Is Bitcoin a Commodity?

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In early 2017, Bitcoin rose to an all-time high of $1129.87 on January 4. One year before, Bitcoin was at the $434 level.

What Is Bitcoin?

Bitcoin is a form of digital “currency”. It is created and held electronically, on a computer. Bitcoins are not paper money like dollars, euro or yen by central banks or monetary authorities. Bitcoin is the first example of a cryptocurrency, which is produced by people and businesses all over the world using advanced computer software that solves mathematical problems.

Satoshi Nakamoto first proposed Bitcoin as a means of payment based on mathematics. Bitcoin is a method of payment or transfer of value that is independent of governmental authorities like central banks that traditionally control money supply and the availability of currency in the global market. In many ways, Bitcoin is a pan-global means of exchange. Transfers are made via computer immediately with low transaction fees. Bitcoin does not flow through the traditional banking system; rather it flows from one computer wallet to another. Bitcoin cannot be held or kept in a pocket or wallet like currency; it is purely a computer-based means of exchange.

Bitcoin is a fixed asset; there is only a total of 21 million coins. Solving the advanced mathematical problems results in the mining of Bitcoins. However, bitcoin is divisible so the growth potential for the exchange medium is unlimited. One of the most interesting inventions that came alongside Bitcoin is blockchain or distributed ledger technology (DLT).

DLT has amazing potential when it comes to traditional operations and settlement ramifications for businesses in the financial as well as other industries. DLT tracks ownership and allows for immediate and efficient transfers of Bitcoin.

Bitcoin has several attributes that set it aside from traditional currencies as a pan-global means of exchange.

Central banks or monetary authorities do not control the number of Bitcoins; it is decentralized making it global. Anyone with a computer can set up a Bitcoin address to receive or transfer Bitcoins in seconds. Bitcoin is anonymous; the cryptocurrency allows users to maintain multiple addresses and setting up an address requires no personal information. The DLT technology makes Bitcoin completely transparent; it stores complete details by address of every transaction that ever occurs. Transfers of Bitcoin are immediate and once made, they are final. At the same time, there are limited fees and international and domestic transfers are not subject to foreign currency exchange rates and fees for transfer. There are no borders when it comes to Bitcoin.

Is Bitcoin a Currency?

There is a great deal of debate about whether Bitcoin is a currency. The Merriam-Webster Dictionary defines currency as:

  • Circulation as a medium of exchange
  • General use, acceptance, or prevalence
  • The quality or state of being present
  • Something (as coins, treasury notes, and banknotes) that is in circulation as a medium of exchange
  • Paper money in circulation
  • A comment article used for barter
  • A medium of verbal or intellectual expression

    The official definition of currency may leave you more confused about whether Bitcoin is a currency or something else. After all, it certainly meets some of the characteristics in the definition, but not others.

    In September 2015, the Commodity Futures Trading Commission (CFTC) in the United States officially designated Bitcoin as a commodity.

    Is Bitcoin a Commodity?

    The CFTC’s designation came as a response to a Bitcoin exchange that was offering derivative contracts or options on the value of the cryptocurrency. However, Bitcoin is one of those assets that does not quite fit well into any definition and a historical understanding of what is a currency and what is a commodity sheds light on the argument.

    Throughout the course of history, many commodities and even some manufactured products have served as currency.

    Probably the best examples are gold and silver. Gold and silver were not only used as a medium of exchange, or currencies for thousands of years, they were backing for many paper currencies around the world until only recently. Central banks and monetary authorities around the world continue to hold vast gold reserves and categorize their holdings as “foreign exchange reserves.” Therefore, both gold and silver can be thought of in the same class as Bitcoin. Moreover, over the course of history salt served as a medium of exchange in ancient times. More recently, cigarettes or blue jeans have been employed as currency in certain areas of the world over recent decades. As you can see, the classification of Bitcoin as a commodity is both dubious and understandable, at the same time. It is hard categorized Bitcoin because it is so new and different from other assets available to market participants. One thing seems certain, the growth of interest in the cryptocurrency over recent years means that it is an asset that deserves our attention.

    The Future for Bitcoin

    Technology has made the world a smaller place over recent years. Bitcoin is a child of the technological revolution. As the first pan-global currency (or commodity) that can be used by people all over the world as a medium of exchange without involving governments, the cryptocurrency will continue to attract interest and resistance.

    In nations where currency flows are subject to stringent government control, Bitcoin offers a method to transfer wealth to regions of the world where restrictions are less onerous. Additionally, since Bitcoin transactions are anonymous, the cryptocurrency will continue to attract transactions connected to nefarious and outlawed activities.

    It is clear that Bitcoin is gaining interest and use around the globe. In 2016, the majority of Bitcoin transactions occurred in China. In fact, the massive volatility in Bitcoin’s value at the beginning of 2017 that took the price from $1129 to under $800 on the same day was likely due to speculation from China. Bitcoin, and its operational child, blockchain technology, have a future in the world markets. However, it is likely that governments all over the world will resist a pan-global asset that operates beyond their reach and can facilitate activities that run counter to their laws and rules or political agenda