Motley Fool Hidden Gems Investing - Is Bitcoin Money?

Episode Date: November 10, 2020

Investors keep asking if bitcoin is a good investment, but is the digital currency actually, y’know…..money? Charlie Wheelan, author of the best-selling “Naked” series of books (e.g, Naked Economics) shares why bitcoin doesn’t pass the money test. Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. With The Motley Fool Money Extra, I'm Chris Hill. Few topics have captured the intrigue of the investing world over the past few years the way that Bitcoin has. Even investors who don't fully understand what it is or how it works are still interested in knowing if Bitcoin is a good investment. By definition, it's a digital currency, but is Bitcoin money? This is something Charlie Whelan has thought a lot about. In addition to being a best-selling author, he's also spent over a decade teaching economics and public policy at Dartmouth College. When we spoke a few years ago, he shared why, for him, Bitcoin does not pass the money test. Money traditionally has three attributes. The first is that it's a unit of account. So when

you go around doing transactions, you think in terms of that unit of account. So when you're in the United States, you think in terms of dollars. If someone tells you that something costs $23, you know how much that is worth. If you travel extensively in another country, you start to think in that currency. I'll ask you, you know, how much is 100 bitcoins worth right now? No idea. No idea. Nobody thinks in bitcoins. And even people, when they get paid at the Bitcoin Foundation, they may get paid in Bitcoins, but they're still thinking in dollars. So as a unit of account, it doesn't work. Another function is a currency or money has to be an effective store of value, because you may not want to use it right away. So if I pay you $1,000,

you want to have some confidence that if you stick it in your dresser drawer, next week, it's still going to be worth $1,000, and hopefully even next year, or something close to it. Well, one of the things about Bitcoin is that its value relative to the dollar and relative to other goods and services has bounced all over the place. And people will often point out excitedly that Bitcoin is rising rapidly in value. Well, that's actually a lousy thing for money to do because if you've contracted to buy something over the long run, let's say you've got a mortgage and you owe 30 years' worth of payments in a currency that suddenly appreciates by 40%, That means your mortgage gets 40% more expensive. So the fact that Bitcoin bounces around in value makes it a terrible store of value.

And then last is a medium of exchange. This is where it actually has a little bit of value. If you want to move a lot of money across an international border anonymously, it works really well. It kind of combines the simplicity of a credit card with the anonymity of cash. But I will ask you, who wants to move lots of money anonymously across international boundaries? And, of course, the answer is weapons merchants, kidnappers, drug kingpins, and so on. For the rest of us, it just doesn't have that much value.

If you want to learn more from Charlie Whelan, check out one of his naked books. No, it's not like that. He's the author of Naked Economics, Naked Statistics, and his most recent one, Naked Money, a revealing look at what it is and why it matters. I'm Chris Hill. Thanks for listening. We'll see you next time.