Bitcoin Explained – Part 2: Medium of Exchange vs. Store of Value
If you don’t know much about bitcoin, this article series -titled “Bitcoin Explained”- can help you understand it better. This is the second article in the series in which I’m going to talk about bitcoin being a medium of exchange and a store of value. I will try my best not to get technical here so everyone can use the series to improve their understanding of bitcoin in every aspect.
What’s medium of exchange?
In the first part of this series, I gave a history of money. In that account, humans started with bartering but soon found out that they need a medium to make every exchange possible and easier. This is how money was born.
Simply put, a medium of exchange is something that the both sides of a trade agree on its value. So one side gives this valuable thing to the other, and receives goods or services in exchange. And the other side, receives this valuable thing, knowing that they’ll be able to spend it in the future to get what they want. Your fiat, government issued money is a medium of exchange.
What’s store of value?
In our history of money, you saw how money can lose its value and purchasing power. People who save money and want to preserve their capital, need to understand this and put their money in a form that doesn’t depreciate over time, at least not as much as their fiat currency.
So someone may buy gold or a property in order to protect their capital against inflation. In this example, gold and property are stores of value. Because they keep your capital from depreciating in value.
So which one is bitcoin?
This is an argument that’s been going on since the very beginning. Satoshi Nakamoto, the founder of bitcoin, calls it “electronic cash” in the bitcoin whitepaper. But there are many people in the bitcoin community that see it as a store of value first and they give some compelling reasons for this belief.
Right now, I kind of agree with both opinions and I think that bitcoin can function in both ways. But I believe we have to wait to get the ultimate answer for this question. Because it’ll depend on many things and the whole direction of the bitcoin and the crypto market.
I’m going to give you both sides of this argument, so you can decide for yourself.
Bitcoin as a medium of exchange
According to blockchain.com the maximum number of confirmed transactions per day on the bitcoin blockchain was around 452 thousands and it happened in the may of 2019. But since the start of 2016, this number hasn’t gone lower than around 140 thousands per day.
It doesn’t seem much when compared to the daily use of dollars or euros. But for a decentralized system, it’s an impressive number. Especially when you factor in the technical difficulties like the maximum number of transactions that the bitcoin blockchain can handle per second. (It’s around 7 right now.)
Of course there are solutions like the lightning network and other payment solutions that aim to solve these problems and make bitcoin transactions faster, cheaper and possible for millions of people per day (even the ones who are not familiar with the technology). But until we actually see this happen, you can’t say that bitcoin is a medium of exchange in the global level.
Bitcoin as a store of value
For many people in the western countries, gold and property will suffice as stores of value. But people in the authoritarian countries have heard many horror stories regarding the seizures of property and valuables by the governments and other powerful organizations. So the idea of a new form of valuable that they can own anonymously to keep their capital from depreciating, is very attractive to these people.
But the amount of return on investment that bitcoin has brought for its owners is so high and its underlying technology and idea are so attractive that many people in democratic countries, who can own gold and property without any real concerns, are also flocking to bitcoin.
Of course the same huge price movements that have brought bitcoin investors a very good return, can go the other way and ruin their financial outlook in the short term. Cryptocurrencies are a highly volatile asset class. And this is the main problem for bitcoin as a store of value.
Many experts think that this volatility will be much lower in the future, as this market matures. But until then, you can’t say that bitcoin is the best store of value in every situation and for everyone.
As you see, bitcoin can be a medium of exchange and a store of value. And it can be a great option for both but there are problems that it needs to overcome in order to actually get there.
So what’s your opinion? Do you see bitcoin as a medium of exchange or a store of value? Comment below with your thoughts.
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***Last Updated on 28 March 2022 by Hamed Derakhshani (Guy with a Wallet)