Is Bitcoin a Currency?

The legitimacy of bitcoin was discussed in part 5 of the bitcoin basics series. We will look at whether bitcoin may be called money in this post.

Bitcoin is a community cryptocurrency that is the next step in the evolution of money due to its fundamental qualities, as we have previously discussed.

Bitcoin is intended to function as a limited-supply digital asset. Bitcoin is designed to satisfy the significant criteria of money in the same way gold and silver were used centuries ago.

For Bitcoin to function as money, it must possess five properties. These are the following:

  • Durability (it does not diminish with time),
  • The ability to transport (it can be easily transported from one place to another)
  • Interchangeability (where every unit is equivalent to every other),
  • Divisibility (where it can be broken into smaller units),
  • Acceptableness (where it can be exchanged for goods and services),
  • as well as shortage (in that it has a restricted supply and is difficult to fake).

Bitcoin, the US Dollar, and the British Pound have no intrinsic worth in the current world. The readiness of a trader to accept either currency as tender in a transaction determines this value.

As a result, we can deduce that currencies require what is known as usefulness. This simplifies to three prominent use cases, which we can deduce as follows:

A Value Store

Any currency must have the ability to maintain its value over time. Because of its rarity, gold is considered valued.

Paper money used to be valued for precious metals like gold and silver. Even though this is no longer the case, the price of gold on the market is still referred to as the ‘Gold Standard.’

Unit of Measurement

A ‘Unit of Account’ is a standardized unit of measurement used to price items in a market. The US Dollar, for example, uses both whole units (Dollars) and decimal values (Cents).

Exchange Mechanism

Finally, any money must be accepted as a means of transferring value between parties. Most businesses nowadays, for example, may operate in their currency or the United States dollar.

What Characterizes Bitcoin as Real Money?

Bitcoin satisfies all of the important qualities and utilities required for it to function as a currency, albeit the relative novelty of digital currencies compared to fiat currencies or precious metals presents some unique obstacles.

Bitcoin’s long-term viability has yet to be shown; the cryptocurrency has lasted ten years from its inception in Satoshi Nakamoto’s white paper and the mining of the blockchain network. It has outshined innumerable predictions that it would be short-lived or a “bubble” at the time of writing.

On the other hand, gold has set the standard for longevity throughout human history and is the most widely recognized type of universally accepted currency. Similarly, the US Dollar has cemented to become possibly the most well-known floating currency over the last century.

Bitcoin is fundamentally portable because it can be transported from one location to another over the internet significantly more readily than gold, fiat currencies, or even paper money.

Bitcoin is only restricted by internet access, which – while many countries and territories globally are currently unable to do so. It represents the very first-time human society has established a payments network that is not inherently rooted in controlling a single nation or ditch national currencies against one another.

Gold and paper money is limited because it can be costly to transport materials around the world. In contrast, digital fiat currencies are often locked in complex agreements between banks and governments that see lengthy transaction times or substantial transaction fees when making the transition from one form of currency to another.

Bitcoin is exchangeable in the same way that US currencies are, in that any bitcoin can be swapped for another. There is nothing unique about a single bitcoin or a single dollar bill.

However, with the advent of advanced analytical technologies that can track the history of any single bitcoin on the blockchain, this feature is at risk. In theory, this allows people to refuse to accept a currency that may have previously been used for illegal purposes.

Several projects are attempting to address these problems by enhancing the confidentiality of bitcoin transactions. It is impossible to trace the history of a given coin if transactions are secret, which eliminates fungibility problems.

Bitcoin is more divisible than gold or fiat currencies like the dollar since it can be divided into infinite values, with the lowest value (0.00000001) being called a Satoshi. Gold is typically challenging to divide into smaller units due to the labor-intensive process of re-coining (producing smaller units) or smelting (combining smaller units into larger units). In the same way, the US Dollar can only be divided into 100 cents.

Finally, because there will only ever be 21 million Bitcoins in circulation, Bitcoin is inherently scarce – the price of gold is flexible in the sense that deeper gold mines become more profitable as the rareness and price of gold increases. In contrast, there are an estimated 10.5 trillion dollars in circulation today.

Bitcoin has utility as a type of “digital gold” (or store of value) due to its scarcity, as a unit of account where Bitcoin, in BTC value, may be used to evaluate products and as a mechanism of exchange to conveniently ease transactions over the internet.

Who is willing to accept Bitcoin?

The most challenging hurdle Bitcoin has yet to overcome is gaining acceptance. While many shops and service providers worldwide accept payment in their local currency or foreign currencies like the US dollar, Bitcoin is still a new currency that is not frequently recognized as money.

However, many innovative service providers and businesses continue to take Bitcoin as payment.

In early 2011, one hungry consumer paid 1000 BTC for two pizzas, and since then, many businesses, shops, and even payment gateways have accepted Bitcoin as payment. Microsoft, Virgin Galactic, PayPal, and even Zynga are among the early users.

As Bitcoin’s value rises, the digital currency will undoubtedly be used as currency more regularly in the months and years ahead.

We will unpack how much a Bitcoin is worth and how it accumulates value in part seven of our Bitcoin Basics series.

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.