Bitcoin and cryptocurrency have become a rather controversial topic for those interested in economics and finance.
Some view Bitcoin & crypto as the best form of money that has ever existed, while others contend that bitcoin could never be considered as good as cash or gold.
It’s important to look at the classical definition of money before coming to a decision on this matter, but it should also be remembered that the definition of money can also evolve over time as new technologies emerge.
There are three main functions of money.
As of now, Bitcoin is mainly used as a store of value, but that could change over time.
Here’s a closer look at bitcoin’s current ability to function as a money:
Store of Value - A store of value is a commodity or asset that is able to hold its value over time. Essentially, people are storing their wealth or savings in a specific asset. While the bitcoin price has been extremely volatile over the short term, its long-term trajectory has been up. Many people have started to put a portion of their savings into bitcoin to protect (and perhaps increase) their wealth over time.
Medium of Exchange - If enough people start to use bitcoin as a store of value, it may also become a medium of exchange . A commonly accepted medium of exchange is a form of payment that you know you can use practically anywhere you need to purchase something. Bitcoin has an extremely large amount of work to do in this area.
Unit of Account - Bitcoin would have to see a dramatic decrease in price volatility for it to become a unit of account because it would be impractical to change the price of goods and services every few minutes. Of course, the ability to instantly change prices on an ongoing basis has lowered the importance of this function of money.
According to the Federal Reserve Bank of St. Louis, there are six generally accepted characteristics of money.
Although bitcoin currently has issues with at least two of these attributes, the digital commodity could eventually evolve to the point where all aspects of being a money were covered.
Let’s take a look at these characteristics of money one by one:
Durability - A good money is able to last a long period of time, and bitcoin is at least as durable as gold, which has always been viewed as the most durable form of money.
Portability - Bitcoin is the most portable money of all time. Although there have been other forms of electronic money in the past, it’s important to remember that those transfers are only for IOUs. With bitcoin, you can transfer your entire life’s savings to the other side of the world in a matter of seconds without the use of an intermediary.
Divisibility - Bitcoin is also the most divisible form of money that has ever existed due to the fact that it is nothing but ones and zeroes. As of now, a bitcoin can be divided down to eight decimal places, but this could be changed in the future.
Uniformity/Fungibility - Every money unit must be equal to all others for a form of money to be useful. It needs to be easy to confirm the authenticity of a money, and a money’s history should also not be able to be tracked. Bitcoin is likely the hardest money to counterfeit in the world’s history because the authenticity of a bitcoin is checked by the network whenever a new payment is made. The ability to track Bitcoin payments through the blockchain is an issue right now because it could cause governments or other individuals to decide that bitcoin associated with criminal activities or thefts are less desirable. Privacy enhancements for bitcoin are in the works, and they could eventually improve its fungibility.
Limited Supply - Having a limited supply is another area where bitcoin shines. This is the first money that has a limited supply by design. Even gold could run into trouble if a large amount were found in a short period of time. Looking further into the future, asteroid mining could also cause problems for the precious metal. With bitcoin, there is nothing left up to chance.
Acceptability - Acceptability is one other area where bitcoin still has issues. Although some big name merchants, such as Overstock and Microsoft, have decided to accept payments made via the peer-to-peer digital cash system, the majority of daily purchases still cannot be made with bitcoin. Bitcoin debit cards have the potential to bridge the gap here, but a Bitcoin debit card with global reach and high limits is still unavailable.
At the end of the day, whether or not bitcoin is money is in the eye of the beholder.
To some, it is still a geek’s wild fantasy, while others are already using it as money today. Bitcoin (as a technology) is also changing the way people think about – or even define – money.
Anything can become money, as long as people are willing to accept it. It’s almost as if money is a shared hallucination .
As long as a commodity or asset has specific features that make it desirable as money, people may choose to use it as such.
To be clear:
Bitcoin is not a widely accepted form of money right now; however, that could change as it becomes easier to join the bitcoin currency network and spend it anywhere one desires.
While Bitcoin might not be seen as money in the USA or other western countries, it certainly is money for residents of countries like Argentina and Venezuela.
For example, in a recent article from the NY Times blog it stated the following:
Nearly 60 percent of Argentines believed that Bitcoin, one of the most popular cryptocurrencies, would retain the value of their savings over that same period, the survey said.
The Argentine Peso is one of the fastest inflating currencies, so it’s only natural that residents of Argentina would use Bitcoin as money.