In Part 1 of What is Bitcoin we looked at the differences between the benefits of a centralised system vs a distributed ledger and the digital currency bitcoin. In this post let’s take a look at a few functions of money to see how bitcoin stacks up against the money we’re familiar with using in our day to day lives.
Fiat money, or currency, has been defined variously as: Any money declared by a government to be legal tender. State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard. Intrinsically valueless money used as money because of government decree. – Wikipedia
Previously currencies like the US dollar, or pound sterling was backed by gold, this is no longer the case.
One of the concepts that people struggle to deal with is that bitcoin has no apparent intrinsic value, so how can you use it as money? What they fail to realise is that banknote in their wallet also holds no intrinsic value, outside of being required to pay your tax bills.
Will bitcoin be replacing cash any day soon? It’s important to note there are technical issues that face Bitcoin, including speed of transactions and transaction fees. Bitcoin is not ready for mass adoption nor to be used as cash for small transactions as a result. However there are a number of changes being made to Bitcoin, and other crypto currencies that look to solve the issue of speed, size of transaction and transaction fee to become better suited to micro transactions and replacing cash.
An important point to keep in mind are the problems that Bitcoin resolve. As computer scientist Andreas Antonopoulos was quoted” “This isn’t money,” he realised, “it’s a decentralised trust network,” with applications extending far beyond digital currency.
- Bitcoin sits on a distributed ledger, this means that there is no centralised database that hackers can pinpoint in on to steal information.
- There is protection from governments. In Zimbabwe, Venezuela, and South Africa bitcoin is trading at a premium and citizens are opting to hold bitcoin while their country experiences economic or political instability.
- Peer to peer payments can be made across the globe, making it easier to send money to anyone, even if they don’t have a bank account.
- A distributed ledger allows transparency that is lacking in the accounting practices of traditional financial institutions
In the next post in the series What is Bitcoin we’ll touch on the idea that bitcoin allows you to become your own bank.
Below are some key functions of money and it’s characteristics from tutor2u.net that will allow you to make your own comparisons as to whether you believe bitcoin is money.
|Key Functions of Money||(£) Traditional Currency||Bitcoin|
|Medium of exchange: money allows goods and services to be traded without the need for a barter system. Barter systems rely on there being a double coincidence of wants between the two people involved in an exchange||Yes||Yes|
|Store of value: this can refer to any asset whose “value” can be used now or used in the future i.e. its value can be retrieved at a later date. This means that people can save now to fund spending at a later date.||Yes||Yes|
|Unit of account: this refers to anything that allows the value of something to be expressed in an understandable way, and in a way that allows the value of items to be compared.||Yes||Yes|
|Standard of deferred payment: this refers to the expressing of the value of a debt i.e. if people borrow today, then they can pay back their loan in the future in a way that is acceptable to the person who made the loan.||Yes||Yes|
Key Characteristics of Money
- Durability i.e. it needs to last
- Portable i.e. easy to carry around, convenient, easy to use
- Divisible i.e. it can be broken down into smaller denominations
- Hard to counterfeit – i.e. it can’t easily be faked or copied
- Must be generally accepted by a population
- Valuable – generally holds value over timeThere are three main types of money: currency, bank deposits and central bank reserves
So, what do you think? Does bitcoin tick all the boxes as money? Even if it is only digital?