Any currency, to be established as money in a society, must have the essential traits of a common medium of exchange in that society. Through the history of civilizations, the world has seen the emergence and use of commodity monies such as gold and silver which have high intrinsic value in a society, and fiat currencies, for example, any paper currency having negligible intrinsic value.
In this post, we will look at the cryptocurrency Bitcoin from different perspectives such as its use as a medium of exchange, its intrinsic value, its technological stack, the storage capacity of its purchasing power, and its use as an instrument of financial investment.
Bitcoin as a medium of exchange for goods and services
Bitcoin or any cryptocurrency will be sucessful as money if a myriad number of diverse goods and services can be exchanged with it. The success of Bitcoin or any currency can be estimated by the number of people using it for exchanging goods and services. It is only possible when a large number of producers and sellers of different goods and services accept cryptocurrencies as a form of payment.
The Intrinsic value of Bitcoin
The main problem of Bitcoin or any cryptocurrency or any fiat currency is its negligible intrinsic value. Unlike gold and silver which have a very high intrinsic value, the cryptocurrencies derive their value from the amount of useful goods and services they can purchase. At any time, the value of a cryptocurrency can be estimated by its purchasing power.
The technological stack of cryptocurrencies
Bitcoin or any other cryptocurrency is developed on a stack of modern technologies such as digital hardware, electrical power, internet, and encryption. This is quite different from other type of currencies such as paper money. The required technological stack of any cryptocurrency is essential for its existence and propagation.
The storage capacity of the purchasing power of Bitcoin
The purchasing power of any currency and its stability over a long duration of time is required for getting the trust of people using it as money. The purchasing power of Bitcoin must remain stable over a long duration of time for its widespread acceptance.
Bitcoin as an instrument of financial investment
With the limited supply of bitcoins, if more and more people buy bitcoins at higher prices, its value in terms of other paper currency is bound to increase. The investors, who invest money in Bitcoin want to profit from the rising price of Bitcoin. They buy bitcoins when they think its price is low and expect that it will increase afterwards, and when the price rises they sell bitcoins to make profit. Using Bitcoin as an instrument of financial investment leads to heavy fluctuations in its price.
The use of Bitcoin as a medium of exchange and its use as an instument of financial investment are two very different things and their success in each case will be measured differently. Those who invest in Bitcoin with the aim of making profits from its rise in price may not be much interested in the use of Bitcoin as money or currency. The success of Bitcoin as a currency depends on the number of people using it, and the number of producers and sellers accepting it as a form of payment for their goods and services.