Is Bitcoin really a form of money?
This article briefly looks at the basic functions of money to compare established global currencies with Bitcoin while also looking at the ‘ephemeralization of money’ and how Bitcoin could be the next natural evolution in society’s relationship with money.
Money has three characteristic functions; to act as medium of exchange, a store of value and a unit of account. As a medium of exchange money acts as an intermediary to facilitate the exchange of assets, liabilities and goods and services and to effectively facilitate exchange it should be durable, fungible, divisible and portable amongst other characteristics. Bitcoin easily meets this criteria; it cannot degrade since the ledger is distributed throughout the network; its decentralized nature means transactions can be sent anywhere in the world within seconds and verified on average in 10 minutes making it incredibly portable nature; it is highly fungible since the Bitcoin protocol does not discern between individual units of bitcoins and it is highly divisible with a unit of bitcoin able to subdivide into 100 million units. As a medium of exchange Bitcoin's military grade cryptography provides security unlike any other form of money either paper or electronic.
As a store of value money functions to store today's wealth for retrieval at a future date and should ideally have low inflation and low volatility to retain its attractiveness as a store of value. Bitcoin’s fixed monetary policy by nature is deflationary which monetary theory suggests, unlike current major global currencies, should retain its value in the long term. Although the Bitcoin price currently exhibits high volatility this is to be expected of a newly established currency and moreover the overall long term trend is a downward one. In any case holders of Bitcoin have enjoyed returns order of magnitude higher than conventional currencies and financial instruments which have been at the mercy of political influence in the form of quantitative easing (12 trillion USD printed since Lehman collapsed 2008) .
Money’s unit of account function serve as tools to measure and make value comparisons between disparate goods, services, assets and liabilities i.e. to compare 10 trucks vs. 1000 potatoes vs. the man hour cost of transporting the potatoes in those trucks. There has been criticism of Bitcoin as a unit of account due to the high value of bitcoin (1100USD = 1 Bitcoin) necessitating the use of four or more decimal places to quote prices, for example 0.00529BTC for a bar of chocolate but one could counter argue that retailers can quote prices in millibits (mBTC) to make it easier for consumers; i.e. 5.29mBTC for a bar of chocolate. Bitcoin opens up the possibility for micro-payments (fractions of a cent) payments to be made online allowing for new and innovative solutions to existing monetization problems. For example online newspapers could charge tiny amounts per article read instead of relying on a failed advertising revenue model.
Apart from function of money comparisons there is a wide range of literature describing the gradual separation of these functions from each other within society and as technology advances Bitcoin is well positioned to meet the demands of an increasingly online and digital society. Maybe one day Bitcoin as an emerging technology could “assume the role of general medium of exchange and store of value while national currencies could become Blackian numeraires that continue to serve as units of account and short-term measures of value” (Evans 2015). Satoshi Nakamoto himself envisaged Bitcoin as a “purely peer-to-peer version of electronic cash which would allow online payments to be sent directly from one party to another” and taking into account Bitcoin’s trajectory, adoption and use over the last 8 years as both a medium of exchange and a store of value we can make the argument that Bitcoin is very much a form of money albeit ahead of it's time but one which the world is rapidly catching up to.