by Emma Dahl

Associate Program Analyst |

Bitcoin is the magic bean of the 21st century. Sometimes it’s treated as a currency, sometimes as a commodity, and sometimes as an illusive technological component that makes money out of thin air.

One argument for bitcoin is that it makes transactions easier and eliminates the need to exchange currencies, but there are already services like Paypal and Venmo that make transferring money easier. While bitcoin was originally developed as a utilitarian currency to make transactions easier, people tend to see it more as a magical bean to get-rich-quick.

Before looking into how bitcoin works, a bit of background on currencies can be helpful.

How do most currencies work?

Most currencies like the US dollar and the euro are tied to an economy. The US Federal Reserve is responsible for producing dollars, and everyone in the US uses dollars to buy things.

Because the whole economy relies upon dollars, this heavily regulates the value of the dollar. Inflation, or a decrease in the value of a dollar, is normal in an economy, but only at a low rate- the US inflation rate for 2017 was 2.1%. The US also exchanges with other countries, so when the value of a US dollar changes, it impacts the ability of the US to trade with other countries.

Since most currencies are tied to economies, this forces the currencies to be at least somewhat regulated. A super-high inflation rate is unlikely in an economy like the US because things like wages and loan payments help to regulate prices.

Can you make your own currency?

Yes, but should you? Technology has made making your own currency easier by not requiring you to print actual paper or coin currency. The main struggle with creating your own currency is that most people outside your community won’t accept it as a form of payment.

For example, if my friend James and I decide we are going to start paying each other in magic beans, James might be fine accepting some magic beans as payment for covering lunch, but if we try to pay the waitress in magic beans, she probably wouldn’t take them.

This is one of the issues with seeing bitcoin as a currency- most currencies are regulated or distributed by a central bank and everyone in that country agrees to accept that form of payment. Just because I think that magic beans are the currency of the future doesn’t mean that everyone else has to start accepting them as well.

Should a currency fluctuate in value?

Another issue with bitcoin is that its value fluctuates substantially from year to year. While currencies in a healthy economy will see a bit of value change from year to year, this is normally just a few percentage points of change. For example, in 2008, the USD to Canadian dollar exchange rate was about 0.94 USD to 1 Canadian dollar, and now is 1.34 USD to 1 Canadian dollar. Some change in the value of a currency is normal, as it reflects changing economic conditions and how countries are doing compared to each other. Huge fluctuations in currency normally reflect an economic crisis, like what is currently happening in Venezuela

Is bitcoin a commodity?

The US Commodity Futures Trading Commission defines bitcoin as a commodity, instead of a currency. Commodities are goods like oil, gold, or agricultural products that are inherently valuable because of their intrinsic qualities. Gold is valuable because it is an important component in computers, so we know that it isn’t just expensive because it’s shiny, it also has a lot of utility. Defining bitcoin as a commodity is tricky because it doesn’t have much value outside of it being a bitcoin. They do sell for a lot of money right now, but you can’t take a bitcoin and build a computer out of it or bake a loaf of bread with it.

Can someone invent a commodity out of thin air?

Like a currency, someone can invent a commodity out of thin air, but it’s not sustainable in the long run. If I decide that my magic beans are a commodity because of their magical properties, maybe I can make some money selling my beans, but when people find out that they aren’t magical and that they are just stuck with some beans, their value decreases. A good commodity holds its value, and this is what makes commodities useful.

So what is a bitcoin?

I would argue that because bitcoin doesn’t hold any utility beyond its own monetary value, it’s not a commodity. But, because it has a volatile price and isn’t accepted as payment, I’d also argue that it isn’t a currency. Although bitcoin had the potential to be used as a currency, because of the limited supply and fluctuating demand, it was operating as a stock but didn’t represent holding a share in a company.

Let’s go back to my magic beans: they don’t work well as money because (1) people don’t accept magic beans as currency and (2) if everyone gets excited about them being magical one day, suddenly the value of a bean changes, and currency that has large fluctuation is not good for the economy. My magic beans also aren’t a commodity because they don’t have a lot of value outside of them being beans. A bitcoin is kind of like a magic bean, but when people realize how little value they hold, at least you can eat the bean.