Ongoing Debate: Is Bitcoin Money or an Asset Class?
Bitcoin (BTC)–Bitcoin has led the way in 2017 as the king of cryptocurrency, a new field of money/technology/asset class that seeks to move traditional fiat into the digital age. When we look back on the history and emergence of cryptocurrencies, 2017 will be the year that things truly took off. The total market cap of all cryptocurrencies began the year just shy of 18 billion USD and, as of writing, is now occupying a space around $245 billion, with Bitcoin owning 56% of the market share and the next closest competitor, Ethereum, barely scraping above 14%. As the general public takes greater interest in the rise of Bitcoin, it becomes more pertinent to answer the question: Is Bitcoin like money in the traditional sense, or is it more of an asset?
Let’s start with a few definitions. Taken from the Encyclopedia Britannica:
Money: a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed; as currency, it circulates anonymously from person to person and country to country, thus facilitating trade.
By this representation, Bitcoin looks an awful lot like money. It serves as a medium of economic exchange. It holds value and can be expressed at a specific price. It can even be circulated anonymously by two people with nothing more than a phone and an internet connection. But is that all we need to make money?
Charles Wheelan, in his book Naked Money, gives a succinct definition that can be applied to Bitcoin’s situation, “Here, the simple becomes the profound: If you can swap something easily and predictably for goods and services, it’s money. If you can’t, it’s not.”
At present, the “money” labeling of Bitcoin is held back by two factors. The first is volatility. A key phrase in Wheelan’s definition is predictably. It’s hard for a merchant to accept 20 USD in Bitcoin for a T-shirt only to see the price fall to 5 USD. In our current bull market (one that looks to continue in the coming years), volatility hurts the consumer. Who in their right mind wants to spend even a dollar in BTC on a sandwich, when that same dollar might be worth five, ten, fifty times as much in the coming decade? Let alone purchasing a car, a house, etc.
This very dilemma was addressed in survey results released by LendEDU last week. The website polled 564 Americans invested in Bitcoin, and asked questions ranging from how long they expected to hold their Bitcoin to why they invested in the first place. One of the more interesting results was in response to the question “At what price would you be willing to sell all of your Bitcoin investment?” The average price per coin was 196,165.78 USD, or twenty-five times the current price. Granted, the question specified selling all of an investor’s Bitcoin. Nonetheless, there is an obvious resistance to parting with any large amount of BTC at present price levels.
Does that mean Bitcoin is an asset? Well, that depends. Investopedia defines an asset as “anything of value that can be converted into cash. Assets are owned by individuals, business, and governments.” Think stocks, bonds, property, etc. By this definition, Bitcoin and cryptocurrencies very neatly fit into an asset class. Exchanges like GDAX offer customers a simple way to buy and sell Bitcoin for national currencies. The “buy and hold” mindset towards Bitcoin closely mirrors that of gold and real estate. This preference for asset class was captured in the book Digital Gold, as a conversation between Wences Casares (founder and CEO of Xapo) and Reid Hoffman. Author Nathaniel Popper writes,
“Wences agreed with Hoffman that Bitcoin was unlikely to catch on as a payment method anytime soon. But for now, Wences believed that Bitcoin would first gain popularity as a globally available asset, similar to gold. Like gold, which was also not used in everyday transactions, Bitcoin’s value was as a digital asset where people could store wealth.”
That conversation took place several years ago, but it’s arguable that little has changed since in terms of tipping the Bitcoin scale towards money. Bitcoin does offer advantages over a traditional asset like gold. It was designed from the beginning to be transferred as a payment system, it’s portable, and each coin fractions into 100 million units. However, even in 2017, there are few places to spend Bitcoin as cash when compared to regular fiat. More importantly, the mindset of Bitcoin users is deeply entrenched as an asset. People are pumping money into Bitcoin in the expectation of greater returns. They expect their investment to continue to rise in value as it has for the past half-decade. While most investors of Bitcoin are excited about the future of cryptocurrency and the shift from traditional banking conglomerates, the overwhelming appeal is in the prospect of profit to be gained.
Does it matter how we classify Bitcoin? The primary reason to define Bitcoin as money or an asset class is to focus the development and goals of the community in the short-term. If the Bitcoin community desires functional use as money, then the present aim should be on pressuring companies like Amazon and Walmart to start accepting BTC as payment. Transaction speed and costs also becomes a priority on the development side. As an asset, there is less of a pressing need for Bitcoin to evolve in the sphere of commerce. Instead, the goal becomes increasing awareness and market capitalization, coercing fiat that would normally be spent on stocks, real estate, etc. into the cyrpto marketplace. However, for Bitcoin to fulfill the long-term promise of its technology, the transition to usability as money will likely have to take place.
The strength of Bitcoin is its ability to function as both money and an asset. Like gold, the value of Bitcoin will continue to climb as it becomes more of a scarce commodity that people want to own. Those who buy into Bitcoin ahead of mass-market adoption will be rewarded as early entrants who survived the risk and uncertainty of the emerging crypto market. Wences Casares foretelling of Bitcoin will likely hold true: Bitcoin will behave as an asset, like stocks or gold, until it reaches total market saturation. Once the price-point stabilizes and BTC payment services become ubiquitous in online and brick-and-mortar companies, then we will begin to see a shift to Bitcoin fulfilling its promise as a truly digital and decentralized currency.