Recently I explained the three functions of “money”.
One way to think about the issue is in terms of the functions of money. Money has three functions:
- Medium of exchange – here money breaks down the double coincidence of wants.
- Store of value – money can be stored and used at a future date.
- Unit of account – money provides a measure of value.
As a store of value money must have a predictable future value – preferably the same value as it has now. Ideally money will have a stable value over time. So that $100 today buys a bundle of goods and services worth $100 and can still do so in one year, or two years and so on.
The Economist is arguing that Bitcoin only meets one of those three functions:
Bitcoin does best as a medium of exchange, thanks to its clever technical design.
Volatile values could prevent Bitcoin from ever establishing itself as a medium of account. Even the few retailers who accept Bitcoin use other currencies as their principal accounting unit. Prices are given in a prominent currency (US dollars, for instance) and the Bitcoin price fluctuates automatically with changes in the crypto-money’s exchange rate. Similarly, most Bitcoin owners work in jobs with wages paid in traditional currencies. So long as Bitcoin buyers and sellers “think” in euros or dollars it will fall short of money status.
Bitcoin, in other words, is an elaborate form of barter. Nothing wrong with that, but it isn’t money.