St. Louis Fed Compares Bitcoin to Traditional Currency

Despite ongoing debates about Bitcoin's qualification as a modern fiat currency, it continues to receive recognition from influential financial institutions. (See also: Is Bitcoin Failing as a Currency?)

The Federal Reserve Bank of St. Louis recently identified three fundamental characteristics that position Bitcoin alongside traditional mainstream currencies. This bank is one of the 12 regional reserve banks forming the backbone of the U.S. central banking system, working in tandem with the Board of Governors in Washington. According to an article by Christine Smith, a content strategist at the St. Louis Fed, these traits highlight Bitcoin's parallels with established currencies.

1. Bitcoin Possesses No Intrinsic Value

Drawing from research by economists Aleksander Berentsen and Fabian Schär, the St. Louis Fed explains that neither Bitcoin nor physical dollar bills hold intrinsic value. Since the U.S. abandoned the gold standard domestically in 1933 and ceased international dollar-to-gold convertibility in 1971, American paper currency is no longer backed by tangible commodities like gold or silver. Similarly, cryptocurrencies such as Bitcoin share this characteristic, making them comparable to leading fiat currencies like the U.S. dollar and the euro.

2. Bitcoin Features a Finite Supply

Contrary to common misconceptions, the Federal Reserve does not literally "print money." Instead, it manages the circulation of currency notes based on economic conditions to maintain price stability and support employment. Scarcity is crucial for a currency's value, necessitating a limited supply.

While Bitcoin lacks a centralized authority like the Fed, its supply is capped and regulated through its mining process, creating a controlled scarcity similar to traditional fiat currencies.

3. Bitcoin Operates Without Intermediaries

A $10 bill can be spent directly without involving third parties, whether purchasing goods or transferring to a friend. Bitcoin's whitepaper describes it as "a purely peer-to-peer version of electronic cash," enabling direct online payments between parties without financial institutions acting as intermediaries. This intrinsic feature aligns Bitcoin with cash's direct usability, reinforcing its similarity to standard fiat money.

Perspectives on Bitcoin as a mainstream currency vary, each with valid points. While Bitcoin's limited supply is unequivocal, aspects like intrinsic value and intermediary involvement can be interpreted differently. Though Bitcoin theoretically has no intrinsic value, mining efforts are essential to generate new coins. Similarly, while peer-to-peer transactions bypass traditional middlemen, miners still verify and authenticate transactions.

Despite these discussions, Bitcoin remains the leading cryptocurrency, and ongoing debates underscore its increasing acceptance and relevance. (See also: MIT Tech Review Reveals Plan to 'Destroy' Bitcoin.)

Investing in cryptocurrencies and Initial Coin Offerings (ICOs) carries significant risk and speculation. This article does not constitute investment advice from Investopedia or the author. Individuals should consult qualified professionals before making financial decisions. Investopedia does not guarantee the accuracy or timeliness of the information provided. At the time of writing, the author holds no cryptocurrency assets.

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