Revised version of a letter published in the June 2022 edition of Mensa Magazine, under the title "A final word on the real value of Bitcoin".
As a professional economist I find myself agreeing with much of Colin McAndry’s defence of Bitcoin (Feedback Plus, May), but an even stronger case for the cryptocurrency can be made.
First, the high electricity cost of Bitcoin mining has a big advantage: it prevents large expansions in the supply of Bitcoin that would lower the price and limit its usefulness as a store of value. By contrast, a major weakness of national currencies is their easy debauchment by `printing money’. Such money creation is attractive for governments because it gives them extra purchasing power (in the short run) at essentially zero cost. Since Bitcoin's supply is limited by the cost of mining, it cannot be debauched by money creation, as the national currency has been in countries with a track record of high inflation (e.g. Argentina, Venezuela).
Second, Bitcoin is a risky asset, but we must compare like with like to get a fair comparison. It is true that Bitcoin has no intrinsic value: it pays no income, has no other use, and is not backed by a commodity or asset with intrinsic value (like gold). However, the same is also true of national currencies – they are ‘fiat money’ and so have value only if people think they do. Ultimately, holding any currency is a gamble and there is always the risk – especially in developing economies – that high inflation or sovereign default will erode the value of savings in national currency. Alternative investments that may hedge these risks (shares, real estate) are also subject to price volatility and bubbles.
Finally, a word on taxes. Bitcoin is classified by HMRC as a chargeable asset for tax purposes. This means, for example, that capital gains must be paid on buy-sell transactions that leave investors better off. Only a small fraction of the UK population invests in Bitcoin, but taxation ensures there is some redistribution to the wider society. Some of the current discontent with Bitcoin surely rests with the unequal distribution of the spoils thus far. Taxation is one way to redress the balance.
Michael Hatcher,
Associate Professor (Economics), University of Southampton