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Thursday, 3 April 2014

Bitcoin is not money like your local currency

Bitcoin is not money like your local currency

There are three basic economic items in the economy:

1. Monetary items, e.g., bank notes and coins, money loans and all other items in the money supply.

2. Variable real value non-monetary items, e.g., property, plant, equipment, inventory, stocks, shares, patents, stamps, gold, etc. 

3. Constant real value non-monetary items, e.g., salaries, wages, rents, interest, capital, profits, losses, all items in shareholders equity, all items in the profit and loss account, accounts receivable, accounts payable, etc. 

Where do bitcoins fit in?

They are not constant real value non-monetary items. Their real values change daily. 

Are they monetary items? Let´s see: are they the same as money?

For any item to be money it has to have all three of the functions of money:

a) Medium of exchange.

b) Store of value.

c) Unit of account.

Bitcoins are certainly a medium of exchange. Somebody bought a Tesla with bitcoins. They are accepted in some stores. 

Bitcoins are certainly a store of value, albeit an unstable store of value. They started off in 2009 at a few US Dollars each. A few months ago they shot up to over USD 1200 each. Today they are down to USD 480 I see on Google search.

Are bitcoins a unit of account? I know they are accepted as such in Germany for the purpose of making bitcoin transactions taxable, but it is specifically then immediately stated in Germany that bitcoins are far from being a currency or even e-money the same as the pound or dollar or euro. They are not generally accepted as a unit of account. Financial reports are not widely prepared in bitcoins. 

Thus, bitcoins generally only fulfil two of the three functions of money, namely medium of exchange and store of value. Bitcoins are thus not money or monetary items. 

However, in 2013 a federal judge in the US stated they are the same as money. That still does not mean that they are widely being used as a unit of account with companies doing their books in terms of bitcoins. 

It is certainly a fact that bitcoins are generally described as bitcoin money, a currency, virtual currency, digital currency, virtual money or cryptocurrency. There is no doubt about that. These are the popular terms in the news, on the internet, in research papers, etc. However, bitcoins are not generally used as a unit of account. Thus they are not money or a monetary item or a local currency in terms of the economic definition of money or a monetary item.

Bitcoins are variable real value non-monetary items. The US IRS ruled that they are properties. They are similar to (not the same as) gold or silver coins, stamps or any other variable real value non-monetary item being used as a medium of exchange and store of value. Cigarettes are often used as a medium and exchange and store of value (over the very short term) in prisons. 

Bloomberg's report regarding the People's Bank of China: "The central bank will keep watching risks from Bitcoin, which is fundamentally not a currency but an investment target, Sheng Songcheng, head of the monetary authority’s statistics department, told reporters in Beijing on Jan. 15."


Nicolaas Smith 

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