Bitcoin as a medium of exchange

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Bitcoin as a money-like good

Bitcoin is designed to have many of the desirable properties of a money-like good[1]. It is: portable, durable, divisible, recognizable, fungible, scarce, hard to counterfeit.

These properties may not be exact, but in practice all of them are true. Bitcoins are divisible down to 0.00000001 bitcoin but sending amounts below 0.000002 btc (0.0002 USD) via a blockchain transaction is usually not practical. Wallet software recognizes every bitcoin the same as every other, so it's fungible, but bad privacy practices could in theory destroy this property if they become widespread. Some people use lightweight wallets which would accept counterfeit bitcoins as payment. Despite this bitcoin can function as a money-like good in practice today.

Bitcoin is also reasonably widely accepted, it can be bought and sold almost anywhere in the world especially in the developed world with a variety of methods. See the guide on buying and selling bitcoins, for example some bitcoins could be transferred to a bitcoin debit card to spend them wherever regular debit cards are accepted.

Bitcoin's value can be volatile, there is little mechanism for encouraging stability or avoiding bubbles, although supply is pre-determined. This usually leads to commerce being denominated in USD or another more stable currency and only settled in bitcoin. Similar to how in certain less-stable countries dollars or euros are used and settlement happens in the local currency.

Bitcoin as a low-trust medium of exchange

Bitcoin also has these properties above and beyond the required ones for money. Almost all of them come from the low requirement for trust of bitcoin which separate it from almost any other medium of exchange. See Principles_of_Bitcoin#Low_trust.

  • Censorship resistant. Nobody can block or intercept a transfer of any amount.
  • Permissionless. No arbitrary gatekeepers can stop someone using it. The bitcoin software can be installed by anybody and used to send/receive.
  • Un-freezable. Nobody can freeze or seize your accounts.
  • Irreversible. Once a transaction is settled nobody can undo it, like cash. (but consumer protection is still possible.)
  • ID-less. Does not require ID or registration to use. So can be used by privacy-conscious people, minors, computers, unbanked people, third-world residents, stateless people, etc
  • Worldwide/borderless. Works anywhere where the internet does.
  • Anonymous. Does not reveal any ID to your counterparty, requires care see Anonymity.
  • Accountable. Publishing your public keys reveals all your transactions, anybody with those keys can see all your transfers on the blockchain record of all bitcoin transactions. (this may be useful for a charity, revealing to an auditor, as proof of reserves for a custodian)
  • Good uptime. Works 24 hours a day, 365 days per year.
  • Quick setup. You can start accepting bitcoins instantaneously, without setting up merchant accounts, buying credit card processing hardware, etc, because bitcoin wallets are simple items of software.
  • Push system. Other internet mediums of exchange like credit cards are 'pull systems', where the receiver is given the sender's credentials and then they pull money into their account. (hopefully the correct amount!)
  • Programmable. A web server can understand or create transactions automatically, for example to release escrow or automatically provide a good or service. Smart contracts can be written with the knowledge that they will be followed no matter what. This allows bitcoin to do things which other media of exchange cannot, such as multisignature or timelock.
  • Fast. Transactions are broadcast through the peer-to-peer network in seconds and can become irreversible within an hour.
  • Low fee. Transaction fees can vary between a few cents and a few dollars depending on network demand and how much priority you wish to assign to the transaction. This property is traded off with being fast.

The fast and low fee properties usually cannot come together, there is a tradeoff between them. A fast transaction usually doesn't have a low fee, a low fee transaction usually isn't fast. See the article on transaction fees. This tradeoff could be made better with technology that hasn't been created yet (see Lightning Network).

Volatility

Bitcoin's exchange rate is currently more unstable than many other currencies. It is hoped that as bitcoin becomes more widely used its volatility will drop. This has already happened when comparing the volatility between 2017 and 2010. See the site: http://btcvol.info/

Despite this, bitcoin's volatility can be mostly avoided when using bitcoin for commerce by buying the required amount of coins and then immediately spending them (for example, to donate to an organization without the payment being blocked, or paying for a VPN anonymously)

See Also

References

  1. https://www.tutor2u.net/economics/reference/characteristics-and-functions-of-money