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Bitcoin has the potential to become a medium of exchange, but it needs more transactional demand to thrive. Currently viewed mainly as a store of value, its unique features could lead to broader acceptance. To help this shift, it's important to start using Bitcoin in everyday transactions and support businesses that accept it.
Let’s face it: Bitcoin might be far from becoming a popular medium of exchange. Spending BTC is not easy. The asset is gaining value for the first and only time, and it hurts to part ways with it. However, the community has to create transactional demand and support Bitcoin businesses and circular economies. It’s pivotal to use Bitcoin as a medium of exchange for the asset to reach the next stage in its development.
Bitcoin is in a great spot. Wall Street is already here, institutional adoption is gaining ground, and the price is pumping. Moreover, all of this is happening with the world’s economy in shambles, and while the US FED is not printing money. That means retail is not here yet, and there’s a massive supply crunch on the horizon. The next year will probably be massive for Bitcoin, but we can’t fall into complacency.
Medium of exchange is the next frontier and the community should look ahead. Let’s explain why.
Imagine landing at an airport exhausted and not having to convert your wealth to the local currency. Imagine being able to just stop a cab, pay with a universal coin, and sleep knowing that everybody around you values and accepts your currency of choice. That freedom is only one of the advantages Bitcoin as a medium of exchange offers. The relative privacy, finite supply, transportability, low fees, and its uncounterfeitable nature are the icing on the cake.
Still, humanity doubts. It’s as River puts it, “The stakes for choosing the correct monetary network are far higher than other networks.” Bitcoin will have to prove itself a thousand times before everybody sees what we see. And that trepidation mixed with the chaotic world we’re living in manifests in the form of volatility. Does Bitcoin have to overcome volatility to become a medium of exchange? We’ll get to that, but first…
The reason Bitcoin’s price goes down every time there’s a global crisis on the horizon is that it’s the most saleable asset on the market. Real estate might take months to sell and the stock market only opens during office hours. On the other hand, the Bitcoin network is open 24/7 and there’s demand for the asset in any country on Earth.
This liquidity is crucial for Bitcoin’s evolution. The Mises Institute explains:
“Menger concludes that the most fundamental attribute a good must have before it can become a medium of exchange—and ultimately the dominant medium and hence money—is its degree of saleableness (market liquidity, marketability) in direct exchange.”
Bitcoin has all those characteristics and more, much more. As Laura Spinaci puts it, “Bitcoin is a global public financial network where, for the first time, remittance and settlement take place within the same ledger.” The era of money as credit is coming to an end, and using Bitcoin as a medium of exchange is the way to take advantage of that fact.
Like cash, Bitcoin opens the possibility of exchanging value and achieving final settlement in one fell swoop. And through the Lightning Network, it can do so in seconds. That’s the gift Bitcoin as a medium of exchange would bring. Bitcoin-only VC firm Ten31 explains:
“Bitcoin is simply the end state digital transformation of money from the shared physical environment to a shared digital environment. An openly accessible digital environment without barriers to entry or seigniorage.”
If all that is true, what’s preventing Bitcoin from entering its medium of exchange era?
There’s a school of thought that believes Bitcoin can’t be considered money yet. This makes sense because, according to classical theory, the functions of money are Store of Value, Medium of Exchange, and Unit of Account. Even though El Salvador and circular economies around the world use Bitcoin as a medium of exchange and Prospera adopted it as a unit of account, most of the world uses it as a store of value and not much else.
Arguably, Bitcoin doesn’t qualify as money according to the definitions of classical Austrian economists. The Mises Institute explains:
“Menger (2009, p. 11) defines money as the “universal medium of exchange,” meaning it must be accepted by everyone, while Mises (1998, p. 398) more reasonably maintains it must be “generally-accepted and commonly-used,” leaving some room for the possibility that not everyone need be willing to accept it. But no matter which definitional version one chooses, it seems fairly clear that bitcoin has not yet reached the threshold of either of them.”
The thing is, Bitcoin is a unique phenomenon. The world has never seen an asset that is a currency and a commodity at the same time and travels at the speed of light. And even if we’re not there yet, people in the know don’t doubt for a second that Bitcoin’s medium of exchange era is on the horizon. There’s a huge obstacle in the way, though…
The commonly used summary of Gresham’s Law is “bad money drives out good money.” In a market with two or more currencies in use, rational people will save on the hardest one and spend the weakest. That presents an optical illusion because people will use “bad money” much more, and it would seem like they prefer it. In reality, their confidence is in the “good money,” the one they’re saving in.
The Mises Institute puts it more colorfully:
“People complain that Bitcoin is not used like money in day-to-day transactions but is more like an investment and used in investment transfers of money. However, this ignores Gresham’s law! Naturally, people are not spending cryptocurrencies very much. They prefer to hold them rather than spend them. They spend the inflationary monies first. That is Gresham’s Law!”
That’s an unfortunate use of “cryptocurrencies” right there. Bitcoin only, there’s no second best. Also, by “inflationary monies” the author refers to Fiat money, be it dollars, euros, or any of the weaker currencies. All of them are food from Bitcoin’s perspective, but it’s going to take time for BTC to take their place as a medium of exchange.
The article ends with advice in history lesson form. According to the author, Sir Thomas Gresham lived in the early 1500s, “but this monetary law was recognized going back to the Greeks and Romans, and the great Polish polymath Copernicus himself recognized and explained the law before Gresham himself. The timelessness and power of this law tells me that good money is a good bet in our future.”
Bitcoin is not only money, it’s good money.
We’re well on our way, the transformation is happening as you read these lines. According to the Nakamoto Institute, “it is impossible for a good to function as a medium of exchange unless there is already demand for it as a store of value.” How does the transfer happen? Well, “the more that people want to store bitcoins, and the higher goes its value, the more liquid bitcoins consequently become and the more trade they enable.”
In Q4 2024, price action has been a spectacle, and the fireworks are just starting. Is Bitcoin mutating into a medium of exchange? Not so fast, besides Gresham’s Law, there’s another obstacle on the way. River explains:
“These factors make incumbent systems resilient to replacement by new competitors, even if they have some superior traits. For a new money to replace an old money, the challenger must be significantly better in order to overcome the network effects of the incumbent.”
Fortunately, Bitcoin is orders of magnitude better than Fiat money, but the process takes time. It may take centuries, because powerful governments back all those colorful bills with violence and propaganda. However, the world is a complex system and people are used to multiple currencies. Bitcoin doesn’t have to completely replace Fiat to become a medium of exchange.
What happens when it does? The Mises Institute explains:
“If bitcoin ultimately becomes money—i.e. a generally-accepted medium of exchange—then it would be the first non-commodity money to succeed in the absence of legal-tender laws, government assurances, or some kind of institutional backing.”
As we said, Bitcoin is a new kind of beast. Something the world hasn’t seen before.
Another factor that might be preventing Bitcoin from entering its medium of exchange era is volatility. There’s nothing we can do about it because the phenomenon is only logical. Ten31 explains:
“People are organically choosing to transition away from inferior mediums to the end state medium for exchange as they store value from today into the future. The transition has been and will continue to be volatile across liquidity horizons. As the distortion of more and more fiat continues to press up against the inelastic supply of bitcoin, volatility will not just persist but at times increase.”
The Nakamoto Institute interprets the same set of data from another perspective:
“The rapid changes in Bitcoin’s price reflect the confusion and self-doubt in the minds of real people trading it, and this is exactly what they should be doing because without price signals, there could be no Bitcoin adoption.”
So, volatility is here to stay. Will Bitcoin ever achieve stability? In this chaotic world we’re living in, it’s hard to believe it will. The Nakamoto Institute is optimistic, though. “Stability occurs (to the extent that it can happen at all) once everyone has not only learned of the favorable properties of the good but has learned that everyone else also knows of those properties.”
In the article above we explored the topic at hand from all angles, but there are facts that we willfully ignored.
And this movement is just starting. Ten31 explains:
“As cyberspace natives mature, their comfort with and reliance on bitcoin will continue to drive broader adoption and integration of bitcoin into the mainstream economy. Because, they will demand a more efficient, transparent, and secure medium for exchange, which bitcoin and its supporting technologies are solely positioned to provide.”
In the price article, Blink quoted the Federal Reserve Bank of San Francisco as saying, " As speculative dynamics disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation.” Then we shouted a call to action: “Stop HODLing your Bitcoin so close to your chest. Spend and replace. Support Bitcoin businesses and circular economies. Sow the seeds for the next stage, and Bitcoin’s price will surge accordingly.”
Once everyone stores their wealth in BTC, merchants will demand to be paid in it. The community can’t afford to wait until then to push Bitcoin as a medium of exchange, though. We need to create transactional demand because the future of the network depends on it.
