Case Study 2 — Is Bitcoin Money? Applying the Three-Functions Test
Bitcoin was created in 2008 by an anonymous person (or group) using the pseudonym Satoshi Nakamoto. It was designed to be "digital cash" — a peer-to-peer payment system that doesn't require banks or governments. By 2024, Bitcoin's total market capitalization exceeded $1 trillion, making it one of the most valuable assets in the world.
But is Bitcoin money? This case study applies the three-functions test from §26.1.
Function 1 — Medium of exchange
The test: can you buy things with Bitcoin?
The answer: sometimes, for some things, with friction. Some businesses accept Bitcoin (Tesla briefly did; El Salvador made it legal tender; some online retailers and restaurants accept it). But the vast majority of transactions worldwide — groceries, rent, gas, healthcare, taxes — cannot be conducted in Bitcoin.
Why it fails as a medium of exchange: - Transaction costs. Bitcoin transactions take 10–60 minutes to confirm (vs. seconds for credit cards or cash). Transaction fees can be substantial ($1–$30 depending on network congestion). - Volatility. Bitcoin's price can move 5–10% in a single day. If you price a meal at 0.001 BTC today, tomorrow that might be worth $10 more or less. Neither the buyer nor the seller wants that uncertainty. - Limited acceptance. Most businesses don't accept Bitcoin because of the volatility and transaction costs.
Assessment: Bitcoin is a poor medium of exchange for everyday transactions. It works for some niche uses (international remittances, transactions in countries with failed currencies) but not for general commerce.
Function 2 — Unit of account
The test: do people quote prices in Bitcoin?
The answer: almost never. Virtually no one prices their goods in BTC. Even businesses that accept Bitcoin typically price in dollars and convert to BTC at the point of sale. You don't see "apartments for rent: 0.5 BTC/month."
Why it fails as a unit of account: the volatility problem again. A good unit of account needs to be stable enough that you can quote a price today that still makes sense next week. Bitcoin's price swings make it useless for this purpose.
Assessment: Bitcoin is a very poor unit of account.
Function 3 — Store of value
The test: does Bitcoin hold its value over time?
The answer: it depends on the time frame. Bitcoin rose from about $0.01 in 2009 to over $60,000 in 2024. Anyone who bought and held since the early days has done extraordinarily well. But Bitcoin also fell from $69,000 (November 2021) to $16,000 (November 2022) — a 77% decline in one year. Anyone who bought at the peak and sold at the trough lost most of their money.
Assessment: Bitcoin is a speculative asset — potentially very profitable over long horizons, very risky over short ones. It is not a reliable store of value in the way that the dollar (which loses 2–3% per year to inflation, but predictably) or gold (which holds value over centuries, with moderate volatility) are.
The verdict
By the three-functions test, Bitcoin is a poor medium of exchange, a very poor unit of account, and a volatile (though historically appreciating) store of value. It is more accurately described as a speculative digital asset than as money.
This doesn't mean Bitcoin is worthless. It has real use cases: as a vehicle for speculation and investment, as a means of transferring value in countries with failed banking systems, as a censorship-resistant payment method, and as a technological innovation (the blockchain) with applications beyond money. But it is not money in the functional economic sense.
We'll return to Bitcoin and cryptocurrency in much more depth in Chapter 37, where we'll also cover stablecoins, central bank digital currencies, and the history of private money. For now, the key lesson: the three-functions test is a useful framework for evaluating whether something is money — and most things that are popularly called "money" aren't, by the strict definition.
Discussion questions
- If Bitcoin's volatility decreased substantially (say, it became as stable as the dollar), would it qualify as money? Which functions would it then satisfy?
- El Salvador made Bitcoin legal tender in 2021. Has the experiment succeeded? Look up the evidence.
- "Bitcoin is digital gold — a store of value, not a medium of exchange." Is this a useful framing? How does gold's economic role compare to Bitcoin's?
- Stablecoins (like USDC or Tether) are designed to maintain a $1 peg. Do stablecoins satisfy the three functions of money better than Bitcoin?
- Could a central bank digital currency (CBDC) combine the technology of crypto with the stability of fiat money? What would that look like?