# Economics in BTC By [Andjey Vujchich](https://paragraph.com/@hapland) · 2023-04-14 --- Bitcoin is a [digital asset](https://en.wikipedia.org/wiki/Digital_asset) designed to work in peer-to-peer transactions as a [currency](https://en.wikipedia.org/wiki/Currency).[\[3\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-paper-6)[\[189\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-Monetarists-204) Bitcoins have three qualities useful in a currency, according to _The Economist_ in January 2015: they are "hard to earn, limited in supply and easy to verify".[\[190\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-ec1305-205) Per some researchers, as of 2015, bitcoin functions more as a [payment system](https://en.wikipedia.org/wiki/Payment_system) than as a currency.[\[29\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-JEP-38) Economists define [money](https://en.wikipedia.org/wiki/Money) as serving the following three purposes: a [store of value](https://en.wikipedia.org/wiki/Store_of_value), a [medium of exchange](https://en.wikipedia.org/wiki/Medium_of_exchange), and a [unit of account](https://en.wikipedia.org/wiki/Unit_of_account).[\[191\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-econ315-206) According to _The Economist_ in 2014, bitcoin functions best as a medium of exchange.[\[191\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-econ315-206) However, this is debated, and a 2018 assessment by _The Economist_ stated that cryptocurrencies met none of these three criteria.[\[182\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-30082018Economist-197) Yale economist [Robert J. Shiller](https://en.wikipedia.org/wiki/Robert_J._Shiller) writes that bitcoin has potential as a unit of account for measuring the relative value of goods, as with Chile's [Unidad de Fomento](https://en.wikipedia.org/wiki/Unidad_de_Fomento), but that "Bitcoin in its present form ... doesn't really solve any sensible economic problem".[\[192\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-Shiller-207) According to research by the [University of Cambridge](https://en.wikipedia.org/wiki/University_of_Cambridge), between 2.9 million and 5.8 million unique users used a [cryptocurrency wallet](https://en.wikipedia.org/wiki/Cryptocurrency_wallet) in 2017, most of them for bitcoin. The number of users has grown significantly since 2013, when there were 300,000–1.3 million users.[\[135\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-CU2017-150) ### Acceptance by merchants [Dish Network](https://en.wikipedia.org/wiki/Dish_Network), a _Fortune_ 500 subscription TV provider, has been described as the first large company to accept bitcoin, in 2014.[\[193\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-208) Bloomberg reported that the largest 17 crypto merchant-processing services handled $69 million in June 2018, down from $411 million in September 2017. Bitcoin is "not actually usable" for retail transactions because of high costs and the inability to process [chargebacks](https://en.wikipedia.org/wiki/Chargeback), according to Nicholas Weaver, a researcher quoted by _Bloomberg_. High price volatility and transaction fees make paying for small retail purchases with bitcoin impractical, according to economist Kim Grauer. However, bitcoin continues to be used for large-item purchases on sites such as [Overstock.com](https://en.wikipedia.org/wiki/Overstock.com), and for cross-border payments to [freelancers](https://en.wikipedia.org/wiki/Freelancer) and other vendors.[\[194\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-impractical-209) In 2017 and 2018, bitcoin's acceptance among major online retailers included only three of the top 500 U.S. online merchants, down from five in 2016.[\[195\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-FT08062018-210) Reasons for this decline include high transaction fees due to bitcoin's scalability issues and long transaction times.[\[196\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-211) As of 2018, the overwhelming majority of bitcoin transactions took place on [cryptocurrency exchanges](https://en.wikipedia.org/wiki/Cryptocurrency_exchange), rather than being used in transactions with merchants.[\[195\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-FT08062018-210) Delays processing payments through the blockchain of about ten minutes make bitcoin use very difficult in a retail setting. Prices are not usually quoted in units of bitcoin and many trades involve one, or sometimes two, conversions into conventional currencies.[\[29\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-JEP-38) Merchants that do accept bitcoin payments may use payment service providers to perform the conversions.[\[197\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-212) ### Financial institutions Bitcoins can be bought on [digital currency exchanges](https://en.wikipedia.org/wiki/Digital_currency_exchange). Per researchers, "there is little sign of bitcoin use" in international remittances despite high fees charged by banks and [Western Union](https://en.wikipedia.org/wiki/Western_Union) who compete in this market.[\[29\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-JEP-38) The [_South China Morning Post_](https://en.wikipedia.org/wiki/South_China_Morning_Post), however, mentions the use of bitcoin by Hong Kong workers to transfer money home.[\[198\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-213) In 2014, the [National Australia Bank](https://en.wikipedia.org/wiki/National_Australia_Bank) closed accounts of businesses with ties to bitcoin,[\[199\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-214) and [HSBC](https://en.wikipedia.org/wiki/HSBC) refused to serve a hedge fund with links to bitcoin.[\[200\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-215) Australian banks in general have been reported as closing down bank accounts of operators of businesses involving the currency.[\[201\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-afr.com-216) On 10 December 2017, the [Chicago Board Options Exchange](https://en.wikipedia.org/wiki/Chicago_Board_Options_Exchange) started trading bitcoin futures,[\[202\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-217) followed by the [Chicago Mercantile Exchange](https://en.wikipedia.org/wiki/Chicago_Mercantile_Exchange), which started trading bitcoin futures on 17 December 2017.[\[203\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-218) In September 2019 the [Central Bank of Venezuela](https://en.wikipedia.org/wiki/Central_Bank_of_Venezuela), at the request of [PDVSA](https://en.wikipedia.org/wiki/PDVSA), ran tests to determine if bitcoin and [ether](https://en.wikipedia.org/wiki/Ethereum) could be held in central bank's reserves. The request was motivated by oil company's goal to pay its suppliers.[\[204\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-219) François R. Velde, Senior Economist at the [Chicago Fed](https://en.wikipedia.org/wiki/Chicago_Fed), described bitcoin as "an elegant solution to the problem of creating a digital currency".[\[205\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-220) David Andolfatto, Vice President at the [Federal Reserve Bank of St. Louis](https://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_St._Louis), stated that bitcoin is a threat to the establishment, which he argues is a good thing for the [Federal Reserve System](https://en.wikipedia.org/wiki/Federal_Reserve_System) and other [central banks](https://en.wikipedia.org/wiki/Central_bank), because it prompts these institutions to operate sound policies.[\[45\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-Andolfatto2014-03-56): 33 [\[206\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-221)[\[207\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-222) ### As an investment The [Winklevoss twins](https://en.wikipedia.org/wiki/Winklevoss_Capital_Management) have purchased bitcoin. In 2013, _The Washington Post_ reported a claim that they owned 1% of all the bitcoins in existence at the time.[\[208\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-223) Other methods of investment are bitcoin funds. The first regulated bitcoin fund was established in [Jersey](https://en.wikipedia.org/wiki/Jersey) in July 2014 and approved by the Jersey Financial Services Commission.[\[209\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-BitcoinJersey-224) _Forbes_ named bitcoin the best investment of 2013.[\[210\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-225) In 2014, Bloomberg named bitcoin one of its worst investments of the year.[\[211\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-worst-226) In 2015, bitcoin topped Bloomberg's currency tables.[\[212\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-227) According to bitinfocharts.com, in 2017, there were 9,272 bitcoin wallets with more than $1 million worth of bitcoins.[\[213\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-228) The exact number of bitcoin millionaires is uncertain as a single person can have more than one bitcoin wallet. ### Venture capital [Peter Thiel](https://en.wikipedia.org/wiki/Peter_Thiel)'s [Founders Fund](https://en.wikipedia.org/wiki/Founders_Fund) invested [US$](https://en.wikipedia.org/wiki/United_States_dollar)3 million in [BitPay](https://en.wikipedia.org/wiki/BitPay).[\[214\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-mtr20130612-229) In 2012, an incubator for bitcoin-focused start-ups was founded by Adam Draper, with financing help from his father, venture capitalist [Tim Draper](https://en.wikipedia.org/wiki/Timothy_C._Draper), one of the largest bitcoin holders after winning an auction of ₿30,000,[\[215\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-wsj1214-230) at the time called "mystery buyer".[\[216\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-guard714-231) The company's goal is to fund 100 bitcoin businesses within 2–3 years with $10,000 to $20,000 for a 6% stake.[\[215\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-wsj1214-230) Investors also invest in bitcoin mining.[\[217\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-232) According to a 2015 study by Paolo Tasca, bitcoin startups raised almost $1 billion in three years (Q1 2012 – Q1 2015).[\[218\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-Tasca-233) [https://opensea.io/assets/0x944b7555A140179Da1F2a14d746D40FDA48dB6d0/2](https://opensea.io/assets/0x944b7555A140179Da1F2a14d746D40FDA48dB6d0/2) ### Price and volatility The price of bitcoins has gone through cycles of appreciation and depreciation referred to by some as [bubbles](https://en.wikipedia.org/wiki/Economic_bubble) and busts.[\[219\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-234) In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[\[220\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-Leebubble-235) In the latter half of 2012 and during the [2012–13 Cypriot financial crisis](https://en.wikipedia.org/wiki/2012%E2%80%9313_Cypriot_financial_crisis), the bitcoin price began to rise,[\[221\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-236) reaching a high of US$266 on 10 April 2013, before crashing to around US$50. On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242.[\[222\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-237) In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600.[\[223\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-238) According to [Mark T. Williams](https://en.wikipedia.org/wiki/Mark_T._Williams), as of 30 September 2014, bitcoin has [volatility](https://en.wikipedia.org/wiki/Volatility_\(finance\)) seven times greater than gold, eight times greater than the [S&P 500](https://en.wikipedia.org/wiki/S%26P_500), and 18 times greater than the US dollar.[\[224\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-239) Hodl is a meme created in reference to holding (as opposed to selling) during periods of volatility. Unusual for an asset, bitcoin weekend trading during December 2020 was higher than for weekdays.[\[225\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-240) [Hedge funds](https://en.wikipedia.org/wiki/Hedge_fund) (using high [leverage](https://en.wikipedia.org/wiki/Leverage_\(finance\)) and [derivates](https://en.wikipedia.org/wiki/Derivative_\(finance\)))[\[226\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-241) have attempted to use the volatility to [profit from downward price movements](https://en.wikipedia.org/wiki/Short_\(finance\)). At the end of January 2021, such positions were over $1 billion, their highest of all time.[\[227\]](https://en.wikipedia.org/wiki/Bitcoin#cite_note-242) As of 8 February 2021, the closing price of bitcoin equaled US$44,797. --- *Originally published on [Andjey Vujchich](https://paragraph.com/@hapland/economics-in-btc)*