What Makes Bitcoin Special? An Economist Explains

One consequence of this difference is that the government can inflate the US dollar if it wishes, by printing money. No one can inflate bitcoin because the supply of the currency is not centrally controlled or subject to manipulation.

One other key difference, Luther says, is that “bitcoin tends to provide more financial privacy in digital transactions.”

While exchanges using the dollar can be very private if done in-person with cash, digital exchanges using the dollar that are not done in person must involve a trusted third-party that records the transaction—like Venmo or your bank. (This opens up an opportunity for privacy violations).

However, “since bitcoin can be transferred without relying on a trusted third party, it tends to offer more financial privacy than traditional digital payment mechanisms,” Luther explains.

Is Bitcoin a ‘Currency’ or an ‘Asset’?

Much of the news around bitcoin involves people making (or losing) money by purchasing it and then selling it when its highly-volatile price shifts. At first glance, it seems more similar to an asset like a stock one buys on the stock market than a currency, defined as a medium of exchange.

But it’s both, Luther explains.

“Bitcoin is, first and foremost, a currency (or, potential currency),” the economist says.

However, “all currencies are assets,” Luther offers. “And some assets appreciate. For this reason, some people think of bitcoin as an investment. But that is secondary. Indeed, bitcoin’s price will only rise if (1) it becomes more useful as a currency today or (2) is expected to be more widely used as a currency in the future. Hence, even those interested in bitcoin as an investment should understand its role as a currency.”

Why Is Bitcoin’s Price So Volatile?

Bitcoin is infamous for its volatility, meaning that its valuation, or price, often swings drastically up and down over relatively short periods of time. This is what makes it an attractive speculative asset for some, but also is a barrier to its adoption as a widespread currency used for exchange.

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