Why is BTC everything else but a currency?

In this article we look at the different aspects of the definition of Bitcoin that have emerged so far and try to differentiate it from the traditional definition of a currency.

1.Why BTC is NOT a legal tender?

Currency is typically defined by economists as having three characteristics: it functions as a medium of exchange, a unit of account, and a store of value. Bitcoin increasingly satisfies the first of these three criteria, because a growing number of merchants, especially in online markets, appear willing to accept it as a form of payment. However, Bitcoin performs poorly as a unit of account and as a store of value. Bitcoin exhibits very high time series volatility, which tends to undermine any useful role for it as a unit of account. A currency should have only negligible volatility in order to be a reliable store of value. No lenders use Bitcoin as the unit of account for standard consumer finance credit, auto loans, and mortgages, and no credit or debit cards have been denominated in Bitcoin. It cannot be sold short and financial derivatives such as forward contracts and swaps that are routine for other currencies do not exist as of now for Bitcoin. Last but not least, Bitcoin also lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment rather than like a currency.

Source:
http://www.pbc.gov.cn/publish/goutongjiaoliu/524/2013/20131205153156832222251/20131205153156832222251_.html
http://www.forbes.com/sites/steveforbes/2013/04/16/bitcoin-whatever-it-is-its-not-money/

2.Why BTC could be considered a virtual medium of exchange for bartering?

Bitcoin is increasingly satisfying the criteria of being a medium of exchange, because a growing number of merchants, especially in online markets, appear willing to accept it as a form of payment. We have seen a winery from New Zealand become the first business in Southern Hemisphere to accept bitcoins. In Europe, more Irish firms started accepting bitcoins and other virtual currencies instead of Euro. In U.S, a growing number of Michigan retailers are accepting bitcoins and other forms of digital currencies.

Source:
http://www.freep.com/
http://www.independent.ie/business/irish/more-irish-firms-to-accept-virtual-currency-bitcoin-instead-of-euro-29881439.html
http://www.coindesk.com/new-zealand-winery-first-accept-bitcoin/

3.Why BTC could be considered a unit of account, like XDR* (Special drawing rights)?

There are two properties that need to be satisfied in order to be called a unit of account. First, in order to be the unit of account, the object should be quantifiable. Regarding this requirement, Bitcoin is quantifiable in order to communicate prices. Second, the units of account are translatable. Units of account need to be able to translate to a meaningful quantity of any other goods. In terms of translatability, Bitcoin qualifies as well, as we have seen many cases where bitcoins are used as a good to exchange other goods.

*Special drawing rights (SDRs, ISO code XDR) is not a currency in itself, SDRs instead represent a claim to currency held by IMF(International Monetary Fund) member countries for which they may be exchanged.

Source:
Melitz, Jacques. Money and the unit of account. Journal of Economics 26.4 (1966): 460-469.
Yermack, David. Is Bitcoin a Real Currency? National Bureau of Economic Research, 2013.
http://goodmorningeconomics.wordpress.com/monetary-economics-1-money-as-a-good/

4.Why BTC could be considered as an asset class like gold for instance?

Gold has real value because it’s shiny and can be used for jewelry. Other commodities get their value from industrial purposes. Traditionally, investors have turned to precious metals such as gold to help protect and privately transfer their wealth.

Bitcoin is similar to a commodity and as such could be considered like an investment instrument. However, as we witnessed during 2013, it can be classified as a unique asset class different from the traditional asset classes. Equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments) are widely perceived as traditional three main asset classes.

Bitcoin has its value for the reason that Bitcoin is a hybrid of three things with which we’re all pretty familiar: a currency, equity, and a social network. The currency part is pretty easy to understand. Someone is offering something for sale like a bike or a month’s rent, and they might give you a quote in dollars, yen and bitcoins. Bitcoin also has equity-like characteristics in that the value seems to grow as the whole Bitcoin ecosystem grows. The value of a bitcoin is up about 50x during 2013, which is an insane swing for a currency, but if you think about it as equity in a hot startup, it’s not that preposterous when coming off of a low base. And most crucially, there’s a social networking element to it.

Source:
http://www.businessinsider.com/why-bitcoin-has-value-2013-12#ixzz2r8QLH6w8
Briere, Marie, Kim Oosterlinck, and Ariane Szafarz. “Virtual Currency, Tangible Return: Portfolio Diversification with Bitcoins.” Working Papers CEB 13 (2013).
http://www.investopedia.com/terms/a/assetclasses.asp

5.Why is BTC described as an encrypted general ledger?

The underlying original idea of Bitcoin is to make every participant collectively the bank. More specifically, according to the Bitcoin protocol, everybody using it keeps the whole transaction records of which coin belongs to which person. That is to say, the entire community is a shred ledger showing all Bitcoin transactions. In Bitcoin language, we call this ledger the Block Chain. Once a transaction between A and B has been declared by one party, he/she will broadcast to the entire community, the community will then make sure that the coin belongs to the party and haven’t been used in other transactions previously or been used simultaneously with another counter party (e.g. A declares a transaction with C with the same coin at the same time with B’s transaction).

Source:
http://www.michaelnielsen.org/ddi/how-the-bitcoin-protocol-actually-works/

6.How is BTC used as token money?

Token money is a form of money which represents a greater value than its intrinsic value. Originally, medium of exchange, such as gold or salt, had an intrinsic value. However, this primitive medium of exchange got replaced by modern fiat money due to the inconvenience of carrying and transfer. The most important property of token money is that people have faith or confidence in using it. When it comes to Bitcoin, we see an increasing number of businesses accepting bitcoins as a mode of payment.

Such a situation makes us recall the bank run that happened in Cyprus in 2013. During the crisis, the Cypriot government decided to levy taxes on the savings account of all bank account holders in order to be able to pay its own bailout by the European Union and IMF(International Monetary Fund). The government declared banking holiday in the country, thus restricting people from withdrawing cash from their bank accounts and limiting the amount of withdrawals from ATMs. Under these circumstances, Bitcoin helped some Cypriots escaping from almighty central governments taking their hard earned money.

Take China as an example, the country has very strict capital controls. As a Chinese millionaire, the only few possible ways to transfer assets to abroad are immigration, gambling in Macau and probably buying a bunch of Rolex watches and taking them along on flights. With the emergence of Bitcoin, the crypto currency has become a hot measure for Chinese millionaires to go around the rules. China’s government had a tough time to track the transfer, which is also why China’s authority banned banks and payment processors to do any transactions related to Bitcoin. As a consequence, we have seen drastic plunges in bitcoin prices.

As the transaction denoted by bitcoins become more prevalent or if the future financial crises keep central banks in captive more frequently, Bitcoin will eventually become the chosen one and satisfy the property of token money.

Source:
http://www.economicshelp.org/blog/glossary/token-money/

7.How is BTC traded like a commodity?

Bitcoins have been defined as commodity according to China’s authority. Additionally, bitcoins are commodities under U.S law as well. A “commodity” is defined under U.S. law as “a useful thing; an article of commerce; a moveable and tangible thing produced or used as the subject of barter or sale.” A thing is tangible if it is “capable of being possessed or realized; readily apprehensible by the mind; real; substantial; evident.”

Bitcoins are tangible, because each bitcoin is constructively possessed. Constructive possession is “control or dominion over a property without actual possession,” compared to actual possession, which is “physical occupancy or control over property”. U.S. courts have interpreted constructive possession to include, “an appreciable ability to guide the destiny” of the thing. United States v. Culpepper, 834 F.2d 879, 881 (10th Cir. Kan. 1987).

Bitcoins are clearly useful articles of commerce capable of being possessed. Bitcoins are traded online every day for goods, services, U.S. dollars, and other currency. Each bitcoin is also controlled by a specific user. Even though every node on the Bitcoin peer-to-peer network has knowledge of the Bitcoins in each Bitcoin wallet, however, the Bitcoins in a particular wallet can be distributed only by the person with the Bitcoin wallet.

Source:
Law Dictionary; See State ex rel. Moose v Frank, 114 Ark 47, 169 SW 333
Ballentine’s Law Dictionary; See Williams v Board of Comrs. 84 Kan 508, 114 P 858.
Black’s Law Dictionary (9th ed. 2009), possession
http://blog.bitcointitan.com/post/17789738826/what-u-s-regulations-apply-to-bitcoins-as-commodities

8.Why Bitcoin could be considered as a store of value like a voucher?

Store of value can be defined as any form of commodity, asset, money or an instrument that has value and can be stored and retrieved over time. Store of value is a fundamental component of the economic system because it allows trade to occur with items that have inherent value. An example of a store of value is a voucher, which can be exchanged for goods and services.

Bitcoin satisfies the definition of the store of value, at least in a broader sense, and is definitely being accepted as a medium of exchange. The government of the United Kingdom recognizes Bitcoin as “single purpose vouchers” which could be used in exchange for goods and services

Source:
http://www.businessinsider.com/why-bitcoin-has-value-2013-12#ixzz2r8QLH6w8 
http://www.mining.com/goldmoney-founder-sees-bitcoin-not-as-the-ultimate-store-of-value-but-the-ultimate-transaction-medium-95251/

 

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