What are bitcoins?

By   Christopher Bendiksen 19th February 2020

Photo by André François McKenzie on Unsplash

Hopefully, you’ve already read our introductory piece ‘What is Bitcoin?’ and you’re now ready to delve a little further into the Bitcoin subcategory of bitcoins.

(If you haven’t, you should know that in this piece we are covering lower case b bitcoins––the monetary unit of the Bitcoin protocol and network––and our goal is to see whether they fit neatly into any existing monetary framework).

The motivation behind this exercise is simple: Whenever we encounter anything new, be it an item an experience or whatever else, one of our best tools for cataloguing and putting this novelty into context is to compare it to things we already know.

Say you’re confronted with some unknown green structure sticking out of the ground. You have never seen anything like it before, but from its immediate characteristics, you’re able to immediately tell it’s a plant.

Because it’s a plant you’re immediately able to draw on existing knowledge pertaining to all plants such that you can be reasonably sure that the green structure in front of you: is a living thing; have roots in the ground; will not move unaided from its spot; requires water air and light, and––if all those needs are met––it will grow and reproduce in time.

This same approach is highly useful in the world of assets and investment. In fact the first question many people ask when confronted with a new asset is what type of asset is it? Is it a bond, a stock, an option, or perhaps a commodity? Context matters here because we evaluate assets differently according to their class, both for purposes of gauging its likely behaviour, valuation, and determining how it could fit within investment portfolios.

It is no surprise then that when we take our first look at bitcoins, we immediately want to put them in a box. And whatever the box we can fit it into will guide our thoughts along our evaluation pathway. But which box do they fit into? Let’s look at some of the most common proposals and explore some of the arguments for and against.

Bitcoins are a Currency

We’ll jump right in and examine the most controversial one first: bitcoin (the monetary unit) is often referred to as a cryptocurrency––a term that actually manages to irk both supporters and detractors.

As with many disputes, much of the disagreement around whether or not Bitcoin is a currency is rooted in a lack of consensus on definitions. So let’s have a quick look at some different definitions of the term currency.

The Oxford Dictionary defines currency as “a system of money in general use in a particular country”. The Cambridge dictionary definition is more or less the same.

Merriam-Webster drops the country reference and defines it as “something (such as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange”

Wikipedia, referencing the Free Dictionary, defines currency as “money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins.”

From these definitions, the common theme is that a currency is a circulating medium of exchange in common use, particularly within specific countries.

Photo by Allef Vinicius on Unsplash

It is hard to argue that bitcoins are in general use in any particular country, but it is a globally circulating medium of exchange. When compared to the US Dollar, bitcoins are obviously much less widely accepted, but when compared to smaller currencies like the Icelandic Krona or the Qatari Riyal it is arguably more accepted (and certainly larger and more liquid).

So while bitcoins are much less of a currency than the largest global currencies, they are still a lot more of a currency than smaller global currencies. You could say that bitcoins have multiple currency-like properties, just not to the same level as the largest global currencies.

Bitcoins are a Commodity

So perhaps bitcoins are more akin to commodities than to currencies. Definitions of commodities are much more relaxed in common vernacular, but in economics, they generally coalesce around raw or semi-processed materials, goods or services whose individual units are fungible––that is, they are equivalent to each other such that that the source of production is irrelevant to the buyer.

This is true for bitcoins. A bitcoin is as fungible as a US Dollar or a bar of fine gold. But the similarities end at fungibility. Unlike commodities, bitcoin production is inelastic. Whereas commodities respond to higher prices by unlocking further supply and to lower prices by restricting it, the same does not happen with bitcoins. No matter the price of bitcoin, the number of bitcoins produced on any given day remains the same.

It is therefore tough to argue that bitcoins are perfectly analogous to commodities. True, they share the aspect of fungibility and they are costly to produce, but that is also all it has in common with them.

Bitcoins are Money

What about money then, are bitcoins money? Let’s look at some definitions again.

According to Oxford, money is “A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.” Cambridge again roughly echoes this stating that money is “coins or notes (= special pieces of paper) that are used to buy things, or an amount of these that a person has.”

Merriam-Webster defines money as “something generally accepted as a medium of exchange, a measure of value, or a means of payment.”

Wikipedia, referencing three academic sources, states that “Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context.”

There are also other definitions of money, but the most common attributes of money across most schools of thought are that it is highly salable, durable, fungible and divisible.

No argument can be made that bitcoins have any physical existence akin to coins or notes. But in today’s age most modern money is digital so we’ll disregard this requirement entirely. On the other fronts it is again clear that bitcoins are––or at the very least can be––money, but that similarly to its comparison with larger currencies, it falls well short of other global monies in terms of overall ‘moneyness’.

Bitcoins are not quite any of the above––at least not fully or perhaps not yet

From our brief examination of the above terms it is clear that they are all scalar. In other words, it is less useful to think about something as either money/currency/commodity, or not, and more useful to consider them along a sliding scale. Binary determination is simply not a good fit since an asset can have varying degrees of conformity to each category (and it could change over time). Instead, the terms are more akin to light and dark, both relative measurements which can only be conceptualised as they relate to others.

It is hard to argue that something either is money or it isn’t. It is much easier to argue that something is more money than something else. For example, US Dollars are more money than the Russian Rouble since they are more widely accepted. Likewise, gold is more money than platinum.

Instead of thinking about bitcoins as being money or not, it is more useful to consider the level of ‘moneyness’ of bitcoins as it compares to that of other forms of money. While bitcoins may not currently be the moneyest money out there, their qualities make them able to advance to higher levels of moneyness. It’s really only a question of adoption.


This material has been prepared by CoinShares and its affiliates for educational and informational purposes only and it is not intended to be relied upon as an offer or a recommendation, offer or solicitation to buy or sell a security nor is it to be construed as investment advice. Predictions, opinions and other information are expressed at the date of publication and are subject to change as circumstances vary. This information has been developed internally and/or obtained from third party sources believed to be reliable; however, no representation or warranty, express or implied, is made as to the accuracy, reliability, or completeness of such information. To the extent permitted by law, we do not accept or assume any liability, responsibility or duty of care for any use of or reliance on this information. Past performance is not a reliable indicator of future performance.

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