Cryptocurrencies: Are They Money?

What this means

A cryptocurrencyA digital asset recorded on a decentralized ledger maintained by a network of computers rather than issued by a central bank. is a digital asset whose ownership records are kept on a shared ledger maintained by many computers at once instead of by a single institution. The best-known ledger design is the blockchainA record of transactions arranged in linked blocks and maintained simultaneously by many independent computers, so that no single party controls the record., where transactions are grouped into blocks and each new block is cryptographically linked to the one before it. Rewriting an old entry would mean redoing everything after it across most of the network, which is what makes the record difficult to alter.

The design goal was decentralization. A conventional bank deposit exists because a bank says it does, and a central bank stands behind the currency. A cryptocurrency balance exists because the network agrees it does, following rules written into software. Many cryptocurrencies cap the total number of units that can ever exist, which is a rule enforced by code rather than by an institution's judgment.

This lesson does not ask whether cryptocurrencies are good or bad. It asks a narrower and more answerable question: are they money? Economics has a standard test, and money has to do three jobs.

The first is medium of exchangeSomething widely accepted as payment for goods and services.. Can you routinely pay with it? Some merchants accept certain cryptocurrencies, and a small number of countries have granted particular ones legal status, but acceptance remains narrow compared with national currencies. Most everyday transactions in most places still cannot be settled this way.

The second is store of valueSomething that reliably holds its purchasing power over time, so value saved today can be spent later.. Does it hold purchasing power between when you receive it and when you spend it? Cryptocurrency prices have historically been highly volatileSubject to large and rapid changes in price., with large swings over short periods. High volatility works against this function. A subcategory called stablecoinsA cryptocurrency designed to hold a fixed value relative to a reference asset, most often a national currency. exists specifically to address it, by pegging value to a reference asset, though a peg holds only as long as the mechanism behind it does.

The third is unit of accountA standard measuring stick for value, letting people compare and record prices in common terms.. Do people quote prices in it? Almost universally not. Even where a cryptocurrency is accepted, prices are typically set in the national currency and converted at the moment of payment. A measuring stick that changes length is not much use for measuring.

The standard's conclusion follows from that test: cryptocurrencies offer the possibility of alternatives to conventional money, but they are not officially categorized as money. Regulators in many countries classify them as property, commodities, or securities rather than currency, which affects how they are taxed and supervised.

So why do people use them? Three reasons appear repeatedly. Financial privacy is one: transactions do not require a bank account or the disclosure of identity to a financial institution, though most blockchains are public, so the appropriate word is pseudonymous rather than anonymous. International payments are a second: sending value across borders through the traditional banking system can involve intermediaries, delays, and fees, and a blockchain transfer works the same regardless of the countries involved. Speculation is the third, and by trading volume it dominates: many holders buy expecting to sell later at a higher price, which is the behavior of someone holding an investment asset rather than someone holding spending money.

That last point is the key analytical claim. An asset held mainly in the hope that its price rises is being used as a speculative assetAn asset bought primarily in the expectation that its price will rise, rather than for use or for the income it produces., not as a medium of exchange, and the two uses actually conflict. If you expect the price to rise you have a reason not to spend it, which suppresses the transaction use. If the price swings sharply you cannot price a sandwich in it. Whether this changes over time is an open question, and it is honest to say so. Technology, regulation, and adoption could all shift. It is equally possible that they do not. Predicting the outcome is not the point; being able to analyze it is.

Why it matters

You will encounter this topic surrounded by extremely loud claims in both directions, from people who describe cryptocurrency as the inevitable future of money and from people who dismiss the entire category. The three-function test gives you something better than picking a side: a framework you can apply yourself to any new digital asset, including ones that do not exist yet.

It also sharpens your understanding of ordinary money. Working out what a cryptocurrency lacks forces you to notice what makes a dollar work, which turns out to have little to do with paper and everything to do with near-universal acceptance and a credible issuer. Standard 13 makes exactly this point: money does not need intrinsic value, because its value comes from being widely accepted in exchange.

Try it

1. Build a three-function scorecard. Make a table with the three functions of money down the side and, across the top, four columns: a national currency such as the dollar, a well-known cryptocurrency, a stablecoin, and one non-money asset such as gold or a share of stock.
2. Fill in each cell with a rating from zero to three plus one sentence of justification. Ratings without justification do not count. Use evidence you can point to, not impressions.
3. Define your evidence before you gather it. For medium of exchange, decide how you will measure acceptance. For store of value, decide over what time window you will assess stability. For unit of account, decide what would count as proof that people quote prices in it. Agreeing on the test before seeing the answer is what keeps this analysis honest.
4. Gather the evidence. Check whether any local businesses accept a cryptocurrency and, if so, in what currency their prices are listed. Look at a chart of a cryptocurrency's value against a national currency and describe the shape of the variation in words. Do the same for a national currency against another national currency and compare the two descriptions.
5. Reach a verdict in writing. Is the cryptocurrency you chose money under the three-function test? A partial answer is acceptable and often correct, but it must be specific about which functions it does and does not perform.
6. Analyze the speculation argument directly. Explain in a paragraph why an asset expected to rise in value tends not to circulate as a medium of exchange, and why sharp price movement makes it unusable as a unit of account. Then state clearly what would have to change for that to be different, and note that whether those changes happen is genuinely unknown.
7. Investigate the three stated reasons for use. For financial privacy, research the difference between anonymous and pseudonymous and explain why public blockchains are usually the latter. For international payments, compare what a cross-border bank transfer involves with what a blockchain transfer involves, in terms of intermediaries and timing. For speculation, find out roughly what share of activity is trading rather than purchasing goods.
8. Do the stablecoin case separately. Research one mechanism used to hold a peg, explain how it is meant to work, and identify the circumstances under which it could fail. Note that a stablecoin scores differently on the three functions than a volatile cryptocurrency does, and say why.
9. Compare regulatory treatment across two countries. How does each classify cryptocurrencies for tax and legal purposes, and what does that classification imply about whether officials treat them as money?
10. Write a one-page neutral briefing for a reader who knows nothing about the topic. Your goal is that a reader could not tell from your writing whether you personally think cryptocurrency is promising. State what it is, what it does and does not do, why people use it, and what remains uncertain. Recommending nothing is the assignment.

Check yourself