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.

Ultimately, the unit of account function of money is a story about adoption.

 

The Absence of a Mandate

Bitcoin faces a unique challenge in successfully becoming a unit of account. It would require a larger proportion of people to price their goods and services in BTC. The main issue with adoption arises when you consider how governmental bodies fit into the equation. Existing national currencies offer an established avenue for the payment of taxes and affords regulators a greater level of control over the economy. Without the direct support of the state, the adoption of Bitcoin needs to be voluntary and systematic at an individual level.

Currently, even the merchants who accept Bitcoin are mostly pricing in dollars. The reality is, those that offer their goods and services online and accept bitcoin still live in a fiat based society, where the vast majority of their expenses still need to be paid in dollars. With the price of bitcoin fluctuating anywhere between 5-20% every 60 days, that level of uncertainty makes for an ill-advised business model.

Without a stable currency, a chicken-and-egg situation exists where people are not able to fully accept bitcoin for their services until their living expenses are priced in Bitcoin. At the same time, businesses cannot price their goods in bitcoin until their expenses for staff are also priced accordingly.

 

A Compiler of Liquidity

There is one area where Bitcoin excels as a unit of account – and that is in the altcoin markets. Altcoins are alternative cryptocurrencies to Bitcoin. Due to the limitations of central bank currencies as a digital medium of exchange, the cryptocurrency exchanges developed into markets priced natively in Bitcoin.

Being that the internet is accessible on a global scale, the natural inclination for users is to trade all cryptocurrencies using their national currency. This would have posed as a problem for the altcoins and its owners. The introduction of additional currencies actually creates inefficiencies in markets. Every time a new pairing is added for an asset, the liquidity on the market gets divided between the pairings. The greater the number of pairings for an asset, the shallower the order book depth would be for each asset. For example, if there was a token listed on an exchange with three pairings, the number of orders would need to be split three ways.

However, exchanges have faced numerous challenges incorporating fiat currencies into their platforms.

  • Firstly, fiat transfers were terribly slow, with transfers frequently taking 1-3 business days
  • They were constrained by standard operating hours, even though cryptocurrency markets are a running 24/7
  • In the early years, due to the lack of regulation, banks viewed bitcoin as a risk and would refuse to provide service to cryptocurrency exchanges

Because fiat portals to Bitcoin were widely available in comparison to altcoins, investors around the world found it easier to first buy bitcoin with their national currency to enter the cryptocurrency market, and from there they transferred their bitcoin into other exchanges to purchase other cryptocurrencies. This process concentrated the liquidity into BTC and reduced the partitioning of market efficiency across the world’s most active fiat-to-crypto currencies – including USD, EUR, GBP, RMB, JPY, AUD, etc.

Both altcoins and Bitcoin were benefactors of this difficulty, as it compelled investors globally to pool liquidity together by using Bitcoin as the native currency.  

 

Digitally Native Potential in the Future

In the future, we will begin to see greater need for a digitally native currency for services that are less tethered to the physical world. These services may include the renting of computing power, storage space, or network capacity. This may mean that smart contract platforms have an opportunity to fulfil the unit of account function of money to a greater capacity than Bitcoin, but in its current state, Bitcoin is superior in the other functions of money.

Looking for more information?