Bitcoin: money or not?


src: pixabay.com

A Very Short Introduction

Bitcoin is a decentralized digital currency that works without a central bank and can be sent from a user to another user without a third-party intermediary. Essentially, you own a Bank in your own pocket when you use Bitcoin. Bitcoin exists only in a digital form unlike the paper form of traditional currencies like USD, EURO. The Bitcoin network is powered by bitcoin nodes spread across the Earth making it a decentralized currency. The Bitcoin transactions are immutable i.e., Bitcoin sent to a user cannot be reverted after a certain number of confirmation blocks.

The Inception

Bitcoin was invented in 2008 by a person or a group of persons known as Satoshi Nakamoto. According to the resources, the 2008 financial crisis and the subsequent inflation was the motivation to create Bitcoin. The genesis block of BTC was mined on January 3rd, 2009. If you are interested to know further, you could read the Bitcoin whitepaper here. The Bitcoin technology relies on cryptography and hence the term 'cryptocurrency' is also interchangeably used to represent the assets that runs on Bitcoin technology.

The major problem solved by Bitcoin technology is the double-spending issue. To mention double-spending issue in layman's terms, you cannot create an unique entity in the digital world. For example, if you visit the Van Gogh museum in Amsterdam, you shall see the wonderful paintings by the great artist in its physical form. There may be many replicas in the market but the original ones can be identified and is tagged highly valuable or expensive. This uniqueness or the ability to distinguish from a replica does not exist in the digital world. If you have a picture in digital form (imagine the picture was created in digital form), multiple copies of it can be easily made and there is nothing as an unique entity anymore.

Characteristics of Money

  • portable

    It should be easy to transport or move. The traditional currencies like EURO or USD can be carried either as paper currency or in digital form backed by Banks.

  • durable

    It should withstand time. At the start of civilization, man used cattle as a form of money and this is not something that could withstand time.

  • divisible

    There should be smaller units for the sake of convenience of daily usage. For example, the EURO has cents. 1 EURO = 100 Cents

  • recognizable

    It should be easy to verify the authenticity of the currency. You basically trust the traditional currencies because it is backed by the Government and the Central Bank

  • fungible

    Fungible means interchangeable. Let's say you have two '1 EURO' coins in your pocket, then you be should be able to buy the same amount of potato chips with either of these coins.

  • scarce

    Supply-Demand relationship drives the market and defines the value for money. If there is an infinite amount of money in circulation (hyperinflation), it declines the value of money.

  • difficult to counterfeit

    It should not be faked.

Characteristics of Bitcoin

  • portable

    Bitcoin exists in digitial form. In 2020, you can find a smartphone in almost everyone's hands. You could use Bitcoin if you have a smartphone as simple as swiping a card.

  • durable

    The chain of blocks in Bitcoin are immutable. It can withstand a long long time frame.

  • divisible

    The smallest unit of Bitcoin is called a Satoshi. 1 Bitcoin = 10^8 Satoshis

  • recognizable

    There are plenty of transaction explorers or wallets that allows to easily verify a Bitcoin transaction. You trust the Bitcoin technology.

  • fungible

    Satoshi(s) or Bitcoin(s) are interchangeable.

  • scarce

    There can only be a total of approx 21 million Bitcoins (this can never be changed). The inflation rate decreases with every bitcoin halving event (happens every 4 years)

  • difficult to counterfeit

    Bitcoin uses asymmetric cryptography and is supposed to be very secure. One could easily verify the transactions.

Summary

Bitcoin abides by the generic characteristics of Money.