Understanding how real money works exposes why Bitcoin fundamentally fails as money and cannot address actual economic challenges. This analysis is based on sound monetary economics explained in detail in Understanding Money: How It Really Works.
Bitcoin's entire design is based on a fundamental misunderstanding: it treats money as a scarce commodity, like gold or oil. This is the commodity theory of money—and it's wrong.
Many people intuitively think of money as a valuable object that exists naturally—something you find, mine, or collect, which the government then taxes away. This metaphor leads to disastrous thinking:
All of these beliefs are false. They stem from treating money as a physical commodity rather than what it actually is: a legal and social construct.
Money is not a commodity. Money is a system of credits and obligations created and sustained by government authority.
The sequence is critical (explained fully in Understanding Money):
Taxes don't fund government spending—taxes create demand for the currency and control inflation. The government doesn't need to "collect" money from citizens before it can spend any more than a bowling alley needs to "collect" points before it can award them to players.
Anthropological and historical research conclusively shows: money originated as credit/debt relationships, not as commodity barter.
The barter myth: Economics textbooks tell a story: "People bartered goods, but it was inefficient, so they naturally adopted gold as money." This story is completely false. Anthropologists have never found a pure barter economy that evolved into a money economy. It's a just-so story invented to justify the commodity theory.
What actually happened: For most of human history, economic exchange used credit systems—written records of debts and obligations:
Gold as money is the historical exception, not the rule. Gold standard periods were brief, unstable, and frequently abandoned because they didn't work. Most monetary history is credit systems.
Another myth: "Markets naturally emerge from free individuals trading, then government interferes." Historical reality is the opposite:
Markets have always required government authority to function. You need:
Every historical marketplace—from ancient Mesopotamia to medieval European fairs to modern exchanges—operated under government authority. The idea of "free markets" independent of government is ahistorical fantasy.
Bitcoin's attempt to create "money without government" ignores 5,000 years of evidence showing this is impossible. Money requires authority to have value, to be accepted, to serve as unit of account. Bitcoin's "solution" is trying to recreate something that never existed and cannot exist.
Bitcoin's designers explicitly modeled it on gold: fixed supply, "mining," artificial scarcity. They thought they were solving a problem (government "debasement" of currency), but they were actually recreating the gold standard—which caused the Great Depression.
The gold standard failed because treating money as a commodity creates rigid, harmful constraints that have nothing to do with real economic capacity.
Under the gold standard:
Bitcoin would create all these same problems. It's gold standard thinking dressed up in digital clothing.
Once you understand that money is not a commodity but a system of credits, you realize:
The constraint on economic activity is real resources (workers, materials, productive capacity), not money supply.
If you have:
Then the economy can do that work. The "money" is just the accounting system to coordinate it. A government with its own currency can always employ idle resources—the question is whether real resources are available, not whether "money" exists.
Bitcoin's artificial scarcity prevents this. It treats money as the constraint, forcing unnecessary unemployment even when real resources are available and work needs doing. This is economic malpractice based on commodity thinking.
The commodity theory leads people to believe government spending "crowds out" private spending—as if there's a fixed pile of money and government takes from the pile, leaving less for the private sector.
This is false. When government spends, it creates new money. It doesn't take from a fixed supply. Government spending adds to the economy; it doesn't subtract from the private sector unless the economy is already at full capacity (in which case the constraint is real resources, not money).
Bitcoin's fixed supply would create actual crowding out—because it treats money as a fixed commodity pie rather than the expandable credit system it actually is.
Economists agree that for something to be "money," it must serve three functions:
Bitcoin fails all three functions in practice.
Scalability: Bitcoin processes approximately 7 transactions per second. Visa processes 65,000. A global monetary system needs to handle billions of transactions daily. Bitcoin's architecture makes this impossible.
Transaction costs: Bitcoin transaction fees spike to $50+ during network congestion. You can't buy coffee with $50 transaction fees. This makes it useless for everyday commerce.
Settlement time: Bitcoin transactions take 10-60 minutes for confirmation. Modern economies need instant settlement. Imagine waiting an hour at checkout while your payment confirms.
Reality check: After 15 years, almost no one uses Bitcoin for actual purchases. The few merchants who accepted it have mostly stopped. Why? Because it doesn't work as payment.
Extreme volatility: Bitcoin's price swings 10-20% in a day. You cannot run a business when your pricing unit changes value wildly. Imagine pricing a car at $30,000 on Monday, only for that to be $25,000 or $35,000 by Friday—without the car changing at all.
No one prices in Bitcoin: Even Bitcoin enthusiasts price things in dollars and convert. When El Salvador made Bitcoin legal tender, businesses still price in dollars and accept Bitcoin at current exchange rate. This proves it's not functioning as unit of account.
If Bitcoin were money, you'd think in Bitcoin. You don't. You think in dollars/euros/yen and Bitcoin is just a speculative asset you convert to real money.
Volatility again: Something that drops 70% in value (as Bitcoin has, repeatedly) is not a store of value—it's speculation. Stores of value are stable. Bitcoin is the opposite.
No inherent demand: As we explained in Understanding Money, currency value comes fundamentally from tax obligations. You need dollars to pay U.S. taxes. You need yen to pay Japanese taxes. You need Bitcoin for... nothing. No government requires it. No obligations create inherent demand. It's pure speculation.
Greater fool theory: Bitcoin's value depends entirely on finding someone willing to pay more than you did. That's not a store of value—that's a Ponzi scheme structure.
Bitcoin's fixed supply (21 million coins) makes it inherently deflationary—and deflation is economically destructive.
Why deflation is harmful:
Historical lesson: The gold standard caused the Great Depression for exactly these reasons. Bitcoin would be worse—at least you could mine more gold.
Remember from Understanding Money: the real constraint on spending is productive capacity, not money supply. If you have unemployed workers willing to work and useful work to be done, a currency-issuing government can employ them.
Bitcoin makes this impossible. You cannot issue more Bitcoin to employ idle workers during recession. You cannot use Bitcoin for counter-cyclical fiscal policy. You cannot use taxation in Bitcoin to control inflation (because no government can require Bitcoin for taxes).
A Bitcoin-based economy would be permanently trapped in whatever unemployment rate results from rigid money supply—exactly the problem that understanding modern money solves.
When economic conditions change, money systems need to adapt:
Bitcoin cannot do any of this. It has no governance mechanism by design. The protocol is rigid. This might sound like a feature ("nobody can manipulate it"), but it's actually a catastrophic bug.
Economies are dynamic systems facing changing conditions. A monetary system with no governance is like a ship with no steering—you're at the mercy of whatever happens.
Bitcoin mining consumes approximately 150 terawatt-hours annually—more electricity than entire countries like Argentina or Norway.
This massive energy use produces nothing of value:
At a time of climate crisis, we cannot afford to waste enough energy to power nations on a system that processes fewer transactions per second than a 1990s database.
Bitcoin advocates claim it solves "monetary manipulation by governments." But as we've explained in Understanding Money:
Bitcoin is a solution in search of a problem, built on fundamental misunderstandings of how money works.
Actual monetary problems facing the world:
None of these problems can be solved by a deflationary, ungovernable, energy-wasting speculative asset.
Bitcoin is not money. It's:
Bitcoin is many things, but it is NOT money, and it cannot solve any real economic problems. Understanding how money actually works makes this clear.
Commons Currency is designed based on correct monetary economics:
See also: