Is bitcoin really a currency?
Since there are different types of currency, I only focus on the one that we use in day-to-day transactions. A currency usually serves three main functions, i.e. medium of exchange, unit of account and store of value.
Before the emergence of currency, the human society adopts barter as a system of exchange. People just exchange goods or services from others by using goods or services directly. The major problem in the barter economy is that it is not easy to find someone who has the product you want and in the meantime is willing to exchange that with the product you have. In addition, you both also need to agree on the quantity of the products. You may end up taking most of the time to find a buyer instead of making your products. That’s why barter is not an effective way to facilitate the trade. Therefore, we need a medium of exchange to minimize the inefficiency. For unit of account, it means the units which are used in pricing the goods and services. For store of value, it means the currency can maintain the purchasing power over time.
Anything that is divisible, durable, portable and limited in supply can provide the three functions mentioned above and serve as a currency. You may not be familiar with the first characteristic which refers to the ability of the currency to be divided into smaller units. There can be huge differences in price for different goods and services so a good currency should be the unit of account for both expensive and cheap items. For example, gold lack divisibility as you cannot use gold to buy small-valued goods like a hamburger.
Bitcoin is highly divisible that one bitcoin can be divided into 100,000,000 satoshi which is the basic unit of bitcoin and is named after the founder Satoshi Nakamoto. It is durable as long as at least one node exists in the entire network, given that there are more than 10,000 nodes currently. It is portable because you can use a mobile phone or paper to store bitcoin. For the feature of limited supply, the total amount of bitcoin is fixed at 21 million. In short, bitcoin fulfills all four requirements to be a currency.
How about its functionality? Bitcoin is certainly a store of value. If you had invested US$1000 of bitcoin in 1st Jan of 2011, you would have had nearly US$24 million!! (Check it out https://99bitcoins.com/if-i-invested-in-bitcoin/ ) For the function of medium of exchange, although there are not many shops accepting bitcoin now, you can still find one in your city. (http://coinmap.org/) If you think shopping offline is not convenient, you can try OpenBazaar which is a decentralized online marketplace that use bitcoin as a payment gateway. I know a big name pops up in your mind when I mention an online marketplace using bitcoin. Silkroad! It is an online marketplace infamous for drug trade and only accessible via TOR which allows users to browse websites anonymously. Perhaps Silkroad is the major place that really use bitcoin frequently as a medium of exchange because of its high anonymity.
However, bitcoin hardly can be a unit of account because of its constant increase in value. If you operate a McDonald and mark the price of hamburgers in bitcoin. You have to change the price frequently to keep the customers as the relative price of a hamburger rises every day with a significant percentage. In case you don’t know what relative price is, it refers to the price of a product in terms of other goods or services. Since other products are priced in USD, the relative price of a bitcoin-priced hamburger rises when bitcoin rises in terms of USD.
To conclude, bitcoin is divisible, durable, portable and limited in supply which makes it suitable to perform the functions of medium of exchange and store of value. However, its constant rise in value makes it hard to be an appropriate unit of account. In fact, I miss a very important mission that the fiat currency needs to achieve, i.e. regulating the economy. I will talk about it later so stay tuned!
