Can virtual currency be regarded as "money"?

Can virtual currency be regarded as "money"?

This blog examines whether virtual currency, such as Bitcoin, can be regarded as money in the economic sense.

Monetary history traces a path from more to less tangible: from commodities via coins, paper money and credit cards to purely digital value. Recently, money has been affected by technological developments and the widespread use of the Internet: the result is the emergence of virtual currencies. Virtual currency can be defined as a type of unregulated currency existing solely in cyberspace in the form of computer code and not backed by any government. Its most prominent example is Bitcoin - a decentralized cryptocurrency operating like a peer-to-peer network with anonymous transactions and no intermediaries involved. In view of the growing popularity of Bitcoin, the question whether Bitcoin can be properly defined as money seems to be of crucial importance.

Money is traditionally associated with three different functions. First, money is a medium of exchange used as an intermediary in trade to avoid the inconveniences of a barter system. Second, money provides a unit of account. It acts as a standard numerical unit for the measurement of value of goods and services to make different offerings on the market more comparable. Third, money serves as a store of value of current earnings for future spending.

How does Bitcoin perform the three main monetary functions? It undoubtedly acts as a medium of exchange allowing individuals to transact directly with one another without the need to pay intermediary fees. Bitcoin can also be used to measure the value of goods and services on the market as it is numerical and divisible.

However, to serve as an efficient unit of account, a currency must be more than decimal and readily divisible. It must provide a measure of relative worth that users can understand on a deep, nearly intuitive level. Otherwise, users must expend time and effort to determine what the currency and its associated unit of account really mean. It is questionable whether Bitcoin can be considered intrinsically and intuitively valuable. To determine how much it is worth, users must translate its value into value expressed in a familiar unit of account. By looking at the string of data, hardly anyone can identify the Bitcoin value.

When assessing a currency as a store of value, the key question is whether the currency is viewed as reliable and stable enough to operate effectively. Given the enormous volatility of Bitcoin, possible technical problems, lack of regulatory oversight and legal uncertainty, it is questionable whether Bitcoin can be a reliable store of value. At any moment the Bitcoin market may collapse due to changing sentiments among Bitcoin users: a technically stronger decentralized currency may appear and degrade Bitcoin to a mere historic incident. And of course at any moment technical problems (malware, cybersecurity threats) may bring Bitcoin down without any advance warnings.

Bitcoin has the potential to perform each of the monetary functions more efficiently than traditional currencies. It is more resistant to inflation and independent of direct political influence. However, due to its enormous volatility and possible techical problems, it still cannot serve as a unit of account and a store value of value. Time will tell whether Bitcoin will be reliable and stable enough to be regarded as money.