The following are two essays that I wrote for a Banking and Finance class for my Masters in Digital Currency. The assignment was two short essays, one on why bitcoin is money and another on why bitcoin is not money. Both have been edited slightly.

Bitcoin is not money

Bitcoin is not recognized by any country as legal tender and therefor should not be considered money. A customer cannot go into a store with Bitcoin and expect a merchant will accept it as payment.

Many of the merchants that currently accept Bitcoin as payment use a processor that immediately converts the bitcoin into a fiat currency. Many customers think that they are purchasing goods with bitcoin; however, the bitcoin is converted to a fiat currency and in the end, the vendor does not hold bitcoin.

Bitcoin has not been in existence long enough to prove that it is a good store of value, which is an important function of money. Bitcoin’s volatility means that there is no guarantee that Bitcoin purchased today will keep its value in the short or long term. There is speculation that over the long term it will increase in value but similar to other commodities this cannot be guaranteed. In that aspect, bitcoin is more of a commodity than money. Fiat currencies aren’t guaranteed to keep value either and have slight volatility, but if a large amount of capital needs to spent in the next few months keeping it in a fiat currency would be a less volatile vehicle than Bitcoin.

An additional challenge for Bitcoin is its ability to be recognizable as currency. A bank note or coin is recognizable as money with a certain value. A customer cannot physically show that they own Bitcoin when making a purchase.

When a customer is considering purchasing an item using Bitcoin they are not calculating the price in bitcoin rather their local currency. A cup of coffee might be cost $2.00 or the equivalent of Ƀ0.0022. The customer would decide that $2.00 is a fair price for coffee and then sends Ƀ0.0022 to the merchant. Most customers could not look at a cup of coffee priced at Ƀ0.0022 and know if it is a fair price or not.

With the coffee example, the vendor gives the customer an address and the customer sends bitcoin to it. However, there is no certainty that it was the customer paying for the coffee and not a third party who happened to see the address. This is fine for coffee, but with a larger purchase such as a house or car most governments require a paper trail to show who the buyer and seller are.

When a customer applies for a mortgage on a house the lender checks the person finances to see if they are qualified for a loan. There is not an easy way for the customer to prove the amount of bitcoin that they say they have. The easiest way to prove ownership would need to be done with a transfer from one account to another and inform the creditor beforehand that the transaction is about to happen. In addition, because of the volatility of bitcoin, the value of the coins may drastically change from the day the loan is qualified to the day that customer closes on a house.

Bitcoin is a commodity not money because of its volatility; it’s unrecognizable as money and has yet to prove that it is a good store of money. Bitcoin is not money.

Bitcoin is Money

Bitcoin is money because it is a highly fungible, divisible and portable way to transfer value from one individual to another. Its value is recognized and many online vendors accept it as payment for goods and services.

In the beginning of each phase of money adoption, time is needed before the currency was accepted as money. When banks started to issue deposit slips to represent money, trust in banks needed to happen before mass adoption occurred.

Bitcoin is in the early stages of adoption and many consumers don’t know it exists as a payment option. Those who do know about it and don’t use it may not trust it. Bitcoin is slowly growing to become money and once consumers trust that their money will be safe in bitcoin, adoption will skyrocket and it will become a full-blown global currency.

This is similar to how many bank users may utilize a bank but don’t understand all of the services that a bank offers. It is not important that the mass population understand how banks work, but they trust that the bank will keep their money safe.

The Financial Crimes Enforcement Network considers Bitcoin a money transmittal system. Many people are using bitcoin to transfer money from one part of the world to another. This could be sending money to family members or paying international employees.

Some of this money transferred via bitcoin is converted directly to a local currency. However, as inflation rises in some areas, the recipients may not need to convert the money to a local currency, as bitcoin could take over as a recognizable money. Users in inflationary markets could start using Bitcoin as their medium of exchange.

In my area in the United States, bitcoin is becoming recognizable as a currency. The bitcoin logo is slowing becoming main-stream and as more people learn about it the more people will use it.

At the gym on Friday night I was talking a friend about this class and mentioned that it was part of Digital Currency Masters program. I mentioned bitcoin and he responded that he had some coins because he could purchase goods online cheaper. The reason for the price discount was the lower fees associated with transferring money using bitcoin. This individual is not technical savvy but knew that bitcoin was money that he could use it to buy things. In his mind, bitcoin was money. To the average consumer, it doesn’t matter what form money takes, it matters that they can exchange bitcoin for goods and services. This experience was very exciting as I see bitcoin becoming recognized as money.

I consider bitcoin because I am able to purchase goods and services with it. It is very portable and I can securely have a lot of money on me at onetime.