Are cryptocurrencies money?

As Bitcoin wobbles backwards and forwards in a volatile market, it seems to have very little in common with “money” – pounds, euros and dollars – despite the ‘currency’ moniker we gave it all those years ago. Short term values are frothy for many reasons, largely related to regulation and supply. The halving of the Bitcoin block reward, expected some time on 20th April, will, yes, halve the volume of Bitcoin added to circulation when each block in the chain is cryptographically secured. On the other hand, there is the possibility that Bitcoins confiscated a decade ago from the Silk Road dark marketplace will soon be released, increasing the circulating supply. And over all of this hang macroeconomic conditions and regulatory actions against exchanges in the US.

But pulling out from the noise and taking stock of Bitcoin, as the first and most decentralised crypto asset, does it merit the designation of a currency after all?

What is money?

To be considered as money, a commodity must be a store of value, a medium of exchange, and a unit of account.

What that commodity is, however, can cover a multitude of things. Gold coins of antiquity were money because they were made of a rare commodity that could be used to save and to pay for things, and could be tallied in a ledger. Paper promissory notes tied to the gold standard had the same qualities but were representative of the commodity, not actually made of it. Fiat currencies, what most of us use now, are not linked to gold reserves but have their value conferred by government, the economy and fiscal policy. To add yet another layer of complexity, we use day to day a mixture of private money – electronic ledgers kept by our commercial banks – and public money in the form of bank notes, the basic money supply.

Going back to the three properties of money, can something like Bitcoin be added to this list?

A store of value

Bitcoins can be saved, stored and retrieved by their owner, and they are usable when they are retrieved. For safe retrieval, whether your horde is gold coins in a buried chest or crypto assets in a cold wallet, it’s important to keep the treasure map or the private key safe from compromise or loss. When any commodities are stored, or course, their relative value to the real world will change, whether that is inflationary pressures that we experience with fiat currency or macroeconomic and speculative impacts. Bitcoin, therefore, is as much a store of value as central bank currencies or scarce commodities like gold.

A medium of exchange

In May 2010, Laszlo Hanyecz traded ten thousand Bitcoin for two pizzas. This marked the first known exchange of Bitcoin for real world goods, although the FAQ section of the Bitcoin website a year earlier advised anyone who wanted to obtain some to “Find a bitcoin owner and sell her something – MMORPG equipment, IT support, lawn mowing, dollars or whatever you can trade with her.” For the growing number of people who hold crypto assets (around 12% of the global adult population at the last count) Bitcoin and other cryptocurrencies are accepted in payment for goods and services, particularly where this involves cross-border transactions. They can also be used in payment of taxes in some jurisdictions, including parts of Switzerland. Bitcoin is definitely a medium of exchange.

A unit of account

Bitcoin gave us the ultimate honest ledger, a cryptographically secured audit trail of transactions. It is at its very heart a unit of account.

It passes all three of the tests of money, as do many of the high volume, liquid, fungible crypto assets that followed it. We won’t be using it to buy our coffee on the high street, but it has paved the way for digital money of the future.

Buy now! “Getting Started with Cryptocurrency: An introduction to digital assets and blockchain” (BCS Publishing,2024).