Federal Reserve St. Louis Branch: Bitcoin Is Not Backed by Anything, Just Like Real Money
RegulationBit News Today3 min read
In a recent report published by the Federal Reserve Bank of St. Louis, a senior analyst argued that Bitcoin is similar to real money, to conventional fiat money, in that it has no intrinsic value. ## Bitcoin Not Backed by Anything
The St. Louis Fed's paper, authored by a senior economic resource analyst, reads in part: "Bitcoin, like fiat money, is not backed by physical assets or cash flows. There is no promise to pay the bearer an amount of anything, just as there is no authority that stands behind it." It is an observation many crypto enthusiasts dispute.
The paper comes in response to attempts by some to characterize Bitcoin as "a store of value" or "digital gold". The authors reject this characterization, noting that Bitcoin is not a useful medium of exchange for most: too volatile for everyday purchases, too centralized in fact.
But, the analysts continue, "Before any Bitcoin investor, merchant, or consumer decides to invest in Bitcoin, they would do well to ask the question: What is Bitcoin's value as a conventional medium of exchange?" ## A Limited Purpose
The report argues that Bitcoin's main market—the Sydney, New York and London markets—is poorly suited to Bitcoin as a medium of exchange. Large traders, the authors say, are in a position to manipulate its price. Bitcoin is traded exclusively as an investment vehicle or at speculative values.
Even if Bitcoin were equally available to Bitcoin holders and non-owners, global money supplies had the same Bitcoin availability, and its price remained the same, Bitcoin still wouldn't work as a medium of exchange. It is too slow and costly to transfer. Ownership is too uncertain, as past hacking events have shown. ## Or An Asset
If Bitcoin is not a viable medium of exchange, the analysts suggest, it must be an asset, like stocks, bonds, or gold. But, as in the case of gold, Bitcoin's price is likely set by the decisions of a relatively small group of market participants rather than the actual decision-making of billions of consumers and businesses.
The authors suggest that Bitcoin trading markets grew up in the first place as a byproduct of the Bitcoin system, rather than the other way around. There is no reason to expect that this will change.
Bitcoin enthusiasts often point to its system as a strength, as a decentralized network immune to the whims of any governments or other central actors. But, the report points out, this is a preposterous claim. Bitcoin is accompanied by several distributed exchanges.
The authors conclude: "The reality is that the 'decentralized' nature of Bitcoin has allowed its trading to be concentrated in a few hands, and its prices to be highly volatile. Bitcoin is a speculative asset, not a medium of exchange, and its future is uncertain."
The St. Louis Fed's analysts aren't the first to reject the idea of Bitcoin as a useful medium of exchange. In fact, Bitcoin has been widely rejected by retail merchants, businesses, and even some economists, as a practical medium of exchange.
Many sitll believe that Bitcoin is fit for greatness. Without a store of value, Bitcoin's usefulness as a medium of exchange is limited. It remains to be seen how Bitcoin's price, or even its usefulness as a medium of exchange, will change in the coming years.
