If this question was asked in 2017 while the market was booming, the majority would answer with some form of a speculative response referencing the performance of Bitcoin’s price. The same question in 2019 is a lot more difficult to answer for the casual investor, who watched the price plummet almost 85% for 12 months.
However, it is during these times of consolidation that assets are acquired by the informed investors who reap the benefits in the long run. So let’s look at the core properties of Bitcoin that actually resonated with the early adopters of bitcoin, who entered their investment without chasing a bull run.
Origin of Bitcoin
Bitcoin was created in 2008 by the pseudo-anonymous Satoshi Nakamoto as a computer science breakthrough that enabled a currency to function as what he calls peer-to-peer electronic cash. There are 3 global problems where bitcoin may emerge as a solution to. In each of these areas, Bitcoin exhibits a number of properties that position it is as a feasible solution.
- Technology: Bitcoin as electronic cash to meet the need for a currency native to the internet
- Economics: Bitcoin as digital gold is a potential solution to the free-floating fiat system
- Politics: Bitcoin as a peer-to-peer currency that grants fiscal liberty to the individual
Functions of Bitcoin
In order to meet any of these needs, we first need to understand bitcoin’s ability to function as money. There are 3 primary functions of money that bitcoin must fulfil.
A Medium of Exchange
Medium of exchange is defined as an ‘intermediary instrument used to facilitate the sale, purchase or trade of goods between parties’. In essence, money needs to be used to facilitate transactions between people. As a payment network that doesn’t require any intermediary, is censorship resistant, immutable, and exists across borders, Bitcoin is poised to be a great medium of exchange.
A Unit of Account
A unit of account is the one of the three main functions of money. A single unit of account in an economy allows for the value of different goods and services to be compared to one another, and means we have a relative understanding of the value of assets. In early economies, this transition towards using a sub-standardised unit of account allowed for advancement beyond simple barter.
In the current fiat economy, we measure value in dollars and cents. In the past, societies could loosely measure value in grams of gold. A bitcoin economy could have goods and services priced in Bitcoin or satoshis (one hundred millionth of a bitcoin), the smallest denomination of BTC.
A Store of Value
The primary role of money is to abstract the value from our goods and services to a form that is easier to store and transact with. As such, the most important function of money is its ability act to as store of value. Early forms of money like cattle and grain grew ineffective as civilisation evolved due to its lack of durability.