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Author Topic: Bitcoin: Commodity, Store of Value or Digital Currency?  (Read 644 times)
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January 06, 2017, 04:06:37 AM
 #1

I don’t often write two posts in a week, but after the warm responses to last week’s post, and in honor of Bitcoin’s 8th birthday today, I thought I’d indulge in one more!
http://p1.bpimg.com/1949/a8a68f0814f9ce33.jpg
I just tweeted that out and judging by the number of quick responses, retweets and shares, it’s a pretty hot topic, so I figured I’d expand my views on this tweet a bit more.
I‘ve referred to bitcoin as a commodity in previous posts and tweets, to much bewilderment. Isn’t it a digital currency? Well, maybe, but not yet.
I also don’t believe Bitcoin is suitable as currency — I think it’s a commodity that can be traded for goods and services. It may become a currency in time, but it just isn’t one right now. It’s a scarce, digital commodity — and the trading that takes place on exchanges really reflects the market sentiment around the value of this digital commodity.
Extracted from my first Bitcoin post, Finding Equilibrium, published in March 2014
To better understand my perspective on this topic, let’s spend a few minutes understanding the differences between commodities, stores of value, and currencies at the most fundamental levels — the links go to Investopedia, which has some solid definitions, but I’ll summarise below for brevity.
A commodity is a basic good in an economy which, though it may exist in different grades (A, B, C, etc), is essentially homogenous and easily tradeable. Gold, Silver, and other precious metals are good examples of commodities, but then again so are wheat, corn, pork bellies, etc.
A store of value can be a commodity that’s not perishable (so wheat, corn and pork bellies are not stores of value) or subject to depreciation over time (for instance, mass produced motor vehicles, or other homogenous products where technology & time can render a store of value worthless). There is typically a base level of demand where its price is not expected to drop below a certain level (for example with Platinum, due to industrial demand), with the possible exception of structural changes to the local or global economy, or maybe even a black swan event. Stores of value do not have to be homogenous either — for instance, a Van Gogh painting. Essentially, stores of value are items where the value does not decay over time, but can in fact also increase.
I can already see the alt cryptocurrency people raising their hands and arguing that Bitcoin could decay over time to a better technology. That is true, but Bitcoin has an enormous network effect, similar to Facebook. I’m happy to bet that better technology elsewhere will not necessarily enable another cryptocurrency to get bigger than Bitcoin anytime soon, if ever. It’s no longer about the technology, it’s about network effect and the demand for the commodity.
Currencies are essentially a common basis for trading. It would be very difficult to lug around kilos of gold or other stores of value, so money was created and historically backed by gold (no longer, and I’m not going to go down that discussion path now either!). Currencies constitute money and are used as a medium of exchange — otherwise you would constantly be trying to figure out the exchange rate of one commodity versus another.
If you’re interested in learning more about the origins of money Nick Szabo wrote an excellent essay in 2002 title Shelling Out: The Origins of Money.
So, what is Bitcoin? It started off being defined in Satoshi’s Whitepaper as a “Peer to Peer Electronic Cash System” — which I think misled a number of people. Yes, it’s a great long term vision, but it really doesn’t explain what the steps are to becoming a digital cash system and how Bitcoin needs to evolve through these phases.
For Bitcoin to become a trusted medium of exchange (aka “a currency”), it needs to be stable, and have low volatility. You cannot have a situation where your money is worth less (or even more) in a day or an hour. Volatility and unpredictability in currencies is harmful to businesses in particular, and if businesses cannot be assured that the Bitcoins they received the previous day will help them replenish their stock, then they will be unwilling to accept it and risk their livelihoods. This equally applies to people who are willing to earn Bitcoin. I’m not talking about using Bitcoin as a payment network and converting to fiat, such as Abra or Bitpay. I’m talking about accepting and holding Bitcoins because they are trusted and will not drop in value.
Bitcoin has come a long way since the highly volatile early days, for a number of reasons, including how the market cap / liquidity pool has expanded in the past 3 years (some more info in this prior post). In fact, Bitcoin volatility is at all-time lows — check BTCVol.
It’s getting close to being stable (and in this post, I said we needed to Make Bitcoin Boring Again, to get past the halving and it was for a while — which was great), but I don’t think we are there yet. I believe that we first need to see it get to the $3,000 price range, which I forecast for later this year, and I believe this is entirely possible, but it must happen while maintaining low volatility and steady growth — countries falling apart and pouring money into Bitcoin will not help the cause if it happens too quickly. If we see Bitcoin spiking too quickly to say $4,000+ well before end of the year, then I’m certain we’re going to see an accompanying crash, and then we’re back to square one.
As per my tweet above, I think we’ve just gone past Phase 1. Bitcoin is well accepted as a digital commodity. Millions of people own it, miners mine it and run successful businesses doing it and it’s recognized that it’s scarce and deflationary, so time does in fact benefit the price over the long term because no more than 21 million will ever be created (only 5m more over the next 100+ years).
If Phase 1 was about establishing Bitcoin as the first digital commodity, then Phase 2 is going to be about proving that there is sufficient global demand for it, that the price rises steadily over time. Bitcoin holders are funny bunch — especially the old school ones. They want to see the glory days of 20x returns in a year (and the accompanying crashes!) — almost like a drug addict looking for one more hit. Those days are gone. We should be aiming for 2–3x gains every year for the next couple of years, and then those returns should be steadily declining over time, but always going up and to the right — the power of compound growth will ensure that we still get 20x returns, but over a longer period of time and in more sustainable fashion. The more stable that Bitcoin becomes, the more it will be a store of value, and eventually it will become a currency — which will usher in a new era for Bitcoin. This could take 5–10 years to play out, but ceteris paribus, it should happen.


link
https://vinnylingham.com/bitcoin-commodity-store-of-value-or-digital-currency-93457cd27c9c#.qf4hsx4xx
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January 08, 2017, 01:48:13 AM
 #2

I've only been introduced to bitcoin last few months of 2016 and I still see it as commodity. Many people I know also see it still that way. People seem to be still making money out of it. Seems that it's still not stable enough to be a store of value at this point. I don't see myself storing all my life savings in something that can go $1000 to $800 overnight.

 
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January 08, 2017, 03:27:27 AM
 #3

I am telling you that bitcoin is both a commodity and a currency. It is a commodity since it is a property that you can purchase using dollars or fiat currency. But it is also a form of currency since you can use it to purchase things online and is also given as a form of salary in online jobs. Bitcoin becomes a commodity even it is a currency because it is not independent in itself it is backed up by dollars to have a value.
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January 08, 2017, 04:14:36 AM
 #4

first i know bitcoin, i don't think its commodity, store of value or digital currency, i think in that time, i only know that bitcoin can help me to earn money. but from time to time i learn bitcoin, i think bitcoin is store of value and include with digital currency for the future, because i see that bitcoin have this chance to be one currency that could be use by all people from all country without any difference than fiat which is need to be convert first in the local fiat if we want to buy something.

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January 08, 2017, 04:18:23 AM
 #5

What is, what is not.
5 to 10 years, is not too fast point, but the future of the currency must be bitcoin
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January 08, 2017, 04:30:32 AM
 #6

Holy Mother Christing Wall Of Text.  OP, I don't mean to offend, but you must realize that most users here only read the thread title and perhaps the first sentence of the thread.  Myself, I have the attention span of a Twix-addicted 4 year old.

Store of value.  That's my vote.  I'm of the opinion that bitcoin is an awful currency, and one of the reasons for that is the volatility we're seeing.  Can't have money fluctuate like that and still retain the drive to spend it.  I guess that argument might also go against it being a good store of value, but I think it's more that than a currency.

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January 09, 2017, 03:11:11 AM
 #7

first i know bitcoin, i don't think its commodity, store of value or digital currency, i think in that time, i only know that bitcoin can help me to earn money. but from time to time i learn bitcoin, i think bitcoin is store of value and include with digital currency for the future, because i see that bitcoin have this chance to be one currency that could be use by all people from all country without any difference than fiat which is need to be convert first in the local fiat if we want to buy something.
Yup everything depend on the users of bitcoins will be considered as currency, commodity, gold or other, the most important bitcoins can give income for every bodies.
Right now bitcoin be considered as stocks in my opinion, because the movement of bitcoin's price is like movement stocks and it can be analyzed by same method is like analysis for stocks price.
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January 09, 2017, 03:25:59 AM
 #8

Bitcoin can be considered as an investment, because from the day of its existence it have been growing gradually with fluctuations. This confirms it to be an potential investment. As a commodity, recently most people have started spending to buy bitcoin and stack it based upon the varying price. Initially its been created as a storage value token for big transactions, now too people are preferring it for several illegal needs. I believe its upon the user who using it based on his requirements.




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January 09, 2017, 03:47:36 AM
 #9

Holy Mother Christing Wall Of Text.  OP, I don't mean to offend, but you must realize that most users here only read the thread title and perhaps the first sentence of the thread.  Myself, I have the attention span of a Twix-addicted 4 year old.

Store of value.  That's my vote.  I'm of the opinion that bitcoin is an awful currency, and one of the reasons for that is the volatility we're seeing.  Can't have money fluctuate like that and still retain the drive to spend it.  I guess that argument might also go against it being a good store of value, but I think it's more that than a currency.
Yeah I doubt even in myself to read that wall , but I did it
At least I get the point that the real money / currency should have low volatile and more to stable
Just like any other currencies, it will be something that scared if then there is a currency that allow you to losing big value in few secs
Hard to accept the fact that bitcoin is having high volatile  and could be used as digital currency in mass. Only few people can do it.
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January 09, 2017, 06:32:28 AM
 #10

Fundamentally bitcoin is a digital currency.

Just to gain popularity and to compete the existing e-currency systems and fiats, bitcoin is also included with a characteristics of store of value.

This store of value makes bitcoin as a commodity, to be traded and to be saved for investments all are possible because of this characteristics of store of value. Yet, bitcoin is a pure digital currency. Yes, after achieving a stable prices (after some 200 years) bitcoin will be used as currency alone.
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January 09, 2017, 07:15:26 AM
 #11

it's all those thing together and it work better than gold, because it act a meant of payment too as a better one than gold

one can argue that all the pump and dump will not make it a good store of value, because your money can depreciate fast, but what you need to follow is the average increase

if you look from the beginning bitcoin is increase each year, the peak and the bottom count basically zero

and if it wasn't a digital currency it would not have this value at all, just take a look at the altscene they are bound to fail because of this reason
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January 09, 2017, 07:39:51 AM
 #12

I like the phased system, but would want to extend it in a way where we could evolve from being a commodity to going to mainstream adoption where bitcoin will function as a currency with store of value functionality. I have to agree with you that using Bitcoin as a currency, would be more difficult for merchants if they accepted Bitcoin directly, but If they used 3rd party payment processors, those payments could be converted directly to fiat, without the loss of value due to volatility. < This is not the perfect solution, because we would want a currency without conversion to fiat in the future >

 
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January 09, 2017, 08:13:13 AM
 #13

For me, I see it as the three because the three characteristics enumerated by OP comes together to give it the popularity it enjoys today and we all at one point or the other use Bitcoin for one or all the three functions above. For example

1. As a commodity, this is common to those who are good in trading by buying low and selling high at different point in time.

2. As a store of value, this is common to people who buy to keep maybe for 6 months or 1 year even more and wait for it to appreciates significantly before disposing.

3. As a currency, here we is for people who acquire for payment of services offered such as design of banners or even payment for signature campaigns etc.

Putting all these together,I cannot separate one from the other.

 
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January 09, 2017, 08:32:38 AM
 #14

I‘ve referred to bitcoin as a commodity in previous posts and tweets, to much bewilderment. Isn’t it a digital currency? Well, maybe, but not yet.
it IS a currency too because you can buy stuff with it, and that is enough reason for calling it a currency.

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I also don’t believe Bitcoin is suitable as currency — I think it’s a commodity that can be traded for goods and services.

the argument about commodity vs currency in bitcoin is a long one without end. but I believe that commodity has intrinsic value by definition so bitcoin can not be that based on this definition.
at some philosophical level Cheesy you can call everything commodity and say everything is like the old days when people used silk and salt to trade.

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It may become a currency in time, but it just isn’t one right now. It’s a scarce, digital commodity — and the trading that takes place on exchanges really reflects the market sentiment around the value of this digital commodity.

as I said right now you can easily use bitcoin to buy anything you like just like you do with fiat. you can go to a store and either pay directly with bitcoin to the shop owner in exchange for the product you get (lets say groceries) or you can use a service that offers debit cards with bitcoin in them and do the purchase. you are using bitcoin as a currency and you can not do the same with any other commodity that you can name.

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So, what is Bitcoin? It started off being defined in Satoshi’s Whitepaper as a “Peer to Peer Electronic Cash System” — which I think misled a number of people. Yes, it’s a great long term vision, but it really doesn’t explain what the steps are to becoming a digital cash system and how Bitcoin needs to evolve through these phases.

again what I said above. there is no misleading, it is currency.

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For Bitcoin to become a trusted medium of exchange (aka “a currency”), it needs to be stable, and have low volatility. You cannot have a situation where your money is worth less (or even more) in a day or an hour. Volatility and unpredictability in currencies is harmful to businesses in particular, and if businesses cannot be assured that the Bitcoins they received the previous day will help them replenish their stock, then they will be unwilling to accept it and risk their livelihoods. This equally applies to people who are willing to earn Bitcoin. I’m not talking about using Bitcoin as a payment network and converting to fiat, such as Abra or Bitpay. I’m talking about accepting and holding Bitcoins because they are trusted and will not drop in value.

now after all the walls of text you come to a good point. I agree with this. I have also said it many times before that if we want to see bitcoin be used "more" as a currency we have to see a more stable price. otherwise people will see it as an investment "first".
but this doesn't mean bitcoin is not a currency!

let me put it this way.
in my country, the value of local currency is low and it has been going down for a couple of years now. many people here are investing in USD, they buy USD and hold it and when value of local currency goes down they can trade USD or sell it to have a profit.
now can you call USD a commodity and claim USD is not a currency?

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January 09, 2017, 03:47:38 PM
 #15

I also don’t believe Bitcoin is suitable as currency — I think it’s a commodity that can be traded for goods and services.

the argument about commodity vs currency in bitcoin is a long one without end. but I believe that commodity has intrinsic value by definition so bitcoin can not be that based on this definition.
at some philosophical level Cheesy you can call everything commodity and say everything is like the old days when people used silk and salt to trade

This argument is mostly as meaningless in and of itself as people arguing over this matter are clueless themselves. These two concepts are not mutually exclusive. This argument would be basically along the same lines as someone arguing with someone else over, say, whether something is fuzzy or warm. It can be both. Currency can be made into a commodity and traded as such, though the converse is not always true, i.e. not every commodity can be made into a usable currency. And Bitcoin as a currency does have intrinsic value...

And exactly this value would be traded if Bitcoin should be commoditized

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January 10, 2017, 01:01:16 AM
 #16

Arguing over definitions is silly. Bitcoin is what it is, it has the characteristics that it has, it can do what it can do, all regardless of the label you apply to it.

The people that care the most about these definitions are the people that insist on classifying everything, and they seem to believe that something cannot exist unless you can classify it.

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January 10, 2017, 03:22:58 AM
 #17

It probably makes sense to look at Bitcoin as a product rather than just a currency.
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January 10, 2017, 05:18:57 AM
 #18

Presently it is all the three mentioned, Bitcoin was designed to be a currency and it is still a currency but the deflationary characteristics makes it a store of value because of the price increases with time also the demand and supply pressure class it has a commodity.
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