Further Evaluating the Classification of Bitcoin as Currency

Apparently, Aswath Damodaran faced a lot of backlash for his post classifying bitcoin as currency. His views haven’t changed:

The crux of the disagreements though lay in my classifying Bitcoin as a currency, not as an asset or as a commodity. Since this classification is central to how you should think about investing versus trading, and value versus price, and goes well beyond Bitcoin, I decided to dig deeper into the classification and provide even more ammunition for those who disagree with me to tell me how wrong I am.

On why it’s not an asset:

One reason that people are uncomfortable drawing the line between currency, commodity and asset is that the line can sometimes shift quickly. Take the US dollar, for instance. Its primary purpose is to serve as a medium of exchange and as a store of value, and it is thus a currency. However, you can lend US dollars to a business or individual and generate interest income. That is true, but it is not the currency that is then the asset, but the loan that you make with it, or the bond that is denominated in it. Building further, if I create a bank that takes in deposits in dollars (and pays an interest rate on them) and lends out those dollars as loans, I have a business and that business is an asset.

On why it’s not a commodity:

The essence of a currency is that its primary uses are as a medium of exchange or as a store of value. The key to a commodity is that it is an input into a process that has a utilitarian function. Oil and coal are clearly commodities, since they derive their value from the fact that they can be used to produce energy.

He ends with a thought similar to what we’ve written recently:

I think it is also time for us to separate arguments about block chains/smart contracts from arguments about crypto currencies, since you can have one without the other, and to differentiate between crypto currencies, rather than defend them or abandon them all, as a bundle. To me, Bitcoin, Ethereum, Ripple and  ICOs are different enough from each other, not only in structure but also in terms of end game, that they need to be assessed independently

The Bitcoin Boom: Asset, Currency, Commodity or Collectible?

From Aswath Damodaran’s post The Bitcoin Boom: Asset, Currency, Commodity or Collectible? at Musings on Markets:

I find myself disagreeing with both its most virulent critics and its strongest proponents.  Unlike Jamie Dimon, I don’t believe that bitcoin is a fraud and that people who are “stupid enough to buy it” will pay a price for that stupidity. Unlike its biggest cheerleaders, I don’t believe that crypto currencies are now or ever will be an asset class or that these currencies can change fundamental truths about risk, investing and management.

He goes on to describe his process for determining how to classify bitcoin, beginning by describing has his asset class classifications as:

  • Cash Generating Asset
  • Commodity
  • Currency
  • Collectible

After concluding that Bitcoin is a currency, though a weak one currently given how much it is used as a means of exchange currently (which would make it closer to a collectible), he layout out three possible long term scenarios:

  • The Global Digital Currency
  • Gold for Millennials
  • The 21st Century Tulip Bulb

A very practical look at Bitcoin from a more traditional financial perspective.