Page 36 - DIY Investor Magazine February 2018

IS BITCOIN MONEY? ALMOST...
Stones, cows, seashells, cigarettes, peppercorns and rice are all examples of commodities which have been used over human history as forms of money. Buy what exactly is money and what are its features?
Economists traditionally consider money to have three core functions:
– a medium of exchange. Money allows its holders
to trade goods and services without having to resort
to bartering. Many thousands of years ago, those with surplus goods to trade needed to rely on there being a ‘double coincidence of wants’.
For example, if one person had a cow and wanted to trade it for 10 sacks of grain there needed to someone who had 10 sacks of grain and wanted a cow – a highly unlikely scenario.
By acting as a medium of exchange, money overcomes this problem.
– a store of value. By storing and holding value, money can be used as a medium of exchange over time. However, fiat currencies, such as the pound and dollar, are not the only stores of value and may not necessarily be the best ways of preserving value over time.
Fiat currencies are subject to the loss of value over
time due to inflation, with other assets such as gold,
art and property arguably holding their value better as time goes on. However, cash is more widely used as a medium of exchange due to its liquidity and is readily accepted in most places – you are unlikely to be able to go into Tesco and pay for your groceries with a gold bar.
– unit of account. Finally, money provides a common measure of the value of goods and services being traded. Being priced in certain units, such as pounds or dollars, buyers and sellers are able to know how much a cow is worth compared to a sack of grain and are able to make more informed decisions.
Along with the three core functions, forms of money must also have a number of other characteristics to be successful.
These include being easy to carry around (not like gold bars) and be divisible into smaller denominations in order to facilitate transactions (so change can be given). Of course, money must be widely accepted
by a population for it to be successful and difficult to counterfeit so confidence in its stability remains high.
Is Crypto Cash?
In the cryptocurrency world, Bitcoin was created in 2008 as the world’s first digital only currency, with its creator having the aim of developing ‘a new electronic cash system...’. But can Bitcoin be considered to be money?
If we analyse the cryptocurrency against the three functions above then the answer sways towards yes, but how successful it is is up for debate.
Firstly, Bitcoin is definitely a medium of exchange. Holders are able to spend their coins in a variety of shops and with a range of traders in order to settle their bills. But while there have been several early adopters, its acceptance as a medium of exchange is not yet widespread. While you may be able to pay for your holiday on the Expedia website or purchase some spicy buffalo wings at PizzaForCoins.com, a report in July this year from Morgan Stanley found that Bitcoin is accepted at just three of the top 500 online merchants.
Perhaps the greatest success of Bitcoin has been its ability to store value. From trading as low as 5 cents seven years ago, as I write its value has just hit $16,708! This is in contrast to the US dollar, which according to
DIY Investor Magazine | Jan 2018 36