Bitcoins - Currency or Asset?

A few years back, I’d written a blog on Bitcoin, the digital currency. Yes, Bitcoin is like the dollar, pound, Euro or rupee. It’s a currency. Except it isn’t issued by any government. We won’t get into the technical details of who creates it, fraud prevention etc here.

 

Bitcoin’s exchange rate against the dollar (and every other government issued currency) keeps making headlines regularly. For both its sharp rise and for its sharp falls. Over 10-15% drops over a weekend aren’t unheard of.

 

Over the years, Bitcoin hasn’t taken off as a currency at all. As James Surowiecki wrote recently:

“Almost from the beginning, only a small percentage of Bitcoin transactions have been for actual goods and services — and of those, many have been for illicit goods and services, like drugs and online gambling.”

And today?

“On average, there are now around 325,000 Bitcoin transactions — including trades — per day. There are roughly a billion credit card transactions per day.”

 

The biggest reason why it is used so less is that it is very slow at processing transactions: it can only support 7 transactions per second. Contrast that with Visa which supports 6,000 transactions per second! Nobody can keep waiting for transactions at a snail’s speed. Then there’s the problem of high transaction fees that make it unsuitable for low value (i.e., day to day) usage.

 

And since its value fluctuates so much, its appealing as an investment. Which in turn means:

“You should hoard it and then sell it once its price rises. And since you can get along perfectly well without spending Bitcoin, there’s never been anything pushing people to stop hoarding.”

Conversely, its volatility is a big turn off for its use as a currency. After all:

“Few people want to get paid today with something that might be 10% less valuable tomorrow. (Of course, it might also be 10% more valuable. But that kind of gamble isn’t one most businesses are interested in making.)”

 

All of which is why Surowiecki says Bitcoin is like gold, an item whose quantity cannot be changed by governments. And just as gold is an investment for many, so too are Bitcoins. Thus, he ends saying:

“Bitcoin began as a cryptocurrency. It has ended as a cryptoasset.”

 

Which is why it surprised me when Tesla, the electric car company owned by Elon Musk, announced it would accept payment in Bitcoins. Why would a company want to accept payments in such a super-volatile currency, I wonder..,