Theoretical definition of Bitcoin as a currency
And so, is BTC a currency or not? Let’s figure it out.
The most widely used definition of money today includes three functions that must be fulfilled:
- Use as a unit of account,
- Use as an intermediary for exchange,
- Use as a store of value.
For example, the Bank of France is quick to point out these elements, completely rejecting crypto assets for each of these criteria. And yet the only example given is Bitcoin. So let’s look at these criteria in more detail.
Criteria for use as a unit of account
The idea is that the value of the object should be expressed in cryptocurrency, or, more precisely, that the value of the object should be instantly understood through this displayed price. For example, if they sell you a loaf of bread for 100 rubles, you can immediately understand that it is very expensive for a loaf.
And, according to banks, fluctuations in the value of BTC prevent this. This is quite understandable from a theoretical point of view, since it is really difficult to estimate the value of goods such as shoes or bread directly in Bitcoins. Setting the final price in BTC, even if only for a week, is often too difficult to be feasible at the moment.
But at the same time, in a very strange way, Venezuelan bolivars continue to be considered a currency, despite much stronger fluctuations than BTC. This is an amazing difference in the attitude of the media, especially when you consider that many Venezuelan merchants accept payment in cryptocurrency in order not to lose money when paying in bolivars. In other words, BTC and ETH have proven to be more stable than the bolivar, which is a recognized currency…
In the case of bolivars, the reason for these fluctuations in value is known. But for crypto assets, what exactly is the reason?
In fact, the root cause is more obvious than it seems: it’s a matter of acceptance.
Currently, the number of cryptocurrency users in the world is relatively very small. Cryptocurrencies obviously don’t have this problem, as the government forces people to use them and agree to pay or receive payment with their help.
Due to the small number of crypto users, the main factor in changing their value is speculation, which is quite regularly combined with market manipulation by individuals or small groups of private interests.
Of course, this is technologically impossible today, but let’s imagine for a moment that BTC is simultaneously used as a global currency by 7.65 billion people. In this case, it would be extremely difficult to influence its price, as it is happening today. Indeed, to hope to change the value of BTC by half a percent, the wealth of entire countries must be at stake.
In addition, it should be noted that according to Coinmarketrate.com , Bitcoin is currently already as stable as the oil and dollar markets. The crypto asset market is on its way to becoming what is considered a “traditional market”, along with the stock market, due to its growing maturity and stability over the years.
Therefore, the use of cryptocurrency as a unit of account ultimately depends only on how many people use it. There remains only one question to answer: which cryptocurrency will be the first to reach the goal of global adoption?
The criterion of an exchange intermediary
This is just a logical consequence of the unit of account criterion. If the value is expressed in BTC, then BTC should be able to be used to make a transaction directly.
Therefore, it is not surprising that the Bank of England is again criticizing crypto assets for their volatility. An empty argument, if one exists at all, as mentioned above.
However, this is not the only case, as the Bank of France also blames crypto assets for “transaction fees that are disproportionately high for simple retail transactions.” Undoubtedly inspired by the critical failures of Bitcoin and Ethereum at the height of the bull run, the Bank of France broke the Olympic record for such statements, far ahead of French politicians of all stripes.
Indeed, both Bitcoin and Ethereum at that time were prone to problems caused by Proof of Work. A slow and outdated protocol that has only a security argument, but is completely unsuitable for mass network use. Like single-lane highways, BTC and ETH networks have become saturated during the bullish season. Transaction prices, of course, have increased.
But at the same time, many other crypto assets offered significantly cheaper transactions either through more centralized consensus systems (NEO, XRP) or through DAG (NANO, IOTA, Byteball). Most of them are extremely cheap, like Ripple, which charges just pennies.
Of course, these networks were not necessarily as lively as the BTC and ETH networks, but still their advantage was that they existed.
Today, the commission for BTC transactions is less than ten cents. An amount that is not negligible when buying an item worth less than ten euros, but which is comparable to the transaction costs incurred when paying with bank cards.
Banks seem to have forgotten that many small retailers in the world refuse to use bank cards for small amounts… In other words, cash transaction costs are sometimes “disproportionate to simple retail transactions.”
With the advent of new crypto assets, such as Decimal Chain or NANO, as well as technological advances, such as the imminent introduction of Proof of Stake in the Ethereum network, it is bank cards that will become more expensive to use, and constantly.
Therefore, this argument also makes no sense.
However, the Bank of England has an ace up its sleeve in the list of arguments against the crypt: guarantees of a refund in case of fraud. In the case of most crypto assets, the decentralized nature obviously does not allow you to move money from one account to another forcibly. Therefore, in case of fraud, it will be more difficult to get your money back.
But is it impossible? In fact, this procedure only requires more work, since it is almost always possible to track down people who have cheated, if we discard anonymous crypto assets, such as, for example, Monero. Since the blockchain, in fact, is an open ledger, a simple appeal to the police should be enough to search for criminals and offenders who used it, as long as it is possible to link any address with a person. This is necessarily the case, since each wallet always turns out to be connected to another one that was used for a “real” transaction.
But all this is obviously much more complicated than just asking the bank to make a decision that the transaction was never carried out. The police can only try to find him, but they cannot guarantee success…
Simply put, it should be remembered that a refund guarantee in case of fraud automatically excludes an absolute guarantee of ownership. If your money is in an institution that can, at its discretion, take it from you in case of suspected fraud, then it can also take it from you in cases not related to fraud.
Finally, it is worth reminding you that there is already a system in place to mitigate the consequences of a lack of guarantees: insurance. Just as you can insure an apartment and its contents (and get a refund in case of theft), you can insure a Bitcoin wallet and its contents. Of course, this is not a widespread practice today, but it is obvious that in the potential future, almost entirely based on crypto assets, such a mechanism will be used everywhere.
Reserve of the cost criterion
The principle of the value reserve, logically, is to preserve its value over time. And, by the way, this means that this value must be justified by something specific. After all, without an external tangible element, currencies have no “intrinsic value”.
At least, that’s what the Banque de France says. According to the Bank of France, “crypto assets are not based on any real underlying asset.” But is this really the case with fiat currencies? After all, if we assume that the value of fiat currencies is relatively constant due to their “intrinsic value”, then it should be possible to make money through savings.
This problem of exponential currency depreciation is the same wherever there is inflation. In the US, for example, the value of the dollar has halved in one generation… A millionaire in 1990 and a millionaire in 2022 have nothing in common with each other. One was considered very rich, and the other was just a representative of the upper middle class.
For these reasons, it is difficult to say that fiat currencies still have intrinsic value today. At the very least, this value is the result of the trust that can be placed in the institution responsible for managing it. But it will always be lower than the cost of a share in a multinational company or a building.
And if fiat currencies cannot be trusted to retain their value, then they are no more a store of value than BTC.
Conclusion
Today’s money is no longer based solely on the trust of the people who use it. States oblige us to use it, in particular, to pay taxes.
However, the accumulation of monetary disasters during the 20th and 21st centuries undermined this trust: the Greek and Cypriot crises, the subprime crisis, Zimbabwe, Venezuela, etc. And what is happening today, and what awaits us tomorrow, has no analogues at all.
I would like to end with a quote from Friedrich Hayek, an economist and philosopher, who said:
“I don’t believe in the return of reasonable money until we take the money out of the hands of the state. We can’t do it forcibly. All we can do is introduce something in some cunning way that it cannot stop.”