Finally, money must provide a relatively stable store of value. No one wants to be paid with assets that can decline sharply in value shortly after they have been received. Bitcoins do not meet this requirement, since the value of one bitcoin in dollars has fluctuated wildly to date. That should be expected for a new program, however, and there are indications of greater stability in recent months. If the market continues to grow, it is reasonable to assume that bitcoins’ value will become increasingly stable.
The outlook for Bitcoin is heavily influenced by the fact that it is developing in countries that already have functioning money systems, which makes Bitcoin a second type of money. This has been a major advantage to Bitcoin acceptability because it has largely neutralized the negative effect of value instability. The price of an item or service can be set in dollars (or euros, etc.), and the transaction executed in bitcoins at the dollar price of the bitcoin on the transaction date. This would work even for a house purchase, where final payment may be deferred for weeks and sometimes months.
On the other hand, the long-run prognosis for Bitcoin depends on its being able to replace the existing money system in at least some major uses. To do that, it must provide a transaction-cost saving or some other benefit relative to the existing money system. The greatest potential seems to be those markets in which transaction costs are high relative to total transaction value. This would include credit cards and cross-border transactions that require conversion of one currency into another.
So long as our existing money system continues to work well, I don’t see any such potential for domestic real estate-related transactions, because transaction costs are a trivial part of transaction values. But I may be missing something; if so, I hope the reader who sees it will clue me in.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2014 Jack Guttentag
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