Bitcoin is a means of exchange. Thus it fulfills the criteria. The first digital currency is now accepted for purchases on many online marketplaces and even in certain brick-and-mortar stores across various nations.
Bitcoin’s reputation as a means of trade has been severely tainted by its use on the dark web. Most notably, users on a website known as Silk Road who were purchasing illicit substances and engaging in risky conduct favored Bitcoin as their payment method.
However, criminals’ assumptions about Bitcoin’s intention to function as anonymous money were incorrect. Governments eventually shut down Silk Road using various Bitcoin public ecosystem tracking tools. Who may argue that Bitcoin was being used as a trade on Silk Road, even though it did not provide users with complete anonymity when making purchases?
More than that, each Bitcoin may be traded for another Bitcoin, much like the U.S. dollar and other fiat currencies. It’s getting to the point where Bitcoin is being used as legal tender in certain nations. The first nation to recognize Bitcoin as legal money was El Salvador in September 2021. El Salvador’s president, Nayib Bukele, thinks Bitcoin would help his country’s 70% population that doesn’t have access to traditional banks.
Though the government of El Salvador may think Bitcoin is a terrific complement to the U.S. dollar as a legal tender, most of its inhabitants are opposed to the tenderization of Bitcoin. Since many residents of El Salvador are unfamiliar with Bitcoin, it will be up to the government to provide education on the currency to determine whether or not adopting Bitcoin as legal money can ease the country’s economic woes.
Bitcoin’s scalability problems are a significant roadblock to broader adoption. Seven transactions per second (TPS) is the current limit for the Bitcoin network, while Visa can handle 24,000. Some layer-two alternatives, like the Lightning Network, attempt to address Bitcoin’s scaling problems.
Although Lightning Network is gaining traction, its scalability as a medium of exchange depends on Bitcoin’s ability to boost its average transaction processing speed (TPS), which will not happen until Lightning Network is successful.
Bitcoin is a deflationary asset since its supply is capped at 21 million coins. Because of the widespread belief that Bitcoin’s value will rise as its supply decreases, the cryptocurrency may one day serve as a means of exchange in the same vein as gold.
However, if merchants don’t start accepting Bitcoin as regular cash, its deflationary nature will make it more useful as a savings asset than a medium of exchange.
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Bitcoin as a unit of account
Due to its high volatility, Bitcoin is unsuitable for use as a medium of exchange. It’s impossible to see an asset released into a local economy if its value may swing by tens of thousands of dollars in a single day.
Due to Bitcoin’s volatility, the value of a product worth $0.00034 in Bitcoin one day might fluctuate by a considerable amount the next hour.
Additionally, it is challenging to ascertain the true worth of Bitcoin at any particular time. Bitcoin prices may vary by hundreds of dollars on various cryptocurrency exchanges at any one time. Businesses can only keep up with the fluctuating Bitcoin price if the global community can settle on a single price.
Next, we have the typical Bitcoin value. How can shops set prices when a single Bitcoin costs far over $10,000, much less a dollar? It would not be evident for consumers and shop owners alike if the price of a cup of coffee fluctuated from $0.00034 worth of Bitcoin on Tuesday to $0.000012 on Thursday.
Current global financial systems are portrayed in the most basic form feasible for accounting and practical purposes. Asking businesses to switch to Bitcoin’s complex and unpredictable accounting system is unlikely to go down well.
Bitcoin as a store of value
Even if there are problems with this label, Bitcoin may be best understood as a store of value, as was previously indicated. One reason people are wary about Bitcoin as a long-term storage technique is that it has been the subject of speculation, which suggests its volatility.
The typical gold investor anticipates a gradual rise in the precious metal’s value beginning at the moment of acquisition and continuing for some time afterward. Gold buyers want to resell their holdings at a price not too far off from where they bought them.
But Bitcoin’s value may fall by more than 100% from the moment who bought it. The significant risk associated with Bitcoin does not augur well for its future as a store of wealth, even though Bitcoin’s volatility may sometimes trend favorably.
Also, Bitcoin’s virtual nature has to be taken into account. Valuables like gold, artwork, and other collectibles may be concealed or kept safely until needed. Although hardware wallets are an option for safe Bitcoin storage, most investors keep their coins in an online cryptocurrency exchange or another internet-connected wallet. Bitcoins stored in online wallets are vulnerable to theft at any time because of their accessibility. While Bitcoin insurance does exist, the extent to which a user may use it relies mainly on where they store their Bitcoin. However, traders are still at the whim of Bitcoin’s extreme volatility, even if an investor discovers the safest place to keep their Bitcoin. Everything depends on whether or not Bitcoin maintains its current level of popularity. While the scarcity of Bitcoin is supposed to keep demand high, the question becomes what to do with all the Bitcoins that have become worthless due to the advent of a unique crypto project.
The case for Bitcoin as a speculative asset
In light of Bitcoin’s tumultuous first decade, you may classify cryptocurrency as a highly speculative investment. Bitcoin’s volatile nature makes it difficult to classify as anything other than speculative, but this might alter in the future.
Former U.S. Treasury Secretary Rosa Rios has suggested that Bitcoin and other cryptocurrencies are purely speculative since they serve no practical use. Rios said that Ripple was less speculative than other cryptocurrencies because of its practical use in international money transfers.
Gary Gensler, chairman of the United States Securities and Exchange Commission, has said that Bitcoin is essentially a speculative store of value. According to Gensler, Bitcoin and other cryptocurrencies are less suitable for people than the dollar. Bitcoin is a distinct asset class, but it should be seen as something other than something that might cause widespread dollarization.