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Is Bitcoin Money, Currency or Commodity?

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bitcoin-money-atmOne aspect of Bitcoin that seems top have many confused including government regulators, banks, speculators and investors is how to classify Bitcoin. Specifically, is Bitcoin money, currency, commodity or something else altogether?

While the classification of Bitcoin might not seem important to those using it, it does get the attention of governments who use this classification in order to decide how to regulate and tax Bitcoin. Just yesterday we saw Warren Buffet declaring Bitcoin is not currency.

The British tax authority - HMRC also declared yesterday that Bitcoin is currency and not a commodity, and exempted it from sales tax.

Warren Buffet said:

It’s not a currency. I wouldn’t be surprised if it wasn’t around in the next 10-20 years.

On the other hand, the British Tax Authority, HMRC said

Bitcoin is seen as the world's first decentralised digital currency, otherwise known as a 'cryptocurrency'. The advent of cryptocurrencies such as Bitcoin is a new and evolving area and determining their legal and regulatory status is ongoing. Cryptocurrencies have a unique identity and cannot therefore be directly compared to any other form of investment activity or payment mechanism.

The statement by HMRC is by far the most important of the two, because it could well influence how many other countries classify Bitcoin, and classifying it as a currency is very significant indeed.

Bitcoin cannot possibly be considered to be a commodity because it is not a natural resource that is mined or produced for commercial purposes. That said, right now Bitcoin is being traded like a commodity as a vehicle of speculation rather than for investment, although the same can be said of currencies on the foreign exchange markets. So is Bitcoin currency or money?

So what then classifies a "currency"? Here is what Wikipedia says:

A definition of intermediate generality is that a currency is a system of money (monetary units) in common use, especially in a nation. Under this definition, British pounds, U.S. dollars, and European euros are different types of currency, or currencies. Currencies in this definition need not be physical objects, but as stores of value are subject to trading between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in the sense used by foreign exchange markets, are defined by governments, and each type has limited boundaries of acceptance.

This is the Wikipedia definition of money:

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can be considered money.

 We can see from these definitions that Bitcoin easily qualifies as both currency or money, neither classification requiring currency or money to be physical in any way. The vast majority of fiat currency is in fact non-physical in that it is simply created dynamically out of thin air on a computer, with no counterpart in notes or coins.

A common criticism of Bitcoin is that it is not backed by any asset of value such as Gold. Well of course neither are fiat currencies, which is why they are "fiat". Such currencies are simply indiscriminately and dynamically created out of thin air, with zero asset backing, based only on trusting the issuing bank or government. In any case, what determines the value of Gold as an asset? Gold is valued according to the mass consensus of what its intrinsic value should be, not based on any tangible factor. The value of Gold, Silver or any commodity is bestowed upon it by those who are involved in the market.

So it is absolutely clear that the true value of Bitcoin as a store of value and medium of exchange is legitimately determined by all those who choose to use it, and accordingly place a value upon it, and any argument against Bitcoin based upon whether it is backed by any assets with perceived value are completely bogus.

A better question might be - what benefits does Bitcoin offer over the fiat currencies that are currently on the verge of catastrophically imploding through being relentlessly devalued by "printing" endless amounts, and the crushing weight of US and global debts based on fiat currencies that must total quadrillions in funded and unfunded liabilities.

Here are three major benefits of Bitcoin over fiat currencies:

  1. Bitcoin is restricted to 21 million in total when all have been mined. In reality millions of Bitcoins will be lost over the years due to deletion, loss of private keys etc. It is looking possible that Mt. Gox alone may have lost up to 850 thousand Bitcoin., so it is likely that in total a million Bitcoin have already been lost making the maximum possible 20 million. Bitcoin is inherently deflationary and will therefore never lose value though dilution as with fiat currencies.
  2. Bitcoin is totally transparent with all Bitcoin being mined and transacted being recorded on the blockchain for all to see and analyse. Fiat currencies which are controlled by privately owned banks in the West and not governments are anything but transparent, with all dealings shady and distorted to hide the fact that a few wealth entities are skimming as much fiat currency as they want, at will.
  3. Bitcoin is not owned, controlled or issued by any bank, government or other entity. It is a completely open distributed peer to peer protocol for the people, by the people that no bank, government or other entity can compromise. 

Why Bitcoin Is Money

When we look at the classic definition of money, we see that  Bitcoin has more right to be classified as money than any fiat currency and even Gold. Here is why.

1. Portable: Bitcoin is infinitely portable through electronic distribution,  Smart Phones, Tablets and other portable computers, Paper Wallets and Cards.

2Durable: Here Bitcoin does fall down somewhat in that Bitcoins can be easily lost due to negligence - accidental deletion of wallets, forgetting pass phrases etc. Fiat currencies are not durable either. Durability of Bitcoin will increase as users become more sophisticated and technologies make it more difficult to lose Bitcoins this way.

3. Divisible: Bitcoin can be divided down to fractions of a Bitcoin very easily. As the value of Bitcoin increases, it will become necessary to divide Bitcoin down to more and more decimal places. For example, if a Bitcoin was worth $10,000 which will almost certainly be the case in future, Bitcoin would need to be divided by 7 decimal places - 0.0000001 of a Bitcoin - at least, to facilitate purchase of smaller items. Failure to do this would render Bitcoin virtually useless as money for the masses.

4. Fungible: Completely interchangeable with another unit of the same money. Bitcoin passes this test.

5. Non-essential for consumption: A pure unit of money that is not also a commodity that can be taken out of circulation for consumption. Bitcoin passes this test - even Gold and Silver do not because they are both used for industrial purposes as well as store of value.

6. Easily Identifiable: This is probably the greatest strength of Bitcoin due to the fact it is totally unique as a Crypto-Currency and almost impossible to forge. The same cannot be said of conventional fiat currencies.

7. Endurable Store of Value: This is an extremely important aspect of money in that a unit of money today will at least retain or increase its value over time. Bitcoin passes this test due to the fact that only 21 million Bitcoins will ever be "mined" and will therefore always have value due to scarcity. The US Dollar and all other fiat currencies fail this crucial test miserably because they can be generated ad-infinitum with zero asset backing of value, especially since the US Dollar was de-coupled from Gold in 1970.  Of course the value of Bitcoin will vary as it is traded and mined, but it will never exceed a finite circulation of 21 Million.

It is clear then that Bitcoin is definitely money or at least has the potential to be money. Bitcoin can and surely will become a new de-facto global monetary system at the right time, just as the existing bankrupt, corrupt and hopelessly broken global financial system is imploding to destruction. Bitcoin will replace it globally.

The ultimate value of Bitcoin will be determined by all participants based on supply, demand, scarcity and other factors but one thing is for sure. If 20 million Bitcoin replaces all or most existing fiat currencies, then the value and price of Bitcoin will be many orders of magnitude from where it is today, with a lot of zeros after the one.  

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