Does cryptocurrency, bitcoin qualify as money? | Opinion

Bitcoin is a type of digital currency, or cryptocurrency, where coins are generated and traded in an electronic exchange system (blockchain) without a central authority, such as a government entity or a banking institution. Bitcoin is the largest cryptocurrency in the world, valued at over $385 billion as of September 27. This means that Bitcoin will rank among the top 30 in the world in terms of total gross domestic product – between the United Arab Emirates ($383 billion) and Norway ($399 billion).

One of the main roles of Bitcoin is supposed to be money. However, to be classified as money, Bitcoin must satisfy at least three basic functions: (1) medium of exchange, (2) store of value, and (3) unit of account. But does Bitcoin currently meet these requirements?

Can Bitcoin buy my groceries?

Is Bitcoin used as a medium of exchange, or generally accepted as payment, for common goods and services, such as groceries? The short answer is yes, but it’s a lot more complicated than that. There are more than 300,000 small businesses operating in Utah, and only 12 accept Bitcoin as a direct form of payment. There are an additional 72 Bitcoin ATMs located at businesses across Utah. The heat map below shows the concentration of these Bitcoin services offered in the state.

These results suggest that less than 0.03% of small businesses in Utah offer Bitcoin services directly. Therefore, the number of small businesses accepting Bitcoin remains low compared to conventional payment systems, such as Visa, Mastercard, Discover and Venmo. However, PayPal recently announced that it will support the transfer of Bitcoin, which will enable more trading and higher usage.

While it does not appear that Bitcoin will be the primary medium of exchange anytime soon, the growth of businesses accepting Bitcoin around the world is increasing relatively quickly.

How stable is Bitcoin?

In economics, a store of value means that an asset is relatively stable and does not depreciate over time. Is Bitcoin a store of value?

To answer this question, I collected daily exchange rates for the US Dollar Index, five foreign currencies (US Dollar, Euro, British Pound, Canadian Dollar and Australian Dollar) and Bitcoin. I looked at the variation in these prices over a five-year period (September 2017 to September 2022). Bitcoin prices fluctuate on average by around 77.22% per year. In contrast, the exchange rates for the US dollar, euro, British pound, Canadian dollar and Australian dollar only vary on average by approximately 4.8%, 8.6%, 10.4%, 8.7% and 12.8% per year. This means that over this sample period, Bitcoin was approximately 8.5 times more volatile than the currencies combined and 16 times more volatile than the US dollar index.

Of course any currency will be somewhat unstable if people use it, but too much instability/uncertainty can be problematic. For example, Bitcoin reached its highest valuation point on November 7, 2021, at $65,466.84 per coin and has fallen to $19,631.63 as of September 27, 2022. Therefore, your grocery budget of $250 per week in Bitcoin at its peak would only be worth about $75 10 months later.

Can my TV be valued in Bitcoin?

Can Bitcoin be used as a measure to value goods and services (unit of account), such as a TV? To do so, Bitcoin must be divisible, countable and fungible. It may surprise you to learn that Bitcoin is much more divisible than other government-issued currencies, as it can be divided into eight decimal places, with the smaller units called satoshis. By comparison, the US dollar can only be divided into two decimal places for everyday use – pennies. Bitcoin is also countable because the units can be easily added, subtracted, multiplied and divided to account for profits, losses, income, expenses and wealth. Also, Bitcoin is fungible in the sense that one Bitcoin is always equal to another Bitcoin. Thus, the answer to the original question is yes, you can value your TV in Bitcoin.

Overall, Bitcoin has the potential to be a safer and more cost-effective source of money, but that has yet to be achieved in today’s market landscape. A world where you use Bitcoin to buy everyday goods and services, such as groceries, is still a long way off, but it is possible. There are nearly 10,000 different cryptocurrencies traded worldwide and it is only a matter of time before someone creates the technology that solves the problems outlined above.

Todd Griffith is Assistant Professor of Finance at the Jon M. Huntsman School of Business at Utah State University.