Norges Bank

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Explainer

Are cryptocurrencies money?

In order to assess the extent to which cryptocurrencies can be characterised as money, we need to know what characteristics money has.

Illustrasjon av kryptovaluta

Historically, the form that money takes does not play a crucial role, ie whether it be physical objects or a certain type of technology.

Money is as money does - ie money is well-suited to transfer, store and measure value. The basic characteristic that enables these functions, is the general acceptance of and confidence in the value of money.

These are the criteria that cryptocurrencies must be assessed against when deciding whether they are suitable as money. But first, a brief look at what cryptocurrencies are.

What are cryptocurrencies really?

There are thousands of different cryptocurrencies, and anyone can create a new cryptocurrency. Most of these currencies are quite unknown, while some have attracted a lot of attention. Bitcoin and Ethereum are among the most well known.

One characteristic shared by many cryptocurrencies is that they are based on distributed ledger technology, also known as blockchains. This means that the database showing current and previous ownership of cryptocurrency units is distributed over many different computers.

As cryptocurrency units change ownership and new units are added, the blockchain database is updated with new blocks connected to previously made blocks. All blocks that have ever been created remain part of the blockchain.

Changing or registering new entries in the database requires the computers in the network to agree that the registration is valid. This makes it difficult for a single actor to control and manipulate the contents of the database.

The creator of the cryptocurrency and operator of the blockchain decide the rules governing how and how many cryptocurrency units will be created.

How well suited are cryptocurrencies as a means of payment, store of value and as a measurement of value?

The value of popular cryptocurrencies such as Bitcoin and Ethereum measured against other currencies has at times varied considerably. Fluctuations in many of the lesser known cryptocurrencies have been even larger. Until now, these large value fluctuations have made cryptocurrencies unsuitable as a measurement of value. It is simply too impractical to use something that itself varies considerably in value over a short time period as a measurement of value.

When the value has been shown to vary considerably over a short time period, this also creates widespread uncertainty about what the value will be in the future. For now, many therefore refuse to accept cryptocurrencies as a means of payment for goods and services, and so far, cryptocurrencies have not become a widespread means of payment.

At the same time, cryptocurrency value fluctuations have attracted many investors. Sharp and rapid increases in value have yielded enormous returns for some investors. Correspondingly, sharp decreases in value have resulted in large losses. As is often the case with investments that fluctuate considerably – values both increase and decrease. While fluctuations are attractive to some, they make others reluctant to place their savings in cryptocurrencies.

So far, cryptocurrencies have not shown that they have the characteristics needed to function as money in line with established currencies like the US dollar, euro, sterling and Norwegian krone.

Short summary

  • Money is as money does - ie money is well-suited to transfer, store and measure value.
  • Cryptocurrencies are governed by a network of computers that together update and maintain an updated overview of cryptocurrency unit ownership
  • So far, large value fluctuations have made cryptocurrencies rather unsuitable as money sparsely adopted.