Is bitcoin money?
Bitcoin and other so-called crypto-currencies are all the rage. Even though bitcoin has recently dropped in value, it’s still higher than at the beginning of 2021 and 300+% higher than three years ago.
Is bitcoin well-suited to be a substitute for a traditional currency such as US dollars or Euros?
In brief, it can be helpful for illicit transactions such as ransomware, money laundering, and drug transactions, but for day-to-day prosaic uses of money, it’s just hype.
A successful and broadly accepted currency performs three core functions:
- medium of exchange
- unit of account
- store of value
A medium of exchange allows an economy to move beyond a barter system and enables unrelated parties to transact even if they’re not interested in trading for what each other has. When you have something I want but I don’t have anything you want in return, barter fails but money smoothly enables that transaction and everyone benefits.
Can bitcoin serve as a medium of exchange? Yes, but our current payment methods of cash, credit and debit cards, venmo, online and paper checks are easier, cheaper, and faster. Everyone’s favorite example was a bitcoin conference in 2018 that wouldn’t accept payment in bitcoin because it was too slow and expensive to process the payments. That’s funny.
A unit of account allows us to value goods and services. Your groceries, rent, and salary are quoted in dollars, rather than bitcoin, ounces of gold, or seashells. Even when Tesla recently announced that they would take payment in bitcoin, their car prices were still stated in dollars.
Can bitcoin serve as a unit of account? Not if you want the value to be stable. Bitcoin is ill-suited for this given how much its value fluctuates each day. It’s unlikely you’ll see prices quoted in bitcoin, rather than dollars, in the foreseeable future.
A store of value allows us to save assets with little fear of the value being depreciated over time. Historically, precious metals and real estate have played this role but a stable currency is a more effective store of value than either a vault full of shiny metal or a triple decker in Boston.
Can bitcoin serve as a store of value? Not really, as again you want its value to be stable. Its hard to imagine rational people putting their life savings into bitcoin and sleeping comfortably each night. Compare that to hundred dollar bills, US Treasury securities, or an FDIC-insured bank CD — they’re not as sexy but they’re safe.
Bitcoin is a fascinating cultural phenomenon but it’s not going to crowd out traditional currencies anytime soon. It may be a brilliant technical idea but it’s still in search of an application. Right now, its best use cases are for illicit transactions but for all other traditional functions of money, our current system works better. And, if you can’t even pay for a bitcoin conference in bitcoin, then what use does it really have?
As for whether it’s a bubble that’s going to pop or a tree that will grow to the sky, I’ll leave that question to someone more prescient than I am.