Bitcoin 101 – Are Bitcoins Money?

In a word: yes.

Money is anything widely accepted as a store of value. The idea of money exists in many forms such as currencies and commodities like dollars, yen, or gold. Since Bitcoin is a widely-accepted currency, it too is money.


Similarities to Historic Currencies


A medium of exchange

Currencies exist as an intermediary for commerce, meaning they are accepted for a broad range of goods and services. The earliest currencies were created 4,000 years ago and existed in forms like precious metals, rare shells, or tokens redeemable for bundles of important commodities like grain, before eventually evolving into coinage, bank notes and paper currencies. Consistent across all historic currencies is their ability to facilitate trade of other products within the range of authority and trust of the body issuing it. Bitcoin, like the currencies preceding it over the past millennia, is used as a medium of exchange.

The number of merchants accepting Bitcoin is growing by the day. Online retailers are accepting it for everything from pizza to electronics, generally alongside the option to pay with a historic currency and occassionally as the only method of payment. Major websites like WordPress and Reddit now allow readers to tip writers right on their sites via Bitcoin. Even Drew Carey is itching to use Bitcoin more:

Drew Carey BTC Tweet

We’re with ya, bud.

Traded freely

Currencies are regularly exchanged not only for goods and services, but frequently for other currencies as well. If you’ve ever been to a foreign country, you probably remember exchanging currency from your home country into currency from the country you’re visiting. This type of exchange happens billions of times every day across the globe between individuals, companies and financial firms. In fact, the foreign exchange market is the largest financial market in the world, with more than 3 trillion US dollars worth of global currencies exchanged daily. Bitcoin has joined the foreign exchange markets and is regularly bought and sold alongside historic currencies.

Historic Trading Volume

Not backed by commodities

Like all major currencies, Bitcoin derives it’s worth from the simple notion that many people accept it as a store of value. All major national currencies operate similarly: none of them are backed by physical commodities. Government-issued currencies derive their value from each holder’s faith in that particular country (or group of countries in the case of the Euro), Bitcoin derives its value from each holder’s faith in the global network. Just like any other currency, as long as people continue to accept it as a store of value, it will continue to be money.


Differences from Historic Currencies


Pre-determined supply

The most notable differences between Bitcoin and other currencies is the idea of limited and pre-determined supply. The amount of currency, or money supply, of nations is driven by the political interests of each country. Debts, trade agendas and other political dealings lead to governments adjusting their money supply, almost exclusively in favor of inflation by increasing the amount of currency available. Bitcoin is not issued at the whim of a governmental authority, as historic currencies are, but instead in known quantities at known intervals. In fact, Bitcoins have always been and always will be issued on a schedule that has been publicly known since the creation of Bitcoins themselves.

No physical representation

Bitcoin exists solely as a digital currency, accounted for electronically on a global network of computers. While they can be stored on physical electronic devices, there is no minted token to represent their value. The reason for this is that each Bitcoin transaction is verified with the network to ensure no one can double-spend the same Bitcoins.

The notion of not having a physical representation of a currency such as cash may seem odd at first, but did you know that only 7% of the total US money supply is printed in cash? The rest exists solely as an electronic record, just like Bitcoin. One key difference is that you can make a copy of the electronic record showing the amount of Bitcoins you hold. If you lose a wallet full of cash, it’s gone forever. If you lose a wallet full of Bitcoin, you can recover your currency as long as you still have your access code.

Phone payment Costanza Wallet
The future of currency Good luck with all that

For more information on bitcoin check out the rest of our Bitcoin 101 lessons:

    What are Bitcoins?

    How are Bitcoins Created?

    How are Bitcoins Stored?

 

3 thoughts on “Bitcoin 101 – Are Bitcoins Money?

  1. i keep trying to explain this to friends but generally can’t explain it right. thx for this

Comments are closed.