Money has four functions. These are:
- A medium of exchange
- A unit of account
- A store of value
Several cryptocurrencies in general and bitcoin in particular fulfill the second and fourth functions. Their recent price trajectory also suggests that they are likely to fulfill the third function.
However, where they fall short so far is in fulfilling the first function. Specifically, even bitcoin, which is the most widely used cryptocurrency, has yet to serve as a widely accepted medium of exchange. In other words, you can’t spend it to buy goods and services across most merchants.
While bitcoin is indeed currently not an effective medium of exchange, as Elaine Ou points out in this blog post, this does not mean that it will not become one in the future. The reason is that, as the history of fiat coins shows us, “value does not come from the ability to spend, the ability to spend comes from value.”
In other words, a currency needs to have value before it can be spent. And this is the phase that cryptocurrency experiments in general and bitcoin in particular are in right now.
Yes, cryptocurrencies are currently in a highly speculative phase, and many of them will have no value in hindsight.
However, this does not mean that one or a select few of them will not emerge from this speculation as effective mediums of exchange, and hence lasting currencies.
Also published on Medium.