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Bitcoin's (BTC) Money Use Case in 2024

By Michael @ CryptoEQ | CryptoEQ | 16 Apr 2024


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Introduction

Bitcoin, a term that encompasses the network, protocol, and system, contrasts with "bitcoin," the unit of account or BTC. This distinction is crucial as it reflects the diverse perspectives and ongoing debates surrounding Bitcoin's purpose and utility. These debates focus on whether Bitcoin should be considered a store of value, a medium of exchange, an alternative asset, or all these roles combined. The uncertainty surrounding these roles stems from differing user motivations and the developmental stage of this digital asset.

One-liner

Bitcoin is an open-to-anyone, incorruptible, uninflatable, self-sovereign, borderless, provably-scarce new asset in which to store wealth.

Diving Deeper

Before we dive in, let’s preface this question just a bit. Bitcoin, much like the term “money” can mean different things to different people. If you asked people from all over the world, “What is money?”...

An American might say, “The paper bills in my purse minted by the U.S. Federal Reserve.”

Someone from Sweden, which has grown into a nearly cashless society, may answer, “Money is now just digital numbers in my bank account that I use to purchase goods via my credit card.”

And someone from Venezuela, which is suffering from extreme hyperinflation, may exclaim, “Money is the currency we are forced to use by our government that loses value every second. Now it’s just a meaningless number that keeps going up and up while I look for other ways to keep my wealth from disappearing.”

And these are just part of the story. What about the answers to questions like where money comes from? Who controls it? Why did we once use shells? And then gold? And then paper? And now computers?

So, I think you see the point. Most things aren’t just ONE thing. A car may be just a box used for transportation to one person, a collector’s item or investment to some, or something you shoot into space for marketing reasons for someone else (looking at you Elon Musk). 

However, generally speaking, societies across the globe and throughout history have grown to expect their money to do three things: 

  1. Serve as a unit of account: Individuals in a complex society require a standard or “benchmark” in order to value items, conduct trade, and calculate output. Money eliminates the mental burden of having to know how many apples a house costs or how much drinking water a hatchet can buy. Money serves as a common denominator for all trade and commerce, reducing the friction innate in a barter economy.
  2. Act as a medium of exchange: A good money eliminates the “coincidence of wants” issue in a barter economy. Rather than having to find a trade partner that will take your watermelons for their dresses, each individual can now sell those specialized items for money and use that money anywhere. A good money is fungible, liquid, and facilitates trade among all (discussed more in later sections). 
  3. Serve as a store of value: Most people earn money for being productive and adding value to society via their work. However, sometimes they do not have immediate needs or use for that money. A good money will preserve that value across time and space, enabling the owner to use it in the future at the time of their choosing.

However, money today is complex, and today’s standard of “fiat” money is actually a relatively new deviation from the historical norm for money. For much of history, currencies were either backed by commodities, privately issued, or both. This allowed citizens to choose the way in which they wished to transact, free from monopolistic restrictions enforced by their governments. However, in the nineteenth century, the notion of “legal tender” began permeating through different nations and governments, essentially making legal the monopoly over the issuance of currency. People of certain countries were now forced to accept money in exchange for goods and services simply because the government decreed it so. 

Fiat money is the term for government-issued money that its citizens are forced to use because they happened to be born within that country’s borders. Fiat money is not valuable because of some superior quality or inherent value but because governments force usage upon its citizens at the threat of jail and violence. The U.S. dollar (USD) is simply backed by people’s fear or faith in the U.S. government, but if the public loses its trust in the central authority, the money will lose its value. USD is not backed by gold or anything else, a fact that 30% of Americans still do not know. 

Bitcoin is similarly complicated with even the narrative within the Bitcoin community evolving over the years. It has been described as all of the following: peer-to-peer (P2P) cash, a distributed computer network, magical internet money, a financial revolution, an inefficient database, a digital payment system, a Swiss bank account in your pocket, a global settlement layer, risk-on and a risk-off asset, an alternative to central banks and the Federal Reserve, a communications protocol, sound/hard money, a hedge against the U.S. dollar, free speech, and of course, a bubble or pyramid schemes.

Bitcoin's Aspirational Role as a Store of Value

Investors often view Bitcoin as a potential store of value, attributing to it the characteristics necessary for this role, despite it not being universally recognized as such. The digital scarcity engineered into Bitcoin’s protocol underscores its novelty and potential durability as an asset. This scarcity, coupled with a decentralized validation mechanism through proof-of-work, ensures its independence from conventional monetary policies.

Furthermore, economic factors such as the U.S.'s rising fiscal deficit and interest rates, which have resulted in significant annualized interest payments, potentially bolster Bitcoin's attractiveness. This situation, combined with a demographic shift towards a younger, more tech-savvy generation, may enhance Bitcoin’s appeal as a store of value.

The Dual-Edged Sword of Volatility

One of the most critical and frequently discussed characteristics of Bitcoin is its volatility. While this trait has attracted significant attention and investment, leading to innovations and development within the cryptocurrency sector, it also presents substantial risks. Bitcoin's price volatility is a natural consequence of its fixed supply and unregulated market environment, making its value susceptible to sharp fluctuations based on changes in demand.

Despite the risks, some investors see Bitcoin's historical volatility as decreasing, suggesting a maturing asset class. Data from Glassnode indicates that Bitcoin's annual realized volatility has reached new lows, suggesting a potential stabilization as the market matures and more participants enter the space.

Institutional Engagement and Future Prospects

As Bitcoin continues to evolve, its integration into mainstream finance is becoming more apparent. Traditional financial institutions are increasingly providing avenues for investing in Bitcoin, such as futures, options, and direct holdings through platforms like Fidelity Digital Assets. This integration suggests a growing acknowledgment of Bitcoin's potential role in diversified investment portfolios.

However, the future of Bitcoin as a widely accepted store of value remains uncertain. Its journey from a niche digital token to a global financial asset is unlikely to be straightforward or guaranteed. The investment community continues to monitor Bitcoin’s adoption curve and its impact on the broader financial landscape.

Conclusion

Bitcoin represents a complex and evolving segment of the financial market. Its potential as a store of value is intertwined with challenges such as high volatility and regulatory uncertainties. However, the increasing institutional involvement and the shifting perceptions of investors towards digital assets may eventually support Bitcoin's maturation into a stable investment asset.

The journey of Bitcoin will depend heavily on broader economic factors, technological developments, and demographic shifts. As such, while Bitcoin presents a unique opportunity, it also requires cautious engagement from investors who are willing to navigate its complexities and inherent risks.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


CryptoEQ
CryptoEQ

Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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