Over the festive season, the conversation in my household inevitably turned to the phenomenal rise – and fall – in the US dollar price (exchange rate) for Bitcoin during December (Figure 1). The roller-coaster ride of the blockchain-based currency has been front-page news for the mainstream media, where it has been both likened to and disassociated from the boom-and-bust of the infamous 1637 Dutch tulip craze.
Figure 1. for Bitcoin
It cannot be denied that December 2017 marks the point where the terms “bitcoin” and “cryptocurrency” went mainstream. But whereas in 1637 the average participant in the Dutch tulip market had a fairly good idea about what was being promised, as 2018 dawns, confusion abounds about exactly what Bitcoin and other cryptocurrencies such as Ethereum (Figure 2), Litecoin, and Dash are; how they differ from other currencies or commodities; and whether trading them in warrants any special policy attention.
Figure 2. Ethereum to US Dollar, December 2017
Currency Concerns
A starting point for understanding the similarities and differences between bitcoins and tulips comes from William Stanley Jevons. His 1875 work, “Money and the Mechanism of Exchange,” defines the four functions of a currency: as a medium of exchange, a measure of value (or unit of account), a standard of deferred payment, and a store of value.
Comparing Bitcoins with tulips reveals that tulips fulfill only the store of value function.
To qualify as a currency, Bitcoin and other cryptocurrencies (which arguably include digital credits such as Airpoints) must fulfill each of these four functions. Clearly, a range of merchants is willing to price in and accept Bitcoin (and Airpoints) in exchange for goods and services, and they can be used to transfer value from one person to another (albeit that Airpoints transferability is somewhat limited), and thereby settle debts. A sum of Bitcoin (or Airpoints) can be held for a period of time as a store of value to be transferred or redeemed in the future, albeit that the terms of exchange may be different to those prevailing when the unit of currency was first acquired. Their status as currencies seems assured.
