Is bitcoin money?

Feb 27, 2024 3:14:38 PM

In the original paper in which Satoshi Nakamoto proposes the creation of Bitcoin, the title is clear in its purpose: A Electronic Cash System. Bitcoin’s idea was to serve as , enabling transactions between holders without the control of a central power. But can bitcoin be considered money? This leads us to an even deeper question: what does it mean to be money?

This is a challenging question to answer. Still, it must have some characteristics and properties to be used as money: durability, portability, divisibility, uniformity, limited supply, and acceptability. We see that bitcoin satisfies most, if not all, of these characteristics. However, bitcoin also has its drawbacks.

It does not have the backing of any government. Unlike money controlled and issued by central governments, which can ultimately be used to pay the country’s legal fees, bitcoin is not guaranteed to be accepted by any public or private entity.

Another problem is the question of its stability. Excluding countries with high inflation, currencies issued by governments are stable. The price of an item does not usually vary throughout the month, much less throughout the day. The price of cryptocurrencies can vary by more than 5% over a single day, making it difficult to price products based on them.

Network scalability also becomes an issue. Bitcoin can only process around 5 transactions per second, which is too little to be used as a currency. The current congestion of the network means that the fee to be paid for each transaction in bitcoin is around a few dollars, what makes it practically impossible to be used for micropayments.

Some solutions to solve the scalability issues were proposed. In the case of bitcoin, we can mention the Lightning Network, which creates private payment channels. The Lightning Network allows micropayments as the fee for each transaction is much lower than on the main network. El Salvador, for example, has used the Lightning Network for micropayments with some success.

The high variation in the price of bitcoin and its low scalability made many people understand it not as money, but as a commodity, like gold. Thus, bitcoin could be used as a deposit of value but it is not intended to be used for everyday transactions. This is one of the reasons why bitcoin is also known as digital gold.

The question of bitcoin being considered money or a commodity is controversial. Some bitcoin supporters accuse the community of straying from Satoshi’s initial vision, whose intention was to create electronic money, not a commodity. Thus, several competing networks have been developed over the years, using the bitcoin base code, but with changes to make it more scalable and make its transactions cheaper. Bitcoin Cash and Bitcoin Satoshi Vision networks are two examples of this split.

It is still too early to say whether bitcoin and other cryptocurrencies will be used as digital money and replace fiat money issued by central governments. Cryptocurrencies are still evolving, and their proper role in the world economy is yet to be defined.