Bitcoin A Store of Value or a Medium of Exchange

Bitcoin A Store of Value or a Medium of Exchange

Bitcoin has taken the world by storm but there is a controversy over what Bitcoin should be. Some people believe it should be a store of value like gold and silver. Other people want it to be a medium of exchange like the US dollar, Paypal, or perhaps debit cards. At this time more people are using Bitcoin as a store of value. How can you blame them since it has risen from under $1000 early in 2017 to over $9000 today. It is hard to justify spending currency today when it might be worth a lot more tomorrow. The people that bought and held Bitcoins are called “Hodlers”. They have seen tremendous gains in the last year and there is the possibility of more gains to come.

Up until now there are a couple of problems with Bitcoin being considered a medium of exchange. Because Bitcoin has become so popular transaction times have been too long and the cost of transactions have been too high. Both of these problems are soon to be resolved with a couple of innovations called Segregated Witness (Segwit) and the Lightning Network (LN). The Lightening Network requires Segwit in order to operate. Segwit was implemented on Aug 1 2017 and has about 14% to 26% of the transactions depending on how it is calculated. For a while the transaction fees were very high, over $30 per transaction. As Segwit has gained more popularity the transaction fees have gone down. That is because with Segwit more transactions can fit in each block. Today as I write a normal transaction fee is less than $1.50.

In comes the Lightening Network (LN). The LN is an “off chain” technology that promises to make Bitcoin nearly instantaneous, cheaper yet, and more private. The LN has nodes that resolves many transactions before the results are placed on the actual blockchain. So if you are signed up to one LN node and you need to send Bitcoins to another address on another LN node the LN handles the transaction hopping from LN node to LN node in a way that is invisible to the user. This creates a virtual parallel system that uses the Bitcoin rules, but handles multiple transactions before putting demand on the actual Bitcoin blockchain. Today the LN is rapidly being adopted and may soon be the main method by which Bitcoin is transfered between addresses. So it has been mostly used for a store of value, but may also soon be considered a great medium of exchange.

Bitcoin is the first, most secure, open access, permissionless, borderless, anti-fragile and most decentralized cryptocurrency. No wonder it is valued so much more and has a larger network effect than any of the other cryptocurrencies today.

Reprint from an article I wrote for R3Publicans