Depending on the use of the cryptocurrency, Bitcoin can act as a currency, a security or as a commodity. ..lol
Bitcoin has been on the centre-stage of attention after providing people with a mind-boggling return that reached a value of around $20,000 from a humble $900 within a single year in 2017. However, many people still doubt Bitcoin as a true asset, and part of this doubt stems from the fact that Bitcoin has never been categorised as a specific financial instrument ever.
One of the most common doubts about Bitcoin people have is whether Bitcoin is a Currency, a Security or a Commodity? While answering the question is tricky, but as the popular commentary on Marketplace suggests, Bitcoin is all of what could be termed by people depending on how they use it.
Bitcoin is a Currency:
Although the word currency often reminds us of a good-smelling, fresh and psychologically green paper note, with changing times and requirements, many types of digital currencies that do have value but are usually not printed on paper have taken the digital landscape by storm.
Unlike common fiat currency, Bitcoin, however, does not have centralised governing authority, and to everyone’s pleasure, it is also not tied to any country or geography as fiat money usually are. The cryptocurrency is also not generated as and when required, but in fact, a complex mathematical cryptographic technique is required to unlock or ‘mine’ Bitcoin, the total units of which is limited to 21.5 million.
Like all other currencies we usually come across, Bitcoin can also be traded, exchanged and used to buy goods and services. The mechanism of Bitcoin transactions is purely digital in nature, and it is run via a technological ledger known as Blockchain. Therefore, in short, although not a physical currency, Bitcoin is an accepted form of digital currency that can act as an alternative to fiat money provided the transactions are done digitally.
Bitcoin is a Security:
Bitcoin is also a security because it is fungible, a negotiable financial tool that has a monetary value. Bitcoin can be used as a variant of stock, such as in case of ICOs; as a bond provided the governmental bodies accept it as legal, and as an option. Bitcoin does provide a sense of ownership of an asset of a financial promise that can be used to recover a financial value in future. Although, the SEC chairman recently said that Bitcoin is not a Security because it is not secured by a third party, the point to note is that, like stocks, it does provide a promise to pay in future according to the market value, and that is a kind of security for Bitcoin enthusiasts.
Although a bank or a third party do not back the security, it is accepted in the crypto community that the value of Bitcoin will remain available, transparent and exchangeable depending on the market position of the cryptocurrency based on demand.
Bitcoin is a Commodity:
What is a commodity actually? According to Investopedia, “a commodity is a basic good used in commerce that is interchangeable with other commodities of the same type.” Therefore, Bitcoin can be considered as a digital commodity because it is used in commerce in the Crypto-economy, and it is interchangeable with other digital and sometimes fiat currencies. Also, Bitcoin remains the same thing wherever it is mined, and therefore, it can be used as a commodity with the same properties and value anywhere on this earth.
The Idea is Basically in how Bitcoin is used.
While it is clear that Bitcoin can act as a currency, a security or a commodity, the real issue with the classification of the cryptocurrency is that its attributes are often prevalent during its use. Therefore, if Bitcoin is used or treated as a currency, it takes the form of a currency. This is applicable to other forms of financial classifications, such as security and commodity too.
Since the very core idea of Bitcoin when it was created was kept versatile so that it can be used as an asset class mentioned above, the cryptocurrency obtained features that resemble securities and commodities, apart from being a currency. It is just a matter of understanding that Bitcoin can have different attributes that define various financial classes that are usually built around different classifications for currencies, securities, and commodities in case of fiat money.
As the Marketplace commentary suggests, it is not the reason of transactions that makes Bitcoin a currency, commodity or a security, but in fact, it is the use of the cryptocurrency or the user that makes it a member of any defined financial classification. Although, some may doubt the real value of such a versatility that does not make it a true member of any specific financial class, it is a matter of great advantage for all users because it reduces the need for three different ideas, and sums up as a single entity that can serve as a currency, a security, and a commodity at the same time.
