You may be able to buy Coke with Bitcoin, but that still doesn't make Bitcoin money

This story in the New Zealand Herald yesterday caught my eye:

A lot of the narrative on virtual currency revolves around its yo-yo-ing worth.

Will we see geeks buying more Ferraris if bitcoin breaks back toward US$20,000, or crying into their keyboards if it crashes below US$5000 again?

But to become an enduring currency, it will also have to prove its utility on a meat-and-potatoes level - such as buying everyday stuff.

That goal has got a little bit closer today with a deal that means Australians and New Zealanders can now buy a coke from a vending machine with bitcoin.

Interestingly, in our ECONS101 tutorial on the topic of money and inflation, we ask the question of whether Bitcoin is money. The answer is no. To see why though, you have to understand what money is.

As I noted in this post last year:

To an economist, money is something that fulfils three functions, which date back to William Stanley Jevons in 1875...:

1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services.

2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and

3. It is a store of value - you can keep it and it will retain its value into the future.

Anything that fulfils those three functions can be considered money. So, coins and banknotes are money because you can exchange them for goods and services, you can use them to measure the value of things, and you can store them and use their value in the future.

Does Bitcoin fulfil those three functions of money? The Herald article only covers the first (medium of exchange) - Bitcoin is used to buy at least some goods and services. However, Bitcoin fails on the last two criteria. It isn't used as a unit of account - no one's quoting you prices in Bitcoin, and I bet the vending machines don't report the Bitcoin price of a can of Coke. And, Bitcoin isn't much of a store of value. It fails on both of those criteria because the value of Bitcoin is far too volatile. Here's the value of Bitcoin over the last twelve months (from Coindesk):

You wouldn't want to store value in an asset that routinely loses a third of its value in a matter of weeks. You're also unlikely to want to quote prices in something that varies widely in value even across a day or two. And on top of that, Bitcoin probably still isn't widely accepted enough to even be considered a medium of exchange.

So, other than creating a bit of media attention for Coke and for their technology partner, this story isn't telling us that Bitcoin is money. You don't need to throw away your dollars just yet.