Why Bitcoin is Not Money

Jonathan M. Hazell

 

What is Bitcoin? Can it be called money?  Money is defined in the dictionary as, "Something used as a way to pay for goods and services. Something accepted as a means of exchange...officially coined or stamped currency." 

http://www.freedictionarydefinitions.com/search.htm?word=money

The key word in this definition is, "officially". Bitcoin can be digitally exchanged anywhere in the world with an Internet connection. Bitcoin is not aligned to any government or geographical location.  It therefore is not official coined or stamped currency. Indeed it is difficult to place a steady value on it to be a means of exchange. The value has greatly fluctuated since its inception. In 2010, a Bitcoin was selling for pennies. By November of 2013, Bitcoin's price reached a high of $1216.00. As of this writing Bitcoin is worth $624.00 each. This is nearly a $200.00 price increase since January 1st. The price of Bitcoin is predicted to go higher until production allotments half in July. At that point the consensus is that Bitcoin's price will go even higher. Some predict a contraction. Whatever happens, Bitcoin's value behaves like a commodity. The price of oil for instance has gone in a free fall over the last few years due to several conditions including lowered demand, Saudi Arabia increased output, etc. The price volatility of the digital currency undoubtedly influences a Bitcoin holder's decision making. Why would someone decide to buy a tent off of Overstock for instance, using Bitcoin? The tent's cost will be hypothetically $50.00 today in U.S. dollars and still be that same price in two weeks time. $50.00 spent in Bitcoin today may be worth $70.00 in two weeks. A Bitcoin holder's prudent choice is to take a long position with the purchase. Bitcoin is proving to be a store of value, just as is gold, stocks, land, or another commodity.

The other issue is International perception. National governments have displayed different reactions to the rise of Bitcoin over the last  five years. https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country. China for instance has made it illegal for banks and other official exchanges to transact in Bitcoin. Individuals may hold it and exchange it with other individuals but cannot use it legally as a means of exchange to purchase goods and services. Other countries such as Russia and Bangladesh have made Bitcoin use illegal in all forms. The United States in March of 2014, declared that Bitcoin was commodity and should be taxed accordingly as other traded goods in terms of capital gains or losses. The vast majority of countries do not have specific regulations against Bitcoin or have declared vague, legal opinions on potential, future regulations. Another tactic has been issuing official warnings on the digital currency's viability. http://www.afr.com/news/economy/monetary-policy/glenn-stevens-says-bitcoins-show-promise-but-so-did-tulips-20131212-iygau.

In short no uniform method is recognized worldwide for the exchange Bitcoin to national currencies. A user in China cannot legally exchange their Bitcoins in a restaurant down the street. A Bangladeshi citizen cannot legally even have possession of a Bitcoin on their computer let alone exchange a Bitcoin for Bangladesh currency. A U.S. citizen can purchase goods in a store or a catalog using Bitcoins. U.S. users however are subject to taxation laws which  potentially can include compliance requirements at a micro levels.  https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidance. The purchase of a cup of coffee, for example, can have a capital gain or loss attached. The U.S. ruling of bitcoin as a commodity therefore treats it fundamentally different than national currencies. A Euro for instance is traded against the U.S. dollar. This value fluctuates daily depending on many conditions; economic changes, political decisions, international trends, etc. The fluctuations however are incremental and do not generally raise or lower dramatically over time. An individual also does not have to calculate capital gains or losses on the fluctuating value of the other currency or currencies. Bitcoin therefore is treated officially by the majority of countries as a commodity, not as a rival currency.  

Bitcoin is a worldwide phenomenon grown from the Worldwide Web. It offers the ability to send funds in ways similar to an email anywhere in the world.  Bitcoin is intrinsically a global, financial unit. What exactly kind of financial unit it is, is up for debate. The United States government formally recognizes it as taxable commodity. Other countries, such as Russia, do not recognize it at all. Other countries are taking a variety of legal stands on digital currency in general. No countries are publicly replacing their currency with Bitcoin or actively using it to officially conduct trade. The U.S. Dollar is still recognized as the reserve currency of the world. This means other countries often sell their own currencies for U.S. dollars in order to conduct international trades. The dollar is the recognized global unit of exchange. For another global reserve currency to emerge, a change in conditions would have to occur. "It is difficult to be the hegemonic reserve currency of the world. The issuing country must have (1) liquid capital markets, (2) a relatively stable economic regime, (3)  a sustainable political regime, and (4) a mighty military force."https://www.amazon.com/Currencies-After-Crash-Uncertain-Paper-Based-ebook/dp/B009NW5IHQ

Since Bitcoin operates on a worldwide scale, It or another digital currency, could potentially challenge other national currencies, even the U.S. dollar itself as a primary unit of international trade.  Stephen Jen's assessment above of a global reserve currency though is in line with the prevailing worldview. This view is that a global reserve currency is linked by definition to a strong nation-state. This nation-state, according to this view must have a historically, vibrant economy and is backed by a strong military. The majority of people still define currency in accordance with national identity.  No matter how efficient Bitcoin's block chain is with its open ledger and inexpensive transaction system, it still is subject to people's perception of what money actually is. Money no longer is a promissory note that can be exchanged for precious metals. That ended in the early 1970's.

Today money is all about perception. People perceive Bitcoin in general to be a store of value, rather than an everyday unit of exchange. It has become an investment opportunity. People perceive dollar bills and other national currencies as money. These paper bills or digitized units have no real value beyond paper and computer cost. One can argue that Bitcoin and the Blockchain applications have intrinsic value because of its encryption and accounting components. People though still assign their definition of money in terms of national identification. Those pieces of paper and digits still have value. Until that national governmental system breaks down or radically changes, Bitcoin will be relegated to investors, enthusiasts, and the high tech industry. Everyday people though, will not use it as money. Governments around the world will not exchange it directly for their own currency in traditional markets or in many cases officially recognize it. If Bitcoin is not used on a daily basis or readily exchanged for other currencies, then it cannot be considered money by definition.  It is a store of value, a commodity, even a new type of accounting system. Bitcoin is not an officially recognized, stable means of purchasing and selling goods and services. It therefore is not money.