What is Bitcoin?

With its value in US dollars reaching $200, Bitcoin has captured the attention and imagination of numerous people throughout the world, spreading from being a technological curiosity used for paying for geeky items and illegal substances to a phenomenon widely discussed even in mainstream media.

However, it seems to me that most of the coverage misses the point of what Bitcoin really is, mostly deceived by the terminology used since it was created. I’m not going to go into neither technical details not the ideas behind its creation, as others have done a much better job of it, but let me explain how I see it from a purely economical standpoint.

Although it’s usually touted as such, Bitcoin is not really a currency, although it has some of its properties – the main actually being the ability to transfer it electronically from one holder to another. But unlike currency its supply is limited – once the number of coins reach a predetermined figure it will not be possible to create (or “mine for”) more, and far before that the processing power required to mine new ones will be so large that the production rate will be zero for all practical purposes. This also means that its value can’t be inflated, as is the case with actual currencies.

This means that Bitcoin also have some properties of a resource or commodity, not unlike gold, water, arable land or something else that has been used, traded and killed for by humans for years and centuries. However, unlike most other resources (actually all that I can think of), Bitcoin a) can be infinitely divided and traded for other resources (or money) in any amount (a bar of gold can be divided down to the level of an atom; below that it’s not gold any more), and b) it has no intrinsic function it can perform which would make it keep some value if it loses its function as a measure of value: gold can be turned into jewellery and electronic parts, water can be drunk, oil can be burned and land can be worked or lived on.

In other words, Bitcoin is really an experiment, something new in the global economy perhaps for the first time since paper money was introduced. We’ll see how it will fare, will it succeed or fail, what it will turn into, and if it’s just the next step in the evolution of the economic instruments.

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