It's not tied to any country. It's not tied to any financial institution. It's not tied to any commodity. It's completely reliant on peer-to-peer trust and cannot be inflated by any government, bank, individual, or corporation.And one coin is worth about 21 thousand dollars today.
It can be hard to comprehend how something so completely detached from our current understanding of money could garner so much support in the last decade. The fact that Bitcoin is not attached to any physical asset has further reshaped our understanding of value between the physical and digital world.
So let's break that concept down. Let's refresh our preconceived ideas on value and worth, through an exploration of Bitcoin and its function as money.
Check the key points for a quick summary of the article or hop to any point on the list below for a thorough explanation.
- Bitcoin sufficiently meets and exceeds the 9 characteristics and functions of money.
- Bitcoin is a decentralised, peer-to-peer money network that allows users to make borderless transactions. This makes it the ideal medium of exchange on a global scale.
- Bitcoin has an immutable and transparent ledger, unlike fiat currency. Every transaction can be verified by anyone who wishes to do so. This makes bitcoin the most trustless form of money ever.
- Bitcoin ‘halving' is a recurring event in which the supply of bitcoin produced every block (known as a block reward) is cut in half around every four years. This halving, coupled with bitcoin's fixed supply of 21 million tokens, makes its supply schedule deflationary and one of the scarcest assets known to man.
- Bitcoin's growing Network Effect and unprecedented speed of adoption suggest Bitcoin will be here for the foreseeable future.
What is Money?
In the 18th century, Scottish economist John Law finally made sense of it all:
“Money is not the value for which goods are exchanged, but the value by which they are exchanged.”
During a time when the world was attempting to move away from trading commodities towards something more stable and portable, John Law helped us understand how a piece of paper could signify value.
His ideas don't stray too far from the truth in our digital world.
In short, money is a tool used to exchange value. Anything physical or digital could be used as money provided it's accepted for payment, trade, or other transactions within a community. Trust is the backbone that helps maintain money's value in a financial system.
Bitcoin as Money
Bitcoin shares many of the characteristics that give traditional commodities and fiat currencies value. There are 9 criteria commonly used to determine if an item or commodity can be considered money.
Because of bitcoin's unique features as a digital money, it can even be argued that bitcoin is superior to traditional money across all these properties.
What Are The Functions of Money?
Store of Value
Store of value is one of the most important functions of money. People will choose to store their wealth in a monetary good if they trust its value/purchasing power will remain stable or appreciate over time. If the value of a good can easily be debased, it will serve as a poor store of value over time.
Bitcoin is considered to be the hardest form of money because it is resistant to having its value compromised by inflation. Bitcoin has a programmatically designed deflationary supply schedule, where the block reward is halved roughly every four years (every 210,000 blocks). This event, known as the ‘halving', gives bitcoin an inflation rate less than both silver and gold. Because the supply of bitcoin decreases over time, it should theoretically increase in value as it becomes scarcer and scarcer. For this reason, many often refer to bitcoin as digital gold.
Medium of Exchange
A medium of exchange is an intermediary instrument or system used to facilitate the sale, purchase, or trade of goods between parties.
Bitcoin is the first global medium of exchange. Borderless transactions can be made efficiently without the need for currency conversion or a financial institution to facilitate the trade.
Bitcoin's growing global acceptance as payment for goods and services, combined with its ability to facilitate cross-border transactions without an intermediary, makes bitcoin the optimal global medium of exchange.
Unit of Account
Money should also function as a viable unit of account, meaning, it can be used to keep track of profits and losses across multiple transactions in a given period; or to value goods and services.
The key to bitcoin (or any other currency) being a unit of account is liquidity. When measuring profits and losses, it's easier to frame data against an asset that is accessible in the market. Bitcoin is the most liquid asset in the cryptocurrency market. And as adoption grows, its volatility also decreases. Taking this into account, bitcoin is the ideal unit of account not only in crypto, but globally.
What Are The Properties of Money?
Money must have a limited supply to ensure its purchasing power remains stable or appreciates over time. Money isn't spared from the laws of supply and demand. And when centralised institutions can influence the money supply, its value can (and most likely will) fluctuate.
Take the Hyperinflation Crisis in Venezuela, for example. When a government continues to print more money to solve its problems, the value of that government's money diminishes. If maintained for a sustained period, the purchasing power of that money can diminish to that of a roll of toilet paper.
The supply issues that have traditionally plagued fiat currencies are beautifully resolved in the Bitcoin network. Bitcoin has a fixed and predictable monetary supply. Bitcoin has a hard cap supply limit of 21 million coins. Of this total supply, just over 19 million bitcoin are currently in circulation, with the last bitcoin expected to enter the supply in the year 2140. Coupled with its deflationary supply schedule, bitcoin is one of the scarcest monetary assets in the world.
If you can't use money for some future purpose, why accept it from someone else?
Although it's probably a no-brainer in our times, tarnishing and perishing of money was a real problem. If you were trading goods for consumption, you had a short timeline to flip your goods into cash. If your economy used salt, coffee beans, rocks, or anything similar, eventually these would tarnish or perish and lose value.
While durability became less of an issue in the modern day, paper currencies still rip and deteriorate over many years of use. Bitcoin is purely digital and thus completely durable. All transaction history is permanently etched in the blockchain, meaning that you should never lose what's rightfully yours (provided you follow the best security practices).
Money should be easily divided into smaller units to buy goods or services of varying values.
The US Dollar is divisible down to 2 decimal places (.01). Bitcoin can be subdivided up to the eighth decimal place (.00000001). The smallest unit of currency is called a Satoshi after Bitcoin's creator. 1 BTC equals 100 million Satoshis.
Let's be honest, not many of us are using hard cash these days. Over the centuries, money has become increasingly more portable. From physical goods to precious coins, paper notes to debit cards, and now digitised cards. Society has naturally evolved to make money storage as compact as possible.
Given that bitcoin is completely digital, it is one of the most portable assets ever created. In September 2021, $2 billion in bitcoin was moved in a transaction that cost a mere $0.78 in fees. Imagine trying to move this amount of money through traditional means. It would take days, possibly weeks. The entire approval process is left in the hands of a financial institution that you would have little control over.
Or imagine one simple transaction completed in minutes. Totally anonymous. No need to hand over valuable personal information to a bank or other intermediary. That's the power of bitcoin. No other payment system in the world is quite like it.
The Bitcoin network doesn't have a digital bouncer shining a flashlight into your $20 bill to verify its legitimacy. But it does have something else, called Proof of Work mining (PoW). This consensus mechanism is a decentralised, peer-to-peer approach to validating transactions on the network.
The authenticity and quantity of money should be readily apparent (i.e., recognisable) to the transacting parties. Using money that is recognisable (and not counterfeit) allows the transactors to easily agree to the terms of an exchange.
Bitcoin's Proof of Work consensus mechanism performs exceedingly well at preventing bad actors from using the network, using a rigorous process to verify the authenticity of every transaction. As a result, Bitcoin is virtually impenetrable to hackers, making it one of the most authentic and recognisable forms of money currently in use.
Fungible, or exchangeable, means that any unit of money can be exchanged for any other unit of the same value.
In short, any bitcoin created can be traded with another bitcoin, since they are essentially identical. Divisible units of bitcoin more commonly referred to as Sats (e.g. Satoshis or Sats), can also be traded with other units.
Why Bitcoin Has Value
Beyond meeting the 9 criteria of money, bitcoin has many unique features that give it value:
Bitcoin is Decentralised
Bitcoin is the first decentralised money. Anyone can use it, and no single entity controls it.
Bitcoin is completely trustless. Anyone can send bitcoin to anyone else in the world. This transaction can be done completely anonymously, without the inference of any government, bank, or other third-party institution.
Network security is also decentralised, meaning there is no one central authority safeguarding the network from hackers. Deep cryptography and a peer-to-peer consensus mechanism encourage and maintain fair play, rewarding those who contribute to the network (a.k.a. miners). It discourages foul play by making attacks an expensive, resource-heavy endeavour for fraudsters. As a result, Bitcoin is one the most secure financial networks ever created.
Bitcoin is Global
Anyone, anywhere can connect to the Bitcoin network, provided they have an internet connection. Bitcoin is an uncensorable and borderless network for transacting value. You can send it to anyone anywhere in the world, as well as use it as payment for goods in services. You can access your money at any time, and there are no limits on the amount you can transact.
Bitcoin is Irreversible
Bitcoin is like cash, in the sense that transactions cannot be reversed by the sender. In comparison, credit cards, conventional online payment systems, and banking transactions can be reversed after the payment has been made—sometimes months after the initial transaction—due to the centralised intermediaries that complete the transactions. This creates a higher fraud risk for merchants, which can lead to higher fees for using credit cards.
Bitcoin is Private
Bitcoin transactions do not contain any information that would reveal the identity of the transacting parties. There is also no need to provide personal information to a merchant. The only things required to complete a transaction are the wallet addresses of the two parties involved, and a predetermined amount to be exchanged.
Bitcoin is Secure
Bitcoin is secured by cutting-edge encryption and is backed by immense amounts of energy. If an individual or organization were to try to undermine Bitcoin's core encryption, it would require impossible amounts of energy, specialized computers, and space. Bitcoin is the most secure computing network in the world.
Bitcoin is Open
Bitcoin operates by open-source code and is globally transparent, unlike fiat currency. Bitcoin has an open ledger, available for anyone in the public to view. At any time, anyone can independently verify the total bitcoin supply and its underlying code, as well as the balances of each account on the global ledger.
Bitcoin Adoption is Growing
Bitcoin's adoption has been consistently increasing since its creation in 2009. It has survived the hardest stage of the adoption curve. So, it would stand to reason that it should only be easier from here. Bitcoin is already widely used by millions of retail investors, billionaire investors, Fortune 500 companies and some small countries. With an adoption rate that has already outpaced the Internet, the network effects of bitcoin could potentially increase from here.
Why Does Digital Money Have Value?
The value of money lies in its ability to facilitate trade. Money is also valuable simply because the wider public believes in its value. As we move toward a cashless society, the physical aspects of money hold less importance provided it meets the 9 criteria listed above.
Could Ethereum Surpass Bitcoin's Market Cap?
The Flippening is a theoretical occurrence in which ethereum becomes the market-dominant cryptocurrency over bitcoin. Although this has never happened, if it were to happen, it would bring into question bitcoin's narrative as the hardest form of money.
Market cap is a valuable measurement, but it often doesn't tell the full story of an asset.
Where Can I Spend Bitcoin?
A list of major retailers to accept bitcoin can be found here.
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Recommended reading: The Philosophy of Bitcoin Part 2: The Monetary System
Disclaimer: This assessment does not consider your personal circumstances, and should not be construed as financial, legal or investment advice. These thoughts are ours only and should only be taken as educational by the reader. Under no circumstances do we make recommendation or assurance towards the views expressed in the blog-post. The Company disclaims all duties and liabilities, including liability for negligence, for any loss or damage which is suffered or incurred by any person acting on any information provided.