Will Bitcoin ever become true currency? It’s already halfway there!

Executive Brief

There are three main criteria that we define money by: to be used as a means of exchange, a reliable store of value and use as a unit of account. Existing cryptocurrencies are already meeting two of these functions - acting as a medium of exchange and unit of account. Market price volatility has prevented cryptocurrencies from becoming a reliable store of value to date, but that could change as the market for them continues to grow, and they become more accepted by the mainstream. 

Read the full story below. 

One of the biggest criticisms that cryptocurrencies are constantly being given is that they will never actually replace “real money”, and therefore their existence is not necessary. However, although it is probably true that there will be a need, or rather a want, for conventional currencies such as the dollar bill in the foreseeable future, this does not constitute an argument against cryptocurrencies being classified as “real money”.

When this is pointed out, the objectors of cryptocurrency will often counter it with arguments about why this won’t happen for decades. However many cryptocurrency proponents believe that currencies such as Bitcoin are already halfway there.

The official definition of ‘money’ requires a fulfillment of three main criteria. The first is that money should act as a viable store of value over time, a shared trait with many assets that are not money. Gold, classic cars, and antiques are all examples of assets that can store value over time, yet fall short of possessing the second criteria of money - to act as a medium of exchange.

The second criterion of money is that it must act as a medium of exchange - to be viable in exchange for payment of goods and services. This is a property that Bitcoin and other digital currencies pass with flying colors - to a much better extent than fiat currencies that are backed by governments. Digital currencies like Bitcoin are already being used and accepted for the purchase of goods at select cafes, and online merchants. While digital currencies are new, and society at large has yet to learn about and adopt it, the market for their use is consistently growing worldwide.

The final criterion which a payment medium must fulfil in order for it to be considered money is to serve as a unit of account. Most currencies have goods priced in their denomination, and have an exchange rate that may be used to discover their comparative value. Currently the global reserve currency by which others are compared to is the American dollar. Digital currencies like Bitcoin and DNotes can serve this function just as well -- even better -- than any ‘old’ money. One Bitcoin in the USA has the same value as one Bitcoin in Germany, Argentina, or New Zealand, which means we have the potential of a first truly global reserve currency being accepted worldwide. One issue today, is that merchants that are accepting digital currencies are often immediately selling them to buy their local currency. This is proof however that currencies like Bitcoin are sometimes preferred for international, and even local transactional mediums due to their faster processing and lower fees.

While Bitcoin and other digital currencies excel at being a medium of exchange, and can act as a unit of account, cryptocurrencies in general still need to grow out of being illiquid markets before they will be able to function as a reliable store value over time. Bitcoin definitely stores value, yet to be adopted and accepted by the mainstream requires a more consistent price value.

First created in 2009, Bitcoin’s last seven years of perpetual growth and corrections are but a snapshot of time compared to other, more widely accepted currencies like the United States dollar and the British pound. If digital currency markets continue to grow, they will be affected less by the daily spikes in traded volume that up until now have caused price volatility. This stabilizing effect would make merchants more likely to hold onto digital currencies, instead of swapping them into their local currency. This could lead to the pricing of goods in digital currency worldwide. A digital currency could one day become the benchmark by which all other currencies compare their value. This would make such a currency the world’s standard unit of account, and combined with the stabilization effect of adoption, would see cryptocurrencies excel in fulfilling the functions of money at an unprecedented level.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Timothy Goggin

Timothy Goggin is an Austrian School economic analyst with an interest in the application of moral philosophy and decentralized systems. He studies economics at the Business School at Victoria University of Wellington, New Zealand. His area of research is the consequential and moral dimensions of implementing digital currencies and the resulting synergies for consumers in the trading environment.

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