When you buy bitcoins, it’s only natural to want to know what you are purchasing – a currency, a commodity, or an asset?
This is a very important question because how Bitcoin and other digital coins are defined financially, will ultimately shape how they are regulated around the world.
These regulations could, in turn, determine if cryptocurrencies will remain a niche market or could instead become a mainstream asset.
In this article, we will try to give you an honest answer if Bitcoin is a currency, an asset, or a commodity. To do this we will go over some of the basics of Bitcoin and see how it compares in each financial category. Let’s get started.
What is Bitcoin?
Bitcoin is a digital peer-to-peer payment network that was created with the goal to provide a borderless and permissionless exchange of value. It runs on a technology called blockchain, which is a public ledger that records all Bitcoin transactions.
This decentralized network belongs to anyone willing to use it. As such, it isn’t governed by any entity and no one can control it or shut it down.
Additionally, Bitcoin has a limited supply of 21 million coins, of which more than 18 million are already in circulation. New coins are obtained by “mining”. This is the process of confirming transactions on the blockchain by solving mathematical problems through sheer computational power.
So what do these characteristics make of Bitcoin? Let’s find out.
Bitcoin as a currency
Bitcoin was originally conceived as a digital payment system. However, due to design choices and the way people are using it, the original cryptocurrency is veering away from this aspect. Here’s why.
First, there’s the question of its fluctuating value. Bitcoin’s price is known to be quite volatile, which undermines one of the main characteristics of a currency which is stability.
In the past few months alone, we have seen the price of Bitcoin fluctuate 5% day-in, day-out. This can be very risky for merchants accepting it as a currency, as their daily margins could be wiped out by price fluctuations in the short term.
The second problem lies in the scalability of the blockchain. As the original cryptocurrency, the coin has amassed a lot of supporters, making the network very secure. However, this longevity isn’t without its downsides. The technology behind Bitcoin provides only an average of 4.5 transactions per second. This scales poorly with mass utilization, and the network can quickly get saturated, bringing transactions to a halt.
Combined with the aforementioned high volatility, this is a big disadvantage for daily usage.
That being said, Bitcoin is still exchanged and used to buy goods and services, making it an accepted form of digital currency that can act as an alternative to fiat money.
Bitcoin as an asset
This brings us to our next question, can Bitcoin be considered an asset? By definition, an asset is a resource with economic value owned by an individual, which can generate future profits or cash flow.
Well, the aforementioned volatility and continuous increasing value could make us think of Bitcoin as an investment asset. With central banks printing more fiat money as needed, anything that is purchased with that currency, equities, and bonds, loses value over time.
Bitcoin’s non-inflationary fixed supply creates scarcity, which helps increase its value when compared to reserve currencies like the US dollar. It has shown throughout the years that it can hedge against inflation by gaining over 5 million % in value in just over 10 years.
A second reason why Bitcoin can be considered an asset is the ability to open investment opportunities to unbanked individuals all over the world. With the rise of Defi projects, anyone can start making profits through different financial products like Bitcoin lending.
Bitcoin as a commodity
So could Bitcoin then be a commodity? The definition states that a commodity is a basic good used in commerce that is interchangeable with other commodities of the same type.
As Bitcoin can be exchanged with other cryptocurrencies on the crypto market, it can be considered as a digital commodity. Just like gold or silver, Bitcoin is traded in hopes that its value will rise and yield a trading profit.
Wrapping up
So, the final answer is that all three are acceptable. We saw that Bitcoin can act:
- as a currency and be used for the exchange of goods and services.
- as an asset and used as an investment or cash-flow generator.
- as a commodity and be traded for similar products on the crypto markets.
This is the main reason why there’s a never-ending discussion on how regulating bodies should classify it. What defines Bitcoin is the way that it is used. The core technology behind Bitcoin is so versatile, that it becomes impossible to define it as a member of a single financial classification.
