How Would Bitcoin function as a Currency?

What is a currency? By definition, it is a medium of exchange for goods and services. If I were to simplify this further, it’s actually just money, usually in the form of banknotes and coins issued by the government. We know that there are 4 functions of money:

o MEDIUM OF EXCHANGE- Can be used to buy or sell goods, instead of bartering

o MEASURE OF VALUE- Compare 2 value of goods and can be used to put a value on labour

o STORE OF VALUE- Value can be kept for a long time

o METHOD FOR DEFERRED PAYMENT- People can pay without money being present (paid later), allowing debts to be created

This brings me onto Bitcoin, the world’s most well-known cryptocurrency. Bitcoin was invented in 2008 and it is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. In this article, I will discuss how Bitcoin could function as a normal currency, like the US Dollar or the British Pound.

One sign of a strong currency is how universally accepted it is, which can be seen with the US dollar, as most currencies are always compared against the US Dollar. Most retailers do not recognise Bitcoin at the moment, due to its volatility and due to how difficult it is to exchange it with other currencies. Some companies such as Tesla, Wikipedia and Microsoft have started to accept payments in bitcoin, but it will take some time before other companies follow pursuit and start to accept payments in Bitcoin. Most recently, Elon Musk’s Tesla gave bitcoin its most significant corporate endorsement yet, as it revealed that it had ploughed $1.5bn of its reserves into the cryptocurrency, causing Bitcoin to climb to $44100 per coin in February. Despite this, it is still not universally accepted as a currency.

Another sign of a strong currency is how stable it is. We all know that Bitcoin is incredible volatile and a 90% rise and drop in a given day is not unheard of. This is because cryptocurrencies have less liquidity than traditional financial markets, due to the absence of a robust ecosystem of institutional investors and large trading firms, which means that people are less willing to invest in Bitcoin, thus having reduced confidence in the currency. Because of this, many retailers are unwilling to use it because they want profits to be stable. As we can see, Bitcoin evidently would not be a stable currency.

This brings me on to the final factor of what makes a strong currency: Is Bitcoin a good store of value? Many economists have compared Bitcoin to gold due to their limited supply, both being secure ways of storing wealth outside banks and both being speculative investments. At the moment, it is too early to tell how well it will store value, as it has only been around for 12 years, whereas gold has been around for 200-250 years.

In conclusion, based on the factors we have looked at, Bitcoin seems as though it would not function well as a currency. With that being said, one Bitcoin is approximately worth $53413.50, showing how strong a currency it is at the moment. While it is almost impossible to predict anything with Bitcoin, many experts believe its volatility will decrease in the future, as its transaction fees will decrease as its transaction speed increases, leading to more retailers accepting payments in it, which will then increase its stability and store of value, which will finally lead it to become a universally accepted currency.