What is money and can Bitcoin really be used as currency?

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Marquez Comelab explores what money is and the different forms it has taken in the past for us to consider whether Bitcoin can be used as currency.

What did you think of Bitcoin when you first heard about it? Many people immediately think of Bitcoin as something being claimed as money or digital currency. Unavoidably then, conversations about Bitcoin almost always touch on a discussion about what money is, because, as described in the title of its whitepaper, Bitcoin is a “Peer-to-Peer Electronic Cash System.” 

Most people commonly dismiss Bitcoin as just a fad, or worse, a scam. They say things like, “You do not just create money. How can something like Bitcoin be money, or become money?” This cynicism is understandable when the only money most of us have ever known are the more recent currencies like dollars, the euro, pound sterling, and the yen. Yet, these are merely forms of money that have existed relatively recently. To understand and appreciate what Bitcoin offers, we need to think further. For this reason, this article presents a short introduction about the nature of money and asks whether something like Bitcoin can be used as money. 

I have looked around for how money, cash and currency are defined, and for our intents and purposes, we can simplify it to this:

Money is any item generally accepted as payment to settle a debt or exchange for goods and services. Cash is money in the form of currency, and currency is anything that is generally used to exchange one thing for another. 

To expand on what the above definition means, let us imagine a basic transaction between two people: you and me. You want something I have, and I want something you have. Since we are civilized human beings, we are not simply going to club each other to try and take what we want violently. So we do what civil people do and reach an agreement. You might propose something like: “In exchange for your bottle of vodka, I will give you ten packs of cigarettes.” 

What you are doing here is you are making me an offer. I might decide to make a counteroffer to adjust the terms of the agreement. We will probably continue countering each other’s offers until we both reach a proposal that balances how we both price vodka and cigarettes. 

Now, let’s assume we eventually agree that I give you my bottle of vodka in exchange for your 10 packs of cigarettes. Does that mean the vodka or cigarettes have become money? Not quite. 

What we have done is we have bartered one good for another. Bartering is the oldest form of commerce of which we are aware. Money was not yet invented, so ancient civilizations exchanged sheep for chickens or cattle for grain. They did not just trade possessions, they also exchange services and favors.

Can we barter with Bitcoin? Certainly. If I had Bitcoins, I could exchange them for your cigarettes, and if you had Bitcoins, you could exchange them for my bottle of vodka. 

When then does something like cigarettes or vodka become money? Something becomes money when many people generally accept it to settle debts or exchange for goods and services. 

In prisons, cigarettes were once a popular form of currency prisoners exchanged for items or favors with each other. Although with non-smoking rules and policies set in place, using cigarettes as a currency has become problematic. According to Michael Gibson-Light, a doctoral candidate at the University of Arizona and a previous inmate, Gustavo Alvarez, author of Prison Ramen, ramen noodles have become money in prisons. As prisons began receiving less funding from the U.S. government, the quantity of food given to prisoners reduced, and the quality also deteriorated. For prisoners, ramen is a cheap, tasty, calorie-rich food that gives them the energy to work and exercise. As a result, it has become so valuable they began using it to buy all sorts of necessary items, from food and clothing to laundry and hygiene products.¹

Vodka, too, has been used by the Russians since the 16th century as currency. In 1998, when Russians lost confidence in the ruble to function as money, using vodka as a medium of exchange became so common that one Siberian district gave 8,000 schoolteachers 15 bottles apiece as wages. They initially proposed using toilet paper or coffins, but vodka was favoured because it was the only thing that could be sold freely or exchanged for bread and other food!²

In the past, our ancestors have also used various items as money. They used animals and plants. In China, Africa and India, they used cowry shells. Yes, those same shells you find along shores and rocky reefs!

As with currencies like cigarettes, vodka, animals and shells, we can see human beings use anything, and have used anything, as money. The process by which a particular item becomes currency is beyond the scope of this article, but we have enough to conclude that the process is driven by necessity. In whatever circumstances we find ourselves, we will look for the most practical, efficient and convenient way to transact with each other so that we, and our dependants, can survive and thrive.

Something becomes money therefore when people start using it as money. In the same way, Bitcoin too can become money if and when people begin using it to exchange goods or services in their daily lives.

Marquez Comelab has been following Bitcoin since 2015. He is interested in how Satoshi Nakamoto’s vision of Bitcoin, Bitcoin SV (BSV), can fix problems and add value to our financial and monetary systems. You can follow him at MarquezComelab.com or Twitter @Marquez_Comelab.

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References:

[1] Article: ‘How Ramen Noodles Became King of Prison Currencies’, by Laurie Vazquez, BigThink.com, Published 23 Aug 2016: https://bigthink.com/laurie-vazquez/how-ramen-noodles-beat-cigarettes-to-become-a-prison-currency [accessed 23 Aug 2021].

[2] Article: ‘How Vodka Became a Currency in Russia’, by Susie Armitage, Atlasobscura.com.com, Published 23 Oct 2019: https://www.atlasobscura.com/articles/vodka-currency-russia [accessed 23 Aug 2021].