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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.

Understanding Token Sales and Initial Coin Offerings (ICOs) – Part 2

An initial coin offering is a hybrid between initial public offerings (IPOs) and crowdfunding. While IPOs have been around since the 17th century when the Dutch East India Company issued shares to the public to raise capital, the crowdfunding phenomenon exploded when the internet started in the late 1990s.

Lost Bitcoins: Is BTC More Scarce Than We Think?

Part of what gives Bitcoin value is its immutable ledger, the blockchain. When something gets added to the blockchain, there is no way to reverse or undo the process. You can’t “take it back.” The unalterable aspect of the Bitcoin blockchain is a huge factor in keeping the currency secure and transparent. Generally, this is a good thing.

 

Accidents Happen: Lost Bitcoins

Like all good things, there are, of course, some catches. For example, if you accidentally send 10 BTC to the wrong address, there is effectively no recourse unless whomever owns that address happens to be a saint and voluntarily returns the funds. Perhaps more common than sending Bitcoin to the wrong address is stashing some Bitcoin away in a wallet for safekeeping and then losing the private key needed to access said wallet.

Even with recent price drops, Bitcoin’s value today makes it hard to imagine anyone leaving a hardware wallet with 20 BTC on it sitting in a drawer and forgetting about it. In the early days of Bitcoin, however, mining with an old laptop was fairly easy. Back in 2009, a handful of BTC had little value and could have been misplaced as easily as pocket change without thinking twice. James Howells, a British man who started mining in the early days, somewhat famously threw away a hard-drive containing 7500 BTC.

According to a 2017 study done by blockchain analytics company Chainalysis, roughly 5 million Bitcoins are currently “out of circulation,” or not being actively traded. Chainalysis, whose clients include the IRS and Europol, estimates that as many as half of those Bitcoins are effectively lost forever. That comes out to upwards of $20 billion (USD) at the time of this writing.

 

The Scarcity Principle

Bitcoin’s value is due in part to the built in scarcity factor that was part of its design. By creating a finite cap to the number of BTC that will ever exist – 21 million – Satoshi Nakamoto imposed a condition that would support increasing value in the system over time. In economics, the “scarcity principle” is a well-established consideration in determining value. Simply put: as demand rises and supply decreases, value increases.

Speaking of Satoshi Nakamoto, he/she/they have somewhere around 8 billion dollars worth of original Bitcoin just sitting, untouched, for a decade. We can see this by looking at the blockchain. Of course, it’s possible that Satoshi’s stash could still be accessed at some point, but if the past is any indication it may be worth considering those Bitcoins out of circulation permanently.

 

The Supply Side

We know that scarcity can have an impact on market value. With a growing global interest in Bitcoin, it is worth considering how many Bitcoins there really are to go around as demand increases. We know how many Bitcoin have been mined to date (just under 16,825,000 at the time of this writing). If, as Chainalysis suggests, 5 million of those are lost Bitcoins, or coins that are otherwise out of circulation, then is the current supply of Bitcoin available on the market actually less than we think? Kim Grauer, Senior Economist at Chainalysis, told Fortune, “That is a very complex question. On the one hand, direct calculations about market cap do not take lost coins into consideration… Yet the market has adapted to the actual demand and supply available.”

While it is difficult to determine precisely how many Bitcoin are permanently out of circulation- locked up in wallets where someone has thrown away the key – it is certainly worth considering that this number may be more than trivial. As further research is conducted into the actual number of Bitcoins in circulation and the number of lost Bitcoins, we will get a clearer picture of what the supply side really looks like and how that fits into the context of the inevitable 21 million cap. Assuming demand doesn’t dwindle, recognizing that Bitcoin may be more scarce than we think could have a positive long term impact on value as markets adapt to new information.

 

5 Bitcoin Core Alternatives That Don’t Fork the Blockchain

5 Bitcoin Core Alternatives That Don’t Fork the Blockchain
bitcoin blockchain

Did you know you can run a node on the Bitcoin network without using the Bitcoin Core software? And that you can do so without causing the blockchain to fork?

Last year Bitcoin has experienced two successful hard forks that split the blockchain into three distinct cryptocurrencies—Bitcoin, Bitcoin Cash and Bitcoin Gold. The two forks in August and November happened because people designed versions of the Core software that were incompatible with the original one they wanted to replace.

Cloud Mining: Hot or Not?

Bitcoin Cloud Mining

As Bitcoin continues to soar to new all-time highs, global awareness surrounding cryptocurrencies has exploded. Particularly for newcomers, the idea of mining Bitcoin can sound very attractive at first. After a little research, however, the realities of needing special mining equipment, electricity costs, and technical know-how can be discouraging to many would-be miners. Cloud mining offers a tempting alternative, allowing people to participate in Bitcoin mining without the burdens of buying equipment, setting it up and managing the necessary hardware and software.

Big-Ticket Items You Can Buy with Bitcoin

items you can buy with bitcoin

For many active investors in the cryptocurrency space, a lot of time is spent trading one coin for another. It can be easy to forget that the viability of most cryptocurrencies depends on being used for commerce in the real world. If nobody were willing to accept Bitcoin as payment, it wouldn’t have much value. Fortunately, more and more merchants, businesses, and individuals are beginning to transact with Bitcoin.

A Comprehensive List of ICO Tracking Websites and Tools

Abstract glowing digital currency button ICO initial coin offering on virtual digital electronic user interface. Cryptocurrnecy concept.
A Comprehensive List of ICO Tracking Websites and Tools

The number of startups and established brands raising capital by selling digital tokens that represent value on the blockchain is on the rise. In 2014, you could expect one initial coin offering (ICO), or crowdsale as they were called then, to launch in two months. In 2017, two or three launch each week, and keeping track of them is becoming an issue.

Popular Blockchain Consensus Mechanisms and How They Work

Blockchain security computer encryption concept for online banking and secure payment technology

In centralized systems, an administrator manages the database and decides what files to store and how to update them. The administrator can delegate this power to others. With decentralized public ledgers, or blockchains, however, no administrators exist. Independent nodes in peer-to-peer networks must come to a consensus on the status of the ledger.

The question Satoshi Nakamoto grappled with when designing Bitcoin—the first blockchain—was how a peer-to-peer network could agree on the status of the public ledger continually and in real-time without stalling the cryptocurrency. He found the answer in “mining”.

Top 3 Bitcoin Scandals

Gold and brass bitcoins
Gold and brass bitcoins

Although it is true that Bitcoin is one of the most innovative inventions of the 21st century with potentials to revolutionize financial systems all around the world, it is also true that Bitcoin has unfortunately been linked to various scandalous incidents. This article highlights the top 3 Bitcoin scandals.

What You Need To Know About Bitcoin Cash

Bitcoins

If you’ve been following the Bitcoin scaling efforts lately, you already know that the Bitcoin blockchain forked on August 1, giving birth to a new currency called Bitcoin Cash (BCH). The event was surrounded by quite a bit of uncertainty over how well the new currency would perform. Would it flatline for lack of support? How would it hold value compared to Bitcoin?