Nowadays, it has become common for people to wonder what is money? It’s a good question. There have been more than a few events this year that have complicated, if not outright challenged, the usual, everyday mindset of pulling out your credit card and paying when it comes to spending. The US money supply has increased by 30%, for example. Can money just develop like that? Then there are all these acronyms for the new financial tools: NFT, SPAC, DOGE. At least these things Cost a lot of money.
The usual line of economists is that money serves three functions in an economy. It is a medium of exchange, a store of value and a unit of account. It’s a simple checklist for determining if certain assets have the right attributes and can rightly be called money. In 2014, NYU Professor David Yermack called bitcoin “marginally useful,“Money-like commodity, popular with hackers and ‘banking opponents.’ Just yesterday, a fifth National Football League star announced that he would take at least part of his compensation in BTC.
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Bitcoin escaped its old-fashioned, anarcho-capitalist roots and entered the mainstream of finance. It is accepted as a payment method at Tesla and WeWork. Institutional giants buy and hold bitcoin. At least some things – usually other cryptos – have a native bitcoin price. Just like bitcoin money? Here are three views:
1. Money itself is a collective fiction, just like bitcoin
Money is and always has been, as CoinDesk main content bureau Michael Casey puts it, a collective imagination. There is no intrinsic aspect that makes money, money. Instead, it’s any object that we can all agree on that has constant transaction value. Yap stones, gold and fiat. Bitcoin is the latest chapter in this shared imagination, a new digital good that bypasses the sovereign issuer and presents the world with a freely accessible standard.
Bitcoin, in this context, is money when it crosses an indefinite and ineffable standard of adoption, such as when there are finally enough people saying, “sure, pay me in bitcoin.” No one knows where the line is, but this weekend’s New York Times ran an article with the headline: “We are all crypto people now.“So it is possible that we have crossed it.
2. Bitcoin is not money, it is an investable asset
In 2018, at the end of that year’s supercycle, the Federal Reserve in St. Louis raised the question, is bitcoin money or a financial instrument? “The line between money and financial assets [sic] is not clear, ” economists wrote. “People’s actions often reveal the role assets play in the economy.”
Although introduced to the world as peer-to-peer digital cash, bitcoin had yet to take on this role, Fed economists said. Instead, it was a “highly speculative asset”. A potential bubble. An inadequate currency because of its price fluctuations and limited liquidity, which few actually used “to buy goods and services”.
Three years later, there are still more than a few people who share this point of view. Journalist Brett Scott argued that bitcoin was successfully marked as a deflationary good by financially conservative alarmists. Although bitcoin can be used to purchase goods, this would not be proof that an equivalent cash transaction has taken place. Instead, it would be a compensation between two assets. Just think about where you are likely to come into possession of BTC: by buying from a crypto exchange.
That said, bitcoin is different from other commodities. It was designed to be fungible, to be broken down into small units of account, and to be easily transferable and stored. Maybe that’s what Scott means by “ornate digital collector’s item.” But few other digital goods have all of these cash-like qualities.
The Federal Reserve has yet to release an update on the current crypto supercycle, so it’s hard to say if the central bank’s thinking on bitcoin has changed. But he published a DeFi explicator.
3. Bitcoin is …
It is possible that bitcoin is all of these and more. It works like money. It also functions as a speculative asset. People buy it as a hedge against inflation as well as for its volatility. It is a growing global reserve currency and a distributed ledger on which to run decentralized applications.
The question of whether bitcoin is real money is reductive. This is especially the case when considering its metaphysical properties. Bitcoin doesn’t exist in the world, but to what extent do they exist?
Craig Warmke, assistant professor at the University of Northern Illinois, rejects the idea that bitcoin exists as a piece of code. It’s not real. Instead, he argues, Bitcoin is “a fictitious substance in a massively co-authored story on a network.”
In other words: “Bitcoin is fair.“
UPDATE: 04/28 (16:18 UTC): Corrects the title of Craig Warmke, he is an assistant professor and not an associate professor.