Recently I read about Alan Greenspan’s comments about Bitcoin to the effect that it’s nothing but a bubble phenomenon. Crypto-currencies are a bubble because these things have no “backing”.

What Alan fails to understand (and what I failed to understand back in 2011) is that money does not need backing. It used to be that fiat money was indeed backed by the government that issued it. It used to be backed by gold, and gold has its natural value as metal. Nowadays, which country can claim that its fiat currency is backed by gold? In reality, fiat currencies are just like any crypto-currency in this regard: no backing.

Ludwig von Mises, in his magnum opus, “The Theory of Money and Credit” teaches that there are two important components in the value of money: its natural use value (i.e., gold *as* metal), and its value when used as a medium of exchange. When gold deflates, its natural value diminishes with respect to its value as medium of exchange. When it inflates, its value as money can decrease to the point that people start using it more for filling teeth and as conductors in integrated circuits.

Crypto-currencies have no natural use value. Crypto-currencies are just numbers stored in their respective networks. They’re not worth anything. They have no “backing”. It does not mean however, that they have no money value. In fact, they are very useful as media of exchange. And therein lies their value: Crypto-currencies are a form of “pure money”.

It’s interesting to note that Ludwig von Mises himself did not conceptualize such “pure money” to be possible. I can’t blame him because computers and the internet have not come of age in his time. I do fault Alan Greenspan, though, for not understanding what crypto-currencies are. I expect more from him because he used to be the Fed Chairman.