Bitcoin prices have fallen hard in the last month, down about 40%. It seems as many people have been gleefully predicting the demise of cryptocurrencies as have been anticipating great returns. If cryptocurrency—whether in the form of Bitcoin, one of its cousins like Ethereum, or some yet-unimagined digital creation—are here to stay, will it come to look and act more as currency or as commodity?
The term cryptocurrency screams currency. The name Bitcoin is intended to create a mental image of money. The intention is to use Bitcoin as a tool for purchasing goods and services, but it is not legal tender.
Perhaps the best real argument to think of cryptocurrencies as currencies is that they are mimicking previous experiences with currencies. It is not unheard of to see a currency of a struggling nation fall off a cliff and lose 40% of its value in about a month. Inflation and deflation are common in modern economies, especially since it became uncommon to tie currencies to a standard commodity.
In 1971, the U.S. stopped tying its dollar to gold, meaning there is no physical commodity behind the value of a U.S. dollar today. Some countries peg their currency to the U.S. dollar, in hopes that the stability of the United States will protect their rates, but, ultimately, currencies appear to be largely floating in the wind like cryptocurrencies.
On the other hand, the underlying purpose behind the cryptocurrency movement seems to be the decentralization of power as a contrast to the existence of currencies. Central banks and governments now regularly interfere with the values of their currencies, raising and lowering rates, printing new money (oftentimes virtually), and trying to plan their economies. Switzerland is one country that has very actively sought to control its currency value, because it is vital for that small country to have a favorable exchange rate with the euro, which surrounds it. If the Swiss franc became too valuable, it would be hard for Switzerland to attract business from surrounding Europe.
In this way, cryptocurrency is intended to be the antidote—not the replication of—modern currencies. Cryptocurrencies are designed to avoid central control, except by powers that manage to own it. Much like commodities are controlled by their owners and rarely by central government authorities (unless those are the owners).
Cryptocurrencies can also be “mined.” That is the term used when computers complete complicated calculations in exchange for new Bitcoins. The term conjures a commodity, like gold or silver—something taken out of the ground with hard work and investment for sale at a later date.
Commodities have three purposes. Most obviously, they are meant to be used, whether they are food, ornaments or components of products. In addition, commodities are also speculated on, meaning people buy them to hold and resell with no intention of using them. There is also a third use that is rarely seen in advanced economies today but was an ever-present form of transaction throughout almost all of mankind’s history: bartering.
Bitcoin and its cousins are surely speculative vehicles for most owners, but they also have roles as objects for bartering. Cryptocurrencies can be used to barter in failed economies (such as Venezuelatoday), in cross-border dealings and when secrecy is desired.
You cannot wear your Bitcoin as jewelry, it cannot power your car and you cannot eat it, but perhaps it is more like a commodity than a currency today.