Cryptocurrency 101: Is Cryptocurrency Real Money?
Since its inception, and particularly in the past few years, great debate has risen as to whether or not cryptocurrencies like Bitcoin can be considered to be real money. Most traditional economists argue that the general instability of prices means that cryptocurrencies cannot yet be considered money. However, as we will explore, when we investigate the key functions of money and compare that against the functions of cryptocurrency we will see that there is certainly reason to believe that one day they will be considered as money. Money is considered to be something that can be used as a medium of exchange, unit of account, and store of value. Some cryptocurrency’s are on their way to being able to perform those functions. In this article we will explore:
- Are crypto currencies actually money?
- Cryptocurrency as medium of exchange
- Cryptocurrency as a store of value
- Cryptocurrency as a unit of account
- The monetary properties of cryptocurrencies
Are Cryptocurrencies Money?
Most economists define money as having three key functions. The debate as to whether cryptocurrency can be considered money is hotly debated. Bitcoin seems the most likely candidate to eventually be accepted as money but this isn’t yet widely accepted. The three functions of money are:
- Medium of exchange
- Store of Value
- Unit of Account
Cryptocurrency: Medium of exchange
A medium of exchange means that something can be traded in exchange for goods and services. Though it’s unlike that you can go to a bar and pay with Bitcoin, there are many goods and services that can be bought by using cryptocurrency. In this sense, cryptocurrency fits the bills as a legitimate medium of exchange.
Cryptocurrency: A Store of Value
To be a store of value, it must be easily accessible, securely stored, and simply saved. Most cryptocurrencies accomplish those measures. However, to be a store of value something must also have a relatively stable value over time. Volatility in every notable cryptocurrency means that most economists tend to agree that cryptocurrencies are not presently stable enough to be considered a store of value. However, over time this may change.
Cryptocurrency: A Unit of Account
his function means that the currency can be used to measure the market value of goods, services, and other transactions. This is essential for entities forming contracts to be able to calculate the value of the things being traded. This means that the currency must be easily divisible to ensure that exact market values are agreed upon. Much like it’s weakness as a store of value, cryptocurrency is widely considered as too volatile to be truly considered as a unit of account. If greater stability is found in cryptocurrencies, then it will likely be more widely accepted as a form of money.
Cryptocurrency Monetary Properties
So perhaps we can’t consider cryptocurrency to be a type of money just yet, though this may soon be the case. However, they are close to being considered legitimate money and because of that they have some interesting monetary properties.
A key ingredient to being taken more seriously as a digital currency is that of supply. By this, we mean the raw amount of currency in the market. Traditional currency can expand the supply of money through quantitative easing, where central banks literally print more notes of their currency. Every cryptocurrency has their own way of controlling the supply of the currency in the system.
Some crypto currencies like Bitcoin, have a finite number of tokens that can ever be in the market and they become harder to find. The amount of currency that can be found is scheduled in the code of the network and cannot be changed. The model that bitcoin uses is requiring miners to solve an ever more difficult cryptographic puzzle to earn a bitcoin. Because we know the approximate total number of tokens that will ever be released, we can approximate the total number of coins circulating at any given time in the future. Another major cryptocurrency, Ethereum, releases up to 18 million Ether (the Ethereum token) per year but it doesn’t have to be this amount nor is there an upper limit on the number of tokens. This means a cryptocurrency like Ethereum is better able to control the inflation of the currency.
Traditional money is based on a IOU system, which is to say that every amount in everyone's regular bank accounts represents some kind of debt. In the old days, money was set against tangible assets like gold and silver but these days it is against debt. Cryptocurrency tokens on the other hand represent nothing but themselves. They are not set against debt or gold, but by how well people in society value them. Building on their decentralized nature, this means that they are free from the control of government measures like quantitative easing. It is free from political interference.
Money is something that serves three functions: A medium of exchange, a store of value, and a unit of account. Cryptocurrencies are growing around the world in their ability to perform as a medium of exchange. However, the general instability of cryptocurrency means that they aren’t yet widely accepted as a good store of value or unit of account. This means that most economists and financial investors are yet to consider cryptocurrency to be a real type of money. Yet, cryptocurrencies do display signs of becoming money at some point and have their own distinct monetary properties. The supply of cryptocurrency is scheduled into the code of the network and is either limited to a maximum number of tokens or a maximum number of added tokens per period. Finally, unlike traditional fiat money, each token represents only itself and is not backed by any form of debt.