Three diagonal digital chains on a blue background. Blockchain technology concept. Mining and … [+] Cryptocurrency. Close up view. 3D rendering

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A cryptocurrency is a software object with units or “tokens” that can be securely and verifiably transferred from one owner to another. Transactions are recorded in a public, widely used database (a “blockchain”). The transmission verification mechanism is cryptographic. It uses a mathematical protocol to authenticate each transaction. The designers of the software object intend to use it as a medium of exchange or currency. Hence cryptocurrency.

Bitcoin was the first decentralized cryptocurrency introduced in 2009. Many imitators followed – there are now thousands of cryptocurrencies. CoinMarketCap, itself described as “the world’s most referenced price tracking website for crypto assets,” counted 4,377 on March 17, 2021.

Over the years, Bitcoin has developed a somewhat tarnished reputation. Human traffickers used it to buy and sell drugs on the Silk Road – an online black market. Hackers traded Bitcoin when they extorted payment to remove “ransomware” from hijacked computers and computer systems.

Recently, however, Bitcoin and cryptocurrencies have generally moved closer to mainstream. Bitcoin prices in US dollars are available on Google Finance and Yahoo Finance. Big banks JPMorgan JPM and Goldman Sachs GS are considering how to participate. Enthusiasts even encourage financial advisors to learn enough about Bitcoin and other cryptocurrencies to be comfortable in client portfolios.

Bitcoin price history July 2014 – March 2021

Rick Miller, Sensible Financial

Why the growing professional financial interest? The price of Bitcoin has risen sharply, as have the prices of other cryptocurrencies. The graph shows the course of the Bitcoin price in US dollars since 2014 from hundreds of dollars to over fifty thousand.

Is Bitcoin a Type of Money? Economists say money has three functions. It serves as:

  • ON Unit of account: It helps people understand how much wealth they have.
  • ON Medium of exchange: People use it to make trading easier and to conduct transactions.
  • ON Value memory: People feel comfortable keeping their wealth in it.

Does Bitcoin do some or all of these things? In short, no.

ON Unit of account: Even people who have traded bitcoin very successfully report their wealth in dollars, not bitcoin. Cryptocurrency markets are measured in dollars, not Bitcoin or other cryptocurrencies. While Bitcoin may one day fulfill this function, it is not yet.

ON Medium of exchange: Bitcoin has been used and is currently used to purchase goods and services. However,

  • Many of the offers are “gimmicky”. For example, Oakland Athletics recently (behind Paywall) offered a year-round package for a six-seat suite for a Bitcoin.
  • Prices are almost always set in dollars, not bitcoin.
  • Few providers accept Bitcoin. PayPal PYPL recently announced that it would support the use of selected cryptocurrencies in users’ PayPal accounts. However, when a consumer selects cryptocurrency as a source of funding, the cryptocurrency is instantly converted to fiat currency and the transaction is processed in fiat currency with the PayPal merchants. The fiat currency (dollar in the US) is the medium of exchange, the cryptocurrency is not.
  • Dollars and other currencies are legal tender (must be accepted if they are offered to settle a debt), cryptocurrencies like Bitcoin are not.

ON Value memory: While many people hold Bitcoin, its frequent large fluctuations in price make it very risky as an asset for holding one’s wealth.

Cryptocurrencies were conceived as currencies, but they do not yet fulfill the central functions of money. In a subsequent article I will examine whether and how they could develop in this direction.

The foregoing content reflects the opinion of Rick Miller and is subject to change at any time without notice. The content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation to buy or sell any securities. There is no guarantee that the statements, opinions, or projections contained herein will prove to be correct.

Past performance may not be an indication of future results. No indices are available for direct investment. Any investor trying to replicate the performance of an index would incur fees and costs that would reduce returns.

Investing in stocks carries risks, including the potential for capital loss. There is no guarantee that an investment plan or strategy will be successful.