Are you wondering whether Bitcoin is sound money? If yes, here’s what you need to understand about Bitcoin as modern money.
It’s no secret that Bitcoin has fueled many people’s imaginations worldwide. Perhaps, that’s because of the recent Bitcoin value increase against the U.S dollar. What’s more, several merchants have announced their plans to incorporate Bitcoin as a payment method at their stores.
However, Bitcoin remains largely unregulated, with most people accessing it via crypto exchanges like the bitcoin system. Essentially, this cryptocurrency doesn’t have a central regulatory authority. Thus, it remains vulnerable to speculative trading and volatility. Consequently, some people still believe that criminals can use it for illegal transactions.
Some countries have even warned their citizens against accepting or using Bitcoin. In other nations, like China, using Bitcoin is unlawful. At the same time, El Salvador has entered the history books as the first country to make Bitcoin a legal tender. But is this virtual currency good money?
What is Good Money?
Some experts argue that good money maintains its purchasing power over short durations. That means people can use it to buy the same amount of goods or pay for a similar service. The price-level stability of a commodity depends on money demand and supply.
But Bitcoin advocates need a rigid supply. Thus, Bitcoin’s availability and circulation should be free of political manipulation. However, Bitcoin’s stringent supply cost cannot respond to its demand volatility. Therefore, its demand fluctuates dramatically, and so is its value.
The Bitcoin Essentials
Bitcoin functions like traditional cash. People can buy or sell Bitcoin on crypto exchanges. What’s more, this virtual currency serves as a payment method for services and products, with several businesses accepting it.
People transact with Bitcoin by sending tokens to the accounts they want to credit. After transacting, the Bitcoin network broadcasts the transaction details publicly. This network has miners or people who validate Bitcoin transactions using networked computers.
A Bitcoin transaction remains pending until most participants in the network verify its validity. Thus, Bitcoin miners verify transactions the way a central authority does with conventional banking transactions before their confirmation. After verification, a block with the transaction details goes to the blockchain. And the network moves on to decode another transaction block.
Bitcoin users create a new address for every transaction for anonymity purposes. However, anybody in the Bitcoin network can access its public blockchain and trace account balances.
What Makes Bitcoin Good Money?
Satoshi Nakamoto envisioned Bitcoin as an alternative to conventional payment systems. The aim was to have a payment system that facilitates cross-border transactions without an intermediary. Thus, the anonymous Bitcoin creator wanted a payment system free of interference by central banks, governments, and other sovereign entities. What’s more, Bitcoin would be free of the alleged exploitation by governments and financial intermediaries like banks. But has Bitcoin served its purpose so far?
- Bitcoin as an exchange medium: Bitcoin must work as an exchange medium to serve as sound money. And today, several merchants take Bitcoin in exchange for services, goods, and other assets. Thus, it fulfills this purpose of money.
- Bitcoin as an accounting unit: People derive Bitcoin use as an accounting unit from its medium of exchange purpose. Thus, anybody that pays with Bitcoin must have the tokens they want to spend in their digital wallet accounts.
- Bitcoin as value storage: Many people purchase and store Bitcoins in their crypto wallet, waiting to increase price or value and sell them later for profits. Thus, Bitcoin is both a value storage and an investment tool.
Bitcoin is good modern money. However, its adoption and acceptance are still in infancy. Therefore, it needs more time to realize Satoshi Nakamoto’s initial goal.