“Money is a matter of functions four: a medium, a measure, a standard, and a store.”
This chant cited by Alfred Milnes in 1919 book titled “The Economic Foundations Of Reconstruction” summarises the four basic properties of money.
It’s one of the basics you learn studying economics, which is going to help us understand why decentralised digital currencies are unlikely to perform the same functions.
In other words, it has to be commonly accepted for transactional purposes so you don’t have to pay for a good with another good or service; it has to accurately reflect the value of products and services; it allows for settling payments at deferred dates (i.e. debt); and it can also be used to store value from whatever you sell (i.e. saved).
To serve well in at least three out of four of these functions, a currency has to possess a stable, predictable value.
The Volatility Of Bitcoin
It’s hard to accurately measure how much anything is worth using a medium whose own price fluctuates highly all the time.
A $100,000 car would have cost 10 BTC in October, but less than two BTC today — and there’s no telling which way it’s going to go in the next few months.
As you can see above, within the last five years, the price of Bitcoin went from $500 to $20,000, then down to $3,500, up to $12,000, down to $5500 and recently to over $60,000. In just a few days, its value can fluctuate by 10 or 20 per cent.
Contracts for delivery of products or services can be settled within a window of a week, month or even a quarter. Of course, as long as a currency’s value is predictable, it isn’t a big deal as it’s unlikely that it is going to change dramatically.
30 days is a fairly standard timeframe for issuing payments. However, with cryptocurrencies being able to jump a few hundred per cent over a period of weeks, you can’t predict what the deferred payment you agreed to may actually be worth when the date is due. It would make conducting any business highly risky.
Bitcoin Shouldn’t Be Regarded As A Currency
The market is exciting thanks to its high volatility as it allows speculators to make significant profits very quickly, but it also comes with a risk of heavy losses.
Many tears have been shed by the owners of digital tokens depending on whether they bought in too late or sold too early.