On the nature of Bitcoin and other crypto-currencies: The future of money

Recent developments of the Bitcoin and other so-called crypto-currencies have triggered discussion on their nature and role, particularly whether they can be deemed to be representatives or precursors of a new, sustainably viable form of a decentralized international currency. In a largely digitally developed globalized economy, the scale and form of such digital currencies would go far beyond the denationalized money imagined by Hayek and other economic thinkers in the pre-digital era.

A very large majority of papers addressing Bitcoin and cryptocurrencies in general are either concerned with technical design elements and analyzing or improving the algorithms governing their mechanics, or with potential financial applications.

The purpose of this paper is to determine the nature of the first, economically most relevant, by far best documented and most iconic crypto-currency, Bitcoin. The novelty of the approach is that this paper addresses how the fundamental design of Bitcoin and the way it is being used can help determine its nature and the role it can take in the long term on a global economic scale.

In a first stage the paper opens with a brief review of the historical development of money and the international monetary system and the definition of money and currencies. In the next section the fundamental goals of the Bitcoin designers and the mechanics governing Bitcoin are explained. Based on these elements the nature of Bitcoin is ascertained by analyzing the design elements with respect to the functions of money and from observations on the use of Bitcoin.

The expected research outcome is to clearly ascertain whether Bitcoin is or has the long-term potential of becoming a full-fledged currency, should rather be viewed as a serious candidate to becoming the first purely digital commodity money or whether it is just a new digital financial asset.