The crucial issue is whether technological innovations, including digital
currencies such as Bitcoin, are viable alternatives to central bank
currencies and traditional bank payments systems. You can make a good
argument in favor or against and the key is the quality of your argument and
the evidence you provide. Some issues to touch on include: Transaction
Costs, Acceptance, Trust, Security, Privacy, Fast, Secure, Efficient, and
Regulatory Uncertainty.
It is useful to come back to the three basic functions of money to see how
well digital currencies fulfill those functions relative to traditional
money.
Medium of Exchange – Needs to be readily accepted. Currently, few retailers
accept bitcoin. However, there appears to be a steady increase in
acceptance. Consumers and merchants fed up with high credit card transaction
costs are lured in by the low costs and reduced market frictions that are
embedded within the bitcoin system. Finding a way to solve the security and
regulatory uncertainty could greatly increase the medium of exchange aspect
of bitcoin, and the technology could allow for a “viral” expansion of its
usage.
Unit of Account – Common denominator for expressing relative values.
Bitcoin does not yet seem to be widely used to denominate values; Andreessen
mentions how easy it is to use bitcoin without having much exchange rate
risk because the payer converts from $ to bitcoin and then the payee
converts from bitcoin to back to $ (but is it really always so easy and low-
cost to do the conversions? Some exchanges have collapsed.) In principle,
however, bitcoin could easily be adopted as a unit of account. Despite the
high value of an individual Bitcoin, technology allows Bitcoin to be easily
divided electronically into any fraction to create a common and convenient
benchmark for valuations.
Store of Value – Maintains value over time so that people are willing to
hold it and use it for transactions purposes. Bitcoin, however, fluctuates
significantly in value over time. Its high exchange rate volatility is a one
of the major criticisms of bitcoin. Jamie Dimon, for example, referred to
bitcoin as a terrible store of value due to the variability of its price.
The uncertainty generated by the volatility may make consumers wary of
holding it and merchants wary of keeping it if they receive bitcoin. People
may be quite uncertain about whether bitcoin will maintain its value over
time. Security and fraud concerns also raise questions about how well
bitcoin can act as a store value over time. Obviously, regulatory changes
could affect its value. Despite these concerns, there are quite a few people
who seem to be willing to invest in and hold bitcoin.
Also, consider the properties we usually associate with what is used as
money:
- Scarce: Upper limit on number of bitcoins that can be mined (but can the
protocols be changed to allow more?)
- Verifiable: “Block ledger” system that allows people in the system to
verify the authenticity of a bitcoin – each has a unique identifier (but
there are examples of bitcoins being lost or stolen, e.g., the collapse of
the Mt Gox exchange. Security and fraud are issues)
- Portable: electronic so easy to carry/transfer
- Durable: exists with an electronic record in a “block ledger” (but,
again, there are examples of bitcoin accounts or “wallets” disappearing)
- Homogeneous: a bitcoin is a bitcoin, no different flavors or types (but
could they somehow become differentiated, e.g., old vs new bitcoin; bitcoin
stored on one exchange vs another?)
- Divisible: since these are electronic book entries, easy to divide
