Bitcoin is an asset class first and a currency second

With Bitcoin blasting past the $2,000 barrier, the doubters are at it again>

Bitcoin is a Speculative Asset, Not a Currency, Says Economics Professor

Bitcoin does not make a good currency for two key reasons: its unstable value and its slow transaction time.

Dorfman claims the most important feature a currency has is being a stable store of value. This factor is important to a developing economy trying to attract investment. It is also important for developed countries to allow investors to earn the returns they expect on investments. An unstable currency makes it difficult for investors to predict the value of future earnings.

Contrary to popular belief, Bitcoin is not supposed to compete with the US dollar; rather, it’s an alternative/competitor to gold and other precious metals. Bitcoin is more than a currency; like gold, it’s also a store of value and an asset class. People have faith in bitcoin being a store of value, like they do in precious metals. Being that it’s fungible like gold, anyone can take their Bitcoins and transact them anywhere at the market price (which like gold, oil, and other commodities, is almost always denominated in US dollars). Gold is very clumsy (way worse than Bitcoin) for transactions yet still very valuable, particularly because it’s a universally accepted store of value that is scarce, imperishable, fungible, and nearly impossible to counterfeit (counterfeit gold can be detected through precise weightings). Bitcoin also has those same properties as gold, yet is vastly superior in many respects: minimal storage costs, zero physical weight and volume, and ease of transactions.

People do not want debts or investments denominated in a currency with value changing by nearly 50% monthly, Dorfman observed.

Although Bitcoin is volatile, so are most currencies: the Canadian Dollar, Euro, Yen, and Pound have all lost 30+% against the US dollar since 2011. Some emerging market currencies such as the Brazil Real, Turkish Lira, Rubble, and Peso have lost far more.

Keeping currency in banks has its own risks, namely defaults and seizures. Depositors in a major Greece bank lost 50% of all deposits above 100,000 Euros during the 2013 Greece banking crisis, although America, unlike Greece and other risky, small economies, does not have this problem. A Bitcoin wallet that can fit in a pocket or on a laptop is much more practical than storing gold bars in a safe, or a briefcase full of cash.

Some compare Bitcoin to the Dutch tulip bubble, but the tulip bubble burst because the market became flooded with newly grown tulips, whereas Bitcoin does not have that problem, because Bitcoin becomes progressively more difficult to mine. Similarly, the high-end art market also has a limited supply.