Bitcoin: A Unit of Account | Investigating Bitcoin 4/5

Investigating Bitcoin 3 | 5  A series of articles investigating bitcoin and its disruptive potential as a currency.

To satisfy the third and final property of money, bitcoin must become a “measuring stick” for assets and liabilities: in other words, it must be fungibile. bitcoins’ digital equality within the blockchain does allow for mutual substitution, although its fungibility could diminish if alternative uses for the blockchain are employed irresponsibly.[1]

Aside from a few isolated examples in which prices are listed in bitcoin, the exchange rate has been too volatile, and acceptance too low, to allow bitcoin to be a useful unit of account. Exceptions typically are tied to the mining ecosystem, in which miners buy hardware for a fixed bitcoin price and receive bitcoin rewards for mining and building blocks. The revenue generated over the life span of mining equipment is tied fundamentally to bitcoin’s value, so the price of the hardware can be as well.

If Bitcoin [2] does gain broad acceptance as a trusted method of payment and its volatility tempers, the bitcoin unit could become a meaningful measure of value. If they were to be earned and spent consistently without passing through an intermediate exchange, bitcoins would have independent purchasing power, as noted above in the bitcoin mining ecosystem. Overstock [OSTK] serves as another example of “closing the loop,” as it accepts bitcoin from customers and then, instead of converting to a local currency, uses it to pay expenses like employee bonuses. Nonetheless, the amount paid is still measured in a local currency rather than in bitcoin itself. Overstock also has experienced limited customer adoption of bitcoin, as it projected reaching $10 to 15 million in bitcoin based sales last year, but achieved only $3 million.

A potential way for bitcoin to quickly establish itself as a unit of account would be for a nation with a dysfunctional currency to endorse it. Instead of pegging its currency to the dollar, a nation could peg its currency to bitcoin. Argentina’s burgeoning bitcoin ecosystem and Ecuador’s electronic money system [3] foreshadow more innovation to come in this space. Furthermore, ARK Invest believes bitcoin’s price appreciation in July 2015 was in part due to the Greek debt crisis, as people flirted with the idea of it replacing the drachma.