Is Bitcoin a currency, or is it an investment like gold? Can it be both? We explore that idea and suggest where it might be going.
What is money?
There are three fundamental values to describe what money is, and what it does.
- 🏦It’s a store of value - you can save it and use it for later, knowing its value will remain.
- 💱It’s a medium of exchange - something we use to buy and sell things that everyone accepts.
- 📝It’s a unit of account - a way to measure the value of goods and services.
It's important to understand this as it helps define how Bitcoin is currently perceived. In places where adoption is low, it doesn’t satisfy any of the above.
In areas where adoption is high, it can tick all three of the what is money boxes. On a global scale, thanks to Bitcoin’s growth in value, it satisfies the criteria that the currency can be a Store of Value.
As a currency
Bitcoin’s original purpose - as laid out in the original paper published by Satoshi Nakamoto was to be a decentralised payment method.
What Satoshi wanted was to create a medium of exchange - a way to buy and sell goods.
There are more than 100,000 websites worldwide that accept Bitcoin as a form of payment.
However, as the popularity of Bitcoin has increased, its ability to serve as a quick, free way to transfer money has become hindered. Transaction fees and the number of transactions that can be handled at once by the network has made Bitcoin seem less viable as a medium of exchange.
Read more about that in our article Bitcoin’s Limits. However, countries like Japan, Russia and Norway all accept Bitcoin is a currency.
The Lightning Network could fix many of the above issues.
Bitcoin as an investment?️
Thanks to Bitcoin’s amazing performance in 2017, many came to see the currency as a place to put cash and watch it grow. Like an investment.
Many have compared it to gold. The Winkelvoss twins - those guys who invested in Facebook - described Bitcoin as Gold 2.0. However, gold as an investment is regarded as somewhere safe to put your money when currencies aren’t faring so well.
Bitcoin’s price volatility makes its suitability as a safe haven questionable. But that could change.
As part of Bitcoin’s design, the amount of Bitcoin available increases in number at a rate of approximately 4% per year. It’s engineered to slowly decline to zero growth around the year 2140.
Bitcoin’s diminishing growth rate and finite quantity are comparable to gold in that sense. What’s more, Bitcoin’s volatility compared to other cryptocurrencies is lower - meaning it has potential to become the gold of crypto.
Bitcoin as a commodity?️
One possible idea for where Bitcoin could be heading is for it to become a tradeable commodity, like oil, or metal. In America, the Commodities Futures Trading Commission designated Bitcoin as a commodity in 2015.
Read more about tax and regulation on Is Bitcoin legal?
Banks like JP Morgan are now seeing the currency as an asset class, too. But that doesn’t mean it’s a done deal for Bitcoin. Currencies are traded as commodities all over the world thanks to their relationship with the prices of certain goods.
Bitcoin’s future isn’t set
So is Bitcoin an investment, or a currency? It’s still not quite decided yet. One thing that gets mentioned in this debate is Bitcoin’s volatility and why it makes it difficult to be seen as a currency.
Most major currencies have an annual volatility rate of between 0.5% and 1% every 30-60 days. Bitcoin’s has been hovering between 4-5% in 2018.
If Bitcoin starts to stabilise, who knows where it might go next.