Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
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BTC
USD
63,700
EUR
59,766
GBP
51,136
BTC
USD
63,700
EUR
59,766
GBP
51,136
BTC
USD
63,700
EUR
59,766
GBP
51,136
BTC
USD
63,700
EUR
59,766
GBP
51,136
BTC
USD
63,700
EUR
59,766
GBP
51,136
BTC
USD
63,700
EUR
59,766
GBP
51,136
BTC
USD
63,700
EUR
59,766
GBP
51,136
POWERED BY  
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
POWERED BY  

Bitcoin: A Store of Value or a Medium of Exchange?

Bitcoin: A Store of Value or a Medium of Exchange?


When Satoshi Nakamoto launched Bitcoin in 2009, the founder saw it in his mind, or expected it to function, as money. We can deduce this from reading the white paper, published three months earlier to detail how the cryptocurrency would work. His use of terms like ‘electronic cash’ and ‘coin’ to describe it is telling.

What is debatable, however, is whether Satoshi intended Bitcoin to act primarily as a store of value or a medium of exchange.

The conventional understanding of money includes that it must perform three functions; it must act simultaneously as a store of value, a medium of exchange and a unit of account. We can easily presume from the white paper that the founder of Bitcoin saw it performing all three of these functions.

Early adopters continued to carry this expectation and hoped or even worked to see Bitcoin and other cryptocurrencies replace fiat currencies such as the US dollar in the global economy.

It has turned out, however, that the way Bitcoin takes on these three conventional functions of money is complicated and highly nuanced. In fact, the cryptocurrency challenges the idea that a currency has to perform all three functions. With over 1,000 cryptocurrencies currently in use, a future is plausible where one currency serves as a store of value and another as a medium of exchange.

 

Unit of account

Let’s start with the least debated function—bitcoin as a unit of account. This means the currency is used to denominate the value of commodities, services, assets and other items in a market.

While many merchants accept bitcoin as a payment option, hardly any price their products using its unit of measure (BTCs), however. By and large, merchants have chosen to price their products in fiat currencies such as the US dollar, even when they accept bitcoin and other cryptocurrencies for payment.

The remaining two functions of money are the most debated when it comes to cryptocurrencies. In fact, the common question now is whether Bitcoin makes a better store of value or a better medium of exchange. Also critical is the question of whether Bitcoin is a currency or a commodity asset.

 

Challenges to medium of exchange

As a medium of exchange, bitcoin has done a good job for itself, especially in its first five years. Blockchain news website CoinDesk, in its 2015 1st quarter report on the status of Bitcoin and blockchain, put the number of merchants accepting it close to the hundred thousands.

When indirect channels of spending, such as Visa branded cards, are taken into consideration, users have perhaps millions of places to spend their bitcoins. The wave of adoption by merchants, however, has within the last two years been slowed by the capacity constraints of the Bitcoin network. It is worsened by the high fees miners now charge to confirm transactions. Indeed, a few merchants have chosen to drop bitcoin from their accepted payment methods, with Stripe being the most recent.

The value of bitcoin has nevertheless continued to grow, with the main driving force being the other monetary function it serves—the store of value. This has made it to behave more like a commodity bearer asset that is tradable for profit. With CMA and Cboe derivatives markets launching bitcoin-pegged futures in December last year, the speculative demand for the cryptocurrency went mainstream.

 

Hope remains

At their core, many in the Bitcoin community still prefer to see the cryptocurrency perform all three functions. They particularly want to see it become a successful medium of exchange because it is the first payment method to offer the potential to facilitate trade without the need for government.

For this reason, taking steps to eliminate the challenges to bitcoin acting as a medium of exchange—such as high transaction fees, slow transaction confirmation and volatility—have the attention of the community as a whole, and of core developers in particular.

Solutions being implemented at the moment include SegWit, which will cut the amount of data needed from each transaction going into the bitcoin block, and the Lightning Network designed to increase transaction capacity of the blockchain to infinity. Some solutions also lie outside the limits of Bitcoin, such as creating new coins that overcome its weaknesses.

While the popularity of using Bitcoin as a store of value grows, its use as a medium of exchange hasn’t died yet. With tweaking, bitcoin will once again make a worthy payment option.