Bitcoin as money

The role of money is threefold:

1. a store of value
2. a medium of exchange
3. a unit of accounting

How does Bitcoin currently measure up on these three counts, and how will it progress over time?

As a store of value

With the current fluctuations in Bitcoin prices, and the general air of uncertainty and unpredictability surrounding it, the jury is still out. Bitcoin could collapse completely in a week, or in five years time they could be worth a small fortune each. Unlike gold, Bitcoin doesn't have a long history to give investors a sense of security. As such, Bitcoins are more like tech stocks at the beginning of the dotcom boom. If they end up like Amazon shares, then Bitcoin hoarders will be laughing all the way to the bank, or rather, not to the bank as you don't need a third party to hold them for you. But if they end up like all the failed dotcom enterprises then it's game over. However, unlike flooz.com or beenz.com, Bitcoin actually offers something new - a secure and cheap method for almost instantaneously transferring wealth from one person to another.

So perhaps currently Bitcoin only scores 4/10 on this count.

As a medium of exchange

Once you have your online wallet set up with a service like blockchain.info's wallet service, or with the canonical Bitcoin wallet program, transferring coins is simple - enter a destination address, an amount and click send. QR code scanners, NFC technology and possibly in the future Bitcoin ATMs and POS terminals mean that Bitcoin should be as easy, or even easier, than using a credit card. No need to type in billing addresses, expiry dates, CRC codes or a "verified by Visa" password. And merchants should be happy with the absence of chargebacks and high transaction fees. The "six verifications and the transaction is secured" means that they can be used to pay for expensive items like cars or houses, whereas a coffee or hot dog vendor would presumably not worry about the risk of a $3 double-spend.

However, the lack of price stability means that the main risk in using Bitcoins as a medium of exchange is that both buyer and seller will be worried that the value of the exchanged Bitcoins will be dramatically different the day after the exchange. Converting them back to dollars or euros immediately after the transaction is the only current defense until prices stabilize. 

So 5/10 on that count.

As a unit of accounting

This function of money is really an extension of the previous section. And again, Bitcoin perform woefully. Although you can instantaneously compare the value of different goods to each other, a television or tablet computer priced at 3 BTC one day might need to be priced at 6 BTC or 1 BTC a few hours later. 

So 1/10 for this one.

Conclusion

Bitcoin scores a rather woeful 11/30 as a form of money at the moment. So why are people still piling in and investing hundreds, thousands or even millions of dollars in them? Because at the moment Bitcoin is not a form of money, it is an investment. Almost everyone investing in Bitcoin at the moment is a speculator. If, at some point in the future Bitcoin finds a stable price and becomes a world currency, then those who got in on the ground floor will be rich. As I write, you can purchase 1 BTC for about $130, but if as many people are using them in 2023 as currently use dollars or euros that investment should be worth at least $50,000. And the potential is clearly there - it just needs the infrastructure (being worked on by various start-up companies), publicity (which only started coming about three months ago), and general acceptance by the public resulting in price stability for that to happen. If each of these three events occurs, then we can add 5 points to each back-of-an-envelope scoring for the electronic currency. Bringing the new "money score" up to at least 26/30, which is much more respectable. 

So it's a gamble, but one that could pay off extremely well in the long run. Bitcoin is an opportunity for those without any real technical knowledge or skill to put down a small amount hard cold cash and have a large(ish) piece of the biggest thing since Microsoft or Apple.

And that's why I think the price of Bitcoin continues to rise over time.