The Great Currency vs. Commodity Debate for Digital Money -- Is Bitcoin Money?

The Confounding Question: What is a Currency?

It doesn't matter if you speak with groups of economists or average guys on the street. Everybody is going to argue about the definition of currency. Before getting into the question of what gives currency value, it's fun to see how confused this question makes people who are supposed to know enough about it to write about it.

The big sticking point seems to be on the split between what makes something an asset or commodity VS. a currency. NYU's Aswath Damodaran says Bitcoin is a currency. He's a finance professor and sometimes known as NYC's "Dean of Valuation." Mark Cuban, a notable billionaire disagrees very strongly.

Cuban says he has no problem with valuing Bitcoin, but he doesn't like its current valuation. He says the value of Bitcoin is a lot like the value of gold. Sure, gold can be used as a commodity sometimes and to make nice jewelry, but it's worth more than that because of the regard people hold it in.

Damodaran says that Bitcoin is a currency because it isn't anything else. It's not a raw material like a commodity, and it doesn't generate income like an asset. Since it's not a collectible, it has to be a currency.

Forbes Doesn't Know

It's sort of ironic because Forbes published a couple of posts about Bitcoin as a currency with headlines that appear to contradict each other.

Headline One

"Bitcoin is a Commodity, Not a Currency"

Headline Two

"Bitcoin Might be a Bubble, But Other Digital Currencies Are Not"

In other words, one headline says that Bitcoin isn't a currency, and the next one says that it is one digital currency out of many. Obviously, Forbes employs many different writers, but still, you have to employ your own tests to decide what's what.

How Do We Test the Value of ANY Currency?

So, what gives a currency any value? Well, currency makes it easier to trade than bartering does. Let's say you have five avocados and want to trade three of them for salsa and chips. You have to find somebody with some salsa who wants your avocados if you're going to barter. It's a lot easier to simply sell your extra avocados for money, and then you can turn around to use your money to purchase the rest of your snack.

Gold has been used as a currency, and it makes shiny jewelry. It also has some industrial uses. It's easy to argue that there are modern substitutes for gold for most uses that are cheaper, so the desire for gold as a status symbol or tradition makes gold more valuable than it might otherwise be.

What about paper money? Actually, let's get real. Most of us don't carry paper money around very often anymore. We carry around plastic and basically spend digital money. Our paychecks also get sent to our bank accounts in a digital form. What is money? It's that thing that's backed by the "faith and credit" of the government.

So, if people accept digital currency for payment, trade, and exchange, it must be a currency. You can't make jewelry out of it, but you can use it to buy jewelry. If it walks like a duck and quacks like a duck, it must be money.

Before you leave:

• You may have interest in this previous article about gold vs. Bitcoin as a currency.
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