Assessing the nature of Bitcoin: Is it money?

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Assessing the nature of Bitcoin: Is it money?

Copyright 2022 Christiana Aristidou LLC

 

To begin with, many people are confused, believing that Bitcoin and Blockchain are the same thing, but this is not true.  In fact, Blockchain is the underlying technology that powers Bitcoin as well as other cryptocurrencies and applications.  While this technology is very complex, the functionality at its core is very simple.  If you search on the Internet, you will find out that there are plenty different definitions about “What is Blockchain.” The truth is that people might not be as interested in knowing what blockchain is or how it is defined as much they care about what Blockchain can solve that was impossible prior to its existence.

In 2008, a person or group of people using the pseudonym Satoshi Nakamoto published a white paper on bitcoin entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ to a cryptography mailing list, describing how the cryptocurrency would work.  In early 2009, Nakamoto mined the first-ever bitcoin, known as the “genesis block” and the first bitcoin transaction soon followed, when a bitcoin was sent from Nakamoto to Hal Finney, a cryptography expert and enthusiast.  To this day, Satoshi Nakamoto is recognized as the brains behind blockchain technology, however its identity remains a mystery.

Bitcoin is revolutionizing the way we conduct business; in broader terms the whole global payments industry, while people around the world are rethinking the meaning of their money. Although Blockchain is the beginning of cryptocurrencies, other blockchain systems have been built that handle much more complex transactions from a simple currency transaction.

Thus, Bitcoin has begun affecting humans’ lives, as the cryptocurrency concept has altered the ways of making transactions and additionally, new jobs are created, inspiring the entrepreneurs all over the world to build start-ups.  All these occur due to the underlying technology and network that process Bitcoin transactions, known as “Blockchain,” and which transforms many industries.

It is important to realize that the term bitcoin has three different meanings.  First of all, it describes the underlying blockchain technology platform.  Secondly, it is the protocol that runs over the underlying blockchain technology to demonstrate how assets are transferred on the blockchain.  And thirdly, it is a digital currency.

Now, we will focus to the third point that Bitcoin is a digital currency.  But is it money? Is it a real currency?  Does it fulfil what traditionally we consider as money? Does it fulfil the traditional, widely accepted definition of money?

What is its nature?  To answer this question, we should first explore money and then assess Bitcoin’s nature.

 

To point out, money has three functions.  It serves as a unit of account, a medium of exchange and a store of value.

  • A unit of account: Prices are quoted in terms of money instead of other goods.  So, a unit of account can be used to measure the value of goods and services, economic activities, assets and liabilities, record debts, and make calculations. A unit of account enables individuals understand how much wealth they have. The three significant characteristics of a unit of account relevant to money are:
    • Divisible: A unit of account can be divided so that its component parts will be equal to the original value. If you divide a euro into four quarters, then the total value of the four quarters still equals to a euro.
    • Fungible: One unit is viewed as the same as any other with no change in value. A euro is the same as any other euro.  In contrast, all real estate is unique, and diamonds differ by colour, cut, carat etc.
    • Countable: It is countable and subject to mathematical operations. Namely, you can add, subtract, divide and multiply units.  This enables individuals to account for profits, losses, income expenses, debt and wealth.
  • A medium of exchange: Money serves as a medium of exchange or something that buyers exchange with sellers when they want to purchase goods or services from them, since most individuals recognize money as valuable.  So, people use it to carry out transactions, to facilitate trade with the purpose to use the money they received to purchase other goods or services from someone else.  Thus, it could be said that money serves the role of an intermediary between the goods or services that individuals want to trade.  The characteristics of a good medium of exchange are: Durability, transportability, divisibility, fungibility and non-counterfeitability.
  • A store of value: Money serves as a store of value, meaning that it keeps its worth both in the present and in the future. Thus, individuals can use it to move purchasing power from the present to the future.  In other words, individuals feel comfortable holding their wealth in it.

 

 

Does Bitcoin have these functions?  Let’s see!

  • Bitcoin as a unit of account: Money functions as a unit of account to measure the value of goods and services.  Since the price of Bitcoin fluctuates dramatically, holders of Bitcoin must frequently make their calculations.  Furthermore, the price of Bitcoin fluctuates on exchanges, and it often trades at various prices on different exchanges, which further makes the situation more complicated.  Moreover, the high cost of one Bitcoin relative to the price of common goods requires merchants to quote Bitcoin prices for most goods to four or five decimal places.
  • Bitcoin as a medium of exchange: To be a good medium of exchange, money must be accepted to be exchanged for goods and services. In the case of Bitcoin, it could be said that bitcoin can be used as a medium of exchange for a limited amount of goods.  Although the number of businesses that accept payment in Bitcoin has been increasing, these transactions still constitute a small part of the economy.  Also, individuals prefer a medium of exchange that keeps stable value over time and Bitcoin’s value has not been stable over its history.
  • Bitcoin as a store of value: Since money serves as a store of value, the stability of that value is even more significant for individuals.  Of course, volatile prices might not appear to be a threat to the store of value function of money when prices are going up.  However, when prices are going down individuals recognize that stable value is an essential aspect of store of value.  For instance, Bitcoin has had a number of periods when prices went down dramatically, damaging the Bitcoin’s store of value credibility and harming its acceptance as a currency.

So, assessing whether Bitcoin has the three functions of money, the answer is no!  Bitcoin does not fulfil the traditional definition and long accepted functions and characteristics of money.  However, Bitcoin is an innovative payment network, and this does not entail that it cannot be considered as a new kind of money, or otherwise digital money. There have been countries which accepted it as money.  For instance, El Salvador became the first country that accepted Bitcoin as an official national currency.

All things considered, it could be said that, if not now, soon, we may see more and more countries recognize Bitcoin as money.  Also, now that humanity invented bitcoin, we may reconsider the criteria or characteristics or functions of money.  To conclude, in the 4th industrial revolution, bitcoin or any other cryptocurrency may well be considered as new money.