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Is Bitcoin a digital currency or a commodity?

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CoinDesk today is attempting to define Bitcoin so everyone is on the same page going forward about this five year-old Internet phenomenon. It is compared to virtual currency, digital and crypto-currency.

The Department of Treasury in 2013 defined virtual currency as a currency or virtual money as a 'a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency.'

Peter Earle, the chief economist at Humint, a marketing agency that is involved with coins for multiplayer games divides crypto-currency vs. ‘simulate’ or game currency. Game currency is used in a specific economic system as is the game multi-player situation. He defines economy to make it clear that digital money goes around the world electronically while virtual currency is applied to a game.

In explaining the use of buying into Worldcraft and other games Earle notes that virtual currency may be exchanged to these ‘game’ coins but used only within the boundaries of the game, ‘they tend to be subject to one-way flows: real-world money is converted into simulated game currencies, but not back out,’ says Earle. ‘This is because game’ simulated currencies are essentially goods, and not an actual medium of exchange.’

What and how the currency is used matters in how to define it. Charles Hoskinson, cryptographer and co-founder of the Ethereum cryptocurrency framework, makes the distinction:

‘A central entity issues the tokens and then they’re used for specific contexts. They can appreciate real-world value though. So WoW and Eve Online ISK do have a market price,’ he says. ‘This is why people in China spend days earning them.’ The other option is to buy into the game with money, the local denomination or fiat currency.

Wences Caseres, founder of mobile payments network Lemon and launched the mobile wallet Xapo, defines another type of asset with the characteristic of earning loyalty points in the real world. He provides an explanation to differentiate currencies as follows:

Virtual currencies are owned and controlled by a counterparty (Facebook credits, American Airlines mileage plus account, American Express reward points, etc) and you have to trust that counterparty since it is up to them to set the value and redemption rules. Digital currencies on the other hand are designed in a way in which, just like with gold, you do not need to trust anyone.’

Hoskinson sets three core characteristics of money as:

  • exchangeability to switch something for a different currency
  • the ability to act as a store of value without losing value over time
  • it is a widely used unit of account and not merely limited to within the boundaries of a game

Is Bitcoin a digital currency as it is not bound by loyalty points or within a game? Hoskinson says it has not arrived yet to that point because it does not meet the guideline that you can use it through your life without many limitations. Hoskinson says, ‘Bitcoin is getting there, with about 15,000 products and services available, maybe more.’

He defines Bitcoin further in description:

‘We want it to be predictable, because that gives you the ability to issue credit, which is one of the most important things in an economy,’ according to Hoskinson. ‘It behaves much more like a digital commodity, or a tech stock.’

Finland, Bank of England and Goldman Sachs all think that it should be defined as a commodity. Yesterday the New York Times reported that three large venture capital firms bought into Pantera Bitcoin Partners, a San Francisco-based hedge fund operator that buys and sells virtual currencies.

Barry Silbert of SecondMarket is putting together an exchange which will allow ‘members’ who are merchant service businesses such as money exchanges, banks, traders and Bitcoin exchanges who can trade bitcoin. Silbert said at the announcement in February that, ‘We’re going to attempt to slow things down a bit and create a true indication of bitcoin value, once or twice a day, and each of the members though they can trade all day long, or they can tie price to the spot price.'

Bitcoin has been on a tumultuous road the past five years since the anonymous cryptologist; Satoshi Nakamoto put the algorithm out on the Internet for the savvy program coders to create Bitcoin chains and bitcoin for trading. It is definitely becoming a commodity and perhaps it will be a digital currency in the near future due to the amount of support it is receiving.

To find out more about the history and advancement of Bitcoin view the list below in Author’s suggestions and the video atop this article from the WSJ: Bitcoin Why should you care?

Victoria Wagner@victoriaross888

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