Bitcoin - Currency or Commodity?
08 Dec 2024home > blogs
Satoshi’s Vision
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. (Bitcoin whitepaper)
Bitcoin is a digital currency used to send/receive money from anyone on the planet without the need for a third party or banking institutions. That’s all there is to Bitcoin.
Bitcoin as a Currency
What’s a currency? Let’s think like a layman. You don’t need an economics degree to figure that out.
- Available to everyone - Everyone should have the currency, for you to exchange currency or trade currency for another commodity/service.
- Stable value - The currency should have a stable value in a shorter period and could inflate/deflate in a longer period. Ex. Your $1 cannot become $5 tomorrow and 50c the day after. You cannot conduct trade or exchange money with such volatility.
- Moderated supply - The currency gets damaged, lost, counterfeited, or even hoarded. There has to be a consistent supply of currency in the market to keep the economy functioning.
- Backed by the government - There has to be a trusted institution that manages the value of the currency by appropriate controls (interest rates, economic policies, laws against counterfeiting, protection from fraud, etc).
What’s the difference between US Dollars and Iranian Rials?. It’s the US government’s military power. Nothing more.
Does bitcoin have these properties?
- Available to everyone - No.
- Stable value - No.
- Moderated supply - No, fixed supply.
- Backed by the government - No.
For any technology to be mass-adopted, it should either fix an existing problem or improve our lives. With fiat currencies, I can send money to anyone in the world or conduct a trade almost immediately (depending on the country you live). All of us are so used to credit/debit cards, mobile payments, UPI, etc. Bitcoin is nowhere close to that immediate transaction (minimum 10 mins).
With the current state, Bitcoin can never replace the banking/payment institutions. So, what do we do?. Come up with a Layer-2 solution to improve the scale (rollups, sidechains, etc).
Q: What exactly are the differences between banking institutions and Layer 2 Scaling Solutions? Please ignore the emotional, political, and human greed aspects. Let’s discuss only the functional elements.
Bitcoin as a Commodity
What’s a commodity?. Let’s think in layman’s terms, again.
It’s a usable product produced with human effort, which can be consumed directly or used to produce other products. Ex., Rice, Wheat, Soy, and Coffee beans - which can be consumed directly. Gold, Silver, and Crude Oil - which can be used to produce other products (typically higher priced products)
- Usage - There must be a well-defined usage for the commodity.
- Require efforts to produce - There has to be efforts to produce the commodity. Ex. Sea water cannot be a commodity, because it’s freely available to anyone in the coastal region. But Fish is a perishable commodity because it requires human efforts to catch them.
Does bitcoin have these properties?
- Usage - No.
- Requires efforts to produce - Yes.
As of today, Bitcoin is hoarded like a commodity with no practical use for it. We are hoping some use will emerge in the future or someone else will buy from us. Doesn’t feel right to me.
Current State of Bitcoin
- Currency or Commodity? - As of today, it’s neither a currency nor a commodity, without a well defined usage. Bitcoin is simply a number in a distributed database, which is difficult to produce and infinitely difficult to fake or break.
- Centralization? - With an unrealistic interest from large financial institutions and governments, bitcoin is being accumulated in a few places like Spot ETFs, Governments, and Whales, which is completely opposite of what Satoshi envisioned. Bitcoin is no longer distributed to the general public.
- No Practical Usage - No stellar developments are happening in the Bitcoin space to compete with Visa/Mastercard etc. Nothing to drive public adoption of Bitcoin usage. When our grandmas and grandpas can use Bitcoin easily - yes, only then Bitcoin is actually competing with the fiat currencies. Until then, it’s a fantasy.
- Greater Fool Theory at Work - The only reason the governments and financial institutions are accumulating overpriced bitcoin is that there will be “a greater fool” in the future who would buy from them for a higher price. We all know how this would end, when there are no fools left.
My expectation from Bitcoin
Nothing. A big thank you to Satoshi & team for pioneering a digital currency proof-of-concept and making it wildly successful.
I would prefer to use a digital currency which
- is based on blockchain with public validator nodes and private mining nodes, backed by a powerful government (the US, as of today).
- improves the transaction speed to be on par with the existing financial institutions.
- integrates with the existing banking/payments systems to make the transition seamless.
- provides offline usage of digital currency for backup during emergencies, internet/power outages, etc.
We all know what the first car looked like, in the late 1800s. Would anyone want to drive that car for day-to-day usage today?. No. Definitely not me. Similarly, Satoshi showed us what’s possible with digital currency. It’s up to us to take it forward, improve it, evolve it to something practically usable, instead of religiously holding on to Bitcoin.
Bitcoin did its job. Let’s move on.
Disclaimer
I love Bitcoin. I understand the risks and I have investments in the Crypto space. I sense a euphoria among the public without a deeper understanding of Bitcoin/Blockchain. This is to warn the innocent public who wishes to make a quick buck with their hard-earned money. Please discuss this with a fiduciary before investing in the Crypto space.
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