In yesterday’s daily blog I said the following:
Bitcoin is not a currency, it’s a speculative asset
Now I didn’t say that to be provocative, that’s not my style. I simply meant that in economic definition terms, at this early stage of the cryptocurrency development, in my opinion they don’t meet enough of the requirements to be considered currencies.
Currency: A generally accepted form of money
So is Bitcoin “money?” Well it definitely has some of the qualities of good money. It’s:
Homogenous – All portions of equal size are equal value
Durable – It does not easily deteriorate or perish
Divisible – Can subdivide it without affecting it’s value
Cognizable – It’s distinguishable from other substances or items
So it has a few qualities of money so it’s well on it’s way, but there are a few that it lacks which is what makes me say at this point in time it’s not yet money or a currency.
1) General acceptability. A recent study showed that only 5 of the top 500 online retailers accept Bitcoin. Of the ones that do, it’s estimated that only 0.001% of their revenue comes from Bitcoin. It’s hardly being used at all as a means of exchange. Also despite the price rising 1650% just this year alone and it’s popularity and familiarity skyrocketing, the number of transactions is holding fairly steady with the majority of it being trading activity rather than merchant use:
2) Stability of value. It’s not a currency if people don’t spend it out of fear of radical price increases, or merchants don’t accept it because of fear of radical price declines. Currencies need to be stable. The reason we spend our currency is because the day to day value is irrelevant in our decision making process.
Remember the Bitcoin pizza? The first documented successful purchase using Bitcoin was when Laszlo Hanyecz bought two Domino’s pizza’s for 10,000 BTC worth 41$ at the time. In hindsight those were expensive pizza’s. Those Bitcoins would now be worth 165 million dollars.
As long as radical price swings make people fear spending their Bitcoins or merchants fear accepting Bitcoins, it can’t be a currency.
3) Portability. Good money needs to be physically portable. US dollars or gold / silver can be transported anywhere physically. Bitcoin however requires a functional internet connection on both sides as well as the blockchain functionality to confirm and log the transaction.
Bitcoin is often talked about as a viable replacement currency for when fiat money fails around the world and governments collapse under the weight of debt and bankruptcy. But if that were to happen, it may be a stretch to assume the failed governments who don’t have any money would still maintain the global structure that supports the internet. A lot of that falls under the public works category right now. Good money can’t rely on third party substructures to function properly.
4) Free / inexpensive transactions. It’s important that the cost in an exchange of goods and services doesn’t make up a significant portion of the transaction. If it does it will discourage use and that runs counter to the purpose of money and currencies.
A year ago the average Bitcoin transaction fee was just 25 cents. As of today that’s risen to nearly 25$.
5) Relatively benign to the Earth. I know this one is a stretch and I could easily skip it, but I am a person who cares very much about this beautiful planet we are blessed to inhabit. There’s a lot of people out there who simply aren’t aware of the energy consumption due to the meteoric rise of cryptocurrencies.
By very design of the way blockchain works, it requires increasingly more computing power to solve, and it’s exponential going forward. That may be a genius idea for the security and viability of the blockchain, but that’s not something mother earth would approve of.
It’s difficult to put an exact number on it but taking an average of a few recent studies it’s estimated that Bitcoin mining consumes more energy than the bottom 150 countries of the world combined. At this rate it’s possible that Bitcoin mining will consume enough energy to power the entire United States in a few years.
Now obviously massive grain of salt here. There are some assumptions baked into those estimates, mainly that the meteoric rise of Bitcoin will continue and will outpace improvements in energy efficiency, but even if they are remotely in the ball park this is something we should be concerned about. How can a viable currency require exponentially more energy?
So is Bitcoin a currency? Is Bitcoin money?
At this point in time (December 2017) I would have to say in the economic sense, no. I know it’s called a currency, and I know a lot of people want it to become mainstream money, but at this point in time unfortunately it’s still in the speculative asset category.
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