Bitcoin proponents frequently express strong opposition to today's dominant monetary system, which they describe to as "paper money" or "fiat money." When they refer to fiat money, they are referring to a medium of exchange (currency) that lacks intrinsic value and is not connected to the price of a commodity, such as gold. That criticism of fiat money has become an issue at all today is a result of the practices pursued by state-sponsored central banks worldwide, which have grown increasingly reckless in recent years, particularly since the financial crisis.

Since 2009, the money supply has been dramatically extended through the printing of increasing amounts of money. Numerous government bonds, such as those issued by the German government, have negative interest rates, which means that investors, rather than gaining money by lending to the government, are actually paying for the privilege when they purchase bonds.

Critics fear that this will result in increased inflation, if not hyperinflation. While inflation has increased modestly in recent months, the high inflation predicted by opponents since 2008 has not materialized. Rather than that, all asset classes have increased in value, particularly government bonds and real estate, but also securities. Critics of expansionary central bank policies are justified in their fear that this would never end nicely. As a result, some have resorted to gold as a hedge against the possibility of another financial crisis.

However, you may be wondering what this has to do with Bitcoin and other crypto-"currencies"? The critique of fiat currency is not new. Almost half a century ago, economist and Nobel laureate Friedrich August von Hayek criticized the paper money system and urged for the removal of the government's monopoly on money in his 1975 speech "Choice in Currency." He contended that everyone should be allowed to give commodities that others may wish to demand in exchange for money. He reasoned that it should no longer be the exclusive province of the state to generate money, but that everyone should be permitted to offer their own kind of money. And, as is customary in a free market economy, he was certain that the best currency will prevail via the natural process of competition.

Bitcoin and kindred crypto-"currencies" are viewed by proponents as the practical realization of Hayek's principles of private money. However, is Bitcoin truly a "currency?" Money and individual currencies perform a range of tasks, the most important of which are to act as a store of value and a medium of exchange. Bitcoin is incompatible with both. Given Bitcoin's enormous price volatility, it is absolutely unsuited as a store of value. And Bitcoin is only accepted as a form of payment in extremely rare circumstances. It may have a place in organized crime, but not in everyday commerce. Elon Musk recently claimed that he will accept Bitcoin payments for Tesla vehicles, however it is unclear whether this will ever happen. Thus, the phrase "crypto-currency" is technically incorrect and should be preceded by inverted commas, as it is not a currency.

To the majority of crypto-"currency" investors, crypto-"currencies" are just speculative. They purchase a crypto-"currency" in the assumption that prices will climb and they would earn a healthy profit, which was previously feasible. Investors who entered at the proper time gained multiples of their initial investment. However, the chance of making a large profit does not define a crypto-"currency" as a "investment" in and of itself. It is also feasible to rake it in at a casino, but no one would ever refer to a casino wager as a "investment."

Bitcoin critics point out that the last few centuries have been rife with speculative bubbles—all of which eventually burst. They are reminiscent of the 1630s Dutch "tulip frenzy," during which the bulbs of specific varieties of tulip were objects of speculation. In certain situations, the prices of single bulbs were comparable to those paid for Amsterdam's most expensive homes. As is the case with all bubbles, the tulip bubble eventually burst—exactly what Bitcoin opponents are now fearful of.

However, even historically solid or well-established financial assets, such as stocks or real estate, can turn speculative. I'm sure we all recall the rising prices paid for houses in the early 2000s in the United States and certain cities and regions of Europe—at least until the bubble burst. Another recent example is the stock market's Dotcom Bubble in the mid- to late-1990s. The development of a bubble around a particular asset does not, however, imply that the item itself is fundamentally flawed.

Nonetheless, I am always dubious when anything becomes "fashionable" and suddenly, everyone is urging you that you must invest immediately. That truly throws off my alarm bells. I did not become wealthy by engaging in "fashionable" activities—I have always invested in assets that left others scratching their heads. Later, when investing in these assets became fashionable—for example, real estate in my hometown of Berlin—I sold.

In terms of crypto-"currencies," German financial market specialist Gerd Kommer makes an excellent point: "Numerous private investors have failed to grasp the fact that crypto-currencies can be used as a method of payment or as a medium of exchange, but not both at the same time. If crypto-currencies do become what they were intended to be but have not yet achieved, namely real currencies that can be used for more than a handful of transactions rather than being used for speculation and gambling, as they have been, their expected inflation-adjusted return will fall to near zero, as is the case with all currencies."

Unlike equities and real estate, which normally earn dividends or rental yields, bitcoin does not create any income. As a result, calculating the intrinsic worth of Bitcoin with any degree of accuracy is difficult. Bitcoin proponents dispute to this claim, pointing out that this is a quality shared by Bitcoin and gold, which similarly produces no income. While this is accurate, the parallel is flawed: Bitcoin has been existing for twelve years, but the first indication of gold being used as a means of payment dates all the way back to the tablets carrying the Babylonian ruler Hammurabi's code of laws, 1,870 years before Christ's birth. Gold was used as money in China 1,100 years before Christ's birth, in the shape of little cubes.

And such traditions are significant: One of the most significant insights provided by the aforementioned economist von Hayek is the recognition that well-functioning institutions arise "not through contrivance or design, but through the survival of the successful," with the selection process operating "through imitation of successful institutions and habits." For thousands of years, gold has passed this test. It remains to be seen whether any of the existing crypto-"currencies" will ever survive and grow through this process of "imitation."

I've saved the most critical piece of advice for last: if you're considering an investment, you should rid yourself of your ideological views, just as you would before handing in your coat at a cloakroom. Personally, I've been interested in politics my entire life and have extremely strong political views. For instance, I am attracted to a variety of libertarian positions—but I put these sympathies aside when weighing the advantages and cons of a particular investment.

Nonetheless, I frequently engage in discussions with others who share my political values and who base their financial methods on those beliefs. They make several compelling arguments against paper money (fiat money) and then recommend that you invest in crypto-"currencies." The majority of people who believe this way have strong political views but have never made a lot of money as investors. Political convictions are frequently inextricably related to powerful emotions—and it is precisely these strong emotions that have no place in the investment world.

Leaving it at that, as is customary, would be shallow, since this statement is much too undifferentiated and leaves far too many open concerns. In my book Hitler’s National Socialism I analyze the dictator’s economic and sociopolitical thinking.

Pollock: “Destruction of All the Essential Traits of Private Ownership”

In an article on the economic system of National Socialism published in 1941, the economist and sociologist Friedrich Pollock (a cofounder of the Institute for Social Research in Frankfurt, which later became the nucleus of the Frankfurt school) pointed out the following:

I agree that the legal institution of private ownership was maintained, and that many attributes characteristic for National Socialism begin to manifest themselves, albeit still vaguely, in non-totalitarian countries. But does this mean that the function of private ownership did not change? Is the “increase of power of a few groups” really the most important result of the change which took place? I believe it reaches far more deeply and should be described as the destruction of all the essential traits of private ownership, saving one exception. Even the mightiest concerns were denied the right to set up new fields of business in areas where the highest profits were to be expected, or to interrupt a production where it became unprofitable. These rights were transferred in their entirety to the ruling groups. The compromise between the groups in power initially determined the extent and direction of the production process. Faced with such a decision, the title of ownership is powerless, even if it is derived from the possession of the overwhelming majority of the share capital, let alone when it only owns a minority.

As far as this goes, the whole concept of nationalization in the form in which it has been attempted and demanded so far appears to me to be wrong, and I come to the same conclusion as Herr Wagener. We have to bring a process of selection into the matter in some way, if we want to come to a natural, healthy and also satisfying solution of the problem, a process of selection for those who should be entitled—and be at all permitted—to have a claim and the right to property and the ownership of companies.

On the other hand, Hitler frequently and emphatically stated that the disposal of his property was in no way the private affair of the industrialist. On October 9, 1934, for example, he declared:

Therefore wealth in particular does not only have greater possibilities for enjoyment, but above all greater obligations. The view that the utilization of a fortune no matter of what size is solely the private affair of the individual requires to be corrected all the more in the National Socialist state, because without the contribution of the community no individual would have been able to enjoy such an advantage.

I tell German industry for example, “You have to produce such and such now.” I then return to this in the Four-Year Plan. If German industry were to answer me, “We are not able to”, then I would say to it, “Fine, then I will take that over myself, but it must be done.” But if industry tells me, “We will do that”, then I am very glad that I do not need to take that on.

The businessmen realized that Hitler's warnings were not empty threats on July 23, 1937, when Hermann Göring announced the foundation of the "AG for Ore Mining and Iron Smelting Hermann Göring." The process that began with Hitler's and Göring's continuous threats culminated in the establishment of the Reichswerke Hermann Göring, which employed 600,000 people by 1940. Salzgitter's facility eventually became the biggest in Europe. This demonstrated that the National Socialist state took its oft-professed "primacy of politics" seriously and would not hesitate to get involved and build up state-controlled firms in sectors where private industry defied state orders. On February 14, 1942, during a conversation with Joseph Goebbels about the problem of increasing production, Hitler stated: "[H]ere we must proceed rigorously, that the entire production process must be re-examined, and that industrialists who refuse to submit to our directives will have to lose their plants regardless of whether they are economically ruined."

Hitler’s Role Model: Stalin and His Planned Economy

The National Socialists intended to expand the planned economy for the period after the war, as we know from many of Hitler’s remarks. He increasingly admired the Soviet economic system. “If Stalin had continued to work for another ten to fifteen years,” Hitler said at a small group meeting in August 1942,

Soviet Russia would have become the most powerful nation on earth, 150, 200, 300 years may go by, that is such a unique phenomenon! That the general standard of living rose, there can be no doubt. The people did not suffer from hunger. Taking everything together we have to say: They built factories here where two years ago there was nothing but forgotten villages, factories which are as big as the Hermann Göring Works.

This question was raised specifically by circles who think purely in terms of capitalism and who do not like to see companies developing which are public, or at least of a public character. The age of the liberal system of business demanded the primacy of business, in other words business comes first, and then the state. As opposed to this, National Socialism takes the position: the state directs the economy, the state is not there for business, business is there for the state.

Mises: “Socialism with the Outward Appearance of Capitalism”

This was how Hitler and the National Socialists saw the very essence of the economic system they had established, but it was also how astute observers such as the economist Ludwig von Mises saw it. Incidentally, he came to the same conclusion as the left-wing economist Friedrich Pollock, quoted at the beginning of this article. On June 18, 1942, Mises wrote a letter to the editor of the New York Times. More clearly than many of his contemporaries and, above all, more clearly than many authors writing about National Socialism today, he recognized that

The German pattern of socialism (Zwangswirtschaft) is characterized by the fact that it maintains, although only nominally, some institutions of capitalism. Labor is, of course, no longer a “commodity”; the labor market has been solemnly abolished; the government fixes wage rates and assigns every worker the place where he must work. Private ownership has been nominally untouched. In fact, however, the former entrepreneurs have been reduced to the status of shop managers (Betriebsführer). The government tells them what and how to produce, at what prices and from whom to buy, at what prices and to whom to sell. Business may remonstrate against inexpedient injunctions, but the final decision rests with the authorities…. Market exchange and entrepreneurship are thus only a sham. The government, not the consumers’ demands, directs production; the government, not the market, fixes every individual’s income and expenditure. This is socialism with the outward appearance of capitalism—all-round planning and total control of all economic activities by the government. Some of the labels of capitalistic market economy are retained, but they signify something entirely different from what they mean in a genuine market economy.

As we know from Hitler's words, he desired to accelerate the transition to a state command economy after the war's conclusion. Hitler said in his July 27–28, 1941 addresses to his inner circle (dubbed "table talks") that "a rational use of a nation's strengths can only be accomplished by a planned economy from above." About two weeks later, he stated: "In terms of economic planning, we are still very much at the beginning, and I suppose it would be rather lovely to build up an all-encompassing German and European economic order."

China has risen rapidly despite, not because of, its enormous inefficient public sector and unrestricted government.

This article was originally published by the Institute of Economic Affairs.