Show Me the Money
Friday, December 01, 2017
While discussing the merits of bitcoin, I was recently asked whether I would like to be paid in bitcoins or Canadian dollars. It’s a good question and brings into focus the unique characteristics of bitcoin and the role of money.
Bitcoin is a digital currency created by computers running software designed to solve mathematical equations. It is traded electronically with very low transaction fees. Unlike more traditional currencies such as the Canadian dollar, U.S. dollar or euro, bitcoin is not printed or controlled by the central banks of the world. By design, there is a limit on the total number of bitcoins that can be produced. Is it really money though?
Economists define money as something that is a:
- store of value – money can be saved and used at a later point in time
- medium of exchange – money can be used to buy and sell things
- unit of account – money provides a common base for pricing
The Canadian dollar and other traditional currencies possess all three characteristics, but does bitcoin?
As a store of value, one can save bitcoins and use them at a later point in time. However, the value of bitcoins is largely determined by how much buyers are willing to pay and this value has been extremely volatile. In the last 12 months, the value of one bitcoin has gone from about US$750 to over US$10,000 currently. Within the last three days, it has fluctuated between US$9,600 and US$11,500.
As a medium of exchange, bitcoin can be used to buy and sell some things directly such as online travel, Microsoft software, computer parts and Subway sandwiches. The list of vendors who are willing to accept bitcoin is increasing but it is still far from being widely adopted.
As a unit of account, whether bitcoin provides a common base for prices is debatable. The extreme volatility of the value of bitcoin compared to traditional currencies makes pricing items solely in bitcoins without any reference to other currencies difficult. In November 2013, Adam Welsh shared on YouTube his experience of buying a Subway sandwich for 0.04 bitcoins or the equivalent of US$12.35. If Subway maintained the price of the sandwich at 0.04 bitcoins, the sandwich would cost over US$400 today!
Without more stability in the value of bitcoin and greater acceptance as a medium of exchange, I think I’ll stick to being paid in Canadian dollars.
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