Part 5 of our series on bitcoin basics looked at if Bitcoin is a hedge against inflation. This article will examine whether bitcoin can be considered money.
As we have seen, Bitcoin is a peer-to-peer cryptocurrency which, because of its fundamental properties is the next step in evolution of money.
Bitcoin was designed to be a rare digital commodity. Bitcoin works in the same way as gold and silver did centuries ago. It is designed to satisfy all major characteristics of money.
Bitcoin must have five properties to function as money. These properties are:
Durability (it doesn’t degrade over time),
Transportability (it can be transported easily from one location to the next)
Fungibility (where each unit is equal to the other)
Divisibility (where you can break it down into smaller units).
Acceptability (where it is exchange to purchase goods and services)
Scarcity (in the sense that there is a limited supply of it and it is difficult to counterfeit).
The modern world does not have Bitcoin, the US Dollar or the British Pound as intrinsically having any value. The willingness of traders to accept any currency as tender in transactions determines the value.
So, it is clear that currencies must have utility. These three main use cases can be summed up as follows:
Store of Value
Any currency must be able hold its value for a long time. Due to its rarity, gold is considered valuable. Paper money used to be weighed against precious metals like gold and silver. Although this is no longer true, we still refer to the price of gold on a market as “The Gold Standard”.
Unit of Account
An ‘Unit of Account’ refers to a universal unit that is used to price goods on a market. The US Dollar, for example, uses both whole units (Dollars), and decimal values (“Cents”).
Mechanism of Exchange
Last but not least, all currencies must be accepted as a means of transferring value from one party into another. Today, many business organizations might transact in either their national currency or the US Dollar.
What makes Bitcoin real money?
Bitcoin has all the necessary properties and utilities to function as a currency. However, the relative novelty of digital currencies when compared with fiat currencies or precious materials presents some interesting challenges.
The durability of Bitcoin is still a matter of debate. Bitcoin has survived for ten years after its debut in Satoshi Nagamoto’s whitepaper and the mining of genesis blocks. It has also managed to outlive many speculations that claimed it would crash or be a bubble.
Gold is still the universally accepted currency and sets the standard for durability. The US Dollar has been solidified over the past 100 years and is now the most widely recognized fiat currency.
Bitcoin is portable in that it can be sent easily over the internet to any location with much greater ease than gold, fiat currencies or paper money.
Bitcoin’s access to the internet is the only limitation. This is despite the fact that many countries and territories around the globe may not have access to it at the moment. It is the first time humanity has been able establish a payment network that isn’t intrinsically tied to one country or pits national currencies against each other.
Paper money and gold are restricted in that it can be very difficult to transport material around the globe. Digital fiat currencies, on the other hand, are often locked in complicated agreements between banks and governments. These agreements may result in long transaction times and high transaction fees for those who wish to change from one currency to the next.
The fungible design of bitcoin is similar to fungible . Any bitcoin can be exchanged with any US dollar. There are no special features in either bitcoin or dollar notes.
This property is now at risk due to the advent of sophisticated analysis software that can track the history of each bitcoin on the blockchain. This allows people to reject accepting a coin that has been used in illegal activities.
These concerns can be addressed by a variety of projects, which aim to increase the privacy of bitcoin transactions. Transactions that are encrypted can be traced back to a specific coin, which solves the problem of fungibility.
Bitcoin can be broken down into infinite values. The lowest value, 0.00000001 Bh., is called a Satoshi. It offers greater division than gold and fiat currencies like the dollar. Due to labour-intensive processes of re-coining or smelting, gold can be difficult to divide into smaller units. The US Dollar cannot be divided into 100 cents.
Finally, Bitcoin is rare due to the fact there will never be 21 million Bitcoins. The price of gold is elastic, in that deeper gold mines become more lucrative as the rarity and value of gold increase, while the current $10.5 trillion Dollars are in circulation.
These properties make Bitcoin useful. Bitcoin can function as a digital gold (or storeof value) and can also be used as an unit for account. Bitcoin can then be used to value goods. Finally, it can also be used as a mechanism to exchange to facilitate internet transactions.
Who accepts Bitcoin?
The greatest obstacle Bitcoin faces is its acceptance. Although many service providers and merchants around the globe might accept payments in their local currency or in international currencies like the Dollar, Bitcoin is still an emerging currency that is not widely accepted as a tender.
But that hasn’t stopped merchants and service providers from accepting Bitcoin payments.
One popular story was that a hungry customer paid 1000 BTC for two pizzas early in 2011. Since then, many services, merchants, payment gateways, and other entities have accepted Bitcoin as a tender. Some of the most notable adopters include Microsoft, PayPal, Virgin Galactic and Zynga.
Bitcoin will appreciate in value and we will see it used as tender more often in the months ahead.
This is part 6 of our Bitcoin Basics Series. We’ll explain what a Bitcoin is worth and how it accrues its value.