Is Bitcoin actually real money?

By: Edward Kim

Posted: 7th July 2021

For the past year, some investors have started to hunt for a new asset class that will represent a “store of value” like the traditional commodity, gold, or perhaps an alternative investment that will have similar characteristics. With Tesla accepting Bitcoin as a method of payment for the purchase of Tesla models, investors have started to speculate that Bitcoin will have future applicability, and this has certainly been reflected in the surge of Bitcoin prices in the first quarter of 2021 (Chart 1). However, following Tesla CEO Elon Musk’s recent negative remark on the cryptocurrency, the price has fallen more than 15%. But what is the outlook of Bitcoin’s recent boom?

Chart 1: BTCUSD

Source: TradingView

The crucial question is what does the future use of Bitcoin look like? And would it even be considered ‘real money’ or have widespread use? The short answer is no. For bitcoin to be money, it requires the three functions of being accepted by the general public, a medium of exchange and a storage of value. The only three monetary systems that have ever existed were gold/silver coins, gold-species standard and the gold-exchange: all performing the three essential functions of money.

On the other hand, Bitcoin does not perform any of these functions. Firstly, there are rarely any goods and services quoted in Bitcoin or any other cryptocurrency, so it isn’t really universally accepted by the world. Also, not only does the price volatility of Bitcoin make it difficult for daily transactions, but it is also subject to capital gain taxes.

In 2010, German company TG Gold-Super-Market introduced gold ATM machines to the world, hoping that gold would become a common medium of exchange for daily transactions instead of fiat money. However, this idea failed miserably due to its low universal acceptance and the inconvenience of using gold for daily transactions. Similarly, Bitcoin may suffer a similar fate.

Finally, can Bitcoin be a storage of value? No. For anything to be considered a storage of value, it should have stable value and must be liquid. Although cryptocurrencies are becoming more liquid, Bitcoin’s huge price volatility have deemed itself unreasonable to store value. Chart 2 compares price volatility of Bitcoin against other assets.

Chart 2: Bitcoin Volatility vs Other Asset Classes

Source: Charts.woobull.com

That takes us to look at what influences the price of Bitcoin. There is an apparent negative correlation with the US dollar as in Chart 3. When the dollar weakens, it tends to inflate prices of everything that is priced through the dollar – namely cryptocurrencies. 

Chart 3: Bitcoin historical price comparison against US dollar index

Source: TradingView

Another factor that influences the cryptocurrency is the speculation amongst individuals. As such, Bitcoin’s prices correlate with how much speculation there is in the marketplace.

Nevertheless, do we know how the future of Bitcoin will play out? Not entirely, but if I assumed correct that this Bitcoin frenzy is just due to mere speculation, then there is greater uncertainty around its potential demise. The question is when and how. One possibility is that prices become so inflated to the point that the next buyers are priced out, leading to falling prices and liquidation. 

Ultimately, Bitcoin may never be ‘real money’. This digital currency that has seemingly appeared out of nowhere is nothing more than an inflated cryptocurrency of speculation.