With the increase in interest and the boom of late 2017 of the crypto market there has been much discussion and neverending articles calling Bitcoin and other cryptos ‘digital money’. There has even been a book released called ‘Bitcoin - the future of money?’.

On the surface it appears that Bitcoin and cryptos act as real money - they are used as a medium of exchange for goods and services.

But do these cryptos deserve to be called money? Do they fit the old economic ‘functions of money’?

What are the ‘functions of money’

Medium of exchange

Before money came along we had a bartering system, where if you wanted something you had to trade it with someone else. Because of the inconvenience factor of this money has been created for its ‘medium of exchange’ - it is tradeable intermediary used to facilitate the sale, purchase or trade of goods between entities (Investopedia). It is generally agreed upon that a medium of exchange should be portable aswell, to mitigate the downside of bartering large items.

In the case of Bitcoin it seems to loosely fit the criteria of ‘medium of exchange’ - it has been designed to facilitate the sale, purchase and trade of goods between entities. There can, however be some debate that Bitcoin is not widely accepted enough to meet this criteria. In general the country in which people live have their own currency which has been adapted as the medium of exchange. For example I am from New Zealand, and people are (generally) paid in New Zealand dollars, and goods are bought and sold with New Zealand dollars.

As Bitcoin is a digital currency it is portable, and so it meets this part of the criteria.

Although I will go into this a bit more below, Bitcoin currently has slow and expensive transaction fees which hinder its ability currently to be a successful medium of exchange. However, because of its nature Bitcoin can still evolve and make changes to become a successful medium of exchange

Unit of Account

A unit of account is basically is the way in which currency is used to value goods and services, and keeping track of debts and assets - it allows consumers to ‘keep the score’. The unit of account needs to be relatively stable in value, otherwise the price of goods and services can't be valued accurately. As I will go into further below, Bitcoins prices have been volatile and so it does not currently meet the ‘unit of account' criteria.

However, as Bitcoins price (hopefully) stabilises in the future it is easily divisible and scalable - it may meet the unit of account criteria. One Bitcoin can be divided into 100,000,000 smaller units called Satoshis. 1 satoshi is cureently worth around 0.0000001BTC or $0.00008USD.

Store of value

Investopedia define a store of value as ‘any form of wealth that maintains its value without depreciating'. We can see that assets such as gold are good stores of value that generally go up in value over time.

However if we look at the price of Bitcoin below we can see that it has experienced wild fluctuations:

Source: coinmarketcap.com

However, currencies such the USD or pounds have a proven store of value and are worth relatively the same amount year to year (controlled for inflation, by the government)

Although having a store of value is meant to be the case with money there are exceptions, where there is hyperinflation, the most recent case probably being Zimbabwe where hyperinflation meant their money became essentially worthless. Zimbabwe eventually had to scrap their money system and adopted the South African Rand. In this case there can, and has been arguments that countries like this could adapt a cryptocurrency such as Bitcoin as their new currency. However, because of the decentralized nature of Bitcoin it is often argued strongly against by governments.

Alot of the fluctuation in price of Bitcoin is due to the fact that it is currently being as more of an investment vehicle by many that as an actual currency for making day to day purchases. People are holding their Bitcoin in the hope of it rising rather than using it for purchasing.

However, because the supply of Bitcoin is known and finite there can be an argument that over time the price will stabilise, and increase. The theory is that if the demand is for Bitcoin is high enough and the supply is decreasing then supply and demand theory will push the price up.

This is not the case with printed money where the supply is controlled by the government and if not controlled properly can lead to hyperinflation.

Summary

In summary it seems that Bitcoin currently meets the function of money as a ‘medium of exchange’, but not as a a 'unit of account' or‘store of value’. However because of Bitcoins deflationary design in theory it should stabilise as the supply decreases leading it to increase in value and become a more reliable store of value and unit of account.

Thanks for reading an I always appreciate comments and discussion!

References
http://nomadcapitalist.com/2014/04/20/top-5-worst-cases-hyperinflation-history/
Wikipedia
Investopedia