The excitement over Bitcoin is hard to miss. Countless articles in the popular press have brought the new investment device to the forefront, and the stories of astronomical returns over the past year (week!?!) have enticed untold thousands to spend their hard-earned money on the mysterious electronic “coin.” As exciting as that is, we wonder how closely Bitcoin matches the expectations of an actual currency.
For those of you who ever had to take an Econ 101 class, you may recall that true money serves three functions: 1) it is a store of value over time, 2) it is a medium of exchange – it is used in financial transactions and 3) it is a unit of account – it used to measure the value of goods. Let’s see how Bitcoin measures up to these three tasks today.
Store of Value. For people to have faith in a currency it must be a dependable way to store value over time. Most of us think this means the currency should not lose value (and that’s true), but the opposite is also true: it shouldn’t be prone to dramatic increases in value, either. The truth is that volatility (a measure of risk) is influenced by changes in prices, be they positive or negative. In the case of Bitcoin, the recent run-up in prices has shown Bitcoin to be quite volatile. What’s the big deal if price jumps up dramatically? Imagine for a moment that you want to sell something valuable and want to accept Bitcoins as payment. And what if that valuable item involves a relatively long sales cycle? What price do you set? If you pick 1000 bitcoins today and the sale takes 60 days to complete, will your buyer still want to pay you 1000 Bitcoins if […]