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What Bitcoin needs to do to become a real currency Posted on Sep 12 - 2017

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The price of the digital currency Bitcoin has skyrocketed this year for myriad reasons, and many cryptocurrency advocates are nodding approvingly as rising prices reflect higher demand.

In March, Bitcoin was hovering at just $1,000 per coin, and now the prices have tripled. Currently, a single bitcoin (BTC) is worth almost $3,300. But while the meteoric rise is good for speculators, it is extremely bad news for people who wish to see Bitcoin’s adoption as a functional currency.

If you open any macroeconomics textbook, it will identify a “currency” based on three things, says Lawrence White, a professor at NYU’s Stern business school. “It’s a medium of exchange, which means you can use it to buy and sell stuff. It’s a unit of account, to keep track of stuff. And it’s a store of value,” he tells Yahoo Finance.

Bitcoin’s massive gains of late make it even tougher to function in those three arenas. For people to want to use a currency for commerce, keeping track of value, and storing value, at least some stability is vital.

Bitcoin’s value is all over the place

“I have a fair amount of trust that a dollar today will be worth approximately the same amount of stuff tomorrow,” White says. “I don’t have the same confidence that may be true with Bitcoin. It’s also the reason why General Motors stock has not become a substitute in transactions for dollars.”

White strikes the heart of the matter with this description. Bitcoin has been behaving much more like a long-term, buy-and-hold investment than a currency for daily use.

As such, people who are betting cryptocurrencies will take off aren’t looking to empty their Bitcoin wallets, but to buy and hold. There is absolutely no motivation to transact in Bitcoin besides the privacy and security aspects, which are not a major factor for most people. What if one bitcoin is worth $4,000 next month? It’s not hard to see how a bull market is bad for the transactional vision of the cryptocurrency.

For Bitcoin to gain traction, it has to achieve at least a semblance of steady value. “We are reluctant to transact in something where the day-to-day value for our transactions’ purposes could vary substantially,” White said.

Acceptability is everything

Bitcoin does have a few things going in its favor. Some retailers like do accept Bitcoin. According to White, acceptability is perhaps the most important mark of a currency, and that’s one of the reasons the U.S. dollar is so powerful: The government says it legally must be accepted.

Bitcoin does not have this governmental guarantee of universal acceptance, so citizens or businesses are not obligated to accept those payments. “It’s self-reinforcing,” White said. “Why do people accept it? Because they believe other people will accept it. Why do they frown and are reluctant or refuse? Because they’re afraid they wouldn’t be able to find anyone to accept it.”


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