The Bitcoin revolution.

• Author: McCallum, Bennett T.
• Position: Essay

The likelihood of the Bitcoin system replacing the Federal Reserve as the main provider of money in the United States and the desirability of such a transformation are the topics of this article. (1) With respect to the first of these topics, one needs to consider how far the so-called Bitcoin Revolution has progressed by estimating the average volume of transactions conducted per time period by means of Bitcoin payments, and then compare recent values of that magnitude with the total volume per period of dollar payments in the United States. (2)

Francois Velde of the Federal Reserve Bank of Chicago has estimated that, as of late 2013, the average volume of bitcoin transactions per minute totaled less than four-tenths of 1 percent of average dollar transactions per minute--actually, not total dollar transactions but only the subset conducted by means of Visa credit card payments (Velde 2013). In the months since the publication of Velde's article the volume of bitcoin payments has been growing rapidly, but their quantitative extent is still negligible from a macroeconomic perspective. In fact, this 0.004 magnitude is quite

close to the ratio implied by magnitudes of Bitcoin and Visa daily transactions averaged over the most recent 12 months as reported on August 7, 2014, by the coinometrics.com web site. These magnitudes are $57.3 million and $16,518 million, so the implied ratio is 0.00345. Alternatively, in terms of stocks, rather than transactions, the Ml measure of the U.S. money supply (currency plus demand deposits) is currently about $2,835 billion (as of August 7, 2014) with bitcoins worth $7.7 billion, for a ratio of 0.00272- again, of the same order of magnitude.

Another way to express the point that Bitcoin is not at this time a quantitatively important money is to reflect on the economist's standard definition of money--namely, an entity that serves as a medium of exchange, store of value, and unit of account. (3) Doing so, one recognizes that some clarification in this common description is necessary to make it analytically coherent. First, traditional money is typically a tangible object (e.g., metallic coins, government issued currency, or legal claims to such coins or currency) and thus is not itself a unit of account, which is intangible. Indeed, careful terminology would replace "unit of account" with "medium of account," a specified amount of which serves as the unit of account. (4)

Also, it is necessary to recognize that in developed economies tangible money does not rank highly as a store of value. For example, in the United States, during the first quarter of 2014, aggregate assets of households and nonprofit organizations together totaled $95,549 billion whereas checkable deposits and currency holdings by these units came to only $1,096 billion (roughly 1/100 of their assets). (3) Much larger components of household plus nonprofit-organization wealth include the reported monetary value of houses, furniture, automobiles, etc. Some major categories are real estate ($22,820 billion), corporate equities ($13,502 billion), corporate and foreign bonds ($2,626 billion), and pension entitlements ($19,766 billion).

Accordingly, it is the medium-of-exchange role that is the primary attribute that serves to define money. (6) But an important qualifier

often made explicit is that money is a generally acceptable medium of exchange. By that standard bitcoins do not qualify as money. Indeed, for most members of the U.S. population there are very few, if any, of their basic payments that could be made using bitcoins.

None of the foregoing arguments rule out the possibility that Bitcoin will become a major--or even the main--medium of exchange in the future. (7) But as of today it seems likely that for law-abiding U.S. citizens the practical attractions of Bitcoin are primarily as a financial investment with very high volatility and as a means of participating in an intellectually fascinating, avant-garde, and potentially revolutionary, social experiment. (8) One would have to admit, however, that there are certain categories of transactions for which bitcoin payments are (or could be) quite important.

Anonymity

Before proceeding, it should be mentioned that, as a novice to the Bitcoin world, I have found it confusing that some experts tout anonymity as a great advantage of Bitcoin over other payment systems while other, also qualified, experts--e.g., Spear (2014)--state that anonymity is not a feature at all. Apparently, however, both are correct but have in mind anonymity in two quite different respects. One is whether it is possible to follow the transactions of an...