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Bitcoin - Commodity or Currency?

An opinion piece by MelodieM based on the premise:

An active, engaged user base is the most important factor in the stabilisation and value of Bitcoins - An Australian perspective.

Commodity

A commodity is a marketable product that meets a demand. A commodity can be bought and sold or stockpiled. Commodities (as a rule) cannot be use to purchase currencies, goods or services - if you sell eggs to your neighbour for $5, they bought the eggs from you with currency; you did not buy the $5 from them with your eggs.

Bitcoin and alt currencies have created a “gold rush” mentality where the goal is to “mine” all that can be mined and stockpiled and this would suggest Bitcoin is a commodity because this is how it is currently being used. Unfortunately Bitcoins do not have the history that gold had backing its value, gold value had already been established over thousands of years. Bitcoin value has been established in 4 years. 1)

Value is still very dependent on the number of adopters who engage with, and circulate Bitcoin but by definition, If no one uses Bitcoin as a currency, then the answer is yes, it is simply a commodity.

A simple example of this might be Crude Oil; at present worth about $100 a barrel, this price is based on what people will pay. Should everyone switch to solar cars and eco oils, crude oil has no use to anyone; no-one buys it, the price (value) plummets.

Alternatively, should war in a far off land stop supply of oil to the market while we do use it, the price increases because everyone needs it.

Currency

A currency is usually an accepted form of payment or exchange for goods or services. Currencies are usually local to a country or region. Currencies can be exchanged for other currencies, and to purchase commodities.

Bitcoin can certainly be used as exchange for goods and services and a few businesses are now starting to adopt it as an acceptable form of payment, but the largest volume of purchases is still into Bitcoin technologies and startups rather than general commerce. I suspect many businesses would accept pure gold if offered as payment from a customer, this does not make gold a currency, neither will it do so for Bitcoin.

While business in Europe has been faster than businesses in Australia 2) to adopt Bitcoin as payment for goods and services, it is more because local currencies have become unstable or lost value, than because Bitcoin is of equal value as a currency. In many cases it is and will continue to be worth more, because its value is not determined locally. In Australia by contrast with a relatively stable currency, has seen a far less enthusiastic acceptance.

What happens when everyone has bought all their coins and no-one is using them?

While many commodities rise in price based on scarcity, this would be a mistake with Bitcoin because slowing supply will only increase demand as long as investors see value in investing, but as slowing supply will also restrict the open market from adopting Bitcoin, there will be less in circulation, to use in general commerce.

Applying the same logic applied in the crude oil example above; if no one is actually using and circulating Bitcoins, their value is based solely on what someone will pay for them as a commodity and if they have no use, that value will decrease over time hastened by external inflation and better profits from commodities there is a demand for.

This scenario is also true in the reverse; the more commerce conducted using Bitcoin in exchange for goods and services outside the Bitcoin community, the more Bitcoin increases in value based on demand.

Of course, the above is all true, only if Bitcoin continues to be valued against FIAT currencies. Should Fiat currencies crash, Bitcoin could become a replacement, but only if business is already equipped to switch not only the tools they use, but also the way currencies are viewed both locally and globally.

In order to provide a platform for this scenario, it is first necessary to recognise the value of users in building the value of Bitcoin.

economics australia


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