Is Bitcoin Real Money

“The market is filled with individuals who know the price of everything, but the value of nothing.” – Philip Fisher. This is especially true in the world of cryptocurrency. We often confuse currency with money. So where does Bitcoin fit into this picture? Let’s dive into the fascinating, and often debated, discussion of money and currency.

Definition Basics: What is Money?

To understand the need for money, imagine a world devoid of cash, cards, and digital wallets. Imagine a world without money. If you grow apples in your field, and want oranges, then you would search for an orange grower, and swap products. This is called bartering. However, bartering relies on a double coincidence of wants. For an exchange to happen, you should want their product, and, simultaneously, they should want your product. However, many times this double coincidence of wants is more difficult to achieve. That’s why money was invented. In its simplest definition, money is any token, physical or virtual, that can be used to trade. This provided freedom in selling what you have for money, and buying what you want for money.

In 1875, a British economist named William Jevons outlined the four key functions of money:

Medium of exchange: Facilitating transactions.

Measure of value: Providing a common unit of account.

Standard of value: Enabling consistent comparisons.

Store of value: Retaining purchasing power over time.

Historically, various commodities served as money, from buckskins to gold. Gold, in particular, became a global standard, backing traditional currencies. However, the 1971 removal of the gold standard in the U.S. ushered in the era of fiat currency – money backed by government decree, that is without intrinsic value. Thus, fiat currency often fails as a “store of value” over the long term because of inflation. Inflation erodes its purchasing power. For example, even with a mere 2% inflation rate, the value of $100 is reduced to $67 after 20 years.

Bitcoin: A Digital Currency, or Money?

Bitcoin, a cryptocurrency built on the revolutionary blockchain technology, has sparked intense debate. Blockchain’s solution to the “double-spending” problem – preventing digital assets from being duplicated – is undeniably groundbreaking. But what about Bitcoin itself?

Value, as they say, is subjective. We can distinguish between:

Economic value: The perceived benefit or utility to an individual.

Market value: The prevailing price in the marketplace.

A transaction occurs when economic value exceeds market value. So, where does Bitcoin stand?

Bitcoin is a digital currency, but its status as “money” hinges on its ability to act as a reliable store of value. Can you confidently say a Bitcoin will hold or increase its purchasing power in the long run, outpacing inflation?

The inherent volatility of Bitcoin makes this a challenging proposition. While it may be a profitable short-term trading asset, its long-term stability remains uncertain. Bitcoin is a relatively new phenomenon that was created in 2009.

The Verdict (For Now)

For the moment, the underlying blockchain technology appears to hold more assured value than Bitcoin itself. While Bitcoin offers exciting trading opportunities, its viability as a long-term store of value is still being tested.

Ultimately, whether Bitcoin is “real money” is a question you must answer for yourself. Consider its volatility, its relative young age, and your own risk tolerance.

In my opinion Bitcoin is currency, but not money.

In contrast, gold has a proven track record as an inflation hedge across numerous economic cycles.

Thus, it is gold that is true money.

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