It is clear form its name that Bitcoin was envisioned as a new form of money. But I would argue that Bitcoin is not money.
Bitcoin is not money
There are significant gaps in Bitcoin meeting the necessary functions and features of money. On that basis, it cannot be considered money.
One should never say never, but I also find it difficult to see Bitcoin ever fulfilling the conditions required for it to be considered money. Bitcoin has little fundamental value (I had previously compared it to tulips), and its fluctuating price is driven entirely by speculation. This makes it difficult for it to be reliable store of value. Without that stability, goods and services will not be widely priced in Bitcoins even if Bitcoin-based quotes are still provided.
The world before money
Prior to the invention of money, goods and services were bartered (exchanged). This however requires a ‘double coincidence of wants’, and is clearly inefficient. If you wanted to exchange your sheep for grain, you had to find somebody who had grain, wanted sheep, and was willing to exchange at a mutually agreeable rate. And if you wanted grain worth less than one sheep, you may have to divide your sheep?
Fortunately, money came along to facilitate these exchanges.
Features of money
Money is commonly understood as having certain features. How does Bitcoin stack up?
|Durable||Bitcoin, being digital, withstands repeated exchange. It does not wear out like physical money.|
|Fungible||A unit of Bitcoin is the same as any other unit of Bitcoin.|
|Portable||Bitcoin is highly portable. You can send them across the internet, or store them on physical devices (like hard drives).|
|Divisible||One Bitcoin is equal to 100 million Satoshis, making it highly divisible.|
|Scarce||There is an artificial limit set that there will only ever be 21 million Bitcoins. Once this number is reached, no new Bitcoins can be “mined”. Moreover, the blockchain technology at the heart of Bitcoin also prevents counterfeiting. Every transaction is verified by the blockchain.|
|Widely accepted||Bitcoin developers and early adopters have worked really hard to make Bitcoin as well known and successful as it is now.
Whilst it is not widely accepted within any one single geographic boundary, I would consider it widely accepted within certain areas of cyberspace. These include not just the dark web (where Bitcoin is widely used), but also the “edgier” (for want of a better word) segment of the regular internet with platforms like 4Chan, Reddit, and Mega.co.nz.
|Stable value||It is here that Bitcoin really fails. The large and erratic fluctuations in its value means that it is really difficult to price goods and services in Bitcoins. This hurts its ability to function and be accepted as money.
Online game service Steam has now stopped accepting Bitcoins because of problems caused if Bitcoin-based transactions were prolonged. In these cases, if the value of the coins changed significantly, “customers had to transfer more bitcoins or get a refund. And either option would result in the customer paying more exchange fees, currently about $20. Some customers adding bitcoins had even been caught out a second time as the value changed again.”
Functions of money
Money is said to serve as a:
- medium of exchange (avoiding the need to barter),
- unit of account (a common measure of value of the goods and services being exchanged), and
- store of value.
Bitcoin arguably fulfils all three of these functions. However on the first two points, I am of the view that items are only quoted (but not priced) in Bitcoins. This is an important difference. It means that items are actually priced by buyers and sellers in some other units of money (e.g. Pound sterling), and merely converted into Bitcoin quotes where necessary. That is why the Bitcoin price of an item may fluctuate even though the sterling price may remain the same.
On the last point, I am not of the opinion that Bitcoin represents a reliable store of value. Speculators may argue otherwise, but I guess we can only wait and see.