin exchange to facilitate transactions. The exchange calculates the current amount of bitcoin to net out to the merchant’s dollar price (after the exchange fee). No merchant can hold any significant amount of bitcoin for the same reason no saver can hold his life savings in bitcoin (as opposed to a HODLer holding his speculation).

Suppose a merchant has 10% net margins, after cost of goods sold plus payroll and rent. That’s not bad, by the way, in this falling-interest rate regime. Just look at the increase in breweries in Switzerland, despite the decline in beer drinking. This is surely putting downward pressure on the profit margins of every brewery.

Anyways, suppose a merchant has a 10% profit margin. He keeps a significant amount of capital in bitcoin. In two days, he loses almost 20 percent as the price of bitcoin drops from $5,000 to nearly $4,000 between Saturday 2 Sep and Monday. That could be enough to bankrupt his company.

Business requires predictability. Some things are not predictable such as the weather (which is one reason why farmers use the futures market). However, the value of money is nearly as important as the rule of law itself, and the right of property. If the value of money is subject to big changes, then the ability (and incentives) to invest for the long-term are undermined or destroyed.