In today's post we'll deal with an important question, considering what is happening in the markets - Today Bitcoin (BTC) crossed the price milestone of $57,000 USD/coin.

So, what I plan to explore is the question - Is Bitcoin a currency?

Throughout its recent history, Bitcoin (BTC) has been a truly loved topic of conversation. One of the resons behind this, is that fact that it has managed to polarize people - Some hate it with their life, while others love it with their life. Some believe in the technology, but not in the asset that is traded. Some are very confused about what it means. While others remain clueless even after it has been explained to them like 500 times.

One of the reasons it has entered people's imagination is it's wide price fluctuations. If you haven't followed it, here's an example:

• In Jan, 2016, it traded to $428 (USD)

• In Jan, 2017, it traded to $940 (USD)

• In Dec, 2017, it reached a near-term peak of $19,862 (USD)

• In Jan, 2019, it reached a near-term through of $3,359 (USD)

• In Nov, 2021, it reached the currently standing all-time high of $68,906 (USD)

• In Nov, 2022, it reached a near-term through of $15,516 (USD)

• Currently, it appears to be moving higher to $56,986 (USD)

One of the other reason it also grabs so much of attention is the fact that people find it very difficult to define as to what it is:

• Is it a security?

• Is it a commodity?

• Is it a currency?

If they don't know they just keep debating.

While there are definitions coming from the regulatoy side, I'm not talking about that. How the regulators define an asset is definitely important, for whole swaths of reasons:

• Compliance

• Taxation

• Risk management

That being said, it is also important to have a general understanding of the nature of an asset - it will not only help with the management of the asset, but it would allow you to better adapt should the regulators at some point in time decide to change their mind.

So, is Bitcoin a Currency?

What is a Currency?

To answer that question, we need to know what a currency is, and what it is not. So, what is a currency?

Think about it:

• You use a currency to buy stuff. And you get a currency when you sell stuff.

• You don't use a currency to eat, wear, or burn (to give you heat, though it is a possibility in extreme conditions)

Let's take an example:

• Let's say you decide to buy Lithium using USD.

• There may be two potential reasons why you decided to buy the Lithium. These are essentially two reasons why you saw value in Lithium:

  • You plan to use the Lithium to make batteries. This, I'll call as Consumption Value.

  • You see the prices of Lithium have come down, so you expect the prices to go higher, when you plan to sell the Lithium for a Profit. This I'll call as the Trade Value.

• Let's assume that, while you're holding on to the Lithium, something happens - three scenarios:

  • Global economy goes through its nornal ups and downs (along with the US economy), and you eventually find a good buyer to buy the Lithium at a good price. You make an expected profit.

  • Depression hits the global economy, while US economy is booming. USD suddenly rises exponentially, and Lithium prices drop. Now, you'd be making a massive loss on that Lithium.

  • USD looses its reserve currency status and the price of USD starts to fall like a rock. If you sell the Lithium for USD, you'd make a massive profit but you don't know how far USD will go down. What if it is dissolved? So, you decide to take EUR for selling the Lithium instead.

  • The world hits a depression due to ongoing devaluation of fiat currencies, so trade starts to move to a barter system instead. All Fiat currencies go on a free-fall, and commodity prices spike. You decide to hold on to the Lithium as you believe, it might provide you the best persistence of value.

Properties of a Currency

The point is that, in practice, what is a currency and what is not is determined based on the nature of the objects exchanged in a transaction, and what is their expected future valuation.

• What you buy and sell is not a currency. It tends to be called a product or merchandise etc.

• What is you provide while buying something is the currency. And what you get while selling something is the currency.

• Thus, an entity in a transaction becomes a currency when it has some of the following properties,

  • It has a higher stability of price - or persistence of value (as compared to the product).

    • Why would you sell something who's price is expected to go up? You'd rather invest in it.

    • Why would you buy something who's price is expected to do down? You'd rather divest away from it.

  • It tends to have a higher level of liquidity

    • Why would you take somehting that you cannot easily trade? Would the entire Canadian population okay a proposal to get paid in GICs with lockup periods instead of cash, even though, the GIC's valuation is exactly the same as the cash, and also pays an interest? Answer is no.

  • It tends to have a lower transaction cost

So, is Bitcoin a Currency?

The answer to that question depends on what the transaciton it about? I mean what is being exchanged for a BTC.

Here are a few examples:

• If BTC is used in a transaction against USD, in today's date, USD will be the one that would act more like a currency.

• If instead, BTC is used in a transaction against let's say SOL, BTC might act more as a currency.

Conclusion

So, in today's world when BTC price remains highly volatile, and it has a lower liquidity, it will act less as a currency, at least against the more liquid fiat currencies. But, it might still act more like a currency against other assets such as another cryptocurrency, maybe a volatile currency such as TRY, or even some high beta stocks.

In future though, if we get to a point where BTC's value becomes much more stable and becomes widely accepted, while let's say GBP becomes very volatile, BTC might end up getting used more as a currency to buy and sell GBP - definitely a speculative statement to explain the concept.

Last, but not the least - even if BTC is not acting much as a currency today, it is not necessarily a bad thing for the investment case for BTC. And in the future, if BTC ends up becoming more of a currency, it may not necessarily end up being a good thing for the investment case for BTC.

I hope I was able help you better understand the question - Is BTC a currency?

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