You will learn whether cryptocurrencies like Bitcoin are real fiat money and their role in today's financial world. What is the purpose of money? Gold versus Bitcoin. What is the States role in supporting cryptocurrencies? Can cryptocurrencies ever become a legal fiat currency and match the intrinsic quality of money?
There is no doubt that cryptocurrencies like Bitcoin are a popular investment albeit volatile in value and thus bring a lot of risk to potential investors. But it is far from certain how these types of currencies would become a mainstream token of “money” unless backed by state authorities.
The Purpose of Money
Money has always served a purpose for us and has a certain set of functions: it has a unit of account that is a base for prices; it is a safe store of value that can be saved and used later, and it is a medium of exchange. Most of us today consider money as a medium of exchange for goods or services. If you would wake up tomorrow in the world with no money, you would need to barter: that said, for example, a plumber in need of milk would need to find a farmer with a broken pipe.
The Problem with Cryptocurrencies
The reality of cryptocurrencies is that they are only accepted by a limited number of retailers or service providers for a relatively few and exclusive range of goods and services. That means that it is a long way ahead for them to become a viable mainstream medium of exchange.
A particular problem with a cryptocurrency, for example, Bitcoin, is its weakness and vulnerability of “volatility” – that means that it is liable to change of value rapidly and unpredictably, and in the world of money that carries a substantial risk.
Gold v Bitcoin
Cryptocurrencies such as Bitcoin have some of the like for like features of gold, which, for many centuries across many advancements of civilizations, has served as a mainstream medium of exchange. Arguably, both are long-lasting, not easy to obtain through mining, have a limited supply, and are apportionable and transferable.
There is no secret that countries protect their physical money by backing it up with gold reserves. When, eventually, the paper claim on gold is severed by nations, "fiat" money (that is a government-issued money in a form of a legal tender and is not backed by any commodity such as gold) comes into being. Its value and power stems from governments and, in turn, individuals, attributing value to it even though it is materially worthless.
Intrinsic Quality of Money
Through deeper legal analysis of money, in the eyes of law, the intrinsic quality of money is to be attributed to all items of property (chattels) that are:
- Issued based on the legal authority and terms of the law in force in a particular state of issue;
- Designated by reference to a particular unit of account;
- In accordance with the terms of that law, to serve as a means of exchange in the state of issue.
As you can see, this definition relies heavily on the state's role in authorising the issue of currency and in establishing a monetary system. Based on that, it is difficult to accommodate this definition with any cryptocurrency, including Bitcoin.
We can fairly conclude that, while cryptocurrencies such as Bitcoins have some of the features of money and they have the potential to serve as a medium of exchange, it is unclear whether we can truly call them money. As an unpegged virtual currency, Bitcoins are, like fiat currencies, materially worthless: their value depends on individuals continuing to believe in their worth. However, unlike fiat money, Bitcoins have no underlying state authority.
Other articles of cryptocurrencies coming soon.