IS BITCOIN MONEY?
Writing about Bitcoin is a challenge for several reasons. It has a short history (ten years), it is highly complex, and there is a certain vagueness to the logic behind the concept. When reading about it, or listening to explanations, I wonder whether or not I understand it adequately. I also wonder how many others do.
Much has already been written and discussed, such that further commentary might be superfluous. But some additional perspective likely won’t hurt. So, for those who asked…
What is it? Bitcoin, simply stated, is a form of digital currency. That is how most people describe it when pressed for an acceptable answer. That does not make Bitcoin unique, though, since most of our money supply today is in the form of digital currency.
Computer technology has changed the way we bank, shop, pay bills, and send money. We also get paid electronically and access our earnings via smart phones and computers. So what is it that makes Bitcoin different?
CRYPTOCURRENCIES
Bitcoin is a cryptocurrency. “A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems.” …Wikipedia
Then what makes Bitcoin (or any other cryptocurrency) a currency? Let’s define currency…
“Currency is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.” …Investopedia
Accordingly, Bitcoin is not yet a currency because it is not a “generally accepted form of money” but, as it increases in use as a ”medium of exchange for goods and services”, and becomes more generally accepted as a form of money, then its credence as a currency is enhanced, whether or not it is issued by a government.
Good; but, there should be a useful advantage to Bitcoin and cryptocurrencies. It should be something that gives them additional value over other forms of digital currency.
A possible advantage is found in the definition above: “Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems”.
The advent of digital technology allows us to communicate and transact business in real time – without being face to face.
Doing so, however, requires verification. Transactions that occur over the internet require a third party for verification. A middle-man, if you will; which generally means a bank.
If I use a debit card or credit card, any transaction is authorized instantaneously by the institution or bank. The bank is verifying that funds are available in the form of either cash or credit, whichever is applicable to the particular transaction. A seller, or vendor, is guaranteed payment and the purchaser has a confirmed record of payment to the other party/seller.
Bitcoin and other cryptocurrencies offer the potential to avoid the third party. Hence, transactions using Bitcoin or other cryptocurrencies are ‘private’ and still instantaneous.
But how does a seller know that a purchaser has Bitcoin to spend and that payment can be received in ‘good form’?
The answer is that every single Bitcoin transaction is recorded within a decentralized tracking system. We might say there is no middleman; rather, a universal, exterior history.
Proponents of Bitcoin claim that the elimination of a middleman/bank and the resulting privacy are huge benefits. In addition, it is possible that transaction fees could be limited or non-existent.
The privacy is attractive for tax and regulatory reasons, yes. Those items are obstacles to free trade. But it is probably not realistic to think that the system will be allowed to function unimpeded on its own for long, if it is successful.
It is naive and short-sighted to think that those who claim to have regulatory authority would sit idly by without making a concerted attempt to intercede.
IS BITCOIN MONEY?
As an ‘alternative’ medium of exchange, Bitcoin has been described and characterized as a form of money. But is it?
Money has three distinct characteristics: medium of exchange, measure of value, store of value.
Bitcoin and other cryptocurrencies are, to a limited extent, mediums of exchange. But are they a measure of value? I don’t think so.
Money is used to value other items – by price. For example, under our current monetary system, we place a relative value on various goods and services by attaching a price to it.
All of the goods and services we buy and sell including our own labor, education, and our very lives for that matter, have value. The value of various items is determined and a price is affixed using a commonly accepted medium of exchange. For purposes of this discussion, that medium of exchange is the US dollar.
However, the perceived value is subjective. An item’s value can vary from one individual to another and with the passage of time.
Lets say a furniture store has a sofa for sale at $995.00. After six months, the sofa is still in the store and still offered at $995.00. So the manager marks it dow to $749.00 and it sells the next day.
Did the sofa lose value over six months? No. And people’s perception of its value likely didn’t change, either. It was probably overpriced to begin with. Which means that its value was overstated originally.
The price of something can be an indication of its value but only in the context that there is a measure of value (in this case, dollars) that is accepted independently and universally.
For Bitcoin to be considered money, it would have to function as a measure of value: How many Bitcoins is the sofa worth?
We don’t know because there is no reasonably reliable application of value for Bitcoin. In other words, how much is Bitcoin worth? Who knows? At least with US dollars – for now, anyway – they serve as a medium of exchange and a measure of value.
Obviously, there is no possibility for Bitcoin to be termed a store of value. This is true not just because it is impossible to determine its value. It is also true because there is no history of sufficient length to provide evidence of store of value. Sufficient evidence would require centuries.
So, if Bitcoin isn’t money, what is it? And does it have value?
How do you determine a value for nothing? A sofa has value. Companies that produce and provide goods and services have value. Real money (i.e. gold) has value. The much-maligned US dollar, a paper substitute for real money, has a commonly accepted, implied value.
Bitcoin is a digital creation which has no value in and of itself. As such, it can never be used as a measure of value for anything else. Think of it this way: How many Bitcoins is your house worth? How many Bitcoins will your next car cost? If you can answer those questions without any calculations, you will know that Bitcoin has become “a generally accepted form of money”.
BITCOIN IS A PROCESS FOR THE TRANSFER OF MONEY
Bitcoin is a process for the transfer of money. But the money being transferred at each transaction is US dollars, the currently accepted medium of exchange.
When a dealer accepts Bitcoin in trade, they are really accepting enough Bitcoin to equal the amount of US dollars agreed upon by both parties. There is a fixed price for the dress you want to buy online, but it is priced in US dollars, not Bitcoin.
The transfer process has value, but not the Bitcoin itself. And, if that is the case, what makes one cryptocurrency’s value different from any other?
Think of it this way: How much of a difference in value to you is there between your bank-issued debit card and a debit card issued by any of the other competing banks?
If you said “little or none” you are correct. So why is Bitcoin’s price so radically different from Litecoin? or Zcash? It seems sort of like different denominations and colors of Monopoly Money.
Bitcoin and other similar digital monies are referred to as cryptocurrencies. However, they are not currencies because they are not “generally accepted form(s) of money”.
In addition, Bitcoin and other cryptocurrencies are not money because they have no value. Thus, they cannot be a measure of value or a medium of exchange.