The history of money is one of transformation, innovation, and adaptation. In the early 20th century, the world’s major economies operated on the gold standard, where the value of currency was directly linked to a specific amount of gold. This system provided a sense of stability and confidence in the value of money. However, over time, the gold standard was abandoned, and nations moved toward fiat currencies — money that has value simply because governments declare it to be so, rather than being backed by a physical commodity like gold.
In this blog post, we’ll explore the features that make for a good currency, the causes of currency failure, and why Bitcoin, despite its many promising attributes, struggles to fulfill the role of a reliable currency in modern economies.
What Makes for a Good Currency?
A currency must fulfill several core functions to be considered effective. These include:
- Medium of Exchange
A good currency must be widely accepted as a medium of exchange. People need to be willing to use it to purchase goods and services. It should facilitate trade without the complexities of barter, where goods and services are directly exchanged. - Store of Value
For a currency to be effective, it must maintain its value over time. A reliable currency allows individuals to save their wealth without the fear of it losing value due to inflation or volatility. People should have confidence that the money they hold today will be worth roughly the same in the future. - Unit of Account
A good currency provides a standard measure for pricing goods and services. This allows individuals to compare values and make informed decisions about spending, saving, and investing. The unit of account simplifies the process of budgeting and financial planning for both individuals and businesses. - Divisibility
A currency must be divisible, meaning it can be broken down into smaller units to accommodate transactions of various sizes. For example, the dollar can be divided into cents, enabling both large and small transactions to be conducted efficiently. - Portability
The currency should be easily transportable. Whether it’s physical cash or a digital representation, people must be able to carry it with them or transfer it quickly and conveniently for transactions. - Durability
A good currency needs to withstand wear and tear. Physical currency, for example, should be able to last over time without disintegrating or becoming illegible. Digital currencies, meanwhile, should have strong security protocols to prevent theft or fraud. - Recognizability
A currency should be easily identifiable and difficult to counterfeit. This ensures that people can trust the money they are using and reduces the potential for fraud in transactions.
What Causes Currencies to Fail?
Despite these ideal features, currencies can fail for various reasons. When a currency loses its ability to fulfill these key functions, it can lead to economic instability and loss of trust. Here are some common causes of currency failure:
- Hyperinflation
Hyperinflation occurs when a currency experiences extremely rapid inflation, often caused by an oversupply of money. As governments print more money to cover deficits or manage debts, the value of the currency diminishes rapidly. This results in prices rising uncontrollably, and people lose faith in the currency. Famous examples of hyperinflation include Zimbabwe in the late 2000s and Weimar Germany in the 1920s. - Government Mismanagement
Currency failure can also result from poor economic management by governments. If a country’s central bank or fiscal policies are ineffective, it can lead to misallocation of resources, loss of investor confidence, and ultimately, the collapse of the currency system. This was the case with the fall of the Roman Empire, which relied heavily on debasing its currency to fund military expenditures. - Political Instability
Political instability can lead to the failure of a currency if the governing institution becomes unstable or loses legitimacy. When a government cannot maintain control over its monetary policy, the public may lose trust in the currency, leading to its collapse. The decline of the Russian ruble following the Soviet Union’s dissolution is a prime example of political instability impacting a currency. - Loss of Convertibility
When a currency is no longer easily convertible into foreign currencies or tangible assets like gold, it can lose its value. For example, when countries abandoned the gold standard in the 20th century, many struggled to adjust to the new system, and some currencies experienced sharp declines in value. The failure to maintain convertibility has historically been a key factor in the collapse of many fiat currencies.
From Gold Standard to Fiat: The Decline of Backed Currencies
In the early 20th century, the global economy operated under the gold standard, where currencies were tied to the value of gold. This created a sense of stability because governments couldn’t simply print money at will; they had to maintain gold reserves to back the value of their currency.
However, during the Great Depression in the 1930s, countries began abandoning the gold standard in favor of more flexible monetary policies. The United States officially left the gold standard in 1971 under President Richard Nixon, effectively ending the Bretton Woods system and moving the world fully into the era of fiat currencies.
Fiat currencies — those that have no intrinsic value and are not backed by physical commodities like gold — are now the norm. They derive their value from the trust and authority of the government issuing them. While this system allows for more flexibility and control over the economy, it also opens the door for inflation, currency devaluation, and potential loss of confidence in the currency.
The Rise of Bitcoin and its Challenges as a Currency
Bitcoin was introduced in 2009 by an anonymous person or group of people under the pseudonym Satoshi Nakamoto. It promised to be an alternative to traditional fiat currencies — a decentralized, peer-to-peer currency free from the control of central banks and governments. For many, Bitcoin represented the potential for a new kind of money, one that could solve the problems of inflation, currency manipulation, and the inefficiencies of the traditional banking system.
However, despite Bitcoin’s revolutionary potential, it faces significant challenges when it comes to being used as a stable, reliable currency. Here are some key reasons why Bitcoin, with its high variability in conversion prices, makes it a poor currency:
- Volatility
One of the primary characteristics of Bitcoin is its volatility. The price of Bitcoin can fluctuate wildly within short periods, often driven by speculation, media attention, and regulatory announcements. This makes Bitcoin unreliable as a store of value or medium of exchange. For example, a product that costs 1 Bitcoin today could cost 1.5 Bitcoins tomorrow, depending on the fluctuations in price, creating instability for businesses and consumers alike. - Lack of Scalability
Bitcoin’s network can only process a limited number of transactions per second, which makes it unsuitable for large-scale transactions. In comparison to traditional payment systems like Visa, which can handle thousands of transactions per second, Bitcoin’s slower processing time and high transaction fees can make it impractical for everyday use. - Regulatory Uncertainty
Bitcoin faces significant regulatory challenges. Governments around the world are still figuring out how to regulate Bitcoin, with some nations outright banning it while others introduce restrictive measures. This regulatory uncertainty can deter businesses and individuals from adopting Bitcoin as a currency, as they face the risk of sudden legal changes. - Limited Acceptance
While Bitcoin has gained traction as an investment asset, it is still not widely accepted as a form of payment for goods and services. Although some businesses do accept Bitcoin, the list is far from comprehensive, and its use as a medium of exchange is limited compared to traditional currencies like the dollar or euro. - Security and Fraud Risks
While the Bitcoin blockchain is considered secure, there have been numerous cases of exchanges being hacked, wallets being stolen, and users falling victim to fraud. The irreversible nature of Bitcoin transactions makes it a risky proposition for those who are not tech-savvy or cautious about securing their digital assets.
Why Bitcoin Struggles to be a True Currency
Despite its technological innovations and the decentralized ideals behind it, Bitcoin fails to meet the essential requirements of a stable currency. Its high volatility, lack of widespread acceptance, scalability issues, and regulatory uncertainty make it a poor candidate for fulfilling the role of a widely-used medium of exchange. Importantly, for advocates of Bitcoin as a currency, the price of Bitcoin is irrelevant. It would trade into other currencies just as well at it being worth $1 to being worth $1,000,000.
For Bitcoin to truly become a global currency, it must overcome these challenges and evolve into a more stable, reliable, and universally accepted form of money. Until then, it remains an asset primarily for speculative investment rather than a practical currency for everyday use.
The dollar, and other fiat currencies, have their own flaws, but they are supported by decades of economic policy, government trust, and global recognition — something Bitcoin still struggles to achieve on a broad scale. So while Bitcoin is an exciting innovation, it’s far from the currency of the future in its current form.