Bitcoin is NOT Money
A little more than ten years ago, a ‘Peer-to-Peer Electronic Cash System’, called Bitcoin, was created by someone called Satoshi Nakamoto- an unknown person or group of people.
This system, which claimed that there is a new way of conducting money transfers and this system is called Bitcoin- a blockchain and a cryptocurrency based on it.
Bitcoin and the system around has attracted a plethora of speculators, mom and pop investors and the attention of media and society as a whole, questioning whether Bitcoin is an asset, a currency, a commodity, money or a scam? The fact that Bitcoin’s name is a combination of ‘crypto + currency’ and that one can purchase certain goods and services with it, as well as make value transfers online, makes Bitcoin associated with money. However, according to the fundamental principles and definition of money- Bitcoin is not money. Let’s explore.
Money, by definition, has to perform the following crucial functions in order to be considered as money:
- It has to be a medium of exchange
- It has to provide a store of value
- It has to be a unit of account and measure of value
One could argue that Bitcoin can be used as medium of exchange, but it can perform this function only in the Bitcoin world, in other words, among the other participants that have Bitcoin and the necessary platforms to conduct transactions with it. The majority of the World’s population do not have that and most (with some exceptions) cannot pay taxes in Bitcoin, therefore, Bitcoin is not a global medium of exchange.
Bitcoin is also not a good measure of value, because we do not think in terms of how certain items are worth in Bitcoin. In fact, if something costs 0.0034 of Bitcoin- this will provide very little comprehension of what is the value of this, and even the most hard-core Bitcoin enthusiasts would convert this into the US Dollars or other currency convenient for their heads to grasp. Therefore, it can be concluded that Bitcoin is not good as a measure of value.
Moreover, money has to provide a store of value: money has to retain value in a way that if we hold a certain amount of money today, we are 99% confident that it will be worth the same amount tomorrow, i.e. one will be able to purchase same amount of goods and services for the specified value of a monetary unit.
Although currencies have proven to be volatile, sometimes producing dramatic inflationary behaviour, and, in general, the global currency system is designed in a way that there is a slight 1–2% annual inflation that encourages spending rather than hoarding, Bitcoin has projected a consistent volatile performance. Therefore, Bitcoin cannot be a reliable store of value, as it is relatively unpredictable what factors can cause a sharp drop or increase in its value, relative to globally established currencies.
Furthermore, an important argument of why Bitcoin cannot be considered as money is because we live in the World, in which we have delegated domestic and international institutions to govern our financial markets and economy by setting rules and regulations. So far, none of these institutions have acknowledged Bitcoin as money. In contrary, the US Internal Revenue Service has said that Bitcoin must to be treated as property, not as currency.
Therefore, if something does not have the features of money, it cannot be treated as money. Bitcoin does not provide these key functions- it is not a widespread medium of exchange, nor anyone thinks of value in terms of Bitcoins. It is clear that Bitcoin perhaps could be valuable due to its certain features, but cannot be considered as money.
Will technology change our perception of what we consider as money? Will a government- backed paper continue to hold our trust, or, rather, we shall switch to reputation- based scores, which will be able to buy us goods and services, therefore acting as money?
Let’s observe and try to answer these questions.
Thank you for reading,
AGNE Q
