Bitcoin as Money?

from the Boston Fed

The spectacular rise late last year in the price of bitcoin, the dominant virtual currency, has attracted much public attention as well as scholarly interest. Some features of bitcoin, as designed and executed to date, have hampered its ability to perform the functions required of a fiat money––as a medium of exchange, unit of account, and store of value. Furthermore, various forms of intermediaries have emerged and evolved within the Bitcoin network, particularly noting the convergence toward concentrated processing, both on and off the blockchain.

We argue that much of this process would have been predicted by established theories of financial intermediation, and we consider the theories’ implication for the future evolution of intermediaries serving users of bitcoin or alternative virtual currencies. We then compare Bitcoin with other innovations to facilitate payment services, from competing alternative digital currencies to electronic payment protocols. We conclude with a broad consideration of the major factors that will likely shape the future development of Bitcoin versus other alternative payment systems. We predict that Bitcoin’s lasting legacy will be the innovations it has spurred to payment technology, although the payment system will remain dominated by large processors because of economies of scale.

[click on image below to read the entire report]

Source: http://www.bostonfed.org/economic/current-policy-perspectives/2014/cpp1404.pdf