Bitcoin as digital money
Many people believe that bitcoin could become the new payment method we will use on a daily basis. This year, Salvador has become the first country to allow this cryptocurrency as a legal form of payment. But can this most popular digital asset be used as such? To answer this question, we must first clarify what money really is and the properties associated with it. Let us briefly familiarize ourselves with some basic terms in order to proceed smoothly to the rest of this article.
According to Wikipedia definition, money is the commodity recognized by general social consensus as the medium of economic exchange in which the prices and values of all other commodities are expressed. As a currency, it circulates anonymously between people and countries, facilitating trade exchange. In other words, it is a material or immaterial means that can be exchanged for goods or services. It is a legally defined payment method that can express, store and transfer value closely related to a real social product. We won’t argue here whether current fiduciary currencies meet this definition, but for the purpose of this article we can assume the current Zloty, Dollar, Pound, Euro etc. fit into the above explanation. Based on the definition of money, one can conclude that bitcoin is indeed money, or at least has a strong predisposition to be so.
We can also distinguish the following economic functions of money (although sometimes a slightly different division can be found, it ultimately boils down to the same thing):
- transactional function – money should be accepted as a common payment method, meaning it can be exchanged for a given good or service anywhere,
- accounting function – money should be the measure of value. Simply put, it should help us determine the price of other goods,
- hoarding function – money should allow us to store value over time. Therefore, if today I receive 1000 PLN for my work and I can buy 160 liters of gasoline for it, then in 20 years I should be able to make the same purchase.
If we take the above definitions and relate them to bitcoin, we can once again conclude that by all means, it can be considered digital money. Some people may have doubts about the hoarding function due to large fluctuations in the exchange rate. However, if we look at bitcoin from a slightly broader perspective, its value over time not only maintains the purchasing power of our work, but actually increases it. Obviously, bitcoin is not recognized as an official payment method in Poland yet, but Rome was not built in a day. Nevertheless, even in our country there are places where you can make purchases with cryptocurrencies – and not only with bitcoin.
What properties does bitcoin have?
In addition to its economic functions, money also has several desirable properties, namely permanence, portability, divisibility, recognizability, acceptability, stability, and homogeneity. How do these properties apply to bitcoin? Well, it is safe to say that it is permanent because thanks to blockchain technology, it is almost impossible, or at least very difficult and highly unlikely, to destroy it.
When it comes to portability, this cryptocurrency does very well as it allows you to conveniently transfer huge values over long distances. While this may still seem daunting to the average user, the progressive growth in use and development of technology (for instance over the past 4 years) suggests that in a relatively short time, using bitcoin will be as easy as using a payment card today.
In terms of divisibility, the world’s most popular cryptocurrency is doing great, since the smallest unit of bitcoin is 1 satoshi worth 0.00000001 BTC. Even with current price of bitcoin, we are able to make payments worth fractions of cents.
As far as recognizability is concerned, more and more people are aware of what bitcoin is, even though most of them would not be able to recognize whether they have been sent a real or fake bitcoin. Let me point out right away that our main cryptocurrency itself cannot be counterfeited, meaning that we are unable to create a fake token on the bitcoin blockchain. However, many people don’t know yet how the blockchain itself works, which could lead to potential fraud.
Moving on to bitcoin acceptability, I have discussed this above and I believe that it will continue to increase over time. In fact, you can see the approach that payments giants such as Visa and Mastercard are taking and how much they are doing to introduce payments using cryptocurrencies.
Stability and homogeneity
We have two more properties to go over: stability and homogeneity. When it comes to stability, which is retaining value over time as discussed before, money is considered stable when its value is fairly constant or growing. Bitcoin has already shown that in the long run its valuation is so far rising, and not only in standard currencies subject to inflation due to the prevailing monetary system, but also in store of value. For example, we can see how bitcoin has behaved when compared to gold, so that there is no doubt about bitcoin stability. I hope we can now more or less agree that bitcoin has (or, in the near future, will have) the above 6 qualities.
That leaves us with one more element: homogeneity also called fungibility, which poses the biggest problem. This property means that given commodity units should be relatively similar and interchangeable to be considered money. For example, if I want to exchange my 10 PLN bill for another bill of the same denomination, both of them should allow me to purchase goods of equal value. There can be no situation in which my ‘paper’ is worthless because it contains something that the first one didn’t have. At first glance, you might say that bitcoin has this feature as well. If we enter any cryptocurrency exchange, we can find various currency pairs that people use to trade their cryptocurrencies. However, we won’t find an option that would allow us to trade, for example, 1 BTC for someone’s 0.5 BTC.
Curious to learn more? To be continued!
Part two of the article is coming soon! Would you like to know more? Then take a look at this article: An introduction to blockchain