When Bitcoin made its official debut in 2009, its primary objective was to be a modern and improved alternative to traditional money. Its creator, who went by the pseudonym “Satoshi Nakamoto,” designed the world’s first cryptocurrency to be used for all the things money can be used for, such as purchasing goods and services or transferring wealth.
Perhaps even more importantly, however, Nakamoto also wanted Bitcoin to fix many of the problems traditional currencies have long faced, such as inflation, counterfeiting, and having to rely on a banking system that can be expensive and often doesn’t perform as we expect. So, just how similar is Bitcoin to traditional cash, and what are the differences?
In this AAG Academy guide, we’ll look at the functions and characteristics of money and Bitcoin, as well as their advantages and disadvantages.
The functions of money are familiar to all of us, and despite the fact that money has taken many different forms throughout the ages, those functions have always remained the same. Technically speaking, there are three key functions to consider. Money serves as a medium of exchange, as a store of value, and as a unit of account.
Being a medium of exchange, money can facilitate transactions and be swapped for goods and services. Without it, the only way to obtain those things would be by bartering, which would involve exchanging goods and services for other goods and services — as humans did around 5,000 years ago before money came into existence.
To be an effective medium of exchange, money must be a store of value, which means that it must be able to hold its value over time. There are many things that are better stores of value than money — such as land and works of art — but those things aren’t as liquid or as widely accepted as money, so they wouldn’t function well as a currency.
Finally, money is a good unit of account since it provides a common measure of the value of goods and services being exchanged. In other words, everyone understands the value of $1 or $100 or $1 million, and therefore, both suppliers and consumers can effectively determine the appropriate price of something.
What are the functions of Bitcoin?
Bitcoin was designed to be an alternative to traditional fiat currencies, so it’s no surprise that it aims to replicate many of money’s functions. It, too, serves as a medium of exchange, as a store of value and, now that it has matured, as a unit of account. That’s why Bitcoin is already being accepted as a form of payment by many merchants, including Microsoft and Twitch.
In fact, Bitcoin is so good at replacing traditional money that it has already been adopted as an official currency by some countries. Both El Salvador and the Central African Republic have made Bitcoin a legal tender alongside their native currencies. However, this wasn’t all Bitcoin was designed to be. It also has some functions that money does not have.
Perhaps the most important is that Bitcoin is completely decentralized. It is not governed or controlled by a central entity such as a government or a bank in the same way that traditional currencies are. This has a number of advantages, chief of which is that users do not have to place their trust in a third party that may not act in the best interests of its consumers.
Bitcoin is also impossible to counterfeit since every single Bitcoin (BTC) has a unique identifier that cannot be replicated or destroyed, and it is significantly less susceptible to inflation. Unlike traditional currencies, which are being minted into circulation all the time, Bitcoin is finite. There will never be more than around 21 million BTC.
There are six key characteristics of money, and those are:
Durability Money is relatively durable, and though it can be easily destroyed if that’s your intention, bills and coins tend to remain in circulation for several decades. What’s more, they can be easily replaced when they do become worn.
Portability No matter how you choose to carry your money — whether you stuff it inside a wallet or leave it in the bank and use a debit card to spend it — it’s easily transportable. You can take your money with you wherever you go.
Uniformity Every U.S. citizen recognizes a $1 because all of them are the same size and shape and feature a similar design. The same can be said for every other denomination of U.S. currency. This gives money uniformity and ensures there’s no confusion between buyer and seller.
Divisibility Traditional currencies can be broken down into different denominations. If you’re in the U.K., for instance, a £50 note can be split into two £20 notes and one £10 note; five £10 notes or ten £5 notes. This obviously makes transacting much easier — and helps with portability.
Acceptability One of the most important characteristics of money is that it is accepted everywhere and by everyone. No matter what you want to buy, it’s money you’ll need in most cases. And if you’re selling, you typically expect money in return. There are exceptions to this, of course — like when you swap certain goods for other goods — but that’s not common practice.
Scarcity Finally, money is in limited supply or scarce. Although new notes and coins are minted into circulation all the time, there are tight controls over how much can be in use at any one time. Governments and central banks don’t just print as much as they like. This ensures money maintains its value and goes some way toward keeping inflation under control.
What are the characteristics of Bitcoin?
In the same way Bitcoin shares many of the same functions as money, it also shares many of the same characteristics. It is durable, portable, uniform, divisible, and in limited supply. The only thing Bitcoin falls behind on at the moment is acceptability. While adoption has grown significantly over the years, Bitcoin still isn’t widely accepted like money is.
Again, however, Bitcoin has some characteristics that money does not have, including decentralization, transparency, and immutability. Bitcoin is also resistant to some of the changes money is sometimes susceptible to, such as revisions to its design or the discontinuation of a certain denomination.
What are the advantages of Bitcoin over money?
As you may have already picked up on by now, there are certain things that make Bitcoin superior to traditional cash. It is not only impossible to counterfeit, but its decentralized nature makes it more secure and more affordable. If you send money to a friend in another country, for instance, it will be cheaper and significantly faster to do it in Bitcoin.
Decentralization also makes Bitcoin totally transparent. Anyone can see a Bitcoin transaction on the blockchain — and even find out how much Bitcoin certain wallets are holding. However, it is not possible to see the identity of the people involved in those transactions or the owners of those wallets, which makes Bitcoin more anonymous than money.
Bitcoin is also absolutely finite in that it is impossible to replace or replicate BTC, and more difficult to lose (assuming you’re careful with it). Furthermore, Bitcoin is global in a way that no other currency has ever been before. It is available in every country, operates the same way in every country, and has the same value in every country.
What are the advantages of money over Bitcoin?
Money’s biggest advantage over Bitcoin is, of course, its acceptability. No matter what you’re buying or where you’re buying it, money will be accepted. Sadly, the same cannot be said for Bitcoin just yet. Although adoption is growing and Bitcoin is accepted by some of the world’s biggest merchants, it is nowhere near as ubiquitous as traditional fiat currencies.
Traditional is also more traceable than Bitcoin. While some may see this as a bad thing, traceability helps cut down on fraud, laundering, cybercrime, terrorism, and many other illegal activites that Bitcoin and other cryptocurrencies are often associated with.
Not necessarily. Both currencies have their advantages and disadvantages when it comes to security. For instance, Bitcoin is usually more difficult to steal and more difficult to lose. However, if you do fall victim to a scam, Bitcoin doesn’t offer the same protections that banks and credit card companies do, and it’s near impossible to trace to an actual person.
“Fiat” is the term used to describe traditional currencies, such as the U.S. dollar, the British pound, and the euro.
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About the author
Senior content writer
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.