Medium Of Exchange Bitcoin – A medium of exchange is a specific type of commodity in an economy that is used primarily to facilitate the exchange of other goods and services.
Money has three defining characteristics: it must be a medium of exchange, a store of value, and a unit of account. A given coin may be better or worse at each of these functions, but all coins serve all three of these purposes.
Medium Of Exchange Bitcoin
For example, the US dollar is a highly liquid and widely accepted medium of exchange and a common unit of account for debts and assets, but it is a relatively weak store of value. Bitcoin, on the other hand, is a great store of value, but has yet to gain the necessary liquidity to become a medium of exchange or widely used as a unit of account.
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Bitcoin currently serves as a medium of exchange around the world. As the world’s first censorship-resistant currency, Bitcoin excels as a medium of exchange in hostile legal environments where authoritarian governments use the financial system to oppress their citizens. Protesters in Hong Kong, Belarus, and Nigeria used Bitcoin to protect themselves and their privacy after local governments froze bank accounts and seized donations to their causes. Bitcoin’s inherent resistance to forfeiture makes it very useful in such cases.
In regions that are more politically stable, Bitcoin has not gained as much traction as a medium of exchange. Some critics claim that this is a sign that Bitcoin is failing. This is a myopic conclusion. In fact, the very factors that have slowed the adoption of Bitcoin as a medium of exchange have finally made it the best money ever. The belief that Bitcoin and the blockchain must be used for everyday payments for Bitcoin to be successful is based on a fundamental misunderstanding of Bitcoin.
Gresham’s Law states that “bad money drives out good money.” In a dual currency economy, bad money is used in circulation and good money is kept as savings.
Bitcoin is a money network that is more like a decentralized central bank than a payment processor like VISA, PayPal, or Venmo. While the latter examples are more visible in the community and more commonly used in everyday payments, it is the monetary network, be it Bitcoin or a central bank, that determines how the entire system works.
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For this reason, the adoption of Bitcoin should not be measured by its use for commercial payments. The number of users, the demand for sending Bitcoin transactions, and the price of Bitcoin are better metrics. Several factors explain why the success of Bitcoin does not depend on its use as a payment method for daily transactions.
Bitcoin is barely a decade old as a project. Remember that in 2009, Bitcoin had a market capitalization of zero. In less than 13 years, this figure has risen to $1 trillion. The elimination of fixed currencies like the US dollar and the acquisition of the status of medium of exchange and unit of account will not happen so quickly.
The network effects of money are stronger than those of any other commodity or network. Unlike social networks, paid networks are mutual. While a user can use Facebook and MySpace, a certain amount of value cannot be invested in Bitcoin and USD at the same time. This forces each individual to choose their own money network and assess the opportunity cost of not joining others.
Also, the risk of choosing the right money network is much higher than other networks. If a person chooses a bad social network, he may get bored, but if he chooses a bad money, he will suffer financially. In cases of hyperinflation, when an entire monetary network collapses, this loss can be catastrophic.
Bitcoin Needn’t Be Medium Of Exchange
These factors make existing systems resistant to replacement by new competitors, even if they have superior features. For a new coin to replace the old, the competitor must be significantly more capable of overcoming the incumbent’s network effects. However, when a money network fails, it crashes suddenly and violently, and the last to leave suffer the most.
From an economic perspective, there is a strong argument for why Bitcoin is not used as a payment method today and why this reflects positively on Bitcoin as money.
Gresham’s Law states that “bad money drives out good money.” In other words, in a dual-currency economy, people spend money that is constantly depreciating and keep money that holds its value. Therefore, bad money will dominate in terms of circulation and use in daily transactions, while good money will dominate in terms of long-term saving and investment.
For example, in the case of Bitcoin, imagine a person who has both Bitcoin and US dollars. If you have to spend money on goods, you better spend your dollars because their value is constantly going up and down. If they want to spend their bitcoins, they will lose the possibility of the bitcoins increasing in value in the future.
The Evolution Of Bitcoin
Therefore, according to Gresham’s law, there should be very little demand to spend bitcoins on everyday purchases, while there is strong demand to accumulate and hold bitcoins for the long term. In fact, today this phenomenon is easily observed.
Bitcoin is only used as a medium of exchange when traders reject the lower currency. Since it is normally illegal for governments to reject their local currency, this can take a long time, but in the meantime, Bitcoin continues to thrive and gain acceptance in other areas.
Another characteristic of money that must be considered is the difference between a medium of exchange and a means of payment. Money is a medium of exchange because it determines the exchange rate between any two goods. However, a payment instrument is simply a method of performing a particular exchange.
For example, if you buy coffee in dollars, you may not pay in physical cash. Instead, you can use a credit card, app, gift card, or even loyalty points. All three are means of payment rather than money itself.
Cryptocurrency And Travel
Similarly, Bitcoin can achieve the status of money and a medium of exchange without being directly used in daily transactions. Paper money, credit cards or other instruments can be converted into Bitcoin and used as a means of payment. Bitcoin overlays can also be used to implement Bitcoin payments without the Bitcoin blockchain.
Bitcoin can be used to purchase many goods and services, such as gift cards, travel experiences, handicrafts, and more. The expansion of physical Bitcoin communities, along with companies creating acceptance-based tools, are a positive trend towards Bitcoin’s circular economy.
Bitcoin uses a blockchain as a ledger to record all transactions. Blockchain is the most secure database available, but not the fastest or cheapest way to transact Bitcoin. Off-chain solutions like the Lightning Network offer exchanges to optimize fast and cheap payments.
Money is a tool that helps people store and exchange value. Some types of money are better than others. When a better type of money was introduced, it replaced the dominant currencies used in human history.
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The Lightning Network (LN) is a protocol designed to enable cheap and instant Bitcoin transactions. While still experimental, it looks promising for Bitcoin’s scalability.
Money scarcity refers to the inability to easily find or create money. While it is important that money is widely available, it can have negative consequences for the economy if money can be easily created.
A blockchain is a chronological list of records called blocks. Each of these blocks contains transactions. Once a block is added to the blockchain, it is impossible to change it, giving Bitcoin immutability.
UTXO is a separate piece of Bitcoin. Bitcoin does not use accounts or balances. Instead, every bit of Bitcoin is owned by individuals, just like physical coins or cash.
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