November 4, 2020

Bitcoin is Money

Or at least it will be. Here’s what we mean.
Chris Slaughter

A cryptocurrency is just that: a currency built on cryptography. Bitcoin, the original and most popular cryptocurrency, was released in 2009 and set the stage for the cryptocurrency industry. Since its inception, Bitcoin has not yet lived up to its vision as a currency. In fact, limited payments utilization of Bitcoin has led Bitcoin to become established as a “store of value” rather than a “currency with value.” Crypto is almost exclusively traded on exchanges by traders looking to speculate on its value or by investors that want to HODL long term. 

Bitcoin’s use as an investment (and it has proven to be a good investment) is supported by the design of Bitcoin. It is often thought of as a reserve asset like gold due to its similar underlying characteristics. Both gold and Bitcoin have a finite supply, are fungible — that is that one gold bar or Bitcoin is as good as another — and the assets are verifiable. Perhaps most importantly, there will only ever be 21 million Bitcoin in existence. Due to this finite supply, BTC is a deflationary, or scarce asset, that increases in value proportional to demand. This is unlike the US dollar, which may be created in unlimited supply by the Federal Reserve. This makes money worth less in the future than it is today and encourages spending. For this reason, Bitcoin, which cannot inflate, may be used as a hedge against inflation.

Because of these qualities, BTC is both a store of value and an inflationary hedge — watch this #LVLUP from LVL CEO Chris to understand more about Bitcoin as a hedge. As it stands, Bitcoin is not generally used as a currency. Investors purchase Bitcoin for cash, wait, and then exchange it back for cash.

But here’s the thing, Bitcoin was designed to be money, Bitcoin is money, and the next decade of Bitcoin’s adoption will be driven by Bitcoin as money.

Daily bitcoin transaction volume, measured in USD notional value, since 2010. The trend reflects the growing value of Bitcoin and its increasing adoption over time.

 The shift from Bitcoin as an investment to Bitcoin as money is already well under way.

That Bitcoin has seen broad adoption as an investment class is itself a prerequisite for Bitcoin’s adoption as money. As Bitcoin transaction volume has steadily increased, it now competes directly as an international currency and method of remediation. More recently, Bitcoin has also seen dramatically increased payment processor adoption. This week (November 2, 2020), major fintech companies PayPal and Venmo announced they will offer and accept Bitcoin for all online transactions. While estimates hold that there are oughly 100 million active cryptocurrency users, PayPal alone has 346 million users. PayPal also interfaces with over 21 millon merchants, dramatically expanding where Bitcoin can be spent - not just held. Additionally, JP Morgan is developing a cryptocurrency, Visa is fast tracking crypto-linked debit cards, and MasterCard is investing heavily in cryptocurrency patents.

Bitcoin transaction volume since 2010. While the notional value of transaction volume has increased, transaction volume measured in Bitcoin remains flat. This may indicate that (non-investment-related) payments transactions have failed to substantially contribute to the scarcity of Bitcoin.

 These changes transform Bitcoin to be more than just an investment, but a medium of payment and liquidity - a currency. And that’s good for Bitcoin as an investment too as well. The more often an asset is used as a currency, its “currency velocity”, the more scarce the asset becomes. Like the finite supply of Bitcoin, this deflationary force, when combined with increasing demand, drives up the value of the asset. As a result, the adoption of Bitcoin as a currency directly enhances Bitcoin’s value as an investment. 

Accelerating the future of money

So Bitcoin is money, and it necessarily follows that Bitcoin as money helps Bitcoin as an investment. But what needs to happen for Bitcoin to become a viable currency? When will we stop pricing Bitcoin in dollars and start pricing dollars in Bitcoin? When will people begin to ask the question, “How much Bitcoin is the Dollar worth today?” We see three necessary factors for Bitcoin to be adopted as a worldwide currency.

First, you need to get paid in Bitcoin. That’s because you get paid money to work, and Bitcoin is money. Today, participating in Bitcoin requires receiving payment in traditional currency, investing that into Bitcoin, and then selling it at a later time to buy goods and services. The problem here, other than high fees, is that you have to take your fiat “money” and turn it into something else, and that’s characteristic of an investment, not money. Receiving payment in Bitcoin serves to both legitimize it as a currency and provide immediate liquidity in Bitcoin without further user effort. 

Second, you have to be able to spend Bitcoin everywhere. Cup of coffee? Bitcoin. Gas? Bitcoin. New TV? Bitcoin. Ethereum? Bitcoin. Moreover, it must be just as easy to buy goods with Bitcoin as it is with USD. Spending Bitcoin should be no harder than spending cash. PayPal’s move to accept Bitcoin is the exact type of behavior we expect to see from fintech companies in this era of Bitcoin as money. Accepting Bitcoin at all purchase points increases the ease of transacting with it.

Third, and perhaps most subtly, fees to exchange Bitcoin and cash (FX fees) need to go to zero. Just like with a foreign currency, exchange may still be necessary at the point of payment. This will be particularly common as payments processors accept Bitcoin, while adoption of Bitcoin by payment recipients may lag. In the event that any exchange between cash and Bitcoin must occur to complete a transaction (and this is the case in almost all Bitcoin payments transactions currently) the FX rate must be zero. Most exchanges treat Bitcoin like an investment transaction, and as such, charge transaction-based fees. Eliminating FX fees removes headwinds to Bitcoin’s adoption as a currency, while allowing Bitcoin to be spent where cash is received today, with no further cost or friction. 

By making paychecks and payments transparent to Bitcoin, and eliminating the friction and costs of exchanging Bitcoin and cash, Bitcoin will have no fundamental disadvantage to traditional currencies, while offering a number of advantages. Bitcoin is deflationary, independently verifiable, and beyond any government’s control to devalue. And to get there, we only need to remember one thing: Bitcoin is money.

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