Is Bitcoin a Good Form of Money?

Written by Sean GraytokUpdated: 22nd Dec 2021
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Is Bitcoin a Good Form of Money?

Effective forms of money are evaluated on how well they satisfy the following three functions: store of value, unit of account, and medium of exchange.

Bitcoin arguably satisfies these functions better than any form of money before it.

Historically, societies have raced to find the hardest form of money to preserve their purchasing power, which they devoted their time and energy to attain.

Communities have used salt, seashells, and various metals to store their value in a monetary good and solve the inherent limitations of a barter economy.

For thousands of years, gold prevailed as the hardest monetary good because it best fulfilled the traits of sound money.

Bitcoin arguably satisfies these functions of money even better than gold, given its inherent advantages as a digital technology designed to solve a specific problem, compared to getting chosen by process of elimination on the periodic table.

While bitcoin is a good form of money, in theory, it is a brand-new technology that is still monetizing in real-time.

It may be several years or decades before it settles into each of these properties of the store of value, unit of account, and especially medium of exchange.

Understanding Bitcoin as Money

This section will evaluate bitcoin as money based on the following three functions:

  • Store of Value
  • Unit of Account
  • Medium of Exchange

Store of Value

Bitcoin is an effective store of value asset because it has a fixed supply of 21 million and is not easily debased.

Like gold, it takes significant amounts of work to create more bitcoin, which helps preserve the value of its existing stockpile.

Bitcoin follows a predetermined supply schedule that issues new coins programmatically.

The difficulty of mining new coins depends on the amount of energy – called hash rate – expended to create them.

Bitcoin’s adaptive difficulty enabled Satoshi’s achievement of creating digital scarcity and ultimately allowed it to exit a cycle of monetary debasement that has crippled all currencies before it.

Historically, when demand for a good monetary increase, people race to produce more.

The subsequent production floods the existing supply of that monetary good, debasing the purchasing power of the existing stockpile and thus eroding the value that was once stored in it.

Bitcoin is impervious to this vicious cycle of debasement. Hence, why it’s “hard money.”

Regardless of how much energy is expended to produce more, the protocol adjusts to maintain its supply schedule and protect the value of the existing coins in circulation.

Unit of Account

The unit of account function of money describes the measurement used to price goods and services.

Establishing a common unit of account solves the problem of having an infinite number of exchange rates in an economy.

However, it’s imperative not to manipulate the unit of account’s supply because doing so impacts the integrity of natural price signals.

It becomes impossible to accurately determine the true value of a good or service if the unit of account’s supply is vulnerable to unpredictable changes.

Using bitcoin as a unit of account removes the ability to manipulate the monetary supply, resulting in authentic price signals for goods and services.

A bitcoin standard allows for the deflationary impacts of technological innovation to be felt in prices.

A good form of money requires certainty at the unit of account layer.

Medium of Exchange

Most people think of the medium-of-exchange property when they hear the word “money.”

Fiat currencies are effective mediums of exchange because they’re highly liquid and are a common denominator for two people that want different things.

Bitcoin is not currently an effective medium of exchange because people don’t want to spend their bitcoin, generally speaking.

The opportunity cost of missing out on further upside outweighs the desire to spend it on something in the present moment.

People would rather part ways with a depreciating asset (fiat) than the best performing asset in history (bitcoin).

However, from a purely technical perspective, bitcoin is a frictionless, permissionless, and instantaneous medium of exchange for small and large purchases.

Billions of USD-equivalent value can be transferred over the Bitcoin rails in the snap of a finger – without needing anyone’s permission.

Smaller, everyday purchases that don’t necessarily require the security of the main blockchain can occur on a layer two solution, such as the Lightning Network.

In the hypothetical scenario of a hyperbitcoinized world, the purchasing power of bitcoin would stabilize, and BTC would appreciate more in tandem with global GDP.

The opportunity costs of spending BTC would decrease, and using it to acquire goods and services would be more desirable than holding onto it for more upside.

Additionally, bitcoin is currently classified as property by the IRS, so spending it is a taxable event.

A hyperbitcoinzied world would undergo many changes – including tax codes – but bitcoin’s current categorization makes it rather inefficient as a medium of exchange.

Bottom Line: Is Bitcoin a Good Form of Money?

Bitcoin satisfies the three functions of an effective monetary good.

If history repeats itself, society will seek out the hardest form of money – there’s a non-zero chance that it seeks out bitcoin.

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This article is for informational purposes only. It is not intended to be investment advice.

Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and leading expert in investing and financial management. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and technologies that are improving the world.