Bitcoin is not a Cryptocurrency (any longer)
This piece may be stating the obvious — indeed I thought the matter was settled — but recently I’ve spoken to some very smart and Bitcoin-literate people who’ve tried to fervently make the case that Bitcoin is a Cryptocurrency.
It is not.
Interestingly, the word currency is mentioned only once in the original Bitcoin white-paper by Satoshi Nakamoto (here). His goal was to create a peer-to-peer electronic cash system. However, cash does not automatically mean currency. For something to be a currency, it has to have a few intrinsic properties. Failure to meet any of these requirements (there may be more) can be a dis-qualifier:
- It must be generally recognized as being a medium of exchange. This would need to be a combination of societal acceptance and legal acknowledgement. We can assume Bitcoin has passed this threshold.
- It must be readily exchangeable between transacting parties. A currency is of no use if the cost of using it as a currency is high. For example, imagine something heavy and bulky — would you consider using your couch instead of cash to trade? We can assume Bitcoin has passed this threshold; although there is room for improvement here — using bitcoin still requires some level of tech savvy but this can be solved.
- Its underlying value must be stable. This requirement is a tricky one, but also the most important one.
It is on this last point that Bitcoin fails as a currency. The rapid rise in the value of Bitcoin creates a dis-incentive for users to think of it as a currency. Broadly speaking, if an asset is inflationary — that is, it tends to lose value relative to other assets over a reference period — then users will have the incentive to get rid of that asset, in the expectation that they acquire some other asset to protect their wealth. Think of the German Mark during the last days of the Weimar Republic (here).
If an asset is deflationary — that is, it tends to constantly gain value relative to other assets — then customers will have the incentive to hoard that asset, in the expectation that its value will rise quicker relative to most other assets. Think of collectible items, real estate (long term), etc.
For an asset-class to be treated as a currency, its price must generally stay within a band where it doesn’t create the incentive to either hoard or get rid of it.
Bitcoin has gotten into the territory where it will not be used as a currency because its value is rising so quickly. Think of it this way: if you were to go shopping for something legal and the vendor offered you the option of paying by Bitcoin, cash, or credit, would you pay for it using Bitcoin? The answer is no.
Does that mean there is no future for Bitcoin at all? Absolutely not — there is a strong future, but as a cryptoasset. Bitcoin is transforming into a store of value; especially as a hedge to the regularly economy (here, here) and I expect its popularity will only rise as major economies encounter recessions and depressions.
