Is Bitcoin a currency or a commodity? Bitcoin is hailed as a revolutionary virtual currency. Like any other money, we can use it to buy and sell goods online.
However, the difference is that though fiat money exists in a physical form, virtual currency like bitcoin does not. Cryptocurrency coins exist only in the virtual space, where people can trade in them.
What is a commodity?
A commodity has a value of its own. For example, coffee is a commodity because it is a highly sought-after good. On the other hand, a paper currency bill will not have any value on its own. The bill only obtains value when someone uses it to buy a commodity- hence assigning value to both the bill and the commodity. Hence, we can then buy a kilo of coffee beans with currency, rather than exchanging it with another commodity that may not share the same value.
Trading commodities for one another can be difficult as they are not fungible in a way. For example, we cannot compare the value of one kilo of coffee with one kilo of bananas easily. Both of them need to hence be assigned some value, which currency does for us!
Why is Bitcoin a Commodity and not a Security?
So, if we can use bitcoin to avail goods and services, why is it considered a commodity and not an actual currency? In a way, crypto coins are a commodity, because we buy them with actual money. A person has to invest some amount of dollars to buy one Bitcoin or one Ether coin. Many countries do not accept cryptocurrency as legal tender due to the numerous coins floating out there, as well as the factor of their volatility. Hence, most people do not actually earn or receive their salaries in the form of cryptocurrency- but rather as their countries’ legal tender.
The range of products that one can buy with cryptocurrency is currently quite low. Crypto coins are fungible in nature (as in one bitcoin= another bitcoin), however, their value changes very abruptly in short bursts of time. We currently treat crypto coins like stocks- they are a store of value of dollars. We see bitcoin as a representation of how many dollars it is worth that day, rather than as its own value.
The Difference between Stocks and Cryptocurrency
However, though we treat cryptocurrency and stocks similarly, there is one key difference between them. Regulatory bodies consider stocks as securities, whereas cryptocurrencies are commodities.
Securities are a secure financial contract that holds money, either to provide returns or to safe keep it. Stocks and bonds are securities because people can safely trade them via financial markets. Authorized bodies like the SEBI and SEC oversee these trades, making the process smooth and secure. On the other hand, cryptocurrencies are decentralized, meaning that no governing body oversees their trade. Since no one is in control of these virtual assets and their exchange, they are commodities rather than securities.
People can buy and sell crypto coins on platforms like Binance, Coinbase, and Bitoasis. However, these platforms are not as well regulated and governed as stock exchange platforms, which the government of the country usually oversees. This is quite similar to commodity markets like oil and gas, gold, and other precious metals. Commodities are exchanged here, but the rules regarding the exchange are quite lax. This can open up the doors to scammers and fraudsters, who may try to take advantage of the lack of rule enforcement. Hence, we cannot consider cryptocurrencies to be securities, as the circumstances of their exchange are not completely secure.
Trading Commodities
We can compare cryptocurrency to other commodities like gold, which people have used as a store of value for centuries. Gold is also expressed in the value of dollars, rather than as gold itself. For example, we can say that the price of gold is $10 per gram today, We do not directly buy goods and services with gold, but rather sell gold to obtain money. We then use that money to buy other commodities. Similarly, we use cryptocurrencies to store value.
By pouring money into a crypto coin, we assign it a value that it would not have on its own. People invest in these commodities so that they can receive handsome returns due to the fluctuations in their prices. In order to buy most of the goods and services that we depend upon in our daily lives, we would have to use fiat currency rather than gold or cryptocurrency. The main aspect of the cryptocurrencies plays a major role.
The Double Coincidence of Wants to Bitcoin is a commodity or currency
Financial institutions do not see transactions made using commodities as official. Any transaction made using a currency is recorded, either by the bank server or any other authority. For example, if a person buys a kilo of coffee using his credit card, then it is recorded on the bank’s servers. However, if a person trades a kilo of coffee for say, a few bananas, then there is no way to record this transaction! Most shops would not even entertain such a means of payment in the first place- as they then cannot use the bananas to further trade for the goods that they actually want!
A person looking to trade his bananas for coffee will then have to find another person whose wants actually match his own. He will have to find someone who has bananas and wants to trade them specifically for coffee! We call this the ‘double coincidence of wants’. The lack of this condition hinders the smooth and efficient trading of goods. Hence, to facilitate the easy trade of each and every type of good, people invented currency.
Similarly, not everyone owns cryptocurrency. Many people still fear virtual currency because of its volatility and all the other risks involved. So, cryptocurrency trade is limited only to the people who actually own it. A person looking to buy something using his virtual money will have to seek out someone willing to accept it.
Conclusion
Who knows, maybe cryptocurrency will indeed become the norm of E-Commerce in the future. With many countries set to develop and roll out their own virtual currencies, maybe the status of cryptocurrency will soon change from a commodity to a security. People may yet change their minds about using cryptocurrency as their main means of making transactions with.
However, for that to happen, the presence of a regulatory body to oversee all trade is of the essence. A commodity can only become a security if its trade is completely safe and secure. Usually, only a governing body can guarantee this. So till then, the world of cryptocurrency trade remains limited to those who trust in it.
