The skyrocketing price of Bitcoin has dominated the financial news for the past few weeks, and the usual suspects are queuing up to offer predictions about its continued rise or inevitable fall. Yet it’s not all good news for fans of the cryptocurrency: in a notable decision, the digital distribution platform Steam has announced that it will no longer be accepting payment in Bitcoin.
In the grand scheme of things, Steam’s new policy will likely have little impact on the use or price of Bitcoin as such. Rather, the decision is significant because it highlights an underlying economic question about the future of the cryptocurrency. Specifically, Steam’s example shows that despite an enormous gain in market value, Bitcoin still has a long way to go before it becomes money.
Money is conventionally defined as a generally accepted medium of exchange, the key part of this definition being “generally accepted.” In order to be adopted on such a large scale, a medium of exchange must fulfil certain basic criteria, the most important of which is that it must be capable of serving as a tool for economic calculation. Entrepreneurs must be able to use a means of payment to compare the costs and benefits of different production plans, and this in turn requires a degree of stability in the value of money. Of course, money’s value is never constant: but it must be dependable. The inability of entrepreneurs to calculate is one reason why extreme price inflation creates widespread social havoc—planning production becomes difficult if not impossible.
One of Mises’s original contributions to monetary theory was the emphasis he placed on money’s role as a medium of exchange. Many others had identified this basic function before Mises, of course, but his approach is distinct in the way it argues that the role of medium of exchange is central, and that money’s other functions—as a unit of account, for example—are derived from it. Money is primarily a means of facilitating peaceful social cooperation, and in this sense is an indispensable part of any advanced division of labor as well as of economic calculation.
This brings us back to Bitcoin. At the moment, Bitcoin is still a minority means of payment, and Steam’s decision helps to illustrate why: Bitcoin does not at the moment satisfy the calculation criterion. As the Steam Team notes:
Historically, the value of Bitcoin has been volatile, but the degree of volatility has become extreme in the last few months, losing as much as 25% in value over a period of days. This creates a problem for customers trying to purchase games with Bitcoin. When checking out on Steam, a customer will transfer x amount of Bitcoin for the cost of the game, plus y amount of Bitcoin to cover the transaction fee charged by the Bitcoin network. The value of Bitcoin is only guaranteed for a certain period of time so if the transaction doesn’t complete within that window of time, then the amount of Bitcoin needed to cover the transaction can change. The amount it can change has been increasing recently to a point where it can be significantly different.
The unpredictable changes in the value of Bitcoin mean that it is now extremely difficult for consumers or producers to gauge the true cost of their transactions, or to make an educated judgment about the best time to buy or sell. Increasing transaction fees for paying in Bitcoin further complicate the issue, especially in regard to relatively small purchases (a major concern for Steam).
At the moment, commentators seem intent on convincing each other of their predictive powers regarding Bitcoin’s price, and everyone wants to be on “right side of financial history.” The vital question though is not around what price Bitcoin will ultimately settle, but if and when it will settle at all, especially compared to its competitors. For the time being, however, the extreme changes in Bitcoin’s price mean that although it might be a good investment, it will not soon become money.
Steam’s decision thus nicely underlines a point that Mises was fond of repeating: entrepreneurs and others who are involved in practical economic affairs often know more about prices and what they mean for the economy than the pundits watching from the wings.